VMware Reports Second Quarter 2011 Results

Year-Over-Year Revenue Growth of 37% to $921 Million; Operating Margin of 20.3%; Non-GAAP Operating Margin of 31.6%; EPS Growth of 183% to $0.51; Non-GAAP EPS Growth of 62% to $0.55; Trailing Twelve Months Operating Cash Flows Growth of 46% to $1.5 Billion; Free Cash Flows Growth of 56% to $1.6 Billion


PALO ALTO, CA -- (Marketwire) -- 07/19/11 -- VMware, Inc. (NYSE: VMW), the global leader in virtualization and cloud infrastructure, today announced financial results for the second quarter of 2011:

  • Revenues for the second quarter were $921 million, an increase of 37% from the second quarter of 2010 as reported, and an increase of 35% measured in constant currency.

  • Operating income for the second quarter was $187 million, an increase of 85% from the second quarter of 2010. Non-GAAP operating income for the second quarter was $291 million, an increase of 56% from the second quarter of 2010.

  • Net income for the second quarter was $220 million, or $0.51 per diluted share, compared to $75 million, or $0.18 per diluted share, for the second quarter of 2010. Non-GAAP net income for the quarter was $235 million, or $0.55 per diluted share, compared to $142 million, or $0.34 per diluted share, for the second quarter of 2010.

  • Operating cash flows for the second quarter were $463 million, an increase of 114% from the second quarter of 2010. Free cash flows for the quarter were $443 million, an increase of 91% from the second quarter of 2010.

  • Trailing twelve months operating cash flows were $1.5 billion, an increase of 46%. Trailing twelve months free cash flows were $1.6 billion, an increase of 56%.

  • Cash, cash equivalents and short-term investments were $3.7 billion and unearned revenue was $2.1 billion as of June 30, 2011.

U.S. revenues for the second quarter of 2011 grew 35% to $450 million from the second quarter of 2010. International revenues grew 38% to $471 million from the second quarter of 2010.

License revenues for the second quarter of 2011 were $465 million, an increase of 44% from the second quarter of 2010 as reported, and an increase of 40% measured in constant currency. Service revenues, which include software maintenance and professional services, were $456 million for the second quarter of 2011, an increase of 30% from the second quarter of 2010.

"VMware's second quarter results were driven by strength across geographies and record enterprise license agreement bookings as a percentage of total bookings," said Mark Peek, chief financial officer. "Third quarter 2011 revenues are expected to be in the range of $915 and $940 million, a year-over-year increase of 28% to 32%. The third quarter non-GAAP operating margin is expected to decline sequentially by 260 to 360 basis points. For the year, we expect annual revenues to be in the range of $3.65 billion and $3.75 billion, an increase of 28% to 31% compared to 2010."

"The quarter's strong performance reflects the continued adoption of virtualization as a key technology for the next era of computing," said Paul Maritz, chief executive officer. "VMware will continue to help customers accelerate towards more efficiency, flexibility and automation with VMware vSphere® 5 and the cloud infrastructure suite."

Recent Highlights & Strategic Announcements

  • In June 2011, VMware announced vFabric 5, an integrated application platform for virtual and cloud environments. vFabric 5 will provide the core application platform for building, deploying and running modern applications by combining our Spring development framework for Java and the latest generation of vFabric application services. We expect vFabric 5 to be generally available in late summer 2011.

  • In June 2011, VMware announced a new collaboration with HP on turnkey solutions to simplify and accelerate virtualization for customers on the journey to cloud computing. The new HP VirtualSystem solutions will be integrated, pre-tested IT infrastructure stacks that will help improve business agility, lower costs and enable cloud computing for enterprise customers of all sizes.

  • In July 2011, VMware announced vSphere 5 and a comprehensive suite of cloud infrastructure technologies. With nearly 200 new and enhanced capabilities, vSphere 5 will set the standard in virtualization, delivering better application performance and availability for all business-critical applications while automating the management of all datacenter resources. VMware vShield™ 5, VMware vCenter™ Site Recovery Manager 5, and VMware vCloud® Director 1.5, products together with VMware vSphere 5 amplify the value customers can realize from virtualized resources by enabling cloud-scale operations. We expect vSphere 5 to begin shipping by the end of our third quarter.

  • During the second quarter, VMware announced the acquisitions of Shavlik Technologies, SlideRocket, SocialCast and Digital Fuel. Shavlik Technologies provides on-premise and SaaS-based management solutions, enabling small and medium-sized businesses to more effectively manage, monitor and secure their IT environments. SocialCast, a modern business communication platform for the enterprise, unites people, information and enterprise applications within collaborative communities. SlideRocket delivers innovative presentation solutions that uniquely leverage modern concepts of cloud computing, collaboration, social media and mobile computing platforms. Digital Fuel enables enterprises to more effectively manage the business impact of IT environments, centralizing visibility of IT costs and integrating financial discipline into IT decisions to deliver meaningful measurements and reports.

VMware plans to host a conference call today to review its second quarter 2011 results and to discuss its financial outlook. The call is scheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed via the Web at http://ir.vmware.com. The webcast will be available live, and a replay will be available following completion of the live broadcast for approximately 30 days.

