VMware Reports Third Quarter 2015 Results

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Submitted by admin on 10/20/2015 @ 1:05 PM Companies mentioned in this article: VMware, Inc.
PALO ALTO, CA--(Marketwired - October 20, 2015) - VMware, Inc. (NYSE: VMW), a leader in cloud infrastructure and business mobility, today announced financial results for the third quarter of 2015: Revenues for the third quarter were $1.67 billion, an increase of 10% from the third quarter of 2014, or up 14% year-over-year in constant currency. License revenues for the third quarter were $681 million, an increase of 7% from the third quarter of 2014, or up 11% year-over-year in constant currency. GAAP net income for the third quarter was $256 million, or $0.60 per diluted share, up 35% per diluted share compared to $194 million, or $0.45 per diluted share, for the third quarter of 2014. Non-GAAP net income for the quarter was $433 million, or $1.02 per diluted share, up 18% per diluted share compared to $377 million, or $0.87 per diluted share, for the third quarter of 2014. GAAP operating income for the third quarter was $326 million, an increase of 35% from the third quarter of 2014. Non-GAAP operating income for the third quarter was $527 million, an increase of 15% from the third quarter of 2014. Operating cash flows for the third quarter were $411 million. Free cash flows for the quarter were $321 million. Cash, cash equivalents and short-term investments were $7.22 billion, and unearned revenues were $4.69 billion as of September 30, 2015. Total revenues plus sequential change in total unearned revenues grew 3% year-over-year, and grew 8% year-over-year when adjusted for constant currency. License revenues plus sequential change in unearned license revenues increased 2% year-over-year, and grew 7% year-over-year when adjusted for constant currency.
"Our solid third-quarter financial results reflect VMware's strength in delivering extraordinary value to our customers," said Pat Gelsinger, chief executive officer, VMware. "We are very optimistic about the long term value to VMware of the Dell and EMC plans to merge and the formation of the Cloud Services Business. VMware's mission and strategy remain unchanged as we continue to deliver extraordinary value to our customers through the power of disruptive innovation."
"Consistent with our third-quarter earnings pre-announcement, I'm pleased with our overall Q3 results, with total revenue exceeding the high end of our guidance range," said Jonathan Chadwick, chief financial officer, chief operating officer and executive vice president, VMware.
Recent Highlights & Strategic Announcements Last week, VMware announced preliminary results for Q3 2015 in conjunction with the announcement by Dell and EMC that Dell is intending to acquire EMC, while maintaining VMware as an independent publicly-traded company. VMware and EMC announced plans to form a new Cloud Services Business, jointly owned 50:50 by EMC and VMware, and offering customers the industry's most comprehensive hybrid cloud portfolio. This new Federation business will bring together vCloud Air, Virtustream, object storage and managed cloud services into one company under the Virtustream brand. The transaction is expected to close in early 2016, and VMware expects to consolidate Virtustream's results into its financial statements beginning in Q1 2016. At VMworld 2015, VMware recently hosted over 32,000 customers, partners and influencers in San Francisco and Barcelona and announced a wave of new products, services and partner updates designed to help customers transform their businesses and embrace a new model for IT. VMware announced new public cloud offerings for VMware vCloud Air, including object storage services and a global DNS service. VMware vCloud Air Object Storage is a portfolio of highly-scalable, reliable and cost effective storage services for unstructured data powered by Google Cloud Platform and EMC. The company announced a major refresh of its Cloud Management Platform including vRealize Automation 7.0 and vRealize Business. Enhancements include the ability to deliver applications with application-centric networking and security across clouds and increased transparency and control over the cost and quality of IT services through a single dashboard. VMware added to its cloud-native technology portfolio with two new projects designed to meet enterprise IT requirements across security and isolation, service level agreements, data persistence, networking services and management. VMware vSphere Integrated Containers will enable IT teams to run cloud-native applications on-premises and on VMware's public cloud, vCloud Air. The VMware Photon Platform is a platform purpose-built for running Cloud-Native Applications. In the End-User Computing space, VMware announced support of Windows 10 with AirWatch Enterprise Mobility Management, which will support all the new capabilities introduced in Windows 10. Also announced was Project A2 which promises to be a new Windows management and application delivery technology that combines unified endpoint management and configuration with the ability to seamlessly move existing Windows applications into the new Windows 10 environment. Additionally, the company announced the acquisition of Boxer, a privately held company that offers a comprehensive and secure personal information management (PIM) solution for mobile devices to businesses and consumers.
