Company Quick10K Filing
Quick10K
Vmware
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$135.73 418 $56,788
10-Q 2019-08-02 Quarter: 2019-08-02
10-Q 2019-05-03 Quarter: 2019-05-03
10-K 2019-02-01 Annual: 2019-02-01
10-Q 2018-11-02 Quarter: 2018-11-02
10-Q 2018-08-03 Quarter: 2018-08-03
10-Q 2018-05-04 Quarter: 2018-05-04
10-K 2018-02-02 Annual: 2018-02-02
10-Q 2017-11-03 Quarter: 2017-11-03
10-Q 2017-08-04 Quarter: 2017-08-04
10-Q 2017-05-05 Quarter: 2017-05-05
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-10-08 Other Events, Exhibits
8-K 2019-10-03 Officers, Exhibits
8-K 2019-08-22 Earnings, Exhibits
8-K 2019-08-22 Enter Agreement, Sale of Shares, Shareholder Vote, Regulation FD, Exhibits
8-K 2019-08-22 Enter Agreement, Shareholder Vote, Other Events, Exhibits
8-K 2019-06-25 Shareholder Vote
8-K 2019-06-12 Shareholder Vote
8-K 2019-05-30 Shareholder Vote
8-K 2019-05-29 Earnings, Other Events, Exhibits
8-K 2019-02-28 Earnings, Exhibits
8-K 2019-01-18 Shareholder Vote
8-K 2018-12-28 Regulation FD, Exhibits
8-K 2018-12-11 Regulation FD, Exhibits
8-K 2018-11-29 Earnings, Exhibits
8-K 2018-11-14 Enter Agreement, Shareholder Vote, Other Events, Exhibits
8-K 2018-11-01 Shareholder Vote
8-K 2018-09-14 Officers, Exhibits
8-K 2018-08-23 Shareholder Vote
8-K 2018-07-19 Shareholder Vote
8-K 2018-07-01 Enter Agreement, Shareholder Vote, Regulation FD, Other Events, Exhibits
8-K 2018-05-31 Earnings, Exhibits
8-K 2018-03-01 Earnings, Exhibits
8-K 2018-01-25 Shareholder Vote
8-K 2018-01-19 Other Events
SPLK Splunk 16,604
TTWO Take Two Interactive Software 14,900
COUP Coupa Software 8,851
BLKB Blackbaud 4,326
ACIW ACI Worldwide 3,205
XNET Xunlei 905
AVID Avid Technology 305
SHSP Sharpspring 126
AEYE Audioeye 33
ZUO Zuora 0
VMW 2019-08-02
Part I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.6 vmw-822019x10qex106.htm
EX-10.10 vmw-822019x10qex1010.htm
EX-10.11 vmw-822019x10qex1011.htm
EX-10.16 vmw-822019x10qex1016.htm
EX-31.1 vmw-822019x10qex311.htm
EX-31.2 vmw-822019x10qex312.htm
EX-32.1 vmw-822019x10qex321.htm
EX-32.2 vmw-822019x10qex322.htm

Vmware Earnings 2019-08-02

VMW 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period            from            to
Commission File Number 001-33622
_______________________________________________________
VMWARE, INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________
Delaware
94-3292913
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
3401 Hillview Avenue

Palo Alto,
CA
94304
(Address of principal executive offices)
(Zip Code)
(650) 427-5000
(Registrant’s telephone number, including area code)
_____________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A common stock
 
VMW
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of August 30, 2019, the number of shares of common stock, par value $0.01 per share, of the registrant outstanding was 408,632,211, of which 108,632,211 shares were Class A common stock and 300,000,000 shares were Class B common stock.



TABLE OF CONTENTS
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 
VMware, Avi Networks, AetherPal, CloudHealth, Workspace ONE, VMware Cloud, Horizon, Horizon Suite, NSX, VMware vSAN, VMware Foundation, vSphere, vRealize, Heptio, VeloCloud, vCloud, and vCloud Air, are registered trademarks or trademarks of VMware or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective companies.