About VMware

VMware delivers virtualization and cloud infrastructure solutions that enable IT organizations to energize businesses of all sizes. With the industry leading virtualization platform -- VMware vSphere® -- customers rely on VMware to reduce capital and operating expenses, improve agility, ensure business continuity, strengthen security and go green. With 2010 revenues of $2.9 billion, more than 250,000 customers and 25,000 partners, VMware is the leader in virtualization, which consistently ranks as a top priority among CIOs. VMware is headquartered in Silicon Valley with offices throughout the world and can be found online at www.vmware.com

VMware, VMware vSphere, VMware vCenter and VMware vCloud are registered trademarks or trademarks of VMware, Inc. in the United States and/or other jurisdictions. Other marks mentioned herein are trademarks which are proprietary to VMware, Inc. or another company.

Use of Non-GAAP Financial Measures

Reconciliations of non-GAAP financial measures to VMware's financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. For a description of these non-GAAP financial measures, including the reasons management uses each measure, please see the section of the tables titled "About Non-GAAP Financial Measures."

Forward-Looking Statements

This press release contains forward-looking statements including, among other things, statements regarding VMware's third quarter and annual revenue projections, expectations regarding third quarter operating margins, continued adoption of virtualization by customers, the role of VMware products in customer implementations of IT and expectations for vFabric 5 and VMware vSphere 5, including their expected release dates. These forward-looking statements are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to: (i) adverse changes in general economic or market conditions; (ii) delays or reductions in consumer or information technology spending; (iii) competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into the virtualization market, and new product and marketing initiatives by our competitors; (iv) factors that affect timing of license revenue recognition such as product announcements and beta programs; (v) our customers' ability to develop, and to transition to, new products and computing strategies such as cloud computing and desktop virtualization; (vi) the uncertainty of customer acceptance of emerging technology; (vii) changes in the willingness of customers to enter into longer term licensing and support arrangements; (viii) rapid technological and market changes in virtualization software and platforms for cloud and desktop computing; (ix) changes to product development timelines; (x) VMware's relationship with EMC Corporation and EMC's ability to control matters requiring stockholder approval, including the election of VMware's board members; (xi) our ability to protect our proprietary technology; (xii) our ability to attract and retain highly qualified employees; (xiii) the successful integration of acquired companies and assets into VMware; and (xiv) fluctuating currency exchange rates. These forward looking statements are based on current expectations and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-K and Form 10-Q and current reports on Form 8-K that we may file from time to time, which could cause actual results to vary from expectations. VMware assumes no obligation to, and does not currently intend to, update any such forward-looking statements after the date of this release.

                                VMware, Inc.

                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (in thousands)
                                (unaudited)


                        For the Three Months Ended For the Six Months Ended
                                 June 30,                  June 30,
                         ------------------------  ------------------------
                             2011         2010         2011         2010
                         -----------  -----------  -----------  -----------

Operating activities:
Net income               $   220,158  $    74,538  $   345,970  $   152,959
Adjustments to reconcile
 net income to net cash
 provided by
operating activities:
 Depreciation and
  amortization                74,709       58,556      155,658      112,344
 Stock-based
  compensation,
  excluding amounts
  capitalized                 85,442       67,836      166,015      131,533
 Excess tax benefits
  from stock-based
  compensation              (101,256)     (64,583)    (151,264)     (88,501)
 Gain on sale of
  Terremark investment       (56,000)           -      (56,000)           -
 Other                         2,864        4,442        3,826        5,859
  Changes in assets and
   liabilities, net of
   acquisitions:
  Accounts receivable        (54,757)     (77,543)      26,583      107,688
  Other assets               (16,133)     (23,406)     (34,053)     (24,251)
  Due to/from EMC, net       (35,265)     (23,474)      25,435        2,302
  Accounts payable           (11,105)       9,207       (1,707)       6,560
  Accrued expenses           102,780       78,098       34,211       26,896
  Income taxes
   receivable from EMC       141,000        2,508      176,444        2,508
  Income taxes payable         4,674       16,759       37,601       31,124
  Deferred income taxes,
   net                        11,119         (126)        (958)      (4,347)
  Unearned revenue            94,566       93,311      212,952      108,401
                         -----------  -----------  -----------  -----------
Net cash provided by
 operating activities        462,796      216,123      940,713      571,075
                         -----------  -----------  -----------  -----------


Investing activities:
Additions to property
 and equipment               (95,186)     (28,996)    (122,232)     (60,108)
Purchase of leasehold
 interest                   (173,126)           -     (173,126)           -
Capitalized software
 development costs           (25,437)     (19,310)     (52,859)     (41,171)
Purchases of available-
 for-sale securities        (529,038)    (660,051)  (1,127,805)    (660,051)
Sales of available-for-
 sale securities             223,491            -      376,588            -
Maturities of available-
 for-sale securities         277,390            -      492,969            -
Purchase of strategic
 investments                  (8,000)           -      (22,000)           -
Sale of strategic
 investments                  76,000            -       78,513            -
Business acquisitions,
 net of cash acquired       (189,138)     (60,600)    (204,088)    (167,150)
Transfer of net assets
 under common control         (7,973)    (175,000)     (20,463)    (175,000)
Decrease (increase) in
 restricted cash              39,858       17,054       (5,142)         206
                         -----------  -----------  -----------  -----------
Net cash used in
 investing activities       (411,159)    (926,903)    (779,645)  (1,103,274)
                         -----------  -----------  -----------  -----------

