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VMware Reports Fiscal 2018 Third Quarter Results

PALO ALTO, CA --(Marketwired - November 30, 2017) - VMware, Inc. (VMW), a global leader in cloud infrastructure and business mobility, today announced financial results for fiscal 2018 third quarter:

  • Revenue for the third quarter was $1.98 billion, an increase of 11% from the third quarter of 2016.
  • License revenue for the third quarter was $785 million, an increase of 14% from the third quarter of 2016.
  • GAAP net income for the third quarter was $443 million, or $1.07 per diluted share, up 43% per diluted share compared to $319 million, or $0.75 per diluted share, for the third quarter of 2016. Non-GAAP net income for the quarter was $553 million, or $1.34 per diluted share, up 17% per diluted share compared to $485 million, or $1.14 per diluted share, for the third quarter of 2016.
  • GAAP operating income for the third quarter was $465 million, an increase of 22% from the third quarter of 2016. Non-GAAP operating income for the third quarter was $689 million, an increase of 16% from the third quarter of 2016.
  • Operating cash flows for the third quarter were $970 million. Free cash flows for the quarter were $911 million.
  • Cash, cash equivalents and short-term investments were $11.6 billion, and unearned revenue was $5.6 billion as of November 3, 2017.
  • Total revenue plus sequential change in total unearned revenue grew 21% year-over-year.
  • License revenue plus sequential change in unearned license revenue grew 16% year-over-year.

"Coming off of a strong VMworld season, we are excited about the new products and services we have introduced this past quarter demonstrating our commitment to innovation and solving complex customer problems," commented Pat Gelsinger, chief executive officer, VMware. "We are very pleased with our Q3 results; our strategy continues to resonate with customers as they embrace and leverage our broad portfolio of products and services."

"We had a solid third quarter," said Zane Rowe, executive vice president and chief financial officer, VMware. "Our results reflect continued strength across the portfolio and customers' commitment to VMware as a strategic partner for both on-premises and hybrid-cloud software solutions."

Recent Highlights & Strategic Announcements

• At VMworld 2017, VMware hosted over 30,000 customers, partners and influencers in Las Vegas and Barcelona and introduced a wave of new products and services focused on the key technologies across cloud, mobility, networking and security. Highlights include:

  • VMware unveiled an expanded set of products and services as part of VMware Cloud™ that are available through VMware and partners, including:
    • VMware Cloud on AWS is now initially available in AWS U.S. West region. VMware Cloud on AWS brings VMware's software-defined data center to the AWS Cloud, allowing customers to run applications across operationally consistent VMware vSphere®-based private, public and hybrid cloud environments, with optimized access to AWS services
    • New VMware Cloud Services that enable end-to-end visibility into cloud usage, costs and networks, with consistent networking and security across public clouds and on-premises environments
  • VMware announced its breakthrough solution for securing applications running on virtualized or cloud environments -- VMware AppDefense™. It helps to deliver an intent-based security model and enables least privilege environments for critical applications.
  • VMware and Pivotal Software, Inc., in collaboration with Google Cloud, unveiled Pivotal Container Service™ (PKS), a commercial release of the open source Cloud Foundry Container Runtime technology that, when available, will help Global 2000 companies operationalize Kubernetes.

• VMware announced its intent to acquire VeloCloud Networks, Inc., provider of industry-leading cloud-delivered software-defined wide-area network (SD-WAN) technology for enterprises and service providers. Once the acquisition closes, VeloCloud will enable VMware to build on the success of its industry-leading network virtualization platform -- VMware NSX® -- and expand its networking portfolio to address end-to-end automation, application continuity, branch transformation and security from data center to cloud to edge.

• According to IDC's 2Q2017 Worldwide Quarterly Converged Systems Tracker, VMware, based on sales of hyperconverged solutions running VMware vSAN™, was the largest hyperconverged infrastructure software vendor during the first half of calendar year 2017.(1)

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 unearned revenue that include year-over-year comparisons will also be made available at http://ir.vmware.com in conjunction with the conference call.

Revised Fiscal Calendar-Year-over-Year Comparisons of Quarterly Results and Sequential Change in Unearned Revenue Balances

VMware revised its fiscal calendar effective January 1, 2017. VMware's first fiscal year under its revised fiscal calendar began on February 4, 2017 and will end February 2, 2018. The period from January 1, 2017 through February 3, 2017 was recorded as a transition period and was reported as a separate period in VMware's Form 10-Q filing for the first quarter of fiscal 2018.