2

Table of Contents

PART I
FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
August 2,

August 3,
 
August 2,

August 3,
 
2019

2018
 
2019

2018
Revenue(1):
 
 
 
 
 
 
 
License
$
1,011

 
$
900

 
$
1,879

 
$
1,674

Services
1,428

 
1,274

 
2,826

 
2,509

Total revenue
2,439

 
2,174

 
4,705

 
4,183

Operating expenses(2):
 
 
 
 
 
 
 
Cost of license revenue
50

 
45

 
101

 
90

Cost of services revenue
315

 
260

 
617

 
511

Research and development
554

 
481

 
1,087

 
934

Sales and marketing
797

 
696

 
1,575

 
1,403

General and administrative
200

 
182

 
387

 
351

Realignment and loss on disposition

 
1

 

 
3

Operating income
523

 
509

 
938

 
891

Investment income
14

 
57

 
28

 
105

Interest expense
(34
)
 
(34
)
 
(67
)
 
(67
)
Other income (expense), net
(502
)
 
240

 
(359
)
 
1,018

Income before income tax
1

 
772

 
540

 
1,947

Income tax provision (benefit)
(4,925
)
 
128

 
(4,890
)
 
361

Net income
$
4,926

 
$
644

 
$
5,430

 
$
1,586

Net income per weighted-average share, basic for Classes A and B
$
12.02

 
$
1.58

 
$
13.24

 
$
3.91

Net income per weighted-average share, diluted for Classes A and B
$
11.83

 
$
1.56

 
$
13.01

 
$
3.85

Weighted-average shares, basic for Classes A and B
409,761

 
407,112

 
410,088

 
406,040

Weighted-average shares, diluted for Classes A and B
416,288

 
413,286

 
417,488

 
412,389

__________
 
 
 
 
 
 
 
(1)   Includes related party revenue as follows (refer to Note C):
License
$
378

 
$
308

 
$
673

 
$
475

Services
356

 
228

 
686

 
433

(2)   Includes stock-based compensation as follows:
 
 
 
 
 
 
Cost of license revenue
$

 
$

 
$
1

 
$

Cost of services revenue
17

 
12

 
33

 
24

Research and development
101

 
90

 
196

 
174

Sales and marketing
60

 
49

 
115

 
95

General and administrative
30

 
26

 
57

 
46

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

Table of Contents

VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
August 2,
 
August 3,
 
August 2,
 
August 3,
 
2019
 
2018
 
2019
 
2018
Net income
$
4,926

 
$
644

 
$
5,430

 
$
1,586

Other comprehensive income (loss):
 
 
 
 
 
 
 
Changes in market value of available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gains (losses), net of tax provision (benefit) of $—, $2, $— and ($3)

 
6

 
(1
)
 
(9
)
Changes in market value of effective foreign currency forward contracts:
 
 
 
 
 
 
 
Unrealized gains (losses), net of tax provision (benefit) of $— for all periods
3

 
1

 
7

 
(12
)
Reclassification of (gains) losses realized during the period, net of tax (provision) benefit of $— for all periods
(2
)
 
(3
)
 
(1
)
 
1

Net change in market value of effective foreign currency forward contracts
1

 
(2
)
 
6

 
(11
)
Total other comprehensive income (loss)
1

 
4

 
5

 
(20
)
Total comprehensive income, net of taxes
$
4,927

 
$
648

 
$
5,435

 
$
1,566

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

Table of Contents

VMware, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
 
August 2,

February 1,
 
2019

2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,948

 
$
2,830

Short-term investments

 
19

Accounts receivable, net of allowance for doubtful accounts of $3 and $2
1,515

 
1,576

Due from related parties, net
754

 
937

Other current assets
412

 
289

Total current assets
5,629

 
5,651

Property and equipment, net
1,225

 
1,133

Other assets
2,290

 
1,853

Deferred tax assets
5,128

 
103

Intangible assets, net
447

 
541

Goodwill
5,653

 
5,381

Total assets
$
20,372

 
$
14,662

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
151

 
$
135

Accrued expenses and other
1,544

 
1,593

Unearned revenue
4,163

 
3,968

Total current liabilities
5,858

 
5,696

Note payable to Dell
270

 
270

Long-term debt
3,976

 
3,972

Unearned revenue
3,370

 
3,010

Income tax payable
833

 
889

Operating lease liabilities
588

 

Other liabilities
278

 
274

Total liabilities
15,173

 
14,111

Contingencies (refer to Note J)

 

Stockholders’ equity:
 