Financing activities:
Proceeds from issuance
 of common stock             110,543      106,132      200,714      215,907
Repurchase of common
 stock                      (132,660)    (113,152)    (280,389)    (144,500)
Excess tax benefits from
 stock-based
 compensation                101,256       64,583      151,264       88,501
Shares repurchased for
 tax withholdings on
 vesting of restricted
 stock                       (48,666)     (34,677)     (70,578)     (45,583)
                         -----------  -----------  -----------  -----------
Net cash provided by
 financing activities         30,473       22,886        1,011      114,325
                         -----------  -----------  -----------  -----------
Net increase (decrease)
 in cash and cash
 equivalents                  82,110     (687,894)     162,079     (417,874)
Cash and cash
 equivalents at
 beginning of the period   1,708,934    2,756,481    1,628,965    2,486,461
                         -----------  -----------  -----------  -----------
Cash and cash
 equivalents at end of
 the period              $ 1,791,044  $ 2,068,587  $ 1,791,044  $ 2,068,587
                         ===========  ===========  ===========  ===========



                                VMware, Inc.

                     CONSOLIDATED STATEMENTS OF INCOME
                  (in thousands, except per share amounts)
                                (unaudited)

                           For the Three Months
                                   Ended           For the Six Months Ended
                                 June 30,                  June 30,
                         ------------------------  ------------------------
                             2011         2010         2011         2010
                         -----------  -----------  -----------  -----------

Revenues:
 License                 $   464,806  $   323,665  $   883,805  $   635,842
 Services                    456,404      350,239      881,126      671,595
                         -----------  -----------  -----------  -----------
                             921,210      673,904    1,764,931    1,307,437
Operating expenses (1):
 Cost of license
  revenues                    48,928       40,269      104,946       80,390
 Cost of services
  revenues                   103,547       77,883      197,426      146,412
 Research and
  development                189,241      161,756      358,404      299,868
 Sales and marketing         314,560      231,662      617,484      448,491
 General and
  administrative              78,042       61,153      146,277      128,909
                         -----------  -----------  -----------  -----------
Operating income             186,892      101,181      340,394      203,367
Investment income              3,715          995        7,121        1,680
Interest expense with
 EMC, net                       (972)        (957)      (1,931)      (1,858)
Other income (expense),
 net                          56,639       (4,275)      56,804       (8,606)
                         -----------  -----------  -----------  -----------
Income before income
 taxes                       246,274       96,944      402,388      194,583
Income tax provision          26,116       22,406       56,418       41,624
                         -----------  -----------  -----------  -----------
Net income               $   220,158  $    74,538  $   345,970  $   152,959
                         ===========  ===========  ===========  ===========

Net income per weighted-
 average share, basic
 for Class A and Class B $      0.52  $      0.18  $      0.83  $      0.38

Net income per weighted-
 average share, diluted
 for Class A and Class B $      0.51  $      0.18  $      0.80  $      0.37

Weighted-average shares,
 basic for Class A and
 Class B                     419,657      407,931      418,557      405,089
Weighted-average shares,
 diluted for Class A and
 Class B                     430,473      422,333      429,984      418,476
______

(1) Includes stock-based
 compensation as
 follows:
 Cost of license
  revenues               $       438  $       390  $       904  $       775
 Cost of services
  revenues                     5,740        4,057       11,328        8,214
 Research and
  development                 46,074       39,445       87,958       74,168
 Sales and marketing          23,264       15,452       45,787       31,499
 General and
  administrative               9,926        8,492       20,038       16,877



                                VMware, Inc.

                         CONSOLIDATED BALANCE SHEETS
                  (in thousands, except per share amounts)
                                 (unaudited)

                                                     June 30,   December 31,
                                                       2011         2010
                                                   ------------ ------------

                      ASSETS
Current assets:
    Cash and cash equivalents                      $  1,791,044 $  1,628,965
    Short-term investments                            1,912,109    1,694,675
    Accounts receivable, net of allowance for
     doubtful accounts of $3,581 and $4,519             592,322      614,726
    Due from EMC, net                                    29,994       55,481
    Deferred tax asset                                  124,595      100,689
    Other current assets                                175,584      203,119
                                                   ------------ ------------
Total current assets                                  4,625,648    4,297,655
Property and equipment, net                             485,950      419,065
Capitalized software development costs, net and
 other                                                  169,876      151,945
Deferred tax asset                                      116,917      149,126
Intangible assets, net                                  429,182      210,928
Goodwill                                              1,714,984    1,568,600
                                                   ------------ ------------
      Total assets                                 $  7,542,557 $  6,797,319
                                                   ============ ============

       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                               $     61,705 $     58,913
    Accrued expenses and other                          541,428      459,813
    Unearned revenue                                  1,358,225    1,270,426
                                                   ------------ ------------
Total current liabilities                             1,961,358    1,789,152
Note payable to EMC                                     450,000      450,000
Unearned revenue                                        719,931      589,668
Deferred tax liability                                    5,378       30,096
Other liabilities                                       105,455      129,960
                                                   ------------ ------------
    Total liabilities                                 3,242,122    2,988,876
Commitments and contingencies
  Stockholders' equity:
  Class A common stock, par value $.01; authorized
   2,500,000 shares; issued and
  outstanding 121,588 and 116,701 shares                  1,216        1,167
  Class B convertible common stock, par value
   $.01; authorized 1,000,000 shares;
  issued and outstanding 300,000 shares                   3,000        3,000
  Additional paid-in capital                          3,119,331    2,955,971
  Accumulated other comprehensive income                  2,248       19,635
  Retained earnings                                   1,174,640      828,670
                                                   ------------ ------------
    Total stockholders' equity                        4,300,435    3,808,443
                                                   ------------ ------------
      Total liabilities and stockholders' equity   $  7,542,557 $  6,797,319
                                                   ============ ============



                               VMware, Inc.

