VMware Reports Fourth Quarter and Full Year 2011 Results

PALO ALTO, CA--(Marketwire - Jan 23, 2012) - VMware, Inc. (NYSE: VMW), the global leaderin virtualization and cloud infrastructure, today announced financialresults for the fourth quarter and full year of 2011:

• Revenues for the fourth quarter were $1.06 billion, an increase of 27%from the fourth quarter of 2010, and an increase of 26% measured inconstant currency.
• Operating income for the fourth quarter was $214 million, an increaseof 64% from the fourth quarter of 2010. Non-GAAP operating income for thefourth quarter was $338 million, an increase of 37% from the fourth quarterof 2010.
• Net income for the fourth quarter was $200 million, or $0.46 perdiluted share, compared to $120 million, or $0.28 per diluted share, forthe fourth quarter of 2010. Non-GAAP net income for the quarter was $266million, or $0.62 per diluted share, compared to $198 million, or $0.46 perdiluted share, for the fourth quarter of 2010.
• Operating cash flows for the fourth quarter were $561 million, anincrease of 38% from the fourth quarter of 2010. Free cash flows for thequarter were $535 million, an increase of 32% from the fourth quarter of2010.
• Revenues for 2011 were $3.77 billion, an increase of 32% from 2010.
• Operating income for 2011 was $735 million, an increase of 72% from2010. Non-GAAP operating income for 2011 was $1.17 billion, an increase of43% from 2010.
• Net income for 2011 was $724 million, or $1.68 per diluted share,compared to $357 million, or $0.84 per diluted share, for 2010. Non-GAAPnet income for 2011 was $936 million, or $2.17 per diluted share, comparedto $639 million, or $1.51 per diluted share, for 2010.
• Operating cash flows for 2011 were $2.03 billion, an increase of 72%and free cash flows for the year were $1.95 billion, an increase of 62%from 2010.
• Cash, cash equivalents and short-term investments were $4.51 billionand unearned revenue was $2.71 billion as of December 31, 2011.

U.S. revenues for 2011 grew 26% to $1.82 billion from 2010. Internationalrevenues grew 38% to $1.94 billion from 2010.

License revenues for 2011 were $1.84 billion, an increase of 31% from 2010.Service revenues, which include software maintenance and professionalservices, were $1.93 billion for 2011, an increase of 32% from 2010.

"The quarter's strong performance further signals that virtualization isthe foundation for simplifying and automating IT," said Paul Maritz, chiefexecutive officer, VMware. "As customers continue to drive significant ITtransformation, our task remains in providing solutions that go beyond costreduction, yielding business and competitive value."

"We are pleased with our record fourth quarter results," said Mark Peek,chief financial officer, VMware. "Our investments over the years haveclearly paid off and we will continue to take advantage of long-termopportunities ahead. First quarter 2012 revenues are expected to be in therange of $1.015 and $1.040 billion, an increase of 20% to 23% from thefirst quarter 2011. Annual 2012 revenues are expected to be in the rangeof $4.475 and $4.6 billion, an increase of 19% to 22% from 2011, and annuallicense revenues are expected to grow between 11% and 16%."

Recent Highlights & Strategic Announcements

• In October 2011, VMware unveiled three product suites designed tosimplify and automate IT management. With significant enhancements toVMware® vCenter Operations™ and the introduction of new VMware®vFabric Application Management™ and VMware® IT Business Managementsuites, VMware will help customers amplify the value of their virtualenvironments and achieve the agility and economics of cloud computing.
• VMware announced VMware vCenter™ Protect Essentials Plus™, acomplete on-premise management system designed to meet the needs of thesmall and midsize businesses (SMBs) and enhancements to its VMware GoPro™ service, simplifying IT management for SMBs.
• VMware announced VMware® Horizon Mobile, a simple way for ITdepartments to securely provision, manage and de-provision a corporatemobile workspace to an employee's Android device over-the-air, whileenabling the employee to retain the privacy and control of their personalmobile environments. VMware Horizon Mobile is expected to be available inearly 2012.
• In December 2011, VMware announced new VMware View™ Clients forKindle Fire, Mac and Linux, along with updates to its popular VMware ViewClients for Android and iPad. The new VMware View Clients for Mac andLinux enable IT organizations to empower more agile, productive andconnected workforce or school communities by providing an easy-to-access,high-fidelity desktop virtualization experience optimized for the device oftheir choice. The new VMware View™ Clients for Mac and Linux areexpected to be available in early 2012.

VMware plans to host a conference call today to review its fourth quarterand 2011 results and to discuss its financial outlook. The call isscheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed viathe Web at http://ir.vmware.com. The webcast will be available live, and areplay will be available following completion of the live broadcast forapproximately 60 days.

About VMware

VMware is the leader in virtualization and cloud infrastructure solutionsthat enable businesses to thrive in the Cloud Era. Customers rely on VMwareto help them transform the way they build, deliver and consume InformationTechnology resources in a manner that is evolutionary and based on theirspecific needs. With 2011 revenues of $3.77 billion, VMware has more than300,000 customers and 25,000 partners. The company is headquartered inSilicon Valley with offices throughout the world and can be found online atwww.vmware.com.

