VMware Reports Second-Quarter 2008 Results

VMware, Inc. (NYSE: VMW), the global leader in virtualization solutions from the desktop to the datacenter, today reported financial results for the second quarter of 2008

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- Revenues for the second quarter were $456 million, an increase of 54% from the second quarter of 2007.
- GAAP operating income for the second quarter was $61 million, compared to $47 million for the same period last year.
- Non-GAAP operating income was $112 million, an increase of 52% from the second quarter of 2007.
- GAAP net income for the quarter was $52 million, or $0.13 per diluted share, compared to $34 million, or $0.10 per diluted share, for the second quarter of 2007.
- Non-GAAP net income for the quarter was $92 million, or $0.23 per diluted share, compared to $52 million, or $0.16 per diluted share, for the second quarter of 2007.
- Cash exceeded $1.5 billion and deferred revenue was $721 million as of June 30, 2008.

Second quarter U.S. revenues grew 43% to $240 million from the second quarter of 2007. International revenues grew 68% to $216 million from the second quarter of 2007 driven by strength in Europe and Australia.

Software license revenue grew 39% to $284 million from second quarter of 2007. Service revenues, which include support, subscription and professional services, were $172 million, an increase of 85% from the second quarter of 2007.

"VMware had another solid quarter, proving that the quality of our products and the immediate return on investment that they yield is delivering high value to customers," said Paul Maritz, president and chief executive officer of VMware. "I am personally excited to become part of a company that has the potential to become one of the truly important and enduring companies in the software industry."

"Our mission is to help customers run datacenters that use powerful, cost-effective, modern hardware to deliver dramatically higher levels of flexibility, manageability and efficiency. Today, much of our growth comes from customers expanding from basic server consolidation, yet increasingly more customers are seeking to virtualize their entire datacenter and desktop environments with VMware Infrastructure. We are also on the threshold of a major new opportunity - as customers begin to leverage VMware as both the on-ramp to the Cloud and for key elements of the Cloud itself. We are well-positioned to become a truly strategic platform for businesses of all sizes."

Second Quarter Highlights

During the second quarter, VMware made several strategic announcements:

- Announced general availability of bundled application and infrastructure management products for the datacenter. VMware Lifecycle Manager, VMware Lab Manager and VMware Stage Manager provide a more cost-effective and powerful way to manage the entire software lifecycle. In particular, they enable end user self-provisioning of virtual machines, give IT departments complete control of virtual machine environments and provide application owners with application release management capabilities.
- Announced general availability of VMware Site Recovery Manager, a pioneering new product for disaster recovery management and automation that simplifies business continuity planning and testing, and reduces the risk and complexity associated with executing disaster recovery.
- Announced the acquisition of B-hive Networks, a privately-held application performance management software company. With this acquisition, which closed on July 1, VMware enhances the VMware portfolio of application and infrastructure management products by offering proactive performance management and service level reporting for applications running within virtual machines. B-hive's R&D facility and team also forms the core of VMware's new development center in Israel.
- Announced general availability of VMware ThinApp 4, an application virtualization solution that lets customers run multiple versions of virtually any application on any Windows operating system without conflict. This product is the result of our first quarter acquisition of Thinstall.
- Announced the VMware Alliance Affiliate Initiative (Channel Affiliate Program) - CA, Dell (Equal Logic), EMC, McAfee, NetApp, Riverbed, and Vizioncore (a subsidiary of Quest Software) have created VMware-oriented virtualization training and tools for channel partners as well as financial incentives on the sale of their products combined with VMware solutions.
- Announced new Original Equipment Manufacturer agreements with key Chinese vendors Lenovo and Inspur to distribute and support VMware Infrastructure 3 on their systems. These agreements will help to further accelerate the adoption of VMware virtualization technologies in China.
- Dell delivered a broad line of server systems embedded with VMware ESXi hypervisor including Dell PowerEdge 2950, R900, 1950, 2900, M600 blade and M605 blade systems. Other major vendors embedding VMware ESXi in their systems include HP, IBM, Fujitsu Siemens, Hitachi, HP and NEC.

Visit www.vmware.com/... for a comprehensive list of VMware highlights from the second quarter.

Financial Outlook

The following forward-looking statements are based on current expectations and are subject to uncertainties and risks discussed below and in documents filed by VMware with the United States Securities and Exchange Commission. Actual results may differ materially.

- 2008 revenues are targeted to grow approximately 42% to 45% compared to 2007.
- Third quarter 2008 revenues are targeted to be within a range of approximately $462 to $468 million.
- Third quarter GAAP operating margin is targeted to be between 11% and 13%. This guidance includes stock-based compensation, employer payroll tax on employee stock transactions, amortization of intangible assets and capitalized software development costs which are targeted at 9% of projected revenue.

