VMware 2012 Annual Report Download - page 49

Table of Contents
and development, are denominated in foreign currencies and are thus exposed to foreign exchange rate fluctuations. Core operating expenses
benefited by $53.6 in 2012 and were negatively impacted by $48.2 in 2011 as compared with their respective prior years due to the effect of
fluctuations in the exchange rates between the U.S. Dollar and other currencies.
Cost of License Revenues
Our core operating expenses for cost of license revenues principally consist of the cost of fulfillment of our software and royalty costs in
connection with technology licensed from third-party providers. The cost of fulfillment of our software includes IT development efforts,
personnel costs, product packaging and related overhead associated with the physical and electronic delivery of our software products.
Core operating expenses for cost of license revenues increased by $17.8 or 24% in 2012 compared with 2011 and by $22.4 or 43% in 2011
compared with 2010 . The increase s were due to increases of $8.0 and $7.6 in 2012 and 2011 , respectively, for IT development costs.
Additionally, cost of license revenues increased by $4.8 and $11.3 in 2012 and 2011 , respectively, primarily related to royalty and licensing
costs for technology licensed from third-party providers that is used in our products.
Cost of Services Revenues
Our core operating expenses for cost of services revenues primarily include the costs of personnel and related overhead to deliver technical
support for our products and to provide our professional services.
Core operating expenses for cost of services revenues increased by $65.8 or 17% in 2012 compared with 2011 , and by $92.5 or 32% in
2011 compared with 2010 . The increase in 2012 was primarily due to growth in employee-related expenses and travel and entertainment
expenses of $61.4, which was largely driven by incremental growth in headcount to support increased revenues. Additionally, our third-party
professional services costs increased by $17.0 to provide technical support and professional services primarily in connection with increased
demand for services. These increases in 2012
were partially offset by a decrease of $8.0 due to the completion of certain IT development projects
and the positive impact of fluctuations in the exchange rate between the U.S. Dollar and foreign currencies of $9.1. The increase in 2011 was
primarily due to growth in employee-related expenses of $48.3, which was largely driven by incremental growth in headcount, as well as an
increase in expenses of $16.2 for IT development costs. Additionally, our third-party professional services costs increased by $13.1 to provide
technical support and professional services primarily in connection with increased services revenues. Fluctuations in the exchange rate between
the U.S. Dollar and foreign currencies also contributed $9.4 to the overall increase in costs of services revenues.
Research and Development Expenses
Our core operating expenses for research and development (“R&D”) expenses include the personnel and related overhead associated with
the R&D of new product offerings and the enhancement of our existing software offerings.
Core operating expenses for R&D increased by $116.9 or 18% in 2012 compared with 2011 , and by $124.1 or 23% in 2011 compared with
2010 . The increase s were primarily due to growth in employee-related expenses of $105.5 and $95.0 in 2012 and 2011 , respectively, which
were primarily driven by incremental growth in headcount from strategic hiring and business acquisitions. In 2012 and 2011, facility-related
expenses of $11.5 and $9.1, respectively, further contributed to the year-over-year increases. Additionally, the positive impact of $9.5 from
fluctuations in the exchange rate between the U.S. Dollar and foreign currencies partially offset the increases in 2012 .
Sales and Marketing Expenses
Our core operating expenses for sales and marketing expenses include personnel costs, sales commissions and related overhead associated
with the sale and marketing of our license and services offerings, as well as the cost of product launches. Sales commissions are generally earned
and expensed when a firm order is received from the customer and may be expensed in a period other than the period in which the related
revenue is recognized. Sales and marketing expenses also include the net impact from the expenses incurred and fees generated by certain
marketing initiatives, including our annual VMworld conferences in the U.S. and Europe.
Core operating expenses for sales and marketing increased by $255.0 or 21% in 2012 compared with 2011 , and by $291.2 or 31% in 2011
compared with 2010 . The increase in 2012 was primarily due to growth in employee-related expenses of $213.8, driven by incremental growth
in headcount and by higher commission expense due to increased sales volumes, as well as an increase of $50.0 in the costs of marketing
programs. The increases in 2012 were partially offset by the positive impact of $28.9 from fluctuations in the exchange rate between the U.S.
Dollar and foreign currencies. The increase in 2011 was primarily due to growth in employee-related expenses of $168.8, driven by incremental
growth in headcount and by higher commission expense due to increased sales volumes. Additionally, the costs of marketing programs increased
by $33.3 and travel and entertainment expense increased by $18.0 in support of our expanding markets and sales efforts. The negative impact of
$30.5 from fluctuations in the exchange rate between the U.S. Dollar and foreign currencies further contributed to the increase.
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