VMware, VMware vCenter Operations, VMware vFabric Application Management,VMware vCenter Protect Essentials Plus, VMware View and VMware Go Pro areregistered trademarks or trademarks of VMware, Inc. in the United Statesand/or other jurisdictions. Other marks mentioned herein are trademarks,which are proprietary to VMware, Inc. or another company.

Use of Non-GAAP Financial Measures

Reconciliations of non-GAAP financial measures to VMware's financialresults as determined in accordance with GAAP are included at the end ofthis press release following the accompanying financial data. For adescription of these non-GAAP financial measures, including the reasonsmanagement 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, amongother things, statements regarding VMware's expected first quarter andannual 2012 revenues and annual 2012 license revenue growth, the expectedtransformation of IT and the role and value proposition of virtualizationand VMware solutions in the IT transformation, our ability to takeadvantage of long-term opportunities, the value to customers and theprospect of customer adoption of our new product suites, and the expectedfeatures and benefits and availability of VMware Horizon Mobile and VMwareView Clients for Mac and Linux. These forward-looking statements aresubject to the safe harbor provisions created by the Private SecuritiesLitigation Reform Act of 1995. Actual results could differ materially fromthose projected in the forward-looking statements as a result of certainrisk factors, including but not limited to: (i) adverse changes in generaleconomic or market conditions; (ii) delays or reductions in consumer orinformation technology spending; (iii) competitive factors, including butnot limited to pricing pressures, industry consolidation, entry of newcompetitors into the virtualization and cloud computing markets, and newproduct and marketing initiatives by our competitors; (iv) factors thataffect timing of license revenue recognition such as product announcements,beta programs and product promotions that can cause revenue recognition ofcertain orders to be deferred; (v) our customers' ability to develop, andto transition to, new products and computing strategies such as cloudcomputing and desktop virtualization; (vi) the uncertainty of customeracceptance of emerging technology; (vii) changes in the willingness ofcustomers to enter into longer term licensing and support arrangements;(viii) rapid technological and market changes in virtualization softwareand platforms for cloud and desktop computing; (ix) changes to productdevelopment timelines; (x) VMware's relationship with EMC Corporation andEMC's ability to control matters requiring stockholder approval, includingthe election of VMware's board members; (xi) our ability to protect ourproprietary technology; (xii) our ability to attract and retain highlyqualified employees; (xiii) the successful integration of acquiredcompanies and assets into VMware; and (xiv) fluctuating currency exchangerates. These forward looking statements are based on current expectationsand are subject to uncertainties and changes in condition, significance,value and effect as well as other risks detailed in documents filed withthe Securities and Exchange Commission, including our most recent reportson Form 10-K and Form 10-Q and current reports on Form 8-K that we may filefrom time to time, which could cause actual results to vary fromexpectations. VMware assumes no obligation to, and does not currentlyintend to, update any such forward-looking statements after the date ofthis release.