                 RECONCILIATION OF GAAP TO NON-GAAP DATA
                 For the Three Months Ended June 30, 2011
                 (in thousands, except per share amounts)
                               (unaudited)

                                       Employer
                                        Payroll
                                         Taxes
                                          on
                               Stock-  Employee              Acquisition
                                Based    Stock                 Related
                              Compensa Transact  Intangible   Items and
                       GAAP     tion     ions   Amortization    Other
                     -------- -------- -------- ------------ -----------

Operating expenses:
Cost of license
 revenues            $ 48,928     (438)     (43)     (11,104)          -
Cost of services
 revenues            $103,547   (5,740)    (502)      (1,242)          -
Research and
 development         $189,241  (46,074)  (3,773)        (797)          -
Sales and marketing  $314,560  (23,264)  (2,254)      (2,426)          -
General and
 administrative      $ 78,042   (9,926)    (618)         (36)     (1,210)

Operating income     $186,892   85,442    7,190       15,605       1,210
Operating margin         20.3%     9.3%     0.8%         1.7%        0.1%

Other income, net    $ 56,639

Income before income
 taxes               $246,274   85,442    7,190       15,605       1,210

Income tax provision $ 26,116
Tax rate                 10.6%

Net income           $220,158   85,442    7,190       15,605       1,210

Net income per
 weighted-average
 share, basic for
 Class A and Class B
 (4)                 $   0.52 $   0.20 $   0.02 $       0.04 $         -

Net income per
 weighted-average
 share, diluted for
 Class A and Class B
 (5)                 $   0.51 $   0.20 $   0.02 $       0.04 $         -



Table continued below


                                  Stock-Based
                                 Compensation
                     Capitalized  Included in  Gain on               Non-
                       Software   Capitalized  Sale of     Tax       GAAP,
                     Development   Software   Terremark Adjustment    as
                      Costs (1)   Development    (2)        (3)    adjusted
                     ----------- ------------ --------- ---------- --------

Operating expenses:
Cost of license
 revenues                (19,807)           -         -          -- $ 17,536
Cost of services
 revenues                      -            -         -          -- $ 96,063
Research and
 development              29,594       (4,157)        -          -- $164,034
Sales and marketing            -            -         -          -- $286,616
General and
 administrative                -            -         -          -- $ 66,252

Operating income          (9,787)       4,157         -          -- $290,709
Operating margin            -1.2%         0.6%        -          --     31.6%

Other income, net                               (56,000)           $    639

Income before income
 taxes                    (9,787)       4,157   (56,000)         -- $294,091

Income tax provision                                        32,702 $ 58,818
Tax rate                                                               20.0%

Net income                (9,787)       4,157   (56,000)   (32,702)$235,273

Net income per
 weighted-average
 share, basic for
 Class A and Class B
 (4)                 $     (0.02)$       0.01 $   (0.13)$    (0.08)$   0.56

Net income per
 weighted-average
 share, diluted for
 Class A and Class B
 (5)                 $     (0.02)$       0.01 $   (0.13)$    (0.08)$   0.55


(1) For the second quarter of 2011, we capitalized $29.6 million
 (including $4.2 million of stock-based compensation) of costs
 incurred for the development of software products. Amortization
 expense from capitalized amounts was $19.8 million for the second
 quarter of 2011.

(2) VMware realized a gain of $56.0 million on the sale of its
 investment in Terremark Worldwide, Inc.

(3) Non-GAAP financial information for the quarter is adjusted for
 a tax rate equal to our annual estimated tax rate on non-GAAP
 income. This rate is based on our estimated annual GAAP income
 tax rate forecast, adjusted to account for items excluded from
 GAAP income in calculating the non-GAAP financial measures
 presented above. Our estimated tax rate on non-GAAP income is
 determined annually and may be re-calculated during the year to
 take into account events or trends that we believe materially
 impact the estimated annual rate including, but not limited to,
 significant changes resulting from tax legislation, tax audit
 closures, material changes in the geographic mix of revenues and
 expenses and other significant events. Due to the differences in
 the tax treatment of items excluded from non-GAAP earnings, as
 well as the methodology applied to our estimated annual tax rates
 as described above, our estimated tax rate on non-GAAP income may
 differ from our GAAP tax rate and from our actual tax
 liabilities.

(4) Calculated based upon 419,657 basic weighted-average shares
 for Class A and Class B.

(5) Calculated based upon 430,473 diluted weighted-average shares
 for Class A and Class B.


                                VMware, Inc.