 
 
Class A common stock, par value $0.01; authorized 2,500,000 shares; issued and outstanding 109,494 and 110,715 shares
1

 
1

Class B convertible common stock, par value $0.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares
3

 
3

Additional paid-in capital

 
531

Accumulated other comprehensive income
7

 
2

Retained earnings
5,188

 
14

Total stockholders’ equity
5,199

 
551

Total liabilities and stockholders’ equity
$
20,372

 
$
14,662

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

Table of Contents

VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Six Months Ended
 
August 2,
 
August 3,
 
2019
 
2018
Operating activities:
 
 
 
Net income
$
5,430

 
$
1,586

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
352

 
307

Stock-based compensation
402

 
339

Deferred income taxes, net
(5,032
)
 
225

Unrealized (gain) loss on equity securities, net
386

 
(1,006
)
(Gain) loss on disposition of assets, revaluation and impairment, net
(3
)
 
(7
)
Other
3

 
3

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
64

 
172

Other current assets and other assets
(381
)
 
(173
)
Due to/from related parties, net
177

 
44

Accounts payable
14

 
95

Accrued expenses and other liabilities
23

 
37

Income taxes payable
(11
)
 
69

Unearned revenue
548

 
191

Net cash provided by operating activities
1,972

 
1,882

Investing activities:
 
 
 
Additions to property and equipment
(158
)
 
(121
)
Purchases of available-for-sale securities

 
(778
)
Sales of available-for-sale securities

 
161

Maturities of available-for-sale securities

 
1,102

Purchases of strategic investments
(8
)
 
(3
)
Proceeds from disposition of assets
20

 
32

Business combinations, net of cash acquired, and purchases of intangible assets
(384
)
 
(26
)
Net cash paid on disposition of a business
(5
)
 
(6
)
Net cash provided by (used in) investing activities
(535
)
 
361

Financing activities:
 
 
 
Proceeds from issuance of common stock
106

 
99

Repurchase of common stock
(1,037
)
 

Shares repurchased for tax withholdings on vesting of restricted stock
(351
)
 
(191
)
Principal payments on finance lease obligations
(1
)
 

Net cash used in financing activities
(1,283
)
 
(92
)
Net increase in cash, cash equivalents and restricted cash
154

 
2,151

Cash, cash equivalents and restricted cash at beginning of the period
2,894

 
6,003

Cash, cash equivalents and restricted cash at end of the period
$
3,048

 
$
8,154

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
64

 
$
64

Cash paid for taxes, net
188

 
74

Non-cash items:
 
 
 
Changes in capital additions, accrued but not paid
$
(5
)
 
$
9

The accompanying notes are an integral part of the condensed consolidated financial statements.

6

Table of Contents

VMware, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
 
Class A
Common Stock
 
Class B
Convertible
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity
Three Months Ended August 2, 2019
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, May 3, 2019
110

 
$
1

 
300

 
$
3

 
$
30

 
$
521

 
$
6

 
$
561

Proceeds from issuance of common stock

 

 

 

 
3

 

 

 
3

Issuance of stock-based awards in acquisition

 

 

 

 
2

 

 

 
2

Repurchase and retirement of common stock
(2
)
 

 

 

 
(187
)
 
(259
)
 

 
(446
)
Issuance of restricted stock
2

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(1
)
 

 

 

 
(141
)
 

 

 
(141
)
Stock-based compensation

 

 

 

 
208

 

 

 
208

Credit from tax sharing arrangement

 

 

 

 
85

 

 

 
85

Total other comprehensive income (loss)

 

 

 

 

 

 
1

 
1

Net income

 

 

 

 

 
4,926

 

 
4,926

Balance, August 2, 2019
109

 
$
1

 
300

 
$
3

 
$

 
$
5,188

 
$
7

 
$
5,199


 
Class A
Common Stock
 
Class B
Convertible
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity
Six Months Ended August 2, 2019
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, February 1, 2019
111

 
$
1

 
300

 
$
3

 
$
531

 
$
14

 
$
2

 
$
551

Cumulative effect of adoption of new accounting pronouncements

 

 

 

 

 
3

 

 
3

Proceeds from issuance of common stock
1

 

 

 

 
106

 

 

 
106

Issuance of stock-based awards in acquisition

 