                               VMware, Inc.                   CONSOLIDATED STATEMENTS OF CASH FLOWS                              (in thousands)                                (unaudited)                          For the Three Months                                  Ended              For the Year Ended                              December 31,              December 31,                        ------------------------  ------------------------                            2011         2010         2011         2010                        -----------  -----------  -----------  -----------Operating activities:Net income              $   200,428  $   119,880  $   723,936  $   357,439Adjustments to reconcile net income to net cash provided by operating activities:  Depreciation and   amortization              86,228       77,090      315,871      260,551  Stock-based   compensation,   excluding amounts   capitalized               80,759       86,501      335,153      291,691  Excess tax benefits   from stock-based   compensation             (26,811)     (56,253)    (224,503)    (223,457)  Gain on sale of   Terremark investment          --           --      (56,000)          --  Other                      10,626        6,963       21,420       13,083   Changes in assets and   liabilities, net of   acquisitions:      Accounts       receivable          (336,123)    (236,362)    (263,366)     (77,121)      Other assets           15,576        3,999      (75,879)     (79,431)      Due to/from EMC,       net                  (61,310)     (44,439)     (18,370)     (28,508)      Accounts payable       (3,960)       4,292      (16,513)       8,881      Accrued expenses      100,353       92,353      115,025      120,880      Income taxes       receivable from       EMC                   23,018           --       269,258        2,508      Income taxes       payable               27,261       46,618       79,183       89,439      Deferred income       taxes, net           (28,936)     (48,513)     (19,663)     (56,948)      Unearned revenue      474,300      354,486      840,081      495,382                        -----------  -----------  -----------  -----------Net cash provided by operating activities       561,409      406,615    2,025,633    1,174,389                        -----------  -----------  -----------  -----------Investing activities:Additions to property and equipment              (52,911)     (40,450)    (230,091)    (131,695)Purchase of leasehold interest                        --           --      (151,083)         --Capitalized software development costs               --      (15,955)     (73,998)     (64,149)Purchases of available- for-sale securities       (584,397)    (477,201)  (2,667,888)  (2,101,907)Sales of available-for- sale securities            208,058      265,033      816,351      389,251Maturities of available-for-sale securities                 249,706       96,160      974,413      127,054Sale of strategic investments                     --           --       78,513        2,648Business acquisitions, net of cash acquired            --           --     (303,610)    (292,970)Transfer of net assets under common control            --      (10,580)     (22,393)    (185,580)Other investing                (815)      (4,800)     (31,187)      (4,594)                        -----------  -----------  -----------  -----------Net cash used in investing activities      (180,359)    (187,793)  (1,610,973)  (2,261,942)                        -----------  -----------  -----------  -----------Financing activities:Proceeds from issuance of common stock             52,332       75,460      337,618      431,306Repurchase of common stock                      (35,287)     (52,587)    (526,203)    (338,527)Excess tax benefits from stock-based compensation                26,811       56,253      224,503      223,457Shares repurchased for tax withholdings on vesting of restricted stock                      (18,979)     (16,063)    (123,787)     (86,179)                        -----------  -----------  -----------  -----------Net cash provided by (used in) financing activities                  24,877       63,063      (87,869)     230,057                        -----------  -----------  -----------  -----------Net increase (decrease) in cash and cash equivalents                405,927      281,885      326,791     (857,496)Cash and cash equivalents at beginning of the period                   1,549,829    1,347,080    1,628,965    2,486,461                        -----------  -----------  -----------  -----------Cash and cash equivalents at end of the period             $ 1,955,756  $ 1,628,965  $ 1,955,756  $ 1,628,965                        ===========  ===========  ===========  ===========                               VMware, Inc.                     CONSOLIDATED STATEMENTS OF INCOME                 (in thousands, except per share amounts)                                (unaudited)                                                             For the Three Months                                     Ended            For the Year Ended                                 December 31,            December 31,                            ----------------------  ----------------------                               2011        2010        2011        2010                            ----------  ----------  ----------  ----------Revenues:      License               $  513,767  $  422,343  $1,841,169  $1,401,424      Services                 546,535     413,318   1,925,927   1,455,919                            ----------  ----------  ----------  ----------                             1,060,302     835,661   3,767,096   2,857,343Operating expenses (1):      Cost of license       revenues                 56,389      50,735     207,398     177,458      Cost of services       revenues                110,485      89,616     414,589     316,257      Research and       development             216,992     177,671     775,051     652,968      Sales and marketing      385,236     313,045   1,334,346   1,013,281      General and       administrative           77,144      73,980     300,541     269,386                            ----------  ----------  ----------  ----------Operating income               214,056     130,614     735,171     427,993Investment income                4,685       2,604      16,157       6,633Interest expense with EMC       (1,060)       (966)     (3,906)     (4,069)Other income (expense), net     (8,815)     (7,205)     46,991     (14,182)                            ----------  ----------  ----------  ----------Income before income taxes     208,866     125,047     794,413     416,375Income tax provision             8,438       5,167      70,477      58,936                            ----------  ----------  ----------  ----------Net income                  $  200,428  $  119,880  $  723,936  $  357,439                            ==========  ==========  ==========  ==========Net income per weighted- average share, basic for Class A and Class B        $     0.47  $     0.29  $     1.72  $     0.87Net income per weighted- average share, diluted for Class A and Class B        $     0.46  $     0.28  $     1.68  $     0.84Weighted-average shares, basic for Class A and Class B                       422,873     414,919     421,188     409,805Weighted-average shares, diluted for Class A and Class B                       431,375     427,883     431,750     423,446(1) Includes stock-based     compensation as follows:      Cost of license       revenue              $      335  $      483  $    1,606  $    1,653      Cost of services       revenues                  5,993       5,877      23,389      18,478      Research and       development              39,643      47,143     174,264     164,435      Sales and marketing       25,138      23,545      95,688      73,146      General and       administrative            9,650       9,453      40,206      33,979                                VMware, Inc.                        