VMWARE, INC. The following management's discussion and analysis is provided in addition to the accompanying condensed consolidated financial statements and notes to assist in understanding our results of operations and financial condition. Financial information as ofApril 30, 2021 should be read in conjunction with our consolidated financial statements for the year endedJanuary 29, 2021 contained in our Annual Report on Form 10-K filed onMarch 26, 2021 . Period-over-period changes are calculated based upon the respective underlying non-rounded data. We refer to our fiscal years endedJanuary 28, 2022 andJanuary 29, 2021 as "fiscal 2022" and "fiscal 2021," respectively. Unless the context requires otherwise, we are referring toVMware, Inc. and its consolidated subsidiaries when we use the terms "VMware ," the "Company," "we," "our" or "us." Overview We originally pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. Information technology ("IT") driven innovation continues to disrupt markets and industries. Technologies emerge faster than organizations can absorb, creating increasingly complex environments. IT is working at an accelerated pace to harness new technologies, platforms and cloud models, ultimately guiding businesses through a digital transformation. To take on these challenges, we are working with customers in the areas of hybrid and multi-cloud, modern applications, networking, security and digital workspaces. Our software provides a flexible digital foundation to enable customers in their digital transformations. Our portfolio supports and addresses the key priorities of our customers including accelerating their cloud journey, migrating and modernizing their applications, empowering digital workspaces, transforming networking and embracing intrinsic security. We enable customers to digitally transform their operations as they ready their applications, infrastructure and employees for constantly evolving business needs. We sell our solutions using enterprise agreements ("EAs") or as part of our non-EA, or transactional, business. EAs are comprehensive offerings that may include license and subscription and SaaS, offered both directly by us and through certain channel partners that also provide for multi-year maintenance and support. We continue to experience strong renewals resulting in additional sales of both our existing and newer products and solutions. Our vSphere and vRealize Cloud Management products form the foundation of our customers' private cloud environments and provide the capabilities for our customers to extend their private cloud to the public cloud and to help them run, manage, secure and connect all their applications across all clouds and devices. During the three months endedApril 30, 2021 , we saw a decline in our on-premises license sales as customers transition to our subscription and SaaS offerings. During the three months endedApril 30, 2021 , revenue growth in our subscription and SaaS offerings was primarily driven by our VMware Cloud Provider Program ("VCPP"), VMware Workspace ONE ("Workspace ONE"), VMware Carbon Black Cloud, VMware Tanzu and VMware Cloud on AWS. We expect revenue growth derived from our subscription and SaaS offerings to continue. In addition, we expect operating margin to be negatively impacted in fiscal 2022 as a result of our incremental investment in our subscription and SaaS portfolio. During the three months endedApril 30, 2021 , we continued to see an increase in the portion of our sales occurring through our subscription and SaaS offerings compared to the portion of our on-premises solutions sold with perpetual licenses. As this trend continues, a greater portion of our revenue will be recognized over time as subscription and SaaS revenue rather than license revenue, which is typically recognized in the fiscal period in which sales occur. As a result, the rate of growth in our license revenue, which has historically been viewed as a leading indicator of our business performance, may be less relevant on a stand-alone basis, and we believe that the overall growth rate of our combined license and subscription and SaaS revenue, as well as the growth in remaining performance obligations, will become better indicators of our future growth prospects.Dell Go -to-Market Initiatives We continue joint marketing, sales, branding and product development efforts withDell Technology Inc. ("Dell") and other Dell companies to enhance the collective value we deliver to our mutual customers. During the three months endedApril 30, 2021 , revenue from Dell, including purchases of products and services directly from us, as well as through our channel partners, accounted for 35% of our consolidated revenue. These purchases included Dell as an original equipment manufacturer ("OEM"), which accounted for 13% of our revenue from Dell, or 5% of our consolidated revenue, during the three months endedApril 30, 2021 . The remaining revenue from Dell consisted of Dell acting as a distributor to other non-Dell resellers, reselling products and services as a reseller or purchasing products and services for its own internal use. On certain transactions,Dell Financial Services ("DFS") also provided financing to our end users at our end users' discretion. 