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Sept. 9, 2019, 4:15 p.m. EDT

10-Q: VMWARE, INC.

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(EDGAR Online via COMTEX) -- ITEM 2. 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 condensed consolidated financial statements and notes to assist in understanding our results of operations and financial condition. Financial information as of August 2, 2019 should be read in conjunction with our consolidated financial statements for the year ended February 1, 2019 contained in our Form 10-K filed on March 29, 2019.

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EUC sales continued to increase during the six months ended August 2, 2019, driven by the adoption of our subscription offerings such as Workspace ONE. Dell Synergies







                             Three Months Ended                                             Six Months Ended
                          August 2,         August 3,                                   August 2,       August 3,
                            2019              2018         $ Change      % Change         2019            2018         $ Change      % Change
        Revenue:
        License       $     1,011         $       900     $     111          12 %     $     1,879     $     1,674     $     205          12 %
        Services:
        Software
        maintenance         1,235               1,109           126          11             2,440           2,186           254          12
        Professional
        services              193                 165            27          17               386             323            63          19
        Total
        services            1,428               1,274           154          12             2,826           2,509           317          13
        Total revenue $     2,439         $     2,174     $     265          12       $     4,705     $     4,183     $     522          12
        Revenue:
        United States $     1,171         $     1,062     $     108          10 %     $     2,223     $     2,000     $     223          11 %
        International       1,268               1,112           156          14             2,482           2,183           299          14
        Total revenue $     2,439         $     2,174     $     265          12       $     4,705     $     4,183     $     522          12
        


Revenue from our Hybrid Cloud Computing offerings consisted primarily of VCPP, and revenue from our SaaS offerings consisted primarily of our Unified Endpoint Management mobile solution within Workspace ONE. VCPP revenue is included in license revenue and SaaS revenue is included in both license and services revenue. Hybrid Cloud Computing, together with our SaaS offerings, increased to greater than 12% of our total revenue during the three and six months ended August 2, 2019 from approximately 10% of our total revenue during the three and six months ended August 3, 2018.

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with new software license sales. In each period presented, customers purchased, on a weighted-average basis, approximately three years of support and maintenance with each new license purchased.







                                                August 2,      February 1,
                                                   2019            2019
        Unearned license revenue               $       338    $         255
        Unearned software maintenance revenue        6,357            5,972
        Unearned professional services revenue         838              751
        Total unearned revenue                 $     7,533    $       6,978
        


Unearned license revenue is primarily related to the allocated portion of our SaaS offerings and is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service.

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Cost of License Revenue, Cost of Services Revenue and Operating Expenses Our cost of services revenue and operating expenses primarily reflected increasing cash-based employee-related expenses, driven by incremental growth in salaries and headcount across most of our income statement expense categories for the three and six months ended August 2, 2019. We expect increases in cash-based employee-related expenses to continue. Cost of License Revenue







                           Three Months Ended                                            Six Months Ended
                       August 2,        August 3,                                   August 2,        August 3,
                         2019             2018          $ Change       % Change        2019            2018          $ Change      % Change
        Cost of
        license
        revenue      $       50       $       45      $         5          10 %    $     100       $        90     $       10          11 %
        Stock-based
        compensation          -                -                -         102              1                 -              -          74
        Total
        expenses     $       50       $       45      $         5          11      $     101       $        90     $       10          11
        % of License
        revenue               5 %              5 %                                         5 %               5 %
        


Cost of license revenue increased during the three and six months ended August 2, 2019 compared to the three and six months ended August 3, 2018, but remained relatively consistent as a percentage of license revenue. Cost of Services Revenue







                          Three Months Ended                                          Six months ended
                      August 2,       August 3,                                   August 2,       August 3,
                         2019            2018         $ Change      % Change         2019           2018        $ Change      % Change
        Cost of
        services
        revenue      $     298       $      248     $       50          20 %     $     584       $     487     $      97          20 %
        Stock-based
        compensation        17               12              4          36              33              24             9          40
        Total
        expenses     $     315       $      260     $       55          21       $     617       $     511     $     106          21
        % of
        Services
        revenue             22 %             20 %                                       22 %            20 %
        


Cost of services revenue increased during the three and six months ended August 2, 2019 compared to the three and six months ended August 3, 2018. The increase was primarily due to growth in cash-based employee-related expenses of $23 million and $42 million, respectively, during the three and six months ended August 2, 2019, driven by incremental growth in headcount and salaries, and an increase in costs associated with third-party hosting services to support our SaaS offerings of $16 million and $31 million, respectively, during the three and six months ended August 2, 2019. The increase during the six months ended August 2, 2019 was also driven by increased equipment and depreciation of $13 million, as well as third-party professional services costs of $12 million, resulting from an increase in demand for technical support and services. Research and Development Expenses