CONSOLIDATED BALANCE SHEETS                  (in thousands, except per share amounts)                                (unaudited)                                                 December 31,  December 31,                                                     2011          2010                                                ------------- -------------                     ASSETSCurrent assets:    Cash and cash equivalents                   $   1,955,756 $   1,628,965    Short-term investments                          2,556,450     1,694,675    Accounts receivable, net of allowance for     doubtful accounts of $3,794 and $4,519           882,857       614,726    Due from EMC, net                                  73,799        55,481    Deferred tax asset                                128,471       100,689    Other current assets                               80,439       203,119                                                ------------- -------------Total current assets                                5,677,772     4,297,655Property and equipment, net                           525,490       419,065Capitalized software development costs, net and other                                                154,236       151,945Deferred tax asset                                    156,855       149,126Intangible assets, net                                407,375       210,928Goodwill                                            1,759,080     1,568,600                                                ------------- -------------      Total assets                              $   8,680,808 $   6,797,319                                                ============= =============      LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:    Accounts payable                            $      49,747 $      58,913    Accrued expenses and other                        587,650       459,813    Unearned revenues                               1,764,109     1,270,426                                                ------------- -------------Total current liabilities                           2,401,506     1,789,152Note payable to EMC                                   450,000       450,000Unearned revenues                                     944,309       589,668Other liabilities                                     114,711       160,056                                                ------------- -------------    Total liabilities                               3,910,526     2,988,876Commitments and contingenciesStockholders' equity:  Class A common stock, par value $.01;   authorized 2,500,000 shares; issued and   outstanding 123,610 and 116,701 shares               1,236         1,167  Class B convertible common stock, par value   $.01; authorized 1,000,000 shares; issued   and outstanding 300,000 shares                       3,000         3,000  Additional paid-in capital                        3,212,264     2,955,971  Accumulated other comprehensive income                1,176        19,635  Retained earnings                                 1,552,606       828,670                                                ------------- -------------    Total stockholders' equity                      4,770,282     3,808,443                                                ------------- -------------      Total liabilities and stockholders'       equity                                   $   8,680,808 $   6,797,319                                                ============= =============                               VMware, Inc.                  RECONCILIATION OF GAAP TO NON-GAAP DATA               For the Three Months Ended December 31, 2011                 (in thousands, except per share amounts)                                (unaudited)                                                     Employer                                                     Payroll                                                     Taxes on                                           Stock-    Employee                                           Based      Stock                                          Compen-     Trans-    Intangible                               GAAP       sation      actions  Amortization                            ----------  ----------  ----------  ----------Operating expenses:Cost of license revenues    $   56,389        (335)        (27)    (13,187)Cost of services revenues   $  110,485      (5,993)       (160)     (1,241)Research and development    $  216,992     (39,643)     (1,486)       (796)Sales and marketing         $  385,236     (25,138)       (867)     (2,866)General and administrative  $   77,144      (9,650)       (383)        (37)Operating income            $  214,056      80,759       2,923      18,127Operating margin                  20.2%        7.6%        0.3%        1.7%Income before income taxes  $  208,866      80,759       2,923      18,127Income tax provision        $    8,438Tax rate                           4.0%Net income                  $  200,428      80,759       2,923      18,127Net income per weighted-average share, basic for Class A and Class B (3)                $     0.47  $     0.19  $     0.01  $     0.04Net income per weighted-average share, diluted for Class A and Class B (4)                $     0.46  $     0.19  $     0.01  $     0.04table continued below                                        Capitalized                           Acquisition   Software                             Related    Development     Tax      Non-GAAP,                            Items and     Costs      Adjustment     as                              Other        (1)          (2)      adjusted                            ----------  ----------  ----------  ----------Operating expenses:Cost of license revenues            --     (22,042)         --  $   20,798Cost of services revenues           --          --          --  $  103,091Research and development            --          --          --  $  175,067Sales and marketing                 --          --          --  $  356,365General and administrative        (197)         --          --  $   66,877Operating income                   197      22,042          --  $  338,104Operating margin                    --         2.1%         --        31.9%Income before income taxes         197      22,042          --  $  332,914Income tax provision                                    58,145  $   66,583Tax rate                                                              20.0%Net income                         197      22,042     (58,145) $  266,331Net income per weighted-average share, basic for Class A and Class B (3)                $       --  $     0.06  $    (0.14) $     0.63Net income per weighted-average share, diluted for Class A and Class B (4)                $       --  $     0.05  $    (0.13) $     0.62(1)  For the fourth quarter of 2011, no costs were capitalized for thedevelopment of software products. Amortization expense from previouslycapitalized amounts was $22.0 million for the fourth quarter of 2011.(2) Non-GAAP financial information for the quarter is adjusted for a taxrate equal to our annual estimated tax rate on non-GAAP income. This rateis based on our estimated annual GAAP income tax rate forecast, adjusted toaccount for items excluded from GAAP income in calculating the non-GAAPfinancial measures presented above. Our estimated tax rate on non-GAAPincome is determined annually and may be adjusted during the year to takeinto account events or trends that we believe materially impact theestimated annual rate including, but not limited to, significant changesresulting from tax legislation, material changes in the geographic mix ofrevenues and expenses and other significant events. Due to the differencesin the tax treatment of items excluded from non-GAAP earnings, as well asthe methodology applied to our estimated annual tax rates as describedabove, our estimated tax rate on non-GAAP income may differ from our GAAPtax rate and from our actual tax liabilities.(3) Calculated based upon 422,873 basic weighted-average shares for Class Aand Class B.(4) Calculated based upon 431,375 diluted weighted-average shares for ClassA and Class B.                               VMware, Inc.                  RECONCILIATION OF GAAP TO NON-GAAP DATA               For the Three Months Ended December 31, 2010                 (in thousands, except per share amounts)                                (unaudited)                                           Employer                                           Payroll                                            Taxes                                              on                                 Stock-    Employee            Acquisition                                 Based      Stock                Related                                Compen-    Trans-   Intangible  Items and                       GAAP     sation     actions  Amortization  Other                     --------  ---------  ---------  --------- ----------Operating expenses:Cost of license revenues            $ 50,735       (483)       (21)    (8,375)         -Cost of services revenues            $ 89,616     (5,877)      (228)    (1,471)         -Research and development         $177,671    (47,143)    (3,299)      (627)         -Sales and marketing  $313,045    (23,545)    (1,496)    (1,664)         -General and administrative      $ 73,980     (9,453)      (342)       (38)      (325)Operating income     $130,614     86,501      5,386     12,175        325Operating margin         15.6%      10.4%       0.6%       1.5%         -                                                                          Income before income taxes               $125,047     86,501      5,386     12,175        325Income tax provision $  5,167Tax rate                  4.1%Net income           $119,880     