 

 

 
2

 

 

 
2

Repurchase and retirement of common stock
(6
)
 

 

 

 
(778
)
 
(259
)
 

 
(1,037
)
Issuance of restricted stock
5

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(2
)
 

 

 

 
(348
)
 

 

 
(348
)
Stock-based compensation

 

 

 

 
402

 

 

 
402

Credit from tax sharing arrangement

 

 

 

 
85

 

 

 
85

Total other comprehensive income (loss)

 

 

 

 

 

 
5

 
5

Net income

 

 

 

 

 
5,430

 

 
5,430

Balance, August 2, 2019
109

 
$
1

 
300

 
$
3

 
$

 
$
5,188

 
$
7

 
$
5,199



7

Table of Contents


Class A
Common Stock
 
Class B
Convertible
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity
Three Months Ended August 3, 2018
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, May 4, 2018
104

 
$
1

 
300

 
$
3

 
$
992

 
$
8,718

 
$
(54
)
 
$
9,660

Proceeds from issuance of common stock
1

 

 

 

 
8

 

 

 
8

Issuance of restricted stock
3

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock

 

 

 

 
(98
)
 

 

 
(98
)
Stock-based compensation

 

 

 

 
177

 

 

 
177

Amount due from tax sharing arrangement

 

 

 

 
(3
)
 

 

 
(3
)
Total other comprehensive income (loss)

 

 

 

 

 

 
4

 
4

Net income

 

 

 

 

 
644

 

 
644

Balance, August 3, 2018
108

 
$
1

 
300

 
$
3

 
$
1,076

 
$
9,362

 
$
(50
)
 
$
10,392


 
Class A
Common Stock
 
Class B
Convertible
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Stockholders’
Equity
Six Months Ended August 3, 2018
Shares
 
Par Value
 
Shares
 
Par Value
 
Balance, February 2, 2018
104

 
$
1

 
300

 
$
3

 
$
844

 
$
7,791

 
$
(15
)
 
$
8,624

Cumulative effect of adoption of new accounting pronouncements

 

 

 

 

 
(15
)
 
(15
)
 
(30
)
Proceeds from issuance of common stock
1

 

 

 

 
99

 

 

 
99

Issuance of restricted stock
4

 

 

 

 

 

 

 

Shares withheld for tax withholdings on vesting of restricted stock
(1
)
 

 

 

 
(203
)
 

 

 
(203
)
Stock-based compensation

 

 

 

 
339

 

 

 
339

Amount due from tax sharing arrangement

 

 

 

 
(3
)
 

 

 
(3
)
Total other comprehensive income (loss)

 

 

 

 

 

 
(20
)
 
(20
)
Net income

 

 

 

 

 
1,586

 

 
1,586

Balance, August 3, 2018
108

 
$
1

 
300

 
$
3

 
$
1,076

 
$
9,362

 
$
(50
)
 
$
10,392

The accompanying notes are an integral part of the condensed consolidated financial statements.