25 -------------------------------------------------------------------------------- Table of Contents COVID-19 Impact The worldwide spread of COVID-19 resulted in a global slowdown of economic activity while also disrupting sales channels and marketing activities and the COVID-19 pandemic may cause economic disruption and market volatility in future periods. While the COVID-19 pandemic has not had a material adverse financial impact on our operations to date, the future course of the pandemic, the ongoing economic impact and the degree and rate of economic recovery remain highly uncertain and continue to rapidly evolve. Although the pandemic has not had the level of financial impact on our business we initially expected, we did experience negative impacts on our sales and certain of our financial results and there continues to be uncertainty regarding the magnitude and duration of the economic effects of the COVID-19 pandemic and the extent to which it will have a negative impact on our sales and our financial results for the remainder of fiscal 2022. For example, license revenue decreased during fiscal 2021 due in part to the effects of COVID-19 as a number of our customers' business plans were impacted by the pandemic. We continue to closely monitor the impact of the pandemic on all aspects of our business. Spin-Off and Special Dividend OnApril 14, 2021 , we entered into a Separation and Distribution Agreement with Dell, pursuant to which, subject to the satisfaction of all closing conditions, Dell will distribute the shares of Class A Stock and ClassB Stock owned by its wholly owned subsidiaries, to the holders of shares of Dell as of a record date determined pursuant to the Separation and Distribution Agreement on a pro rata basis (the "Spin-Off"). Subject to the various conditions, we will pay a cash dividend, pro rata, to each of the holders of Common Stock (including Dell) immediately prior to the Spin-Off in an aggregate amount equal to an amount to be mutually agreed by us and Dell between$11.5 billion and$12.0 billion (the "Special Dividend"). We expect to fund the Special Dividend, in part, through the incurrence of new indebtedness. The Spin-Off is expected to close during the fourth quarter of calendar 2021, subject to certain closing conditions, including receipt of a favorable Internal Revenue Service ruling that the distribution of shares to Dell and its stockholders will qualify as generally tax-free forU.S. federal income tax purposes. Results of Operations Approximately 70% of our sales are denominated inthe United States ("U.S.") dollar. In certain countries, however, we also invoice and collect in various foreign currencies, principally euro, British pound, Japanese yen, Australian dollar, and Chinese renminbi. In addition, we incur and pay operating expenses in currencies other than theU.S. dollar. As a result, our financial statements, including our revenue, operating expenses, unearned revenue and the resulting cash flows derived from theU.S. dollar equivalent of foreign currency transactions, are affected by foreign exchange fluctuations. Revenue Our revenue during the periods presented was as follows (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 $ Change % Change Revenue: License$ 646 $ 660 $ (15) (2) % Subscription and SaaS 741 572 169 29 Total license and subscription and SaaS 1,387 1,232 154 12 Services: Software maintenance 1,321 1,245 75 6 Professional services 286 257 30 12 Total services 1,607 1,502 106 7 Total revenue$ 2,994 $ 2,734 $ 260 9 Revenue: United States$ 1,466 $ 1,363 $ 102 8 % International 1,528 1,371 157 11 Total revenue$ 2,994 $ 2,734 $ 260 9 Revenue from our subscription offerings consisted primarily of our VCPP cloud-based offerings that are billed to customers on a consumption basis and revenue from VMware Tanzu and other offerings that are billed on a subscription basis. Revenue from our SaaS offerings consisted primarily of our Unified Endpoint Management mobile solution within Workspace 26 -------------------------------------------------------------------------------- Table of Contents ONE, VMware Cloud on AWS,CloudHealth byVMware and VMware SD-WAN byVeloCloud offerings, and newer SaaS offerings, such as VMware Carbon Black Cloud. License revenue relating to the sale of on-premises licenses that are part of a multi-year contract is generally recognized upon delivery of the underlying license, whereas revenue derived from our subscription and SaaS offerings is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service. License Revenue License revenue decreased during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 , largely due to a shift in demand from our on-premises solutions sold with perpetual licenses to cloud-based solutions. Additionally, as customers adopt our cloud-based offerings, license revenue may be lower and subject to greater fluctuation in the future, driven by a higher percentage of cloud-based offerings being sold as well as the variability of large deals between fiscal quarters, which deals historically have had a large license revenue impact. Subscription and SaaS Revenue Subscription and SaaS revenue increased during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . Revenue growth from our VCPP, Workspace ONE, VMware Carbon Black Cloud, VMware Tanzu and VMware Cloud on AWS offerings continued to contribute to subscription and SaaS revenue growth during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . Services Revenue During the three months endedApril 30, 2021 , software maintenance revenue continued to benefit from maintenance contracts sold in previous periods. In each period presented, customers purchased, on a weighted-average basis, greater than two years of support and maintenance with each new license purchased. Professional services revenue increased during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . Services we provide through our technical account managers and our continued focus on solution deployments, including our networking, security, cloud management and