86,501      5,386     12,175        325Net income per weighted-average share, basic for Class A and Class B (3)        $   0.29  $    0.21  $    0.01  $    0.03 $        -Net income per weighted-average share, diluted for Class A and  Class B (4)       $   0.28  $    0.20  $    0.01  $    0.03 $        -table continued below                                 Stock-                                  Based                              Compensation                                Included                    Capitalized    in                      Software Capitalized   Tax      Non-GAAP,                    Development Software   Adjustment    as                     Costs (1) Development    (2)     adjusted                    ---------- ---------- ---------- ----------Operating expenses:Cost of license revenues              (28,465)         -          - $   13,391Cost of services revenues                    -          -          - $   82,040Research and development            18,776     (2,821)         - $  142,557Sales and marketing          -          -          - $  286,340General and administrative              -          -          - $   63,822Operating income         9,689      2,821          - $  247,511Operating margin           1.2%       0.3%         -       29.6%Income before income taxes                   9,689      2,821          - $  241,944Income tax provision                          38,383 $   43,550Tax rate                                                   18.0%Net income               9,689      2,821    (38,383)$  198,394Net income per weighted-average share, basic for Class A and Class B (3)        $     0.02 $     0.01 $    (0.09)$     0.48Net income per weighted-average share, diluted for Class A and Class B (4)        $     0.02 $     0.01 $    (0.09)$     0.46(1) For the fourth quarter of 2010, we capitalized $18.8million (including $2.8 million of stock-based compensation)of costs incurred for the development of software products.Amortization expense from capitalized amounts was $28.5million for the fourth quarter of 2010.(2) Non-GAAP financial information for the quarter is adjustedfor a tax rate equal to our annual estimated tax rate on non-GAAP income. This rate is based on our estimated annual GAAPincome tax rate forecast, adjusted to account for itemsexcluded from GAAP income in calculating the non-GAAPfinancial measures presented above. Our estimated tax rate onnon-GAAP income is determined annually and may be adjustedduring the year to take into account events or trends that webelieve materially impact the estimated annual rate including,but not limited to, significant changes resulting from taxlegislation, material changes in the geographic mix ofrevenues and expenses and other significant events. Due to thedifferences in the tax treatment of items excluded from non-GAAP earnings, as well as the methodology applied to ourestimated annual tax rates as described above, our estimatedtax rate on non-GAAP income may differ from our GAAP tax rateand from our actual tax liabilities.(3) Calculated based upon 414,919 basic weighted-average sharesfor Class A and Class B.(4) Calculated based upon 427,883 diluted weighted-averageshares for Class A and Class B.                               VMware, Inc.                  RECONCILIATION OF GAAP TO NON-GAAP DATA                   For the Year Ended December 31, 2011                 (in thousands, except per share amounts)                                (unaudited)                                              Employer                                              Payroll                                             Taxes on                                     Stock-  Employee          Acquisition                                     Based    Stock   Intangible  Related                                    Compen-  Trans-     Amor-   Items and                           GAAP     sation    actions   tization   Other                       -----------  --------  --------  --------  --------Operating expenses:Cost of license revenues              $   207,398    (1,606)     (120)  (46,074)     --Cost of services revenues              $   414,589   (23,389)   (1,368)   (4,967)     --Research and development           $   775,051  (174,264)   (9,724)   (3,187)     --Sales and marketing    $ 1,334,346   (95,688)   (5,577)  (10,213)     --General and administrative        $   300,541   (40,206)   (1,580)     (145)   (2,423)Operating income       $   735,171   335,153    18,369    64,586     2,423Operating margin              19.5%      8.9%      0.5%      1.7%      0.1%Other income (expense), net        $    46,991Income before income taxes                 $   794,413   335,153    18,369    64,586     2,423Income tax provision   $    70,477Tax rate                       8.9%Net income             $   723,936   335,153    18,369    64,586     2,423Net income per weighted-average share, basic for Class A and Class B (4)                   $      1.72  $   0.80  $   0.04  $   0.15  $   0.01Net income per weighted-average share, diluted for Class A and Class B (5)                   $      1.68  $   0.78  $   0.04  $   0.15  $   0.01table continued below                                     Stock-                                     Based                                  Compensation                                    Included                                    in Capit-                       Capitalized   alized   Gain on                         Software   Software  Sale of     Tax     Non-GAAP,                       Development  Develop-  Terremark Adjust-      as                         Costs (1)    ment    (2)       ment (3)  adjusted                       -----------  --------  --------  --------  ---------Operating expenses:Cost of license revenues                  (84,741)     --        --        --  $  74,857 Cost of services revenues                     --        --        --        --  $ 384,865Research and development                86,426   (12,428)     --        --  $ 661,874Sales and marketing           --        --        --        --  $1,222,868General and administrative               --        --        --        --  $  256,187Operating income            (1,685)   12,428      --        --  $1,166,445Operating margin              --         0.3%     --        --        31.0%Other income (expense), net                                (56,000)             (9,009)Income before income taxes                      (1,685)   12,428   (56,000)     --  $1,169,687Income tax provision                                    163,459 $  233,936Tax rate                                                              20.0%Net income                  (1,685)   12,428   (56,000)(163,459)$  935,751Net income per weighted-average share, basic for Class A and Class B (4)                   $     (0.01) $   0.03  $  (0.13) $ (0.39)$     2.22Net income per weighted-average share, diluted for Class A and Class B (5)                   $     (0.01) $   0.03  $  (0.13) $ (0.38)$     2.17(1)  For the year ended December 31, 2011, we capitalized $86.4 million(including $12.4 million of stock-based compensation) of costs incurred forthe development of software products. Amortization expense from capitalizedamounts was $84.7 million for the year ended December 31, 2011.(2) VMware realized a gain of $56.0 million on the sale of its investmentin Terremark Worldwide, Inc.(3) Non-GAAP financial information for the quarter is adjusted for a taxrate equal to our annual estimated tax rate on non-GAAP income. This rateis based on our estimated annual GAAP income tax rate forecast, adjusted toaccount for items excluded from GAAP income in calculating the non-GAAPfinancial measures presented above. Our estimated tax rate on non-GAAPincome is determined annually and may be adjusted during the year to takeinto account events or trends that we believe materially impact theestimated annual rate including, but not limited to, significant changesresulting from tax legislation, material changes in the geographic mix ofrevenues and expenses and other significant events. Due to the differencesin the tax treatment of items excluded from non-GAAP earnings, as well asthe methodology applied to our estimated annual tax rates as describedabove, our estimated tax rate on non-GAAP income may differ from our GAAPtax rate and from our actual tax liabilities.(4) Calculated based upon 421,188 basic weighted-average shares for Class Aand Class B.(5) Calculated based upon 431,750 diluted weighted-average shares for ClassA and Class B.                               VMware, Inc.                  