8

Table of Contents

VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Overview and Basis of Presentation
Company and Background
VMware, Inc. (“VMware” or the “Company”) originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. Information technology (“IT”) driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. IT is working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding their business through a digital transformation. To take on these challenges, VMware is working with customers in the areas of hybrid cloud, multi-cloud, modern applications, networking and security, and digital workspaces. VMware’s software provides a flexible digital foundation to help enable customers in their digital transformations.
Accounting Principles
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, for a fair statement of VMware’s condensed consolidated results of operations, financial position and cash flows for the periods presented. Results of operations are not necessarily indicative of the results that may be expected for the full fiscal year 2020. Certain information and footnote disclosures typically included in annual consolidated financial statements have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in VMware’s Form 10-K filed on March 29, 2019. 
Effective September 7, 2016, Dell Technologies Inc. (“Dell”) (formerly Denali Holding Inc.) acquired EMC Corporation (“EMC”), VMware’s parent company, including EMC’s majority control of VMware (the “Dell Acquisition”). As of August 2, 2019, Dell controlled 80.8% of VMware’s outstanding common stock and 97.5% of the combined voting power of VMware’s outstanding common stock, including 31 million shares of VMware’s Class A common stock and all of VMware’s Class B common stock.
As VMware is a majority-owned and controlled subsidiary of Dell, its results of operations and financial position are consolidated with Dell’s financial statements. Transactions prior to the effective date of the Dell Acquisition represent transactions only with EMC and its consolidated subsidiaries.
Management believes the assumptions underlying the condensed consolidated financial statements are reasonable. However, the amounts recorded for VMware’s related party transactions with Dell and its consolidated subsidiaries may not be considered arm’s length with an unrelated third party. Therefore, the condensed consolidated financial statements included herein may not necessarily reflect the results of operations, financial position and cash flows had VMware engaged in such transactions with an unrelated third party during all periods presented. Accordingly, VMware’s historical financial information is not necessarily indicative of what the Company’s results of operations, financial position and cash flows will be in the future, if and when VMware contracts at arm’s length with unrelated third parties for products and services the Company receives from and provides to Dell.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of VMware and subsidiaries in which VMware has a controlling financial interest. All intercompany transactions and account balances between VMware and its subsidiaries have been eliminated in consolidation. Transactions with Dell and its consolidated subsidiaries are generally settled in cash and are classified on the condensed consolidated statements of cash flows based upon the nature of the underlying transaction.
Intra-Group Transfer of Intellectual Property
During the second quarter of fiscal 2020, the Company completed an intra-group transfer of certain of its intellectual property rights (the “IP”) to its Irish subsidiary, where its international business is headquartered (the “IP Transfer”). The

9

Table of Contents
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

transaction will change the Company’s mix of international income from a lower non-U.S. tax jurisdiction to Ireland, which is subject to a statutory tax rate of 12.5%. However, the Company does not expect its effective income tax rate to increase significantly in fiscal 2020, as it expects the income earned in Ireland will largely be offset by certain tax deductions.
A discrete tax benefit of $4.9 billion was recognized as a deferred tax asset during the second quarter of fiscal 2020. This deferred tax asset was recognized as a result of the book and tax basis difference on the IP transferred to Ireland. The tax amortization related to the IP transferred will be recognized in future periods and any amortization that is unused in a particular year can be carried forward indefinitely under Irish tax laws. The deferred tax asset and the tax benefit were measured based on the Irish tax rate expected to apply in the years the asset will be recovered. The Company expects to realize the deferred tax asset resulting from the IP Transfer and will assess the realizability of the deferred tax asset periodically. The impact of the transaction to net cash provided by or used in operating, investing and financing activities on the condensed consolidated statements of cash flows during the six months ended August 2, 2019 was not material.
Use of Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, trade receivable valuation, marketing development funds, expected period of benefit for deferred commissions, useful lives assigned to fixed assets and intangible assets, valuation of goodwill and definite-lived intangibles, income taxes, stock-based compensation and contingencies. Actual results could differ from those estimates.
Significant Accounting Policies
During February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (“Topic 842”). The updated standard requires the recognition of a liability for lease obligations and corresponding right-of-use (“ROU”) assets on the balance sheet, and disclosures of certain information regarding leasing arrangements. VMware adopted this standard effective February 2, 2019 and applied it retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. The Company elected to apply practical expedients upon transition to this standard, which allowed the Company to use the beginning of the period of adoption as the date of initial application, and to not reassess lease classification, treatment of initial direct costs, or whether an existing or expired contract contains a lease. Prior period amounts were not recast under this standard.
Upon adoption, VMware recognized ROU assets of $666 million, a liability for lease obligations of $629 million, and an immaterial cumulative-effect adjustment to retained earnings, net of taxes, as of February 2, 2019. The updated standard did not have a material impact on the condensed consolidated statements of income or net cash provided by or used in operating, investing and financing activities on the condensed consolidated statements of cash flows.
Significant accounting policies applicable to leases reflect the adoption of Topic 842. There were no other changes to VMware’s significant accounting policies described in the Form 10-K filed on March 29, 2019 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.
Leases
VMware determines if an arrangement contains a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all economic benefits from and has the ability to direct the use of the asset. ROU assets resulting from operating leases are included in other assets, and operating lease liabilities are included in accrued expenses and other and operating lease liabilities on the condensed consolidated balance sheets. ROU assets resulting from finance leases are included in property and equipment, net, and finance lease liabilities are included in accrued expenses and other and other liabilities on the condensed consolidated balance sheets. The current portion of finance lease liabilities included in accrued expenses and other was not material as of August 2, 2019.
Lease assets and liabilities are measured at the present value of the future minimum lease payments over the lease term at commencement date using the incremental borrowing rate. The incremental borrowing rate is generally determined using factors such as the Treasury yields, the Company’s credit rating and interest rates of similar debt instruments with comparable credit ratings, among others.
The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that VMware will exercise that option. Lease expense resulting from the minimum lease payments is amortized on a straight-line basis over the remaining lease term. VMware elected the practical expedient to exclude leasing arrangements with a duration of less than 12 months.