The company will host a conference call today at 2:00 p.m. PT/ 5:00 p.m. ET to review financial results and business outlook. A live web broadcast of the event will be available on the VMware investor relations website at http://ir.vmware.com . Slides will accompany the web broadcast. The replay of the webcast and slides will be available on the website for two months. In addition, six quarters of historical data for revenues which include year over year comparisons will also be made available at http://ir.vmware.com in conjunction with the conference call.
About VMware
VMware is the leader in virtualization and cloud infrastructure solutions that enable businesses to thrive in the Cloud Era. Customers rely on VMware to help them transform the way they build, deliver and consume Information Technology resources in a manner that is evolutionary and based on their specific needs. With 2014 revenues of $6 billion, VMware has more than 500,000 customers and 75,000 partners. The company is headquartered in Silicon Valley with offices throughout the world and can be found online at www.vmware.com .
Additional Information
VMware's website is located at www.vmware.com , and its investor relations website is located at http://ir.vmware.com . VMware's goal is to maintain the investor relations website as a portal through which investors can easily find or navigate to pertinent information about VMware, all of which is made available free of charge. The additional information includes materials that VMware files with the SEC; announcements of investor conferences and events at which its executives talk about its products, services and competitive strategies; webcasts of its quarterly earnings calls, investor conferences and events (archives of which are also available for a limited time); additional information on its financial metrics, including reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures; press releases on quarterly earnings, product and service announcements, legal developments and international news; corporate governance information; and other news, blogs and announcements that VMware may post from time to time that investors may find useful or interesting.
VMware, VMworld, vCloud, vCloud Air, vSphere, Photon Platform, vRealize and AirWatch, 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 organizations.
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 future growth, the potential long-term value to VMware of both the Dell and EMC merger and the formation of the Cloud Services Business, including with respect to the Cloud Services Business the expected closing timing and the expectation to consolidate the Cloud Services Business's results into VMware's financial statements, as well as VMware vSphere Integrated Containers, Photon Platform and Project A2 technology previews and offerings. 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, government and information technology spending; (iii) competitive factors, including but not limited to pricing pressures, industry consolidation, entry of new competitors into the virtualization software and cloud, end user and mobile computing industries, and new product and marketing initiatives by VMware's competitors; (iv) VMware's customers' ability to transition to new products and computing strategies such as cloud computing, desktop virtualization and the software defined data center; (v) the uncertainty of customer acceptance of emerging technology; (vi) changes in the willingness of customers to enter into longer term licensing and support arrangements; (vii) rapid technological changes in the virtualization software and cloud, end user and mobile computing industries; (viii) changes to product and service development timelines; (ix) VMware's relationship with EMC Corporation and EMC's ability to control matters requiring stockholder approval, including the election of VMware's board members and matters relating to EMC's investment in VMware, and any changes that Dell may implement following the completion of the Dell-EMC merger; (x) VMware's ability to protect its proprietary technology; (xi) VMware's ability to attract and retain highly qualified employees; (xii) the unsuccessful integration of acquired companies and assets