RECONCILIATION OF GAAP TO NON-GAAP DATA                   For the Year Ended December 31, 2010                 (in thousands, except per share amounts)                                (unaudited)                                              Employer                                              Payroll                                             Taxes on                                     Stock-   Employee         Acquisition                                     Based    Stock   Intangible  Related                                    Compen-  Transact-  Amor-    Items and                           GAAP     sation     ions     tization   Other                       -----------  --------  --------  --------  --------Operating expenses:Cost of license revenues              $   177,458    (1,653)      (84)  (23,785)     --Cost of services revenues              $   316,257   (18,478)     (791)   (4,670)     --  Research and development           $   652,968  (164,435)   (9,101)   (2,354)     --Sales and marketing    $ 1,013,281   (73,146)   (4,633)   (3,797)     --General and administrative        $   269,386   (33,979)   (1,689)     (152)   (3,499)Operating income       $   427,993   291,691    16,298    34,758     3,499Operating margin              15.0%     10.2%      0.6%      1.2%      0.1%Income before income taxes                 $   416,375   291,691    16,298    34,758     3,499Income tax provision   $    58,936Tax rate                      14.2%Net income             $   357,439   291,691    16,298    34,758     3,499Net income per weighted-average share, basic for Class A and Class B (3)                   $      0.87  $   0.71  $   0.04  $   0.08  $   0.01Net income per weighted-average share, diluted for Class A and Class B (4)                   $      0.84  $   0.69  $   0.04  $   0.08  $   --table continues below                                     Stock-                                     Based                                  Compensation                                    Included                                    in Capit-                       Capitalized   alized                         Software   Software  Tax       Non-GAAP,                       Development  Develop-  Adjust-      as                         Costs (1)    ment    ment (2)  adjusted                       -----------  --------  --------  --------Operating expenses:Cost of license revenues                  (99,522)     --        --    $  52,414Cost of services revenues                     --        --        --    $ 292,318Research and development                71,666   (10,924)     --    $ 537,820Sales and marketing           --        --        --    $ 931,705General and administrative               --        --        --    $ 230,067Operating income            27,856    10,924      --    $ 813,019Operating margin               1.0%      0.4%     --         28.5%Income before income taxes                      27,856    10,924      --    $ 801,401Income tax provision                           103,558  $ 162,494Tax rate                                                    20.3%Net income                  27,856    10,924  (103,558) $ 638,907Net income per weighted-average share, basic for Class A and Class B (3)                   $      0.07  $   0.03  $  (0.25) $   1.56Net income per weighted-average share, diluted for Class A and Class B (4)                   $      0.07  $   0.03  $  (0.24) $   1.51(1)  For the year ended December 31 2010, we capitalized $71.7 million(including $10.9 million of stock-based compensation) of costs incurred forthe development of software products. Amortization expense from capitalizedamounts was $99.5 million for the year ended December 31, 2010.(2) Non-GAAP financial information for the quarter is adjusted for a taxrate equal to our annual estimated tax rate on non-GAAP income. This rateis based on our estimated annual GAAP income tax rate forecast, adjusted toaccount for items excluded from GAAP income in calculating the non-GAAPfinancial measures presented above. Our estimated tax rate on non-GAAPincome is determined annually and may be adjusted during the year to takeinto account events or trends that we believe materially impact theestimated annual rate including, but not limited to, significant changesresulting from tax legislation, material changes in the geographic mix ofrevenues and expenses and other significant events. Due to the differencesin the tax treatment of items excluded from non-GAAP earnings, as well asthe methodology applied to our estimated annual tax rates as describedabove, our estimated tax rate on non-GAAP income may differ from our GAAPtax rate and from our actual tax liabilities.(3) Calculated based upon 409,805 basic weighted-average shares for Class Aand Class B.(4) Calculated based upon 423,446 diluted weighted-average shares for ClassA and Class B.                               VMware, Inc.                              REVENUE BY TYPE                              (in thousands)                                (unaudited)                          For the Three Months                                  Ended              For the Year Ended                              December 31,              December 31,                        ------------------------  ------------------------                            2011         2010         2011         2010                        -----------  -----------  -----------  -----------Revenues:  License               $   513,767  $   422,343  $ 1,841,169  $ 1,401,424  Services:    Software     maintenance            463,489      345,260    1,640,397    1,217,064    Professional     services                83,046       68,058      285,530      238,855                        -----------  -----------  -----------  -----------  Total services            546,535      413,318    1,925,927    1,455,919                        -----------  -----------  -----------  -----------                        $ 1,060,302  $   835,661  $ 3,767,096  $ 2,857,343                        ===========  ===========  ===========  ===========Percentage of revenues:  License                      48.5%        50.5%        48.9%        49.0%  Services:    Software     maintenance               43.7%        41.3%        43.5%        42.6%    Professional     services                   7.8%         8.2%         7.6%         8.4%                        -----------  -----------  -----------  -----------  Total services               51.5%        49.5%        51.1%        51.0%                        -----------  -----------  -----------  -----------                              100.0%       100.0%       100.0%       100.0%                        ===========  ===========  ===========  ===========                               VMware, Inc.        RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES                            TO FREE CASH FLOWS                      (A NON-GAAP FINANCIAL MEASURE)          For the Three Months Ended December 31, 2011 and 2010                              (in thousands)                                (unaudited)                                                    For the Three Months                                                            Ended                                                        December 31,                                                  ------------------------                                                      2011         2010                                                  -----------  -----------GAAP cash flows from operating activities         $   561,409  $   406,615Capitalized software development costs                      -      (15,955)Excess tax benefits from stock-based compensation      26,811       56,253Capital expenditures                                  (52,911)     (40,450)                                                  -----------  -----------Free cash flows                                   $   535,309  $   406,463                                                  ===========  ===========                               VMware, Inc.        RECONCILIATION OF GAAP CASH FLOWS FROM OPERATING ACTIVITIES                            TO FREE CASH FLOWS                      (A NON-GAAP FINANCIAL MEASURE)              For the Year Ended December 31, 2011 and 2010                              (in thousands)                                (unaudited)                                                     For the Year Ended                                                        December 31,                                                  ------------------------                                                      2011         2010                                                  -----------  -----------GAAP cash flows from operating activities         $ 2,025,633  $ 1,174,389Capitalized software development costs                (73,998)     (64,149)Excess tax benefits from stock-based compensation     224,503      223,457Capital expenditures                                 (230,091)    (131,695)                                                  -----------  -----------Free cash flows                                   $ 1,946,047  $ 1,202,002                                                  ===========  ===========