Year-over-year comparisons of quarterly financial results included in this press release and the attached financial tables compare results for VMware's fiscal 2018 third quarter (August 5, 2017 through November 3, 2017) to VMware's fiscal 2016 third quarter (July 1, 2016 through September 30, 2016). Sequential changes in total unearned revenue and unearned license revenue for the third quarter of fiscal 2018 compare VMware's total unearned revenue and unearned license revenue balances as of August 4, 2017, the last day of the VMware's fiscal 2018 second quarter, to the respective balances as of November 3, 2017, the last day of VMware's fiscal 2018 third quarter.

About VMware

VMware, a global leader in cloud infrastructure and business mobility, helps customers realize possibilities by accelerating their digital transformation journeys. With VMware solutions, organizations are improving business agility by modernizing data centers and integrating public clouds, driving innovation with modern apps, creating exceptional experiences by empowering the digital workspace, and safeguarding customer trust by transforming security. With 2016 revenue of $7.09 billion, VMware is headquartered in Palo Alto, CA and has over 500,000 customers and 75,000 partners worldwide.

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, VMware Cloud, vSphere, AppDefense, NSX and VMware vSAN are registered trademarks of VMware, Inc. or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective organizations.

(1) IDC Worldwide Quarterly Converged Systems Tracker, 2Q2017

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 the expected benefits to customers of VMware products and services, as well as VMware's intention to acquire VeloCloud Networks, Inc. and the expected complementary nature and strategic advantages of combined product and solutions offerings after the acquisition's close. 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) VMware's ability to enter into and maintain strategically effective partnerships and alliances; (vi) the uncertainty of customer acceptance of emerging technology; (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 Dell Technologies and Dell's ability to control matters requiring stockholder approval, including the election of VMware's board members and matters relating to Dell's investment in VMware; (x) VMware's ability to protect its proprietary technology; (xi) VMware's ability to attract and retain highly qualified employees; (xii) the ability of the parties to satisfy closing conditions to VMware's acquisition of VeloCloud Networks, Inc. on a timely basis or at all; (xiii) market conditions, regulatory requirements and other corporate considerations that could affect the timing and closing conditions to VMware's acquisition of VeloCloud Networks, Inc.; (xiv) the ability to successfully integrate into VMware acquired companies and assets and smoothly transition services related to divested assets from VMware; (xv) the ability of VMware to realize synergies from Dell; (xvi) disruptions resulting from key management changes; (xvii) fluctuating currency exchange rates; (xviii) changes in VMware's financial condition; and (xix) potential disruptions relating to the transition to Dell's fiscal year and further business integrations with Dell. 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.

   
CONDENSED CONSOLIDATED STATEMENTS OF INCOME  
(amounts in millions, except per share amounts, and shares in thousands)  
(unaudited)  
                         
    Three Months Ended     Nine Months Ended  
    November 3,     September 30,     November 3,     September 30,  
    2017     2016     2017     2016  
                                 
Revenue:                                
  License   $ 785     $ 691     $ 2,127     $ 1,907  
  Services     1,191       1,087       3,485       3,153  
Total revenue     1,976       1,778       5,612       5,060  
Operating expenses(1):                                
  Cost of license revenue     38       40       116       121  
  Cost of services revenue     240       226       721       658  
  Research and development     449       389       1,298       1,109  
  Sales and marketing     607       564       1,862       1,708  
  General and administrative     175       178       486       516  
  Realignment and loss on disposition     2       -       88       52  
Operating income     465       381       1,041       896  
Investment income     33       21       82       56  
Interest expense     (28 )     (7 )     (41 )     (20 )
Other income (expense), net     (2 )     (8 )     51       (8 )
Income before income tax     468       387       1,133       924  
Income tax provision     25       68       124       179  
Net income   $ 443     $ 319     $ 1,009     $ 745  
                                 
Net income per weighted-average share, basic for Classes A and B   $ 1.09     $ 0.76     $ 2.47     $ 1.76  
Net income per weighted-average share, diluted for Classes A and B   $ 1.07     $ 0.75     $ 2.44     $ 1.75  
                                 
Weighted-average shares, basic for Classes A and B     406,733       421,704       407,856       423,341  
Weighted-average shares, diluted for Classes A and B     413,013       425,008       413,957       425,851  
__________                                
  (1) Includes stock-based compensation as follows:                                
  Cost of license revenue   $ -     $ -     $ 1     $ 2  
  Cost of services revenue     13       13       38       38  
  Research and development     96       80       266       224  
  Sales and marketing     52       51       150       146  
  General and administrative     21       26       58       62  
                                   