                   RECONCILIATION OF GAAP TO NON-GAAP DATA
                  For the Three Months Ended June 30, 2010
                  (in thousands, except per share amounts)
                                 (unaudited)

                                          Employer
                                           Payroll
                                            Taxes
                                             on
                                  Stock-  Employee              Acquisition
                                   Based    Stock                 Related
                                 Compensa Transact  Intangible   Items and
                          GAAP     tion     ions   Amortization    Other
                        -------- -------- -------- ------------ -----------

Operating expenses:
Cost of license revenues$ 40,269     (390)     (25)      (5,611)          -
Cost of services
 revenues               $ 77,883   (4,057)    (122)      (1,471)          -
Research and development$161,756  (39,445)  (1,719)        (627)          -
Sales and marketing     $231,662  (15,452)    (724)        (598)          -
General and
 administrative         $ 61,153   (8,492)    (365)         (38)       (900)

Operating income        $101,181   67,836    2,955        8,345         900
Operating margin            15.0%    10.1%     0.4%         1.2%        0.2%

Income before income
 taxes                  $ 96,944   67,836    2,955        8,345         900

Income tax provision    $ 22,406
Tax rate                    23.1%

Net income              $ 74,538   67,836    2,955        8,345         900

Net income per weighted-
 average share, basic
 for Class A and Class B
 (3)                    $   0.18 $   0.17 $   0.01 $       0.02 $         -

Net income per weighted-
 average share, diluted
 for Class A and Class B
 (4)                    $   0.18 $   0.16 $   0.01 $       0.02 $         -


Table continued below

                                     Stock-Based
                                    Compensation
                        Capitalized  Included in
                          Software   Capitalized     Tax     Non-GAAP,
                        Development   Software   Adjustment     as
                         Costs (1)   Development     (2)     adjusted
                        ----------- ------------ ---------- ----------

Operating expenses:
Cost of license revenues    (21,236)           -          - $   13,007
Cost of services
 revenues                         -            -          - $   72,233
Research and development     18,594       (2,691)         - $  135,868
Sales and marketing               -            -          - $  214,888
General and
 administrative                   -            -          - $   51,358

Operating income              2,642        2,691          - $  186,550
Operating margin                0.4%         0.4%         -       27.7%

Income before income
 taxes                        2,642        2,691          - $  182,313

Income tax provision                                 17,703 $   40,109
Tax rate                                                          22.0%

Net income                    2,642        2,691    (17,703)$  142,204

Net income per weighted-
 average share, basic
 for Class A and Class B
 (3)                    $         - $       0.01 $    (0.04)$     0.35

Net income per weighted-
 average share, diluted
 for Class A and Class B
 (4)                    $         - $       0.01 $    (0.04)$     0.34


(1) For the second quarter of 2010, we capitalized $18.6 million
 (including $2.7 million of stock-based compensation) of costs
 incurred for the development of software products. Amortization
 expense from capitalized amounts was $21.2 million for the second
 quarter of 2010.

(2) Non-GAAP financial information for the quarter is adjusted for a
 tax rate equal to our annual estimated tax rate on non-GAAP income.
 This rate is based on our estimated annual GAAP income tax rate
 forecast, adjusted to account for items excluded from GAAP income in
 calculating the non-GAAP financial measures presented above. Our
 estimated tax rate on non-GAAP income is determined annually and may
 be re-calculated during the year to take into account events or
 trends that we believe materially impact the estimated annual rate
 including, but not limited to, significant changes resulting from tax
 legislation, tax audit closures, material changes in the geographic
 mix of revenues and expenses and other significant events. Due to the
 differences in the tax treatment of items excluded from non-GAAP
 earnings, as well as the methodology applied to our estimated annual
 tax rates as described above, our estimated tax rate on non-GAAP
 income may differ from our GAAP tax rate and from our actual tax
 liabilities.

(3) Calculated based upon 407,931 basic weighted-average shares for
 Class A and Class B.

(4) Calculated based upon 422,333 diluted weighted-average shares for
 Class A and Class B.


                                VMware, Inc.

                   RECONCILIATION OF GAAP TO NON-GAAP DATA
                   For the Six Months Ended June 30, 2011
                  (in thousands, except per share amounts)
                                 (unaudited)

                                        Employer
                                         Payroll
                                          Taxes                 Acquisition
                                       on Employee                Related
                          Stock-Based     Stock     Intangible   Items and
                  GAAP   Compensation Transactions Amortization    Other
                -------- ------------ ------------ ------------ -----------

Operating
 expenses:
Cost of license
 revenues       $104,946         (904)         (67)     (20,144)          -
Cost of
 services
 revenues       $197,426      (11,328)        (879)      (2,484)          -
Research and
 development    $358,404      (87,958)      (5,844)      (1,594)          -
Sales and
 marketing      $617,484      (45,787)      (3,307)      (4,515)          -
General and
 administrative $146,277      (20,038)        (857)         (72)     (1,382)

Operating
 income         $340,394      166,015       10,954       28,809       1,382
Operating
 margin             19.3%         9.4%         0.6%         1.6%        0.1%

Other income,
 net            $ 56,804

Income before
 income taxes   $402,388      166,015       10,954       28,809       1,382