About Non-GAAP Financial Measures
To provide investors and others with additional information regardingVMware's results, we have disclosed in this press release the followingnon-GAAP financial measures: non-GAAP operating income, non-GAAP netincome, non-GAAP operating margin, free cash flows and trailingtwelve-month free cash flows. VMware has provided a reconciliation of eachnon-GAAP financial measure used in this earnings release to the mostdirectly comparable GAAP financial measure. These non-GAAP financialmeasures differ from GAAP in that they exclude stock-based compensation,employer payroll tax on employee stock transactions, amortization ofintangible assets, acquisition related items, the net effect of theamortization and capitalization of software development costs and the gainthat VMware realized upon its sale of its investment in TerremarkWorldwide, Inc. during the second quarter of fiscal 2011, each as discussedbelow.

VMware's management uses these non-GAAP financial measures to understandand compare operating results across accounting periods, for internalbudgeting and forecasting purposes, for short- and long-term operatingplans, to calculate bonus payments and to evaluate VMware's financialperformance, the performance of its individual functional groups and theability of operations to generate cash. Management believes these non-GAAPfinancial measures reflect VMware's ongoing business in a manner thatallows for meaningful period-to-period comparisons and analysis of trendsin VMware's business, as they exclude expenses and gains that are notreflective of ongoing operating results. Management also believes thatthese non-GAAP financial measures provide useful information to investorsand others in understanding and evaluating VMware's operating results andfuture prospects in the same manner as management and in comparingfinancial results across accounting periods and to those of peer companies.Additionally, management believes information regarding free cash flowsprovides investors and others with an important perspective on the cashavailable to make strategic acquisitions and investments, to repurchaseshares, to fund ongoing operations and to fund other capital expenditures.