digital workspace offerings, contributed to the increase in professional services revenue. We continue to also focus on enabling our partners to deliver professional services for our solutions, and as such, our professional services revenue may vary as we continue to leverage our partners. Timing of service engagements will also impact the amount of professional services revenue we recognize during a period. Unearned Revenue Unearned revenue as of the periods presented consisted of the following (table in millions): April 30, January 29, 2021 2021 Unearned license revenue$ 16 $ 15 Unearned subscription and SaaS revenue 2,064 1,998 Unearned software maintenance revenue 6,957 7,092 Unearned professional services revenue 1,163 1,209 Total unearned revenue$ 10,200 $ 10,314 Unearned subscription and SaaS revenue is generally recognized over time as customers consume the services or ratably over the term of the subscription, commencing upon provisioning of the service. Unearned software maintenance revenue is attributable to our maintenance contracts and is generally recognized ratably over the contract duration. The weighted-average remaining contractual term as ofApril 30, 2021 was approximately two years. Unearned professional services revenue results primarily from prepaid professional services and is generally recognized as the services are performed. Remaining Performance Obligations and Backlog Remaining Performance Obligations Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted non-cancellable customer contracts at the end of any given period. 27 -------------------------------------------------------------------------------- Table of Contents As ofApril 30, 2021 , the aggregate transaction price allocated to remaining performance obligations was$11.0 billion , of which approximately 56% is expected to be recognized as revenue over the next twelve months and the remainder thereafter. As ofJanuary 29, 2021 , the aggregate transaction price allocated to remaining performance obligations was$11.3 billion , of which approximately 55% was expected to be recognized as revenue during fiscal 2022, and the remainder thereafter. Backlog Backlog is comprised of unfulfilled purchase orders or unfulfilled executed agreements at the end of a given period and is net of related estimated rebates and marketing development funds. Backlog consists of licenses, subscription and SaaS, and services. As ofApril 30, 2021 , our total backlog was$52 million , and our backlog related to licenses was$14 million . For our backlog related to licenses, we generally expect to deliver and recognize as revenue during the following quarter. Backlog totaling$15 million as ofApril 30, 2021 was excluded from the remaining performance obligations because such contracts are subject to cancellation until fulfillment of the performance obligation occurs. As ofJanuary 29, 2021 , our total backlog was$93 million , and our backlog related to licenses was$23 million . The amount excluded from the remaining performance obligations because such contracts are subject to cancellation until fulfillment of the performance obligation occurs was$18 million as ofJanuary 29, 2021 . The amount and composition of backlog will fluctuate period to period, and backlog is managed based upon multiple considerations, including product and geography. We do not believe the amount of backlog is indicative of future sales or revenue or that the mix of backlog at the end of any given period correlates with actual sales performance of a particular geography or particular products and services. Cost of License Revenue, Cost of Subscription and SaaS Revenue, Cost of Services Revenue and Operating Expenses Our cost of services revenue and operating expenses primarily reflected increasing cash-based employee-related expenses, driven by incremental growth in headcount across most of our income statement expense categories, offset in part by decreased travel-related costs resulting from travel restrictions imposed in response to the COVID-19 pandemic for the three months endedApril 30, 2021 . Cost of License Revenue Cost of license revenue primarily consists of the cost of fulfillment of our SD-WAN offerings, royalty costs in connection with technology licensed from third-party providers and amortization of intangible assets. The cost of fulfillment of our software and hardware SD-WAN offerings includes personnel costs and related overhead associated with delivery of our products. Cost of license revenue during the periods presented was as follows (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 $ Change % Change Cost of license revenue$ 37 $ 40 $ (2) (6) % % of License revenue 6 % 6 % Cost of license revenue remained relatively consistent during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . Cost of Subscription and SaaS Revenue Cost of subscription and SaaS revenue primarily includes personnel costs and related overhead associated with hosted services supporting our SaaS offerings. Additionally, cost of subscription and SaaS revenue also includes depreciation of equipment supporting our subscription and SaaS offerings. Cost of subscription and SaaS revenue during the periods presented was as follows (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 $ Change % Change Cost of subscription and SaaS revenue$ 152 $ 122 $ 29 24 % Stock-based compensation 5 4 2 43 Total expenses$ 157 $ 126 $ 31 24 % of Subscription and SaaS revenue 21 % 22 % 28 -------------------------------------------------------------------------------- Table of Contents Cost of subscription and SaaS revenue increased during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . The increase was primarily driven by increased equipment and depreciation of$11 million , as well as growth in cash-based employee-related cost of$11 million , which was primarily driven by incremental growth in headcount. Cost of Services Revenue Cost of services revenue primarily includes the costs of personnel and related overhead to deliver technical support for our products and costs to deliver professional services. Additionally, cost of services revenue includes depreciation of equipment supporting our service offerings. Cost of services revenue during the periods presented was as follows (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 $ Change % Change Cost of services revenue$ 312 $ 296 $ 16 6 % Stock-based compensation 25 22 3 13 Total expenses$ 337 $ 318 $ 19 6 % of Services revenue 21 % 21 % Cost of services revenue increased during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . The increase was primarily due to growth in cash-based employee-related expenses of$19 million , primarily driven by incremental growth in headcount. Research and Development Expenses Research and development expenses include the personnel and related overhead associated with the development of our product software and service offerings. We continue to invest in and focus on expanding our subscription and SaaS offerings. Research and development expenses during the periods presented were as follows (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 $ Change % Change Research and development$ 581 $ 540 $ 40 7 % Stock-based compensation 127 125 3 2 Total expenses$ 708 $ 665 $ 42 6 % of Total revenue 24 % 24 % Research and development expenses increased during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . The increase was primarily due to growth in cash-based employee-related expenses of$42 million , primarily driven by incremental growth in headcount, as well as increased equipment and depreciation. These increases were partially offset by increased capitalized internal-use software development costs of$13 million . Sales and Marketing Expenses Sales and marketing expenses include personnel costs, sales commissions and related overhead associated with the sale and marketing of our license, subscription and SaaS and services offerings, as well as the cost of product launches and marketing initiatives. A significant portion of our sales commissions are deferred and recognized over the expected period of benefit. Sales and marketing expenses during the periods presented were as follows (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 $ Change % Change Sales and marketing$ 884 $ 845 $ 39 5 % Stock-based compensation 75 72 1 2 Total expenses$ 959 $ 917 $ 40 4 % of Total revenue 32 % 34 % Sales and marketing expenses increased during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . The increase was primarily due to growth in cash-based employee-related expenses of$89 million , primarily driven by incremental growth in headcount, as well as higher commission costs of$31 million resulting from increased sales 29 -------------------------------------------------------------------------------- Table of Contents volume. The increase was partially offset by decreased costs incurred for sales enablement-based initiatives of$26 million , as well as decreased travel-related costs of$15 million resulting from travel restrictions imposed in response to the COVID-19 pandemic. General and Administrative Expenses General and administrative expenses include personnel and related overhead costs to support the business. These expenses include the costs associated with finance, human resources, IT infrastructure and legal, as well as expenses related to corporate costs and initiatives. General and administrative expenses during the periods presented were as follows (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 $ Change % Change General and administrative$ 205 $ 197 $ 8 4 % Stock-based compensation 31 49 (18) (36) Total expenses$ 236 $ 246 $ (9) (4) % of Total revenue 8 % 9 % General and administrative expenses decreased during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 . The decrease was primarily driven by decreased acquisition-related costs of$18 million , as well as decreased stock-based compensation of$18 million , which was primarily due to the departure of our former Chief Executive Officer. These decreases were partially offset by an increase in cash-based employee-related expenses of$27 million , primarily driven by incremental growth in headcount. Other Income (Expense), net Other income (expense), net during the periods presented was as follows (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 $ Change % Change Other income (expense), net$ (23) $ (6) $ (18) (288) % % of Total revenue (1) % - % Other income (expense), net during the three months endedApril 30, 2021 was primarily driven by an unrealized loss of$33 million recognized on one of our investments in equity securities, which completed its initial public offering during the third quarter of fiscal 2021. The fair value of the publicly traded investment is determined primarily using the quoted market price of its common stock. As a result, any volatility in its publicly traded common stock introduces a degree of variability to our consolidated statements of income. Income Tax Provision (Benefit) The following table summarizes our income tax provision (benefit) during the periods presented (dollars in millions): Three Months Ended April 30, May 1, 2021 2020 Income tax provision (benefit)$ 61 $ (18) Effective income tax rate 12.6 % N/M
N/M - Effective tax rate is not considered meaningful.