into VMware; (xiii) VMware and EMC failing to sign definitive agreements, or subsequently satisfying closing conditions, related to the formation of the new Cloud Services Business; (xiv) the failure to satisfy required accounting requirements for consolidating the Cloud Services Business's results into VMware's financial statements or the timing of any such consolidation; (xv) disruptions to VMware's business resulting from the pendency of EMC's acquisition by Dell and the potential for loss of VMware customers due to uncertainty that the Dell-EMC transaction could have on VMware's business; (xvi) the failure of Dell's acquisition of EMC to close when anticipated, if at all; (xvii) the ability of VMware to realize synergies following Dell's acquisition of EMC; (xviii) changes that Dell may make to EMC's commercial arrangements with VMware following the closing of Dell's acquisition of EMC; (xix) negative analyst or stockholder sentiment regarding VMware's stock price due to the pending Dell-EMC merger; and (xx) the potential negative impact on VMware's stock price due to any confusion or uncertainty caused by the VMware tracking stock that is expected to be issued by Dell to EMC stockholders in the transaction. These forward-looking statements are made as of the date of this press release, 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 VMware's 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. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2015 2014 2015 2014 Revenues: License $ 681 $ 639 $ 1,896 $ 1,814 Services 991 876 2,883 2,519 GSA settlement - - (76) - Total revenues 1,672 1,515 4,703 4,333 Operating expenses (1): Cost of license revenues 46 46 142 143 Cost of services revenues 212 196 609 519 Research and development 331 327 958 936 Sales and marketing 556 529 1,656 1,550 General and administrative 201 169 568 498 Realignment charges - 6 20 4 Operating income 326 242 750 683 Investment income 13 11 38 28 Interest expense with EMC (7) (7) (20) (18) Other income (expense), net (7) (2) (8) (2) Income before income taxes 325 244 760 691 Income tax provision 69 50 137 131 Net income $ 256 $ 194 $ 623 $ 560 Net income per weighted-average share, basic for Class A and Class B $ 0.61 $ 0.45 $ 1.47 $ 1.30 Net income per weighted-average share, diluted for Class A and Class B $ 0.60 $ 0.45 $ 1.46 $ 1.29 Weighted-average shares, basic for Class A and Class B 422,329 430,463 424,799 430,408 Weighted-average shares, diluted for Class A and Class B 423,981 434,118 427,466 434,656 (1) Includes stock-based compensation as follows: Cost of license revenues $ - $ 1 $ 1 $ 2 Cost of services revenues 11 11 32 31 Research and development 56 61 164 187 Sales and marketing 43 43 124 128 General and administrative 16 17 47 51 VMware, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (amounts in millions, except per share amounts, and shares in thousands) (unaudited) September 30, December 31, 2015 2014 ASSETS Current assets: Cash and cash equivalents $ 2,083 $ 2,071 Short-term investments 5,139 5,004 Accounts receivable, net of allowance for doubtful accounts of $2 and $2 1,011 1,520 Due from related parties, net 25 49 Deferred tax asset 254 248 Other current assets 150 238 Total current assets 8,662 9,130 Property and equipment, net 1,124 1,035 Other assets 175 174 Deferred tax asset 204 165 Intangible assets, net 645 748 Goodwill 3,981 3,964 Total assets $ 14,791 $ 15,216 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 139 $ 203 Accrued expenses and other 622 811 Unearned revenues 2,989 2,982 Total current liabilities 3,750 3,996 Note payable to EMC 1,500 1,500 Unearned revenues 1,697 1,851 Other liabilities 310 283 Total liabilities 7,257 7,630 Commitments and contingencies Stockholders' equity: Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 121,799 and 129,359 shares 1 1 Class B convertible common stock, par value $.01; authorized 1,000,000 shares; issued and outstanding 300,000 shares 3 3 Additional paid-in capital 2,707 3,380 Accumulated other comprehensive income (loss) (3) (1) Retained earnings 4,821 4,198 Total VMware, Inc.'s stockholders' equity 7,529 7,581 Non-controlling interests 5 5 Total stockholders' equity 7,534 7,586 Total liabilities and stockholders' equity $ 14,791 $ 15,216 VMware, Inc. