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VMWARE INC. Reports Operating Results (10-Q)

October 29, 2010 | About:
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10qk

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VMWARE INC. (VMW) filed Quarterly Report for the period ended 2010-09-30.

Vmware Inc. has a market cap of $30.99 billion; its shares were traded at around $76.57 with a P/E ratio of 94 and P/S ratio of 15.4. VMW is in the portfolios of Bruce Kovner of Caxton Associates, Louis Moore Bacon of Moore Capital Management, LP, Steven Cohen of SAC Capital Advisors, George Soros of Soros Fund Management LLC, Jeremy Grantham of GMO LLC, Ron Baron of Baron Funds, PRIMECAP Management.

Highlight of Business Operations:

As calculated under our tax sharing agreement with EMC, we paid EMC $5.1 in the first nine months of 2010 for our portion of EMCs 2009 consolidated federal income taxes. No payments were made by us to EMC during the third quarter of 2010. During the third quarter and first nine months of 2009, we paid $11.7 and $14.2, respectively, for our portion of EMCs taxes related to the consolidated state income tax returns and consolidated federal income tax return for various periods, and the conclusion of the 2005 and 2006 federal income tax audit. Under the same tax sharing agreement, EMC paid us $2.5 during the first nine months of 2010 for a refund of an overpayment related to the consolidated federal and state income taxes for the fiscal year ended December 31, 2008. No payments were made by EMC to us during the third quarter of 2010. During the third quarter and first nine months of 2009, EMC paid us $19.7 and $107.6, respectively, for our stand-alone federal taxable loss for the fiscal year ended December 31, 2008 and for a refund of an overpayment related to our portion of EMCs 2007 federal consolidated tax return. The amounts that we pay to EMC for our portion of federal income taxes on EMCs consolidated tax return differ from the amounts we would owe on a stand-alone basis, and the difference is presented as a component of stockholders equity.

As of September 30, 2010, we had $38.0 due from EMC, which was partially offset by $27.0 due to EMC. The net amount due from EMC as of September 30, 2010 was $11.0 and resulted from the related party transactions described above. In addition to the $11.0 due from EMC, as of September 30, 2010, we had $118.1 of income taxes receivable due from EMC, which is included in other current assets, and $6.2 of income taxes payable due to EMC, which is included in accrued expenses and other, on our consolidated balance sheets. A large portion of the income tax receivable is related to 2010 federal income taxes and is expected to be received from EMC after the 2010 consolidated federal tax return extension is filed. Balances due to or from EMC which are unrelated to tax obligations are generally settled in cash within 60 days of each quarter-end. The timing of the tax payments due to and from EMC is governed by the tax sharing agreement with EMC.

Total revenues increased by $224.5 or 46%, to $714.2 in the third quarter of 2010, compared with $489.8 in the third quarter of 2009. The revenue mix in the third quarter of 2010 reflected an increase of $103.0 in license revenues and an increase of $121.5 in services revenues as compared with the third quarter of 2009. Total revenues increased by $605.9, or 43%, to $2,021.7 in the first nine months of 2010, compared with $1,415.7 in the first nine months of 2009, reflecting an increase of $253.8 in license revenues and an increase of $352.1 in services revenues. The shift in our revenue mix year-over-year is primarily due to increases in services revenues which continued to benefit from strong maintenance renewals, multi-year software maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with software licenses. Geographically, both U.S. and international revenues increased in the third quarter and first nine months of 2010 as compared to the same periods in the prior year. In the U.S., the federal market was particularly strong compared to the same period last year. Internationally, revenues increased due to strong demand across all regions, despite on-going macro-economic concerns, particularly in Europe.

Software license revenues increased by $103.0 or 43%, to $343.2 in the third quarter of 2010, compared with $240.3 in the third quarter of 2009. Software license revenues increased by $253.8 or 35%, to $979.1 in the first nine months of 2010, compared with $725.2 in the first nine months of 2009. We believe license revenues benefited from strong customer demand for the vSphere platform, a foundation to cloud computing, as well as growing interest in our desktop solutions. However, despite customer interest in deploying virtualization solutions as they update their IT infrastructure, we believe demand for our products remains subject to the challenges that our customers face due to continuing uncertainty in the economic environment. Although we believe there is generally a quick return on investment in virtualization, organizations often update their IT infrastructure when deploying virtualization, and the hardware investment is a capital outlay that is several times larger than that of our software.

Services revenues increased $121.5 or 49%, to $371.0 in the third quarter of 2010, compared with $249.5 in the third quarter of 2009. Services revenues increased $352.1 or 51%, to $1,042.6 in the first nine months of 2010, compared with $690.5 in the first nine months of 2009. The increase in services revenues during the third quarter and the first nine months of 2010 was primarily attributable to growth in our software maintenance revenues.

Professional services revenues increased $20.2 or 55%, to $56.9 in the third quarter of 2010, compared with $36.7 in the third quarter of 2009. Professional services revenues increased $57.9 or 51%, to $170.8 in the first nine months of 2010, compared with $112.9 in the first nine months of 2009. In the third quarter and first nine months of 2010, professional services revenues increased largely due to incremental services revenues from our acquired businesses and customer training related to vSphere deployments. We do not expect strong growth in our professional services revenues as we continue to invest in our partners and the eco-system to broadly offer the best set of solutions to our customers. As a result of this strategy, our professional services revenue can vary based on the delivery channels used in any given period as well as the timing of engagements.

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