Income tax
 provision      $ 56,418
Tax rate            14.0%

Net income      $345,970      166,015       10,954       28,809       1,382

Net income per
 weighted-
 average share,
 basic for
 Class A and
 Class B (4)    $   0.83 $       0.40 $       0.03 $       0.07 $         -

Net income per
 weighted-
 average share,
 diluted for
 Class A and
 Class B (5)    $   0.80 $       0.39 $       0.03 $       0.07 $         -


Table continued below

                            Stock-Based
                           Compensation
               Capitalized  Included in   Gain on
                 Software   Capitalized   Sale of      Tax
               Development   Software    Terremark  Adjustment  Non-GAAP,
                Costs (1)   Development     (2)         (3)    as adjusted
               ----------- ------------ ----------- ---------- -----------

Operating
 expenses:
Cost of license
 revenues          (48,272)           -           -          - $    35,559
Cost of
 services
 revenues                -            -           -          - $   182,735
Research and
 development        61,898       (9,039)          -          - $   315,867
Sales and
 marketing               -            -           -          - $   563,875
General and
 administrative          -            -           -          - $   123,928

Operating
 income            (13,626)       9,039           -          - $   542,967
Operating
 margin               -0.7%         0.5%          -          -        30.8%

Other income,
 net                                        (56,000)                   804

Income before
 income taxes      (13,626)       9,039     (56,000)         - $   548,961

Income tax
 provision                                              53,374 $   109,792
Tax rate                                                              20.0%

Net income         (13,626)       9,039     (56,000)   (53,374)$   439,169

Net income per
 weighted-
 average share,
 basic for
 Class A and
 Class B (4)   $     (0.03)$       0.01 $     (0.13)$    (0.13)$      1.05

Net income per
 weighted-
 average share,
 diluted for
 Class A and
 Class B (5)   $     (0.03)$       0.01 $     (0.13)$    (0.12)$      1.02


(1) For the first half of 2011, we capitalized $61.9 million
 (including $9.0 million of stock-based compensation) of costs
 incurred for the development of software products.
 Amortization expense from capitalized amounts was $48.3
 million for the first half of 2011.

(2) VMware realized a gain of $56.0 million on the sale of its investment
 in Terremark Worldwide, Inc.

(3) Non-GAAP financial information for the quarter is adjusted
 for a tax rate equal to our annual estimated tax rate on non-
 GAAP income. This rate is based on our estimated annual GAAP
 income tax rate forecast, adjusted to account for items
 excluded from GAAP income in calculating the non-GAAP
 financial measures presented above. Our estimated tax rate on
 non-GAAP income is determined annually and may be re-
 calculated during the year to take into account events or
 trends that we believe materially impact the estimated annual
 rate including, but not limited to, significant changes
 resulting from tax legislation, tax audit closures, material
 changes in the geographic mix of revenues and expenses and
 other significant events. Due to the differences in the tax
 treatment of items excluded from non-GAAP earnings, as well
 as the methodology applied to our estimated annual tax rates
 as described above, our estimated tax rate on non-GAAP income
 may differ from our GAAP tax rate and from our actual tax
 liabilities.

(4) Calculated based upon 418,557 basic weighted-average shares for
 Class A and Class B.

(5) Calculated based upon 429,984 diluted weighted-average shares for
 Class A and Class B.

                                VMware, Inc.

                   RECONCILIATION OF GAAP TO NON-GAAP DATA
                   For the Six Months Ended June 30, 2010
                  (in thousands, except per share amounts)
                                 (unaudited)

                                       Employer
                                        Payroll
                                         Taxes                  Acquisition
                                      on Employee                 Related
                         Stock-Based     Stock     Intangible    Items and
                 GAAP   Compensation Transactions Amortization     Other
               -------- ------------ ------------ ------------ ------------

Operating
 expenses:
Cost of license
 revenues      $ 80,390         (775)         (37)      (8,722)           --
Cost of
 services
 revenues      $146,412       (8,214)        (177)      (1,728)           --
Research and
 development   $299,868      (74,168)      (2,702)      (1,100)           --
Sales and
 marketing     $448,491      (31,499)      (1,061)      (1,038)           --
General and
 administrative$128,909      (16,877)        (576)         (76)      (2,139)

Operating
 income        $203,367      131,533        4,553       12,664        2,139
Operating
 margin            15.6%        10.1%         0.3%         1.0%         0.1%

Income before
 income taxes  $194,583      131,533        4,553       12,664        2,139

Income tax
 provision     $ 41,624
Tax rate           21.4%

Net income     $152,959      131,533        4,553       12,664        2,139

Net income per
 weighted-
 average share,
 basic for
 Class A and
 Class B (3)   $   0.38 $       0.32 $       0.01 $       0.03 $       0.01

Net income per
 weighted-
 average share,
 diluted for
 Class A and
 Class B (4)   $   0.37 $       0.31 $       0.01 $       0.03 $       0.01


Table continued below

                             Stock-Based
                            Compensation
                Capitalized  Included in
                 Software    Capitalized     Tax     Non-GAAP,
                Development   Software   Adjustment     as
                 Costs (1)   Development     (2)     adjusted
               ------------ ------------ ---------- ----------