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2015 2014 2015 2014 Operating activities: Net income $ 256 $ 194 $ 623 $ 560 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 87 91 246 255 Stock-based compensation 126 133 368 399 Excess tax benefits from stock- based compensation (1) (8) (27) (34) Deferred income taxes, net (21) (36) (44) (115) Impairment of strategic investment 5 - 5 - Changes in assets and liabilities, net of acquisitions: Accounts receivable 203 163 508 293 Other assets 27 (27) 14 (70) Due to/from related parties, net (32) 57 31 25 Accounts payable (2) 49 (36) 41 Accrued expenses (180) (60) (153) (4) Income taxes payable 71 65 24 178 Unearned revenues (128) (15) (148) 237 Net cash provided by operating activities 411 606 1,411 1,765 Investing activities: Additions to property and equipment (90) (100) (274) (254) Purchases of available-for-sale securities (580) (998) (2,675) (2,974) Sales of available-for-sale securities 326 610 1,700 1,551 Maturities of available-for-sale securities 317 162 840 483 Purchases of strategic investments (7) (1) (11) (41) Business acquisitions, net of cash acquired - (44) (21) (1,112) Decrease (increase) in restricted cash 76 - 77 (76) Other investing - - 2 (10) Net cash provided by (used in) investing activities 42 (371) (362) (2,433) Financing activities: Proceeds from issuance of common stock 55 59 123 158 Proceeds from issuance of note payable to EMC - - - 1,050 Reduction in capital from EMC - - - (24) Proceeds from non-controlling interests - 7 4 7 Repurchase of common stock (200) (43) (1,050) (450) Excess tax benefits from stock-based compensation 1 8 27 34 Shares repurchased for tax withholdings on vesting of restricted stock (17) (27) (141) (119) Net cash provided by (used in) financing activities (161) 4 (1,037) 656 Net increase (decrease) in cash and cash equivalents 292 239 12 (12) Cash and cash equivalents at beginning of the period 1,791 2,054 2,071 2,305 Cash and cash equivalents at end of the period $ 2,083 $ 2,293 $ 2,083 $ 2,293 Supplemental disclosures of cash flow information: Cash paid for interest $ 7 $ 7 $ 21 $ 20 Cash paid for taxes, net 19 19 155 65 Non-cash items: Changes in capital additions, accrued but not paid $ (27) $ (14) $ (49) $ (3) Fair value of stock-based awards assumed in acquisitions - 1 - 25 VMware, Inc. CONSTANT CURRENCY GROWTH IN REVENUES PLUS SEQUENTIAL CHANGE IN UNEARNED REVENUES (INCLUDES RECONCILIATION OF GAAP TO NON-GAAP DATA) (in millions) (unaudited) Constant Currency Growth in Total Revenues Plus Sequential Change in Unearned Revenues Three Months Ended September 30, 2015 2014 Total revenues, as reported $ 1,672 $ 1,515 Sequential change in unearned revenues (128) (15) Total revenues plus sequential change in unearned revenues $ 1,544 $ 1,500 Change (%) over prior year, as reported 3% Change (%) over prior year, including adjustment for impact of foreign currency (1) 8% Constant Currency Growth in License Revenues Plus Sequential Change in Unearned License Revenues Three Months Ended September 30, 2015 2014 Total license revenues as reported $ 681 $ 639 Sequential change in unearned license revenues (77) (48) Total license revenues plus sequential change in unearned license revenues $ 604 $ 591 Change (%) over prior year, as reported 2% Change (%) over prior year, including adjustment for impact of foreign currency (2) 7% (1) Percentage change compares total revenues plus sequential change in unearned revenues in constant currency for the three months ended September 30, 2015 versus total revenues plus sequential change in unearned revenues as reported for the three months ended September 30, 2014. See "Growth in Constant Currency" for more information. (2) Percentage change compares license revenues plus sequential change in unearned license revenues in constant currency for the three months ended September 30, 2015 versus license revenues plus sequential change in unearned license revenues as reported for the three months ended September 30, 2014. See "Growth in Constant Currency" for more information. VMware, Inc. SUPPLEMENTAL REVENUES SCHEDULE (INCLUDES RECONCILIATION OF GAAP TO NON-GAAP DATA) (in millions) (unaudited) Three Months Ended September