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March 26, 2020, 4:48 p.m. EDT

10-K: VMWARE, INC.

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(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management's discussion and analysis is provided in addition to the accompanying consolidated financial statements and notes to assist in understanding our results of operations and financial condition. In December 2019, VMware completed the acquisition of Pivotal, formerly a subsidiary of VMware's parent company, Dell. The acquisition was accounted for as a transaction between entities under common control in accordance with Accounting Standards Codification 805-50, Business Combination - Related Issues, which requires retrospective combination of entities for all periods presented, as if the combination had been in effect since the inception of common control. As such, prior period financial information has been recast. The recast financial statements combine VMware's historical financial results with those of Pivotal. Refer to Note B to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.

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license revenue and services revenue in the consolidated statements of income. In light of our recent acquisitions, management decided that revenue recognized from subscription and SaaS offerings will be presented separately as it provides a more meaningful representation of the nature of its revenue. The new subscription and SaaS revenue line item includes revenue from our VMware Cloud Provider Program ("VCPP") cloud offerings that are billed to customers on a consumption basis, revenue from Pivotal and other offerings that are billed on a subscription basis as well as revenue from SaaS offerings, such as VMware Workspace ONE ("Workspace ONE") and VMware Cloud on AWS. Revenue and its related costs from prior periods have been reclassified to conform to the fiscal 2020 presentation.

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Coronavirus (COVID-19) Impact







                                      For the Year Ended                           Fiscal Year                  Fiscal Year
                        January 31,       February 1,       February 2,           2020 vs. 2019                2019 vs. 2018
                           2020              2019              2018           $ Change      % Change       $ Change      % Change
        Revenue:
        License       $       3,181     $       3,042     $       2,628     $      139           5 %     $      414          16 %
        Subscription
        and SaaS              1,877             1,303               927            574          44              376          41
        Total license
        and
        subscription
        and SaaS              5,058             4,345             3,555            713          16              790          22
        Services:
        Software
        maintenance           4,754             4,351             3,919            403           9              431          11
        Professional
        services                999               917               862             82           9               56           6
        Total
        services              5,753             5,268             4,781            485           9              487          10
        Total revenue $      10,811     $       9,613     $       8,336     $    1,198          12       $    1,277          15
        Revenue:
        United States $       5,405     $       4,696     $       4,200     $      709          15 %     $      496          12 %
        International         5,406             4,917             4,136            489          10              781          19
        Total revenue $      10,811     $       9,613     $       8,336     $    1,198          12       $    1,277          15
        


Revenue from our subscription offerings consisted primarily of VMware's VCPP cloud offerings that are billed to customers on a consumption basis and revenue from Pivotal and other offerings that are billed on a subscription basis. Revenue from our SaaS offerings consisted primarily of our Unified Endpoint Management mobile solution within Workspace ONE and newer SaaS offerings, such as VMware Carbon Black Cloud platform, CloudHealth and VMware SD-WAN by VeloCloud.

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VeloCloud Networks, Inc. ("VeloCloud"), also contributed to subscription and SaaS revenue growth during fiscal 2019 compared to fiscal 2018. We continue to expect growth in our subscription and SaaS offerings over the next fiscal year. Services Revenue







                                                January 31,      February 1,
                                                    2020             2019
        Unearned license revenue               $          19    $          15
        Unearned subscription and SaaS revenue         1,534              916
        Unearned software maintenance revenue          6,700            5,741
        Unearned professional services revenue         1,015              767
        Total unearned revenue                 $       9,268    $       7,439
        


Unearned subscription and SaaS revenue is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service. Previously, unearned subscription and SaaS revenue was allocated between unearned license revenue and unearned software maintenance revenue in prior periods and has been reclassified to conform with current period presentation.

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performance obligations because such contracts are subject to cancellation until fulfillment of the performance obligation occurs.