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

• Stock-based compensation. Although stock-based compensation is animportant aspect of the compensation of VMware's employees and executives,determining the fair value of certain of the stock-based instruments weutilize involves a high degree of judgment and estimation and the expenserecorded may bear little resemblance to the actual value realized upon thevesting, future exercise or termination of the related stock-based awards.Furthermore, unlike cash compensation, the value of stock options, which isan element of our ongoing stock-based compensation expense, is determinedusing a complex formula that incorporates factors, such as marketvolatility, that are beyond our control. Management believes it is usefulto exclude stock-based compensation in order to better understand the long-term performance of our core business and to facilitate comparison ofour results to those of peer companies. In addition, we account forstock-based compensation under GAAP, which requires that we report theexcess income tax benefit from stock-based compensation as a financing cash flow rather than as an operating cash flow. We have added this benefit backto our calculation of free cash flows in order to generally classify cashflows arising from income taxes as operating cash flows.
• Employer payroll tax on employee stock transactions. The amount ofemployer payroll taxes on stock-based compensation is dependent on VMware'sstock price and other factors that are beyond our control and do notcorrelate to the operation of the business.
• Amortization of intangible assets. A portion of the purchase price ofVMware's acquisitions is generally allocated to intangible assets, such asintellectual property, and is subject to amortization. However, VMware doesnot acquire businesses on a predictable cycle. Additionally, the amount ofan acquisition's purchase price allocated to intangible assets and the termof its related amortization can vary significantly and are unique to eachacquisition. Therefore, VMware believes that the presentation of non-GAAPfinancial measures that adjust for the amortization of intangible assets,provides investors and others with a consistent basis for comparison acrossaccounting periods.
• Acquisition related items. Acquisition related items include directcosts of acquisitions, such as transaction fees, which vary significantlyand are unique to each acquisition. Additionally, VMware does not acquirebusinesses on a predictable cycle.
• Capitalized software development costs. Capitalized softwaredevelopment costs encompasses capitalization of development costs and thesubsequent amortization of the capitalized costs over the useful life ofthe product. Amortization and capitalization of software development costscan vary significantly depending upon the timing of products reachingtechnological feasibility and being made generally available. In addition,we exclude the capitalization of software from our free cash flows tobetter convey management's view of operating cash flows. To the extent thatwe capitalize costs under generally accepted accounting guidance, weincrease our GAAP operating cash flows due to f the reduced expenserecognized within net income and paid out in cash during the period.
• Gain on sale of Terremark investment. In the second quarter of 2011,we sold our investment in Terremark Worldwide, Inc., which was acquired byVerizon in a cash transaction, and realized a gain of $56.0 million. Ourinvestment in Terremark was made in connection with a business andtechnical collaboration and was not made to seek an investment gain or tofund our business operations. To the extent that sizeable gains or lossesare realized on such investments, they do not occur on a predictable cycle.Additionally, the timing of the event that triggered our divestment andwhether or not we realized a gain or loss, was not under our control.
• Tax Adjustment. Non-GAAP financial information for the quarter isadjusted for a tax rate equal to our annual estimated tax rate on non-GAAPincome. This rate is based on our estimated annual GAAP income tax rateforecast, adjusted to account for items excluded from GAAP income incalculating our non-GAAP income. Our estimated tax rate on non-GAAP incomeis determined annually and may be adjusted during the year to take intoaccount events or trends that we believe materially impact the estimatedannual rate including, but not limited to, significant changes resultingfrom tax legislation, material changes in the geographic mix of revenuesand expenses and other significant events. Due to the differences in thetax treatment of items excluded from non-GAAP earnings, as well as themethodology applied to our estimated annual tax rates as described above,our estimated tax rate on non-GAAP income may differ from our GAAP tax rateand from our actual tax liabilities.

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

The use of non-GAAP financial measures has certain limitations because theydo not reflect all items of income and expense that affect VMware'soperations. Specifically, in the case of stock-based compensation, ifVMware did not pay out a portion of its compensation in the form ofstock-based compensation and related employer payroll taxes, the cashsalary expense included in costs of revenues and operating expenses wouldbe higher, which would affect VMware's cash position. VMware compensatesfor these limitations by reconciling the non-GAAP financial measures to themost comparable GAAP financial measures. These non-GAAP financial measuresshould be considered in addition to, not as a substitute for or inisolation from, measures prepared in accordance with GAAP and should not beconsidered measures of VMware's liquidity. Further, these non-GAAP measuresmay differ from the non-GAAP information used by other companies, includingpeer companies, and therefore comparability may be limited. Managementencourages investors and others to review VMware's financial information inits entirety and not rely on a single financial measure.

Revenue Growth in Constant Currency

We have invoiced and collected in the Euro, the British Pound, the JapaneseYen, and the Australian Dollar in their respective regions since May 2009.As a result, our total revenues are affected by changes in the U.S. Dollaragainst these currencies. In order to provide a comparable framework forassessing how our business performed excluding the effect of foreigncurrency fluctuations, management analyzes year-over-year revenue growth ona constant currency basis. Since all of our entities operate with the U.S.Dollar as their functional currency, unearned revenues for orders booked incurrencies other than U.S. Dollars are converted into U.S. Dollars at theexchange rate in effect for the month in which each order is booked Wecalculate constant currency on license revenues recognized during thecurrent period that were originally booked in currencies other than U.S.Dollars by comparing the exchange rates at which the revenue was recognizedagainst the exchange rate that was used in the comparable period. We do notcalculate constant currency on services revenues, which include softwaremaintenance revenues and professional services revenues.