June March December September June 30, 30, 31, 31, 30, 30, 2015 2015 2015 2014 2014 2014 Revenues as reported (1): License $ 681 $ 638 $ 576 $ 777 $ 639 $ 614 Software maintenance 863 829 813 803 779 737 Professional services 128 130 122 123 97 106 GSA settlement - (76) - - - - Total revenues $ 1,672 $1,521 $1,511 $ 1,703 $ 1,515 $1,457 Change (%) over prior year License 6.6% 3.9% 2.7% 13.0% 13.4% 15.8% Software maintenance 10.8% 12.4% 15.9% 14.9% 21.0% 20.0% Professional services 31.3% 22.6% 24.6% 26.9% 18.6% 7.5% GSA settlement n/a n/a n/a n/a n/a n/a Total revenues 10.3% 4.4% 11.1% 14.8% 17.5% 17.2% Revenues as reported, excluding GSA settlement (2) License $ 681 $ 638 $ 576 $ 777 $ 639 $ 614 Software maintenance 863 829 813 803 779 737 Professional services 128 130 122 123 97 106 Non-GAAP total revenues $ 1,672 $1,597 $1,511 $ 1,703 $ 1,515 $1,457 Change (%) over prior year License 6.6% 3.9% 2.7% 13.0% 13.4% 15.8% Software maintenance 10.8% 12.4% 15.9% 14.9% 21.0% 20.0% Professional services 31.3% 22.6% 24.6% 26.9% 18.6% 7.5% Non-GAAP total revenues 10.3% 9.6% 11.1% 14.8% 17.5% 17.2% (1) Represents revenues reported each quarter. (2) Represents revenues reported each quarter less the reduction of revenues due to the GSA settlement recognized in the second quarter of 2015. VMware, Inc. SUPPLEMENTAL UNEARNED REVENUES SCHEDULE (in millions) (unaudited) September June March December September June 30, 30, 31, 31, 30, 30, 2015 2015 2015 2014 2014 2014 Unearned revenues as reported (1) License $ 404 $ 481 $ 466 $ 488 $ 428 $ 476 Software maintenance 3,850 3,894 3,847 3,905 3,558 3,541 Professional services 432 438 431 440 389 372 Total unearned revenues $ 4,686 $4,813 $4,744 $ 4,833 $ 4,375 $4,389 Change (%) over prior year License (5.6)% 1.1% 1.7% 4.9% 3.3% 11.5% Software maintenance 8.2% 10.0% 13.9% 18.2% 21.2% 22.0% Professional services 11.2% 17.9% 28.2% 36.0% 36.6% 39.7% Total unearned revenues 7.1% 9.7% 13.7% 18.1% 20.3% 22.0% (1) Represents unearned revenues reported each quarter. VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended September 30, 2015 (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Employer Payroll Taxes on Employee Stock-Based Stock Intangible GAAP Compensation Transactions Amortization Operating expenses: Cost of license revenues $ 46 - - (27) Cost of services revenues $ 212 (11) - (1) Research and development $ 331 (56) - - Sales and marketing $ 556 (43) (2) (6) General and administrative $ 201 (16) - (1) Operating income $ 326 126 2 35 Operating margin (2) 19.5% 7.5% 0.1% 2.1% Other income (expense), net $ (7) - - - Income before income taxes $ 325 126 2 35 Income tax provision $ 69 Tax rate (2) 21.4% Net Income $ 256 126 2 35 Net income per weighted- average share, basic for Class A and Class B (2) (3) $0.61 $ 0.30 $ 0.01 $ 0.08 Net income per weighted- average share, diluted for Class A and Class B (2) (4) $0.60 $ 0.30 $ 0.01 $ 0.08 table continued below Acquisition and Other Related Tax Non-GAAP, Items Adjustment (1) as adjusted (2) Operating expenses: Cost of license revenues - - $ 19 Cost of services revenues - - $ 200 Research and development - - $ 274 Sales and marketing - - $ 506 General and administrative (38) - $ 146 Operating income 38 - $ 527 Operating margin (2) 2.3% - 31.5% Other income (expense), net 5 - $ (2) Income before income taxes 43 - $ 531 Income tax provision 29 $ 98 Tax rate (2) 18.5% Net Income 43 (29) $ 433 Net income per weighted- average share, basic for Class A and Class B (2) (3) $ 0.10 $ (0.07) $ 1.03 Net income per weighted- average share, diluted for Class A and Class B (2) (4) $ 0.10 $ (0.07) $ 1.02 (1) 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 adjusted 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, 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. (2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (3) Calculated based upon 422,329 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 423,981 diluted weighted-average shares for Class A and Class B. VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Three Months Ended September 30, 2014 (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Employer Payroll Taxes on Employee Stock-Based Stock Intangible GAAP Compensation Transactions Amortization