VMware 2012 Annual Report Download - page 58

Table of Contents
assets, we generally allocate a portion of the purchase price of an acquisition to intangible assets, such as intellectual property, which is
subject to amortization. The amount of employer payroll taxes on stock-based compensation is dependent on our stock price and other
factors that are beyond our control and do not correlate to the operation of the business. Additionally, the amount of an acquisition’s
purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each
acquisition. Acquisition-related items include direct costs of acquisitions, such as transaction fees, which vary significantly and are
unique to each acquisition. We also do not acquire businesses on a predictable cycle.
Free cash flows
In evaluating our liquidity internally, we focus on long-term, sustainable growth in free cash flows over trailing twelve month periods,
which we consider to be a relevant measure of our long-term progress. In 2012, we changed our methodology for calculating free cash flows,
which is reflected in the amounts presented for all periods, to be defined as GAAP operating cash flows less capital expenditures. We include the
impact from capital expenditures on property and equipment because these expenditures are also considered to be a necessary component of our
operations and therefore part of our core operating expenses. Management uses free cash flows as a measure of financial progress in our
business, as it balances operating results, cash management and capital efficiency. We believe that free cash flows provides useful information to
investors and others as it allows for meaningful period-to-period comparisons of our operating cash flows for analysis of trends in our business.
Additionally, we believe that it provides investors and others with an important perspective on the amount of cash that we may choose to use for
strategic acquisitions and investments, the repurchase of shares, operations and other capital expenditures.
Limitations on the use of Non
-GAAP financial measures
A limitation of our non-GAAP financial measures of core operating expenses and free cash flows is that they do not have uniform
definitions. Our definitions will likely differ from the definitions used by other companies, including peer companies, and therefore
comparability may be limited. Thus, our non-GAAP measures of core operating expenses and free cash flows should be considered in addition
to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. Additionally, in the case of stock-based
compensation, if we did not pay out a portion of compensation in the form of stock-based compensation and related employer payroll taxes, the
cash salary expense included in costs of revenues and operating expenses would be higher which would affect our cash position. Further, the
non-GAAP measure of core operating expenses has certain limitations because it does not reflect all items of income and expense that affect our
operations and are reflected in the GAAP measure of total operating expenses.
We compensate for these limitations by reconciling core operating expenses to the most comparable GAAP financial measure. Management
encourages investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view our
non-GAAP financial measures in conjunction with the most comparable GAAP financial measures.
See “Results of Operations—Operating Expenses” for a reconciliation of the non-
GAAP financial measure of core operating expenses to the
most comparable GAAP measure, “total operating expenses,” for the years ended December 31, 2012 , 2011, and 2010.
See “Liquidity and Capital Resources” for a reconciliation of free cash flows to the most comparable GAAP measure, “
net cash provided by
operating activities,” for the years ended December 31, 2012 , 2011 and 2010.
Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments
Guarantees and Indemnification Obligations
We enter into agreements in the ordinary course of business with, among others, customers, distributors, resellers, system vendors and
systems integrators. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products
infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require
us to indemnify the other party against certain claims relating to property damage, personal injury, or the acts or omissions by us and our
employees, agents or representatives.
We have agreements with certain vendors, financial institutions, lessors and service providers pursuant to which we have agreed to
indemnify the other party for specified matters, such as acts and omissions by us and our employees, agents, or representatives.
We have procurement or license agreements with respect to technology that we have obtained the right to use in our products and
agreements. Under some of these agreements, we have agreed to indemnify the supplier for certain claims that may be brought against such party
with respect to our acts or omissions relating to the supplied products or technologies.
We have agreed to indemnify our directors and executive officers, to the extent legally permissible, against all liabilities reasonably incurred
in connection with any action in which such individual may be involved by reason of such individual being
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