Operating
 expenses:
Cost of license
 revenues           (44,917)           --          -- $   25,939
Cost of
 services
 revenues                 --            --          -- $  136,293
Research and
 development         44,635       (6,871)         -- $  259,662
Sales and
 marketing                --            --          -- $  414,893
General and
 administrative           --            --          -- $  109,241

Operating
 income                 282        6,871          -- $  361,409
Operating
 margin                   --          0.5%         --       27.6%

Income before
 income taxes           282        6,871          -- $  352,625

Income tax
 provision                                   35,954 $   77,578
Tax rate                                                  22.0%

Net income              282        6,871    (35,954)$  275,047

Net income per
 weighted-
 average share,
 basic for
 Class A and
 Class B (3)   $          -- $       0.02 $    (0.09)$     0.68

Net income per
 weighted-
 average share,
 diluted for
 Class A and
 Class B (4)   $          -- $       0.02 $    (0.09)$     0.66


(1) For the first half of 2010, we capitalized $44.6 million
 (including $6.9 million of stock-based compensation) of costs
 incurred for the development of software products.
 Amortization expense from capitalized amounts was $44.9
 million for the first half of 2010.

(2) Non-GAAP financial information for the quarter is adjusted
 for a tax rate equal to our annual estimated tax rate on non-
 GAAP income. This rate is based on our estimated annual GAAP
 income tax rate forecast, adjusted to account for items
 excluded from GAAP income in calculating the non-GAAP
 financial measures presented above. Our estimated tax rate on
 non-GAAP income is determined annually and may be re-
 calculated during the year to take into account events or
 trends that we believe materially impact the estimated annual
 rate including, but not limited to, significant changes
 resulting from tax legislation, tax audit closures, material
 changes in the geographic mix of revenues and expenses and
 other significant events. Due to the differences in the tax
 treatment of items excluded from non-GAAP earnings, as well
 as the methodology applied to our estimated annual tax rates
 as described above, our estimated tax rate on non-GAAP income
 may differ from our GAAP tax rate and from our actual tax
 liabilities.

(3) Calculated based upon 405,089 basic weighted-average
 shares for Class A and Class B.

(4) Calculated based upon 418,476 diluted weighted-average
 shares for Class A and Class B.


                                VMware, Inc.

                              REVENUE BY TYPE
                               (in thousands)
                                (unaudited)

                           For the Three Months
                                   Ended           For the Six Months Ended
                                 June 30,                  June 30,
                         ------------------------  ------------------------
                             2011         2010         2011         2010
                         -----------  -----------  -----------  -----------

Revenues:
 License                 $   464,806  $   323,665  $   883,805  $   635,842
 Services:
  Software maintenance       386,329      290,429      750,135      557,673
  Professional services       70,075       59,810      130,991      113,922
                         -----------  -----------  -----------  -----------
 Total services              456,404      350,239      881,126      671,595
                         -----------  -----------  -----------  -----------
                         $   921,210  $   673,904  $ 1,764,931  $ 1,307,437
                         ===========  ===========  ===========  ===========


Percentage of revenues:
 License                        50.5%        48.0%        50.1%        48.6%
 Services:
  Software maintenance          41.9%        43.1%        42.5%        42.7%
  Professional services          7.6%         8.9%         7.4%         8.7%
                         -----------  -----------  -----------  -----------
 Total services                 49.5%        52.0%        49.9%        51.4%
                         -----------  -----------  -----------  -----------
                               100.0%       100.0%       100.0%       100.0%
                         ===========  ===========  ===========  ===========



                                VMware, Inc.

        RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES
                             TO FREE CASH FLOWS
                       (A NON-GAAP FINANCIAL MEASURE)
             For the Three Months Ended June 30, 2011 and 2010
                               (in thousands)
                                (unaudited)

                                                     For the Three Months
                                                             Ended
                                                           June 30,
                                                   ------------------------
                                                       2011         2010
                                                   -----------  -----------

GAAP cash flows from operating activities          $   462,796  $   216,123
Capitalized software development costs                 (25,437)     (19,310)
Excess tax benefits from stock-based compensation      101,256       64,583
Capital expenditures                                   (95,186)     (28,996)
                                                   -----------  -----------
Free cash flows                                    $   443,429  $   232,400
                                                   ===========  ===========





                                VMware, Inc.

        RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES
                             TO FREE CASH FLOWS
                       (A NON-GAAP FINANCIAL MEASURE)
        For the Trailing Twelve Months Ended June 30, 2011 and 2010
                               (in thousands)
                                (unaudited)

                                                    For the Trailing Twelve
                                                            Months
                                                        Ended June 30,
                                                   ------------------------
                                                       2011         2010
                                                   -----------  -----------

GAAP cash flows from operating activities          $ 1,544,027  $ 1,054,132
Capitalized software development costs                 (75,837)     (65,102)
Excess tax benefits from stock-based compensation      286,220      110,242
Capital expenditures                                  (193,819)     (97,815)
                                                   -----------  -----------
Free cash flows                                    $ 1,560,591  $ 1,001,457
                                                   ===========  ===========

About Non-GAAP Financial Measures
To provide investors and others with additional information regarding VMware's results, we have disclosed in this press release the following non-GAAP financial measures: non-GAAP operating income, non-GAAP net income, non-GAAP operating margin, free cash flows and trailing twelve-month free cash flows. VMware has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. These non-GAAP financial measures differ from GAAP in that they exclude stock-based compensation, employer payroll tax on employee stock transactions, amortization of intangible assets, acquisition related items, the net effect of the amortization and capitalization of software development costs and the gain that VMware realized upon its sale of its investment in Terremark Worldwide, Inc. during the second quarter of fiscal 2011, each as discussed below.