Operating expenses: Cost of license revenues $ 46 (1) - (28) Cost of services revenues $ 196 (11) - - Research and development $ 327 (61) (1) (2) Sales and marketing $ 529 (43) (2) (5) General and administrative $ 169 (17) - (1) Realignment charges $ 6 - - - Operating income $ 242 133 3 36 Operating margin(2) 16.0% 8.8% 0.2% 2.4% Income before income taxes $ 244 133 3 36 Income tax provision $ 50 Tax rate (2) 20.4% Net Income $ 194 133 3 36 Net income per weighted-average share, basic for Class A and Class B (2) (3) $0.45 $ 0.31 $ 0.01 $ 0.08 Net income per weighted-average share, diluted for Class A and Class B (2) (4) $0.45 $ 0.31 $ 0.01 $ 0.08 table continued below Acquisition and Other Realignment Related Tax Non-GAAP, Charges Items Adjustment (1) as adjusted (2) Operating expenses: Cost of license revenues - - - $ 18 Cost of services revenues - - - $ 185 Research and development - - - $ 264 Sales and marketing - - - $ 478 General and administrative - (41) - $ 110 Realignment charges (6) - - $ - Operating income 6 41 - $ 460 Operating margin(2) 0.4% 2.7% - 30.4% Income before income taxes 6 41 - $ 462 Income tax provision 36 $ 85 Tax rate (2) 18.5% Net Income 6 41 (36) $ 377 Net income per weighted-average share, basic for Class A and Class B (2) (3) $ 0.01 $ 0.10 $ (0.08) $ 0.88 Net income per weighted-average share, diluted for Class A and Class B (2) (4) $ 0.01 $ 0.10 $ (0.08) $ 0.87 (1) 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 adjusted 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, 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. (2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (3) Calculated based upon 430,463 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 434,118 diluted weighted-average shares for Class A and Class B. VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Nine Months Ended September 30, 2015 (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Employer Payroll Taxes on Employee Stock-Based Stock Intangible GAAP Compensation Transactions Amortization Revenues: GSA settlement $ (76) - - - Total revenues $4,703 - - - Operating expenses: Cost of license revenues $ 142 (1) - (82) Cost of services revenues $ 609 (32) (1) (2) Research and development $ 958 (164) (2) - Sales and marketing $1,656 (124) (4) (21) General and administrative $ 568 (47) (2) (2) Realignment charges $ 20 - - - Operating income $ 750 368 9 107 Operating margin (2) 15.9% 7.8% 0.2% 2.3% Other income (expense), net $ (8) - - - Income before income taxes $ 760 368 9 107 Income tax provision $ 137 Tax rate (2) 18.0% Net Income $ 623 368 9 107 Net income per weighted-average share, basic for Class A and Class B (2) (3) $ 1.47 $ 0.87 $ 0.02 $ 0.25 Net income per weighted-average share, diluted for Class A and Class B (2) (4) $ 1.46 $ 0.86 $ 0.02 $ 0.25 table continued below Acquisition Certain and Other Litigation Realignment Related GSA and Other Charges Items Settlement Contingencies Revenues: GSA settlement - - 76 - Total revenues - - 76 - Operating expenses: Cost of license revenues - - - - Cost of services revenues - - - - Research and development - - - - Sales and marketing - - - - General and administrative - (123) 6 (11) Realignment charges (20) - - - Operating income 20 123 70 11 Operating margin (2) 0.4% 2.6% 1.5% 0.2% Other income (expense), net - 2 - - Income before income taxes 20 124 70 11 Income tax provision Tax rate (2) Net Income 20 124 70 11 Net income per weighted-average share, basic for Class A and Class B (2) (3) $ 0.05 $ 0.29 $ 0.16 $ 0.03 Net income per weighted-average share, diluted for Class A and Class B (2) (4) $ 0.05 $ 0.29 $ 0.16 $ 0.03 table continued below Tax Non-GAAP, Adjustment as adjusted (1) (2) Revenues: GSA settlement - $ - Total revenues - $ 4,779 Operating expenses: Cost of license revenues - $ 59 Cost of services revenues - $ 574 Research and development - $ 792 Sales and marketing - $ 1,507 General and administrative - $ 389 Realignment charges - $ - Operating income - $ 1,458 Operating margin (2) - 30.5% Other income (expense), net - $ (6) Income before income taxes - $ 1,470 Income tax provision 135 $ 272 Tax rate (2) 18.5% Net Income (135) $ 1,198 Net income per weighted-average share, basic for Class A and Class