Our quarterly effective income tax rate is based on our estimated annual income tax rate forecast and discrete tax items recognized in the period. The change in our effective income tax rate for the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 was primarily driven by a discrete tax benefit of$59 million recognized as a deferred tax asset due to an intra-group transfer of Pivotal's intellectual property rights to our Irish subsidiary during the three months endedMay 1, 2020 . We are included in Dell's consolidated tax group forU.S. federal income tax purposes and will continue to be included in Dell's consolidated tax group for periods in which Dell beneficially owns at least 80% of the total voting power and value of our combined outstanding Class A and Class B common stock as calculated forU.S. federal income tax purposes. The percentage of voting power and value calculated forU.S. federal income tax purposes may differ from the percentage of 30 -------------------------------------------------------------------------------- Table of Contents outstanding shares beneficially owned by Dell due to the greater voting power of our Class B common stock as compared to our Class A common stock and other factors. Each member of a consolidated tax group during any part of a consolidated return year is jointly and severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency thereon. Should Dell's ownership fall below 80% of the total voting power or value of our outstanding stock in any period, then we would no longer be included in the Dell consolidated tax group forU.S. federal income tax purposes, and ourU.S. federal income tax would be reported separately from that of the Dell consolidated tax group. Although our results are included in the Dell consolidated return forU.S. federal income tax purposes, our income tax provision or benefit is calculated primarily as though we were a separate taxpayer. However, under certain circumstances, transactions between us and Dell are assessed using consolidated tax return rules. Our effective tax rate in the future will depend upon the proportion of our income before provision for income taxes earned in theU.S. and in jurisdictions with a tax rate lower than theU.S. statutory rate. Our non-U.S. earnings are primarily earned by our subsidiary organized inIreland , where the rate of taxation is lower than ourU.S. tax rate, and as such, our annual effective tax rate can be significantly affected by the composition of our earnings in theU.S. and non-U.S. jurisdictions. Our future effective tax rate may be affected by such factors as changes in tax laws, changes in our business or statutory rates, changing interpretation of existing laws or regulations, the impact of accounting for stock-based compensation and the recognition of excess tax benefits or tax deficiencies within the income tax provision or benefit in the period in which they occur, the impact of accounting for business combinations, our acquisition of Pivotal, which was accounted for as a common control transaction, shifts in the amount of earnings in theU.S. compared with other regions in the world and overall levels of income before tax, changes in our international organization, as well as the expiration of statute of limitations and settlements of audits. Our Relationship with Dell The information provided below includes a summary of transactions with Dell and Dell's consolidated subsidiaries (collectively, "Dell"). Transactions with Dell We engaged with Dell in the following ongoing related party transactions, which resulted in revenue and receipts, and unearned revenue for us: •Pursuant to OEM and reseller arrangements, Dell integrates or bundles our products and services with Dell's products and sells them to end users. Dell also acts as a distributor, purchasing our standalone products and services for resale to end-user customers throughVMware -authorized resellers. Revenue under these arrangements is presented net of related marketing development funds and rebates paid to Dell. In addition, we provide professional services to end users based upon contractual agreements with Dell. •Dell purchases products and services from us for its internal use. •From time to time, we and Dell enter into agreements to collaborate on technology projects, and Dell pays us for services or reimburses us for costs incurred by us, in connection with such projects. During the three months endedApril 30, 2021 andMay 1, 2020 , revenue from Dell accounted for 35% and 32% of our consolidated revenue, respectively. During the three months endedApril 30, 2021 andMay 1, 2020 , revenue recognized on transactions where Dell acted as an OEM accounted for 13% and 12% of total revenue from Dell, respectively, or 5% and 4% of our consolidated revenue, respectively. Dell purchases our products and services directly from us, as well as through our channel partners. Information about our revenue and receipts, and unearned revenue from such arrangements, for the periods presented consisted of the following (table in millions): Revenue and Receipts Unearned Revenue Three Months Ended As of April 30, May 1, April 30, January 29, 2021 2020 2021 2021 Reseller revenue$ 1,036 $ 864 $ 4,928 $ 4,952 Internal-use revenue 12 18 42 45
Sales through Dell as a distributor, which is included in reseller revenue,
continues to grow rapidly.
Receipts from Dell for collaborative technology projects were not material
during the three months ended
31
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Table of Contents
Customer deposits resulting from transactions with Dell were $209 million and
$214 million as of April 30, 2021 and January 29, 2021 , respectively.
We engaged with Dell in the following ongoing related party transactions, which
resulted in costs to us:
•We purchase and lease products and purchase services from Dell.
•From time to time, we and Dell enter into agreements to collaborate on
technology projects, and we pay Dell for services provided to us by Dell related
to such projects.