VMware's management uses these non-GAAP financial measures to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short- and long-term operating plans, to calculate bonus payments and to evaluate VMware's financial performance, the performance of its individual functional groups and the ability of operations to generate cash. Management believes these non-GAAP financial measures reflect VMware's ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in VMware's business, as they exclude expenses that are not reflective of ongoing operating results. Management also believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating VMware's operating results and future prospects in the same manner as management and in comparing financial results across accounting periods and to those of peer companies. Additionally, management believes information regarding free cash flows provides investors and others with an important perspective on the cash available to make strategic acquisitions and investments, to repurchase shares, to fund ongoing operations and to fund other capital expenditures.

Management believes these non-GAAP financial measures are useful to investors and others in assessing VMware's operating performance due to the following factors:

  • Stock-based compensation. Although stock-based compensation is an important aspect of the compensation of VMware's employees and executives, determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards. Furthermore, unlike cash compensation, the value of stock-based compensation is determined using a complex formula that incorporates factors, such as market volatility, that are beyond our control. Management believes it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison of our results to those of peer companies. In addition, we account for stock-based compensation under GAAP, which requires that we report the excess income tax benefit from stock-based compensation as a financing cash flow rather than as an operating cash flow. We have added this benefit back to our calculation of free cash flows in order to generally classify cash flows arising from income taxes as operating cash flows.

  • Employer payroll tax on employee stock transactions. The amount of employer payroll taxes on stock-based compensation is dependent on VMware's stock price and other factors that are beyond our control and do not correlate to the operation of the business.

  • Amortization of intangible assets. A portion of the purchase price of VMware's acquisitions is generally allocated to intangible assets, such as intellectual property, and is subject to amortization. However, VMware does not acquire businesses on a predictable cycle. 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. Therefore, VMware believes that the presentation of non-GAAP financial measures that adjust for the amortization of intangible assets, provides investors and others with a consistent basis for comparison across accounting periods.

  • Acquisition related items. Acquisition related items include direct costs of acquisitions, such as transaction fees, which vary significantly and are unique to each acquisition. Additionally, VMware does not acquire businesses on a predictable cycle.

  • Amortization and capitalization of software development costs. Amortization and capitalization of software development costs can vary significantly depending upon the timing of products reaching technological feasibility and being made generally available. In addition, we exclude the capitalization of software from our free cash flows to better convey management's view of operating cash flows. If we did not capitalize costs under generally accepted accounting guidance, our GAAP operating cash flows would be lower as a result of additional expense recognized within net income and paid out in cash during the period.

  • Gain on sale of Terremark investment. In the second quarter of 2011, we sold our investment in Terremark Worldwide, Inc., which was acquired by Verizon in a cash transaction, and realized a gain of $56.0 million. Our investment in Terremark was made in connection with a business and technical collaboration and was not made to seek an investment gain or to fund our business operations. To the extent that sizeable gains or losses are realized on such investments, they do not occur on a predictable cycle. Additionally, the timing of the event that triggered our divestment and whether or not we realized a gain or loss, was not under our control.

Additionally, we believe that the non-GAAP financial measure, free cash flows, is meaningful to investors because we review cash flows generated from operations after taking into consideration capital expenditures due to the fact that these expenditures are considered to be a necessary component of ongoing operations. As discussed above, we also exclude capitalization of software development costs and the excess income tax benefit from stock-based compensation from our measure of free cash flows.

The use of non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense that affect VMware's operations. Specifically, in the case of stock-based compensation, if VMware did not pay out a portion of its 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 VMware's cash position. VMware compensates for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, measures prepared in accordance with GAAP and should not be considered measures of VMware's liquidity. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. Management encourages investors and others to review VMware's financial information in its entirety and not rely on a single financial measure.

Revenue Growth in Constant Currency

We have invoiced and collected in the Euro, the British Pound, the Japanese Yen, and the Australian Dollar in their respective regions since May 2009. As a result, our total revenues are affected by changes in the U.S. Dollar against these currencies. In order to provide a comparable framework for assessing how our business performed excluding the effect of foreign currency fluctuations, management analyzes year-over-year revenue growth on a constant currency basis. Since all of our entities operate with the U.S. Dollar as their functional currency, revenues for orders booked in currencies other than U.S. Dollars are converted into unearned revenue at the exchange rate in effect for the month in which each order is booked. We calculate constant currency on license revenues recognized during the current period that were originally booked in currencies other than U.S. Dollars by comparing the exchange rates at which the revenue was recognized against the exchange rate that was used in the comparable period. We do not calculate constant currency on services revenues, which include software maintenance revenues and professional services revenues.

Contacts:

Michael Haase
VMware Investor Relations
mhaase@vmware.com
650-427-2875

Gloria Lee
VMware Investor Relations
glee@vmware.com
650-427-3267

Joan Stone
VMware Global Communications
joanstone@vmware.com
650-427-4436