   
CONDENSED CONSOLIDATED BALANCE SHEETS  
(amounts in millions, except per share amounts, and shares in thousands)  
(unaudited)  
           
    November 3,   December 31,  
    2017   2016  
               
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 6,012   $ 2,790  
  Short-term investments     5,600     5,195  
  Accounts receivable, net of allowance for doubtful accounts of $2 and $2     900     1,856  
  Due from related parties, net     254     132  
  Other current assets     160     362  
Total current assets     12,926     10,335  
Property and equipment, net     1,031     1,049  
Other assets     282     248  
Deferred tax assets     641     462  
Intangible assets, net     443     517  
Goodwill     4,271     4,032  
    Total assets   $ 19,594   $ 16,643  
               
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current liabilities:              
  Accounts payable   $ 99   $ 125  
  Accrued expenses and other     926     898  
  Unearned revenue     3,500     3,531  
Total current liabilities     4,525     4,554  
Notes payable to Dell     270     1,500  
Long-term debt     3,962     -  
Unearned revenue     2,147     2,093  
Other liabilities     416     399  
    Total liabilities     11,320     8,546  
Contingencies              
Stockholders' equity:              
  Class A common stock, par value $.01; authorized 2,500,000 shares; issued and outstanding 103,819 and 108,351     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     879     1,721  
  Accumulated other comprehensive income (loss)     9     (9 )
  Retained earnings     7,382     6,381  
    Total stockholders' equity     8,274     8,097  
      Total liabilities and stockholders' equity   $ 19,594   $ 16,643  
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  
(in millions)  
(unaudited)  
                         
    Three Months Ended     Nine Months Ended  
    November 3,     September 30,     November 3,     September 30,  
    2017     2016     2017     2016  
Operating activities:                                
Net income   $ 443     $ 319     $ 1,009     $ 745  
Adjustments to reconcile net income to net cash provided by operating activities:                                
  Depreciation and amortization     80       87       246       261  
  Stock-based compensation     182       170       513       472  
  Excess tax benefits from stock-based compensation     -       (6 )     -       (7 )
  Deferred income taxes, net     65       (19 )     100       (24 )
  Amortization of debt discount and issuance costs     1       -       1       -  
  Loss on disposition     2       -       80       -  
  Gain on disposition of strategic investments     -       -       (38 )     (1 )
  Impairment of strategic investments     3       7       5       12  
  Gain on extinguishment of debt     (6 )     -       (6 )     -  
  Loss on Dell stock purchase     -       -       2       -  
  Loss on disposal of assets     -       5       1       12  
  Other     -       -       2       (1 )
  Changes in assets and liabilities, net of acquisitions:                                
    Accounts receivable     290       96       293       513  
    Other assets     (1 )     4       (27 )     (22 )
    Due to/from related parties, net     (47 )     73       (162 )     55  
    Accounts payable     (20 )     (16 )     39       (26 )
    Accrued expenses and other liabilities     (96 )     (83 )     27       (64 )
    Income taxes payable     (70 )     10       (63 )     (26 )
    Unearned revenue     144       (27 )     342       18  
Net cash provided by operating activities     970       620       2,364       1,917  
                                 
Investing activities:                                
Additions to property and equipment     (59 )     (30 )     (164 )     (109 )
Purchases of available-for-sale securities     (1,186 )     (1,126 )     (3,339 )     (3,337 )
Sales of available-for-sale securities     492       790       1,745       1,769  
Maturities of available-for-sale securities     436       396       1,207       1,015  
Proceeds from disposition of assets     -       1       -       3  
Purchases of strategic investments     (1 )     (7 )     (33 )     (33 )
Proceeds from sales of strategic investments     -       -       6       1  
Business combinations, net of cash acquired     -       -       (236 )     (59 )
Net cash paid on disposition of a business     (7 )     -       (47 )     -  
Increase in restricted cash     -       -       -       (2 )
Net cash provided by (used in) investing activities     (325 )     24       (861 )     (752 )
                                 
Financing activities:                                
Proceeds from issuance of common stock     28       54       104       106  
Net proceeds from issuance of long-term debt     3,961       -       3,961       -  
Repayment of notes payable to Dell     (1,225 )     -       (1,225 )     -  
Payment to acquire non-controlling interests     -       -       -       (4 )
Repurchase of common stock     (855 )     (1,016 )     (1,280 )     (1,016 )
Excess tax benefits from stock-based compensation     -       6       -       7  
Shares repurchased for tax withholdings on vesting of restricted stock     (94 )     (25 )     (271 )     (97 )
Net cash provided by (used in) financing activities     1,815       (981 )     1,289       (1,004 )
Net increase (decrease) in cash and cash equivalents     2,460       (337 )     2,792       161  
Cash and cash equivalents at beginning of the period     3,552       2,991       3,220       2,493  
Cash and cash equivalents at end of the period   $ 6,012     $ 2,654     $ 6,012     $ 2,654  
                                 