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Research and development expenses during the periods presented were as follows (dollars in millions):







                          Three Months Ended                                          Six Months Ended
                      August 2,       August 3,                                   August 2,      August 3,
                         2019            2018         $ Change      % Change         2019          2018        $ Change      % Change
        Research and
        development  $     453       $      391     $       62          16 %     $      891     $     760     $     131          17 %
        Stock-based
        compensation       101               90             11          12              196           174            22          13
        Total
        expenses     $     554       $      481     $       72          15       $    1,087     $     934     $     153          16
        % of Total
        revenue             23 %             22 %                                        23 %          22 %
        


Research and development expenses increased during the three and six months ended August 2, 2019 compared to the three and six months ended August 3, 2018. The increase was primarily due to growth in cash-based employee-related expenses of $53 million and $97 million, respectively, during the three and six months ended August 2, 2019 driven by incremental growth in headcount and salaries. The increase was also driven by an increase of stock-based compensation of $11 million and $22 million, respectively, during the three and six months ended August 2, 2019 primarily driven by an increase in restricted stock unit awards granted after the first quarter of fiscal 2019. Equipment, depreciation and facilities related costs of $29 million also contributed to the increase during the six months ended August 2, 2019.







                          Three Months Ended                                          Six Months Ended
                      August 2,       August 3,                                   August 2,      August 3,
                         2019            2018        $ Change      % Change         2019            2018        $ Change      % Change
        Sales and
        marketing    $     737       $      647     $      91          14 %     $     1,460     $    1,308     $     152          12 %
        Stock-based
        compensation        60               49            11          22               115             95            21          22
        Total
        expenses     $     797       $      696     $     101          15       $     1,575     $    1,403     $     173          12
        % of Total
        revenue             33 %             32 %                                        33 %           34 %
        


Sales and marketing expenses increased during the three and six months ended August 2, 2019 compared to the three and six months ended August 3, 2018. The increase was primarily due to growth in cash-based employee-related expenses of $68 million and $119 million, respectively, during the three and six months ended August 2, 2019 driven by incremental growth in headcount and salaries, as well as higher commission costs resulting from increased sales volume. The increase was also driven by an increase in stock-based compensation of $11 million and $21 million, respectively, during the three and six months ended August 2, 2019 primarily driven by an increase in restricted stock unit awards granted after the first quarter of fiscal 2019. The increase during the six months ended August 2, 2019 was also driven by increased equipment and depreciation of $13 million.

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General and administrative expenses during the periods presented were as follows (dollars in millions):







                            Three Months Ended                                          Six Months Ended
                        August 2,       August 3,                                   August 2,       August 3,
                           2019            2018         $ Change      % Change         2019           2018         $ Change      % Change
        General and
        administrative $     170       $      156     $       13           8 %     $     330       $     305     $       25           8 %
        Stock-based
        compensation          30               26              5          19              57              46             11          23
        Total expenses $     200       $      182     $       18          10       $     387       $     351     $       36          10
        % of Total
        revenue                8 %              8 %                                        8 %             8 %
        


General and administrative expenses remained relatively consistent as a percentage of total revenue during the three months ended August 2, 2019 compared to the three months ended August 3, 2018.







                         Three Months Ended                                            Six Months Ended
                     August 2,        August 3,                                    August 2,       August 3,
                       2019             2018         $ Change       % Change         2019             2018        $ Change       % Change
        Investment
        income     $       14       $       57      $     (43 )       (76 )%     $       28       $      105     $     (78 )       (74 )%
        % of Total
        revenue             1 %              3 %                                          1 %              3 %
        


Investment income decreased during the three and six months ended August 2, 2019 compared to the three and six months ended August 3, 2018. The decrease was primarily due to a decrease in interest income driven by the decline in our cash equivalents and short-term investments as a result of the liquidation of our fixed income investments that were used primarily to fund the $11.0 billion special cash dividend paid during the fourth quarter of fiscal 2019. We expect investment income during fiscal 2020 to decrease as compared to fiscal 2019, primarily due to lower cash equivalent and short-term investment balances in fiscal 2020.







                        Three Months Ended                                         Six Months Ended
                     August 2,       August 3,                                 August 2,      August 3,
                       2019            2018        $ Change      % Change        2019            2018        $ Change     % Change
        Other
        income
        (expense),
        net        $    (502 )      $     240     $    (742 )      (310 )%   $     (359 )    $    1,018     $ (1,376 )      (135 )%
        % of Total
        revenue          (21 )%            11 %                                      (8 )%           24 %
        


The decrease in other income (expense), net was primarily related to our . . .

Sep 09, 2019

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