VMware plans to host a conference call today to review its second-quarter results and discuss its financial outlook. The call is scheduled to begin at 2:00 p.m. PT/ 5:00 p.m. ET and can be accessed via the Web at http://ir.vmware.com. The Internet will be available live, and a replay will be available following completion of the live broadcast for approximately 30 days.

Use of Non-GAAP Financial Measures

VMware has provided a reconciliation of each non-GAAP financial measure used in this earnings release to the most directly comparable GAAP financial measure. These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for or in isolation from, measures of VMware's financial performance prepared in accordance with GAAP. These measures differ from GAAP in that they exclude stock-based compensation, amortization of intangible assets, the write-off of in-process research and development, employer payroll tax on employee stock transactions, and the net effect of the amortization and capitalization of software under Statement of Financial Accounting Standards No. 86 ("FAS86"), VMware's bases for these adjustments are described below.

VMware's management uses the non-GAAP financial measures referenced in this release and shown in the accompanying schedules to gain an understanding of VMware's comparative operating results (when comparing such results with previous periods or forecasts) and its future prospects and excludes the above-listed items (stock-based compensation, amortization of intangible assets, write-off of in-process research and development, employer payroll tax on employee stock transactions, and the net effect of the amortization and capitalization of software under FAS86) from its internal operating plans and measurement of financial performance, including budgeting, calculating bonus payments, and forecasting future periods. These non-GAAP financial measures are used by VMware's management in their financial and operating decision-making because management believes they reflect VMware's ongoing business in a manner that allows meaningful period-to-period comparisons. As the non-GAAP financial measures exclude expenses that VMware believes are not reflective of ongoing operating results, management believes the non-GAAP financial measures enable management to better analyze trends in its business. VMware's management also believes that these non-GAAP financial measures provide useful information to investors and others (a) in understanding and evaluating VMware's current operating results and future prospects in the same manner as management does, if they so choose, and (b) in comparing in a consistent manner VMware's current financial results with VMware's past financial results.

In addition to the foregoing, management believes that these non-GAAP measures are useful to investors and others in assessing VMware's operating performance due to the following factors:

- Although stock-based compensation is an important aspect of the compensation of VMware's employees and executives, determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expense recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards. VMware does not believe these non-cash expenses are reflective of ongoing operating results.
- The amount of employer payroll taxes on stock-based compensation is dependent on VMware's stock price and the timing and size of exercise by employees of their stock options and of vesting in restricted stock, over which management has limited to no control, and as such does not correlate to VMware's operation of the business.
- VMware's amortization of intangible assets includes the effects of EMC's acquisition of VMware in January 2004. Also, VMware does not acquire businesses on a predictable cycle. VMware therefore believes that the presentation of non-GAAP measures that adjust for the amortization of intangible assets and the write-off of in-process research and development, provide investors and others with a consistent basis for comparison across accounting periods and, therefore, are useful to investors and others in helping them to better understand VMware's operating results and underlying operational trends.
- The amortization and capitalization of software under FAS86 can vary significantly depending upon the timing of products reaching technological feasibility. VMware does not believe that the variance in operating results caused by the net effect of applying FAS86 properly reflect underlying operational trends.

VMware's non-GAAP financial measures may be defined differently than similar terms used by other companies and, accordingly, may not be comparable to similarly-titled non-GAAP financial measures used by other companies. There are significant limitations associated with the use of non-GAAP financial measures. Specifically, the non-GAAP financial measures that exclude stock-based compensation, intangible amortization, in-process research and development, and the net effect of the amortization and capitalization of software under FAS86, do not include all items of income and expense that affect VMware's operations. More specifically, in the case of stock-based compensation, if VMware did not pay out a portion of its compensation in the form of stock-based compensation and related employer payroll taxes, the cash salary expense included in costs of revenues and operating expenses would be higher. Payment of employer payroll taxes on stock-based compensation is also a cash expense for VMware and impacts the Company's cash position. In the case of intangible amortization, while not directly affecting VMware's cash position, it represents the loss of value of intangible assets over time. As a result, non-GAAP net income and non-GAAP net income per share, which exclude this expense, do not reflect the full economic loss in value of those intangible assets. Management compensates for these limitations by reconciling the non-GAAP financial measures to VMware's financial results as determined in accordance with GAAP, which reconciliations are set forth in the accompanying schedules to this release, in the current report on Form 8-K furnished to the SEC on the date hereof and on http://ir.vmware.com
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