Supplemental disclosures of cash flow information:                                
Cash paid for interest   $ 3     $ 7     $ 19     $ 21  
Cash paid for taxes, net     25       76       87       212  
Non-cash items:                                
Changes in capital additions, accrued but not paid   $ 13     $ 4     $ 19     $ (15 )
                                 
   
GROWTH IN REVENUE PLUS SEQUENTIAL CHANGE IN UNEARNED REVENUE  
(in millions)  
(unaudited)  
             
Growth in Total Revenue Plus Sequential Change in Unearned Revenue  
             
    Three Months Ended  
    November 3,     September 30,  
    2017     2016  
                 
Total revenue, as reported   $ 1,976     $ 1,778  
Sequential change in unearned revenue(1)     143       (27 )
Total revenue plus sequential change in unearned revenue   $ 2,119     $ 1,751  
                 
Change (%) over prior year, as reported     21 %        
                 
Growth in License Revenue Plus Sequential Change in Unearned License Revenue  
             
    Three Months Ended  
    November 3,     September 30,  
    2017     2016  
                 
Total license revenue, as reported   $ 785     $ 691  
Sequential change in unearned license revenue     (16 )     (30 )
Total license revenue plus sequential change in unearned license revenue   $ 769     $ 661  
                 
Change (%) over prior year, as reported     16 %        
                 
(1) Sequential change in unearned revenue consists of the change in total unearned revenue from the preceding quarter. Total unearned revenue consists of current and non-current unearned revenue amounts presented in the condensed consolidated balance sheets.  
   
 
SUPPLEMENTAL UNEARNED REVENUE SCHEDULE
(in millions)
(unaudited)
                         
    November   August   May   December   September   June
    3, 2017   4, 2017   5, 2017   31, 2016   30, 2016   30, 2016
Unearned revenue as reported:                                    
  License   $ 503   $ 519   $ 472   $ 503   $ 425   $ 455
  Software maintenance     4,623     4,522     4,323     4,628     4,201     4,189
  Professional services     521     463     440     493     468     478
Total unearned revenue   $ 5,647   $ 5,504   $ 5,235   $ 5,624   $ 5,094   $ 5,122
                                     
Change (%) over prior year:                                    
  License     18.4 %     14.2 %     13.8 %     17.4 %     5.1 %     (5.5 )%
  Software maintenance     10.0 %     8.0 %     5.3 %     10.9 %     9.1 %     7.6 %
  Professional services     11.1 %     (3.1)%     (3.7)%     3.9 %     8.6 %     9.2 %
Total unearned revenue     10.8 %     7.5 %     5.2 %     10.8 %     8.7 %     6.4 %
                                     
 
RECONCILIATION OF GAAP TO NON-GAAP DATA
For the Three Months Ended November 3, 2017
(amounts in millions, except per share amounts, and shares in thousands)
(unaudited)
...
   
    GAAP     Stock-Based
Compensation
    Employer
Payroll Taxes
on Employee
Stock Transactions
    Intangible
Amortization
    Acquisition, Disposition
and Other
Related
Items
    Tax
Adjustment (1)
    Non-GAAP,
as adjusted (2)
 
Operating expenses:                                                        
  Cost of license revenue   $ 38       -       -       (26 )     -       -     $ 11  
  Cost of services revenue   $ 240       (13 )     (1 )     (1 )     -       -     $ 225  
  Research and development   $ 449       (96 )     -       -       (1 )     -     $ 352  
  Sales and marketing   $ 607       (52 )     (1 )     (6 )     (1 )     -     $ 550  
  General and administrative   $ 175       (21 )     -       -       (4 )     -     $ 149  
  Realignment and loss on disposition   $ 2       -       -       -       (2 )     -     $ -  
                                                         
Operating income   $ 465       182       2       33       8       -     $ 689  
Operating margin(2)     23.5 %     9.2 %     0.1 %     1.6 %     0.4 %     -       34.8 %
                                                         
Other income (expense), net   $ (2 )     -       -       -       3       -     $ 2  
                                                         
Income before income tax   $ 468       182       2       33       11       -     $ 696  
                                                         
Income tax provision   $ 25                                       118     $ 143  
Tax rate(2)     5.4 %