•In certain geographic regions where we do not have an established legal entity,
we contract with Dell subsidiaries for support services and support from Dell
personnel who are managed by us. The costs incurred by Dell on our behalf
related to these employees are charged to us with a mark-up intended to
approximate costs that would have been incurred had we contracted for such
services with an unrelated third party. These costs are included as expenses on
our condensed consolidated statements of income and primarily include salaries,
benefits, travel and occupancy expenses. Dell also incurs certain administrative
costs on our behalf in the U.S. that are recorded as expenses on our condensed
consolidated statements of income.
•In certain geographic regions, Dell files a consolidated indirect tax return,
which includes value added taxes and other indirect taxes collected by us from
our customers. We remit the indirect taxes to Dell, and Dell remits the tax
payment to the foreign governments on our behalf.
•From time to time, we invoice end users on behalf of Dell for certain services
rendered by Dell. Cash related to these services is collected from the end user
by us and remitted to Dell.
•From time to time, we enter into agency arrangements with Dell that enable us
to sell our subscriptions and services, leveraging the Dell enterprise
relationships and end customer contracts.
Information about our payments for such arrangements during the periods
presented consisted of the following (table in millions):
Three Months Ended
April 30 , May 1,
2021 2020Purchases and leases of products and purchases of services(1) $ 47 $ 44
Dell subsidiary support and administrative costs 13 27 (1) Amount includes indirect taxes that were remitted to Dell during the periods presented. We also purchase Dell products through Dell's channel partners. Purchases of Dell products through Dell's channel partners were not significant during the periods presented. From time to time, we and Dell also enter into joint marketing, sales, branding and product development arrangements, for which both parties may incur costs. In connection with and subject to the consummation of the Spin-Off, we and Dell have agreed to enter into a commercial agreement that is intended to preserve and enhance our strategic partnership with Dell to deliver joint customer value and a transition services agreement to facilitate the transactions and the operation of us and Dell following the Spin-Off.Dell Financial Services DFS provided financing to certain of our end users at our end users' discretion. Upon acceptance of the financing arrangement by both our end users and DFS, amounts classified as trade accounts receivable are reclassified to due from related parties, net on the condensed consolidated balance sheets. Revenue recognized on transactions financed through DFS was recorded net of financing fees. Financing fees on arrangements accepted by both parties were not significant during the three months endedApril 30, 2021 and were$13 million during the three months endedMay 1, 2020 . 32 -------------------------------------------------------------------------------- Table of Contents Tax Agreements with Dell In connection with the Spin-Off and concurrently with the execution of the Separation and Distribution Agreement, effective as ofApril 14, 2021 , we and Dell entered into a Tax Matters Agreement (the "Tax Matters Agreement") and agreed to terminate the tax sharing agreement as amended onDecember 30, 2019 (together, the "Tax Agreements"). The Tax Matters Agreement governs the Company's and Dell's respective rights and obligations, both for pre-Spin-Off periods and post-Spin-Off periods, regarding income and other taxes, and related matters, including tax liabilities and benefits, attributes and returns. Payments received from and made to Dell pursuant to the Tax Agreements were$45 million and$12 million , respectively, during the three months endedApril 30, 2021 and payments made to Dell pursuant to the Tax Agreements during the three months endedMay 1, 2020 were$25 million . Payments from us to Dell under the Tax Agreements relate to our portion of federal income taxes on Dell's consolidated tax return as well as state tax payments for combined states. The timing of the tax payments due to and from related parties is governed by the Tax Agreements. Our portion of the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries (the "Transition Tax") is governed by a letter agreement between Dell,EMC and us executed onApril 1, 2019 (the "Letter Agreement"). Our portion of federal income taxes on Dell's consolidated tax return differ from the amounts we would owe on a separate tax return basis and our payments to Dell generally are capped at the amount that we would have paid on a separate tax return basis. The difference between the amount of tax calculated on a separate tax return basis and the amount of tax calculated pursuant to the Tax Agreements that was recorded in additional paid-in capital was not significant during each of the three months endedApril 30, 2021 andMay 1, 2020 . As a result of the activity under the Tax Agreements with Dell, amounts due to Dell were$523 million and$451 million as ofApril 30, 2021 andJanuary 29, 2021 , respectively, primarily related to our estimated tax obligation resulting from the Transition Tax. The 2017 Tax Act included a deferral election for an eight-year installment payment method on the Transition Tax. We expect to pay the remainder of our Transition Tax over a period of five years. Pivotal Tax Sharing Agreement withDell During the fourth quarter of