B (2) (3) $ (0.32) $ 2.82 Net income per weighted-average share, diluted for Class A and Class B (2) (4) $ (0.32) $ 2.80 (1) 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 adjusted 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, 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. (2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (3) Calculated based upon 424,799 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 427,466 diluted weighted-average shares for Class A and Class B. VMware, Inc. RECONCILIATION OF GAAP TO NON-GAAP DATA For the Nine Months Ended September 30, 2014 (amounts in millions, except per share amounts, and shares in thousands) (unaudited) Employer Payroll Taxes on Employee Stock-Based Stock Intangible GAAP Compensation Transactions Amortization Operating expenses: Cost of license revenues $ 143 (2) - (79) Cost of services revenues $ 519 (31) (1) (1) Research and development $ 936 (187) (3) (5) Sales and marketing $1,550 (128) (3) (14) General and administra- tive $ 498 (51) (1) (1) Realignment charges $ 4 - - - Operating income $ 683 399 8 100 Operating margin (2) 15.8% 9.2% 0.2% 2.3% Other income (expense), net $ (2) - - - Income before income taxes $ 691 399 8 100 Income tax provision $ 131 Tax rate (2) 18.9% Net Income $ 560 399 8 100 Net income per weighted- average share, basic for Class A and Class B (2) (3) $ 1.30 $ 0.93 $ 0.02 $ 0.23 Net income per weighted- average share, diluted for Class A and Class B (2) (4) $ 1.29 $ 0.92 $ 0.02 $ 0.23 table continued below Non- Acquisition Certain GAAP, and Other Litigation Tax as Realignment Related and Other Adjustment adjusted Charges Items Contingencies (1) (2) Operating expenses: Cost of license revenues - - - - $ 61 Cost of services revenues - - - - $ 488 Research and development - - - - $ 742 Sales and marketing - - - - $ 1,402 General and administra -tive - (107) (11) - $ 328 Realignment charges (4) - - - $ - Operating income 4 107 11 - $ 1,312 Operating margin (2) 0.1% 2.5% 0.2% - 30.3% Other income (expense), net - 1 - - $ (1) Income before income taxes 4 108 11 - $ 1,321 Income tax provision 114 $ 244 Tax rate (2) 18.5% Net Income 4 108 11 (114) $ 1,077 Net income per weighted- average share, basic for Class A and Class B (2) (3) $ 0.01 $ 0.25 $ 0.02 $ (0.26) $ 2.50 Net income per weighted- average share, diluted for Class A and Class B (2) (4) $ 0.01 $ 0.25 $ 0.02 $ (0.26) $ 2.48 (1) 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 adjusted 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, 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. (2) Totals may not sum, due to rounding. Operating margin, tax rate and net income per weighted average share information are calculated based upon the respective underlying, non-rounded data. (3) Calculated based upon 430,408 basic weighted-average shares for Class A and Class B. (4) Calculated based upon 434,656 diluted weighted-average shares for Class A and Class B. VMware, Inc. REVENUES BY TYPE (in millions) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2015 2014 2015 2014 Revenues: License $ 681 $ 639 $ 1,896 $ 1,814 Services: Software maintenance 863 779 2,505 2,217 Professional services 128 97 378 302 Total services 991 876 2,883 2,519 GSA settlement - - (76) - Total revenues $ 1,672 $ 1,515 $ 4,703 $ 4,333 Percentage of revenues: License 40.8% 42.2% 40.3% 41.9% Services: Software maintenance 51.6% 51.4% 53.3% 51.2% Professional services 7.6% 6.4% 8.0% 6.9% Total services 59.2% 57.8% 61.3% 58.1% GSA settlement -% -% (1.6)% -% Total revenues 100.0% 100.0% 100.0% 100.0% VMware, Inc. REVENUES BY GEOGRAPHY (in millions) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2015 2014 2015 2014 Revenues: United States $ 861 $ 780 $ 2,364 $ 2,112 International 811 735 2,339 2,221 Total revenues $ 1,672 $ 1,515 $ 4,703 $ 4,333 Percentage of revenues: United States 51.5% 51.5% 50.3% 48.8% International 48.5% 48.5% 49.7% 51.2% Total revenues 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) (in millions) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2015 2014 2015 2014 GAAP cash flows from operating activities $ 411 $ 606 $ 1,411 $ 1,765 Capital expenditures (90) (100) (274) (254) Free cash flows $ 321 $ 506 $ 1,137 $ 1,511 ====