                                    For the Year Ended                           Fiscal Year                    Fiscal Year
                       January 31,      February 1,      February 2,            2020 vs. 2019                  2019 vs. 2018
                          2020              2019             2018           $ Change       % Change       $ Change        % Change
        Cost of
        license
        revenue      $         165     $        149     $        133     $      16             11 %     $        16          12  %
        Stock-based
        compensation             1                1                2             -             45                (1 )       (50 )
        Total
        expenses     $         166     $        150     $        135     $      16             11       $        15          11
        % of License
        revenue                  5 %              5 %              5 %
        


Cost of license revenue increased in fiscal 2020 compared to fiscal 2019 and in fiscal 2019 compared to fiscal 2018, but remained relatively consistent as a percentage of license revenue.







                                    For the Year Ended                          Fiscal Year                   Fiscal Year
                       January 31,      February 1,      February 2,           2020 vs. 2019                 2019 vs. 2018
                          2020              2019             2018          $ Change      % Change        $ Change       % Change
        Cost of
        subscription
        and SaaS
        revenue      $         387     $        273     $        195     $      114          42 %     $      78             40 %
        Stock-based
        compensation            13                7                5              6          83               2             46
        Total
        expenses     $         400     $        280     $        200     $      120          43       $      80             40
        % of
        Subscription
        and SaaS
        revenue                 21 %             21 %             22 %
        


Cost of subscription and SaaS revenue increased during fiscal 2020 compared to fiscal 2019. The increase was primarily due to growth in costs associated with hosted services to support our SaaS offerings of $46 million, resulting from an increase in demand for technical support and services, as well as in increase in cash-based employee-related expenses of $25 million, driven by incremental growth in headcount and salaries. The increase was also driven by increased equipment, depreciation and facilities costs, as well as increased amortization of intangible assets of $14 million.

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        Cost of Services Revenue
        Cost of services revenue primarily includes the costs of personnel and related
        overhead to physically and electronically deliver technical support for our
        products and costs to deliver professional services. Additionally, cost of
        services revenue includes depreciation of equipment supporting our service
        offerings.
        Cost of services revenue during the periods presented was as follows (dollars in
        millions):
                                  For the Year Ended                        Fiscal Year                   Fiscal Year
                      January 31,     February 1,     February 2,          2020 vs. 2019                 2019 vs. 2018
                         2020            2019            2018          $ Change      % Change        $ Change       % Change
        Cost of
        services
        revenue      $     1,150     $     1,064     $     1,019     $       86           8 %     $      45              4 %
        Stock-based
        compensation          83              58              53             25          42               5             10
        Total
        expenses     $     1,233     $     1,122     $     1,072     $      111          10       $      50              5
        % of
        Services
        revenue               21 %            21 %            22 %
        


Cost of services revenue increased during fiscal 2020 compared to fiscal 2019. The increase was primarily due to growth in cash-based employee-related expenses of $65 million, driven by incremental growth in headcount and salaries, as well as an increase in third-party professional services costs of $16 million, resulting from an increase in demand for technical support and services. Equipment, depreciation and facilities costs of $12 million, and stock-based compensation expense of $25 million, primarily driven by an increase in restricted stock unit awards granted after the first quarter of fiscal 2019, also contributed to the increase.







                                  For the Year Ended                        Fiscal Year                  Fiscal Year
                      January 31,     February 1,     February 2,          2020 vs. 2019                2019 vs. 2018
                         2020            2019            2018          $ Change      % Change       $ Change      % Change
        Research and
        development  $     2,063     $     1,782     $     1,554     $      281          16 %     $      228          15 %
        Stock-based
        compensation         459             391             363             68          17               28           8
        Total
        expenses     $     2,522     $     2,173     $     1,917     $      349          16       $      256          13
        % of Total
        revenue               23 %            23 %            23 %
        


Research and development expenses increased in fiscal 2020 compared to fiscal 2019. The increase was primarily due to growth in cash-based employee-related expenses of $227 million, driven by incremental growth in salaries and headcount, both organic and through acquisitions. The increase was also driven by an increase of stock-based compensation of $68 million, primarily driven by . . .

Mar 26, 2020

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