fiscal 2020, we completed the acquisition of Pivotal. Pivotal continues to file its separate tax return forU.S. federal income tax purposes as it left the Dell consolidated tax group at the time of Pivotal's IPO inApril 2018 . Pivotal continues to be included on Dell's unitary state tax returns. Pursuant to a tax sharing agreement, Pivotal historically received payments from Dell for tax benefits that Dell realized due to Pivotal's inclusion on such returns. There were no payments received from Dell during the three months endedApril 30, 2021 andMay 1, 2020 . Due To/From Related Parties, Net Amounts due to and from related parties, net as of the periods presented consisted of the following (table in millions): April 30, January 29, 2021 2021 Due from related parties, current$ 848 $ 1,558 Due to related parties, current(1) 95 120 Due from related parties, net, current$ 753 $ 1,438 (1) Includes an immaterial amount related to our current operating lease liabilities due to related parties. We also recognized an immaterial amount related to non-current operating lease liabilities due to related parties. This amount has been included in operating lease liabilities on the condensed consolidated balance sheets as ofApril 30, 2021 andJanuary 29, 2021 . Amounts in due from related parties, net, excluding DFS and tax obligations, include the current portion of amounts due to and due from related parties. Amounts included in due from related parties, net are generally settled in cash within 60 days of each quarter-end. Notes Payable toDell As ofApril 30, 2021 andJanuary 29, 2021 , we had an outstanding promissory note payable to Dell in the principal amount of$270 million dueDecember 1, 2022 . The note may be prepaid without penalty or premium. Interest is payable quarterly in arrears at the annual rate of 1.75%. During each of the three months endedApril 30, 2021 andMay 1, 2020 , interest expense on the notes payable to Dell was not significant. 33 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As of the periods presented, we held cash, cash equivalents and short-term investments as follows (table in millions): April 30, January 29, 2021 2021 Cash and cash equivalents$ 5,594 $ 4,692 Short-term investments 120 23
Total cash, cash equivalents and short-term investments
Cash equivalents primarily consisted of amounts invested in money market funds. We limit the amount of our investments with any single issuer and monitor the diversity of the portfolio and the amount of investments held at any single financial institution, thereby diversifying our credit risk. Short-term investments consisted of marketable equity securities in a company that completed its initial public offering during the third quarter of fiscal 2021. In the event that conditions for payment of the Special Dividend are satisfied and the Special Dividend is paid, we expect to fund$2.5 billion to$3.5 billion of the dividend through our cash reserves and the balance through incremental indebtedness. As a result, if conditions for the Special Dividend are met, we expect our cash and cash equivalents balance to decline. We continue to expect that cash generated by operations will be our primary source of liquidity. We also continue to believe that, despite this potential decline in cash and cash equivalents, existing cash, cash equivalents and our borrowing capacity, together with any cash generated from operations, will be sufficient to fund our operations for at least the next twelve months. While we believe these cash sources will be sufficient to fund our operations, our overall level of cash needs may be affected by capital allocation decisions that may include the number and size of acquisitions and stock repurchases, among other things. We remain committed to maintaining an investment grade profile and credit rating. Following our planned Spin-Off from Dell, we expect to use free cash flow primarily to de-lever debt. In addition, we plan to continue with our balanced capital allocation policy through investing in our product and solution offerings, acquisitions and returning capital to stockholders through share repurchases. Additionally, given the unpredictable nature of our outstanding legal proceedings, an unfavorable resolution of one or more legal proceedings, claims, or investigations could have a negative impact on our overall liquidity. The 2017 Tax Act imposed a Transition Tax and eliminatedU.S. Federal taxes on foreign subsidiary distributions. The Transition Tax was calculated on a separate tax return basis. Our unpaid liabilities related to the Transition Tax as ofApril 30, 2021 was$564 million , which we expect to pay over the next five years pursuant to a letter agreement between Dell,EMC and us executed during the first quarter of fiscal 2020. Actual tax payments made to Dell pursuant to the tax sharing agreement may differ materially from our total estimated tax liability calculated on a separate tax return basis. The difference between our estimated liability and the amount paid to Dell is recognized as a component of additional paid-in capital, generally in the period in which the consolidated tax return is filed. Our cash flows summarized for the periods presented were as follows (table in millions): Three Months Ended April 30, May 1, 2021 2020 Net cash provided by (used in): Operating activities$ 1,266 $ 1,374 Investing activities (72) (126) Financing activities (297) 1,793
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
- (1)
Net increase in cash, cash equivalents and restricted cash