10

Table of Contents
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. Certain lease agreements may contain lease and non-lease components, such a common-area maintenance costs. The Company elected to account for these components as a single lease component in determining the lease liability. Variable lease payments, which are primarily comprised of common-area maintenance, utilities and real estate taxes that are passed on from the lessor in proportion to the space leased by the Company, are recognized in operating expenses in the period in which the obligation for those payments was incurred.
The Company subleases certain leased office space to third parties when it determines there is excess leased capacity. Sublease income was not material for all periods presented.
B. Revenue, Unearned Revenue and Remaining Performance Obligations
Revenue
Contract Assets
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets include fixed fee professional services where transfer of services has occurred in advance of the Company’s right to invoice. Contract assets are classified as accounts receivables upon invoicing. Contract assets are included in other current assets on the condensed consolidated balance sheets. Contract assets were $29 million and $24 million as of August 2, 2019 and February 1, 2019, respectively. Contract asset balances will fluctuate based upon the timing of transfer of services, billings and customers’ acceptance of contractual milestones.
Contract Liabilities
Contract liabilities consist of unearned revenue, which is generally recorded when VMware has the right to invoice or payments have been received for undelivered products or services.
Customer Deposits
Customer deposits include prepayments from customers related to amounts received for contracts that include certain cancellation rights. Purchased credits eligible for redemption of VMware’s hosted services (“cloud credits”) are included in customer deposits until the cloud credit is consumed or is contractually committed to a specific hosted service. Cloud credits are redeemable by the customer for the gross value of the hosted offering. Upon contractual commitment for a hosted service, the net value of the cloud credits that are expected to be recognized as revenue when the obligation is fulfilled will be classified as unearned revenue.
As of August 2, 2019, customer deposits related to customer prepayments and cloud credits of $218 million were included in accrued expenses and other, and $100 million were included in other liabilities on the condensed consolidated balance sheets. As of February 1, 2019, customer deposits related to customer prepayments of $238 million were included in accrued expenses and other, and $60 million were included in other liabilities on the condensed consolidated balance sheets.
Deferred Commissions
Deferred commissions are classified as current or non-current based on the duration of the expected period of benefit. Deferred commissions, including the employer portion of payroll taxes, included in other current assets as of August 2, 2019 and February 1, 2019 were not significant. Deferred commissions included in other assets were $783 million and $756 million as of August 2, 2019 and February 1, 2019, respectively.
Amortization expense for deferred commissions was included in sales and marketing on the condensed consolidated statements of income and was $76 million and $151 million during the three and six months ended August 2, 2019, respectively, and $61 million and $128 million during the three and six months ended August 3, 2018, respectively.

11

Table of Contents
VMware, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)

Unearned Revenue
Unearned revenue as of the periods presented consisted of the following (table in millions):
 
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 VMware’s software-as-a-service (“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.
Unearned software maintenance revenue is attributable to VMware’s maintenance contracts and is generally recognized over time on a ratable basis over the contract duration. The weighted-average remaining contractual term as of August 2, 2019 was approximately two years. In addition, unearned software maintenance revenue also includes the allocated portion of VMware’s SaaS offerings. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed.
The following tables summarize unearned revenue activity during the periods presented (table in millions):
 
Three Months Ended
 
May 3,
 
August 2,
 
2019
 
2019
Balance, beginning of the period
$
6,978

 
$
7,119

Current period billings
1,506

 
1,827

Revenue recognized from amounts previously classified as unearned revenue(1)
(1,365
)
 
(1,420
)
Other

 
7

Balance, end of the period
$
7,119

 
$
7,533


 
Three Months Ended
 
May 4,
&