$ 3,040 Operating Activities Cash provided by operating activities decreased by$108 million during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 , primarily due to increased cash payments for employee-related expenses, including salaries, bonuses and commissions, resulting primarily from growth in headcount. The activity was partially offset by an increase in cash collections due to increased sales, lower payments associated with lower travel spending due to the COVID-19 pandemic and a decrease in net cash paid for taxes during the three months endedApril 30, 2021 . 34 -------------------------------------------------------------------------------- Table of Contents Investing Activities Cash used in investing activities decreased by$54 million during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 , primarily driven by a decrease in cash used in business combinations and additions to property and equipment. Financing Activities Cash used in financing activities changed by$2.1 billion during the three months endedApril 30, 2021 compared to the three months endedMay 1, 2020 , primarily due to the absence of the net cash proceeds received from the issuance of long-term debt of$2.0 billion , as well as an increase of$190 million in repurchases of shares of our Class A common stock. Unsecured Senior Notes The following table summarizes the principal on our two series of unsecured senior notes issuedAugust 21, 2017 and our three series of unsecured senior notes issuedApril 7, 2020 (collectively, the "Senior Notes") as ofApril 30, 2021 (amounts in millions): Senior Notes issuedAugust 21, 2017 : 2.95% Senior Note DueAugust 21, 2022 $ 1,500 3.90% Senior Note DueAugust 21, 2027 1,250 Senior Notes issuedApril 7, 2020 : 4.50% Senior Note DueMay 15, 2025 750 4.65% Senior Note DueMay 15, 2027 500 4.70% Senior Note DueMay 15, 2030 750 Total principal amount$ 4,750 Interest on the Senior Notes issued onApril 7, 2020 is payable semiannually in arrears, onMay 15 andNovember 15 of each year, beginningNovember 15, 2020 . The interest rate on each note issued onApril 7, 2020 is subject to adjustment based on certain rating events. Interest on the Senior Notes issued onAugust 21, 2017 is payable semiannually in arrears, onFebruary 21 andAugust 21 of each year. During the three months endedApril 30, 2021 andMay 1, 2020 ,$47 million and$61 million , respectively, was paid for interest related to the Senior Notes. The Senior Notes also contain restrictive covenants that, in certain circumstances, limit our ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate, merge, sell or otherwise dispose of all or substantially all of our assets. OnMay 11, 2020 , we exercised a make-whole call and redeemed the$1.3 billion unsecured senior note dueAugust 21, 2020 at a premium. We intend to use the net proceeds of the Senior Notes for general corporate purposes, including mergers and acquisitions, repayment of other indebtedness or stock repurchases. Revolving Credit Facility OnSeptember 12, 2017 , we entered into an unsecured credit agreement establishing a revolving credit facility with a syndicate of lenders that provides us with a borrowing capacity of up to$1.0 billion , for general corporate purposes. The credit agreement contains certain representations, warranties and covenants. Commitments under the revolving credit facility are available for a period of five years, which may be extended, subject to the satisfaction of certain conditions, by up to two one-year periods. As ofApril 30, 2021 andJanuary 29, 2021 , there was no outstanding borrowing under the revolving credit facility. Note Payable to Dell Refer to "Our Relationship with Dell" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 for disclosure regarding our note payable to Dell. Stock Repurchase Program From time to time, we repurchase stock pursuant to authorized stock repurchase programs in open market transactions as permitted by securities laws and other legal requirements. We are not obligated to purchase any shares under our stock repurchase programs. The timing of any repurchases and the actual number of shares repurchased depends on a variety of factors, including our stock price, cash requirements for operations and business combinations, corporate and regulatory requirements and other market and economic conditions. Purchases may be discontinued at any time we believe additional purchases are not warranted. From time to time, we also purchase stock in private transactions, such as with Dell. All shares repurchased under our stock repurchase programs are retired. 35 -------------------------------------------------------------------------------- Table of Contents Refer to Note L to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for stock repurchase authorizations approved by our board of directors for the periods presented. Critical Accounting Policies and Estimates In preparing our condensed consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP"), we are required to make estimates, assumptions and judgments that affect the amounts reported on our financial statements and the accompanying disclosures. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. We base our estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. These estimates may change in future periods and will be recognized in the condensed consolidated financial statements as new events occur and additional information becomes known. Actual results could differ from those estimates and any such differences may be material to our financial statements. We believe that the critical accounting policies and estimates set forth within Part II, Item 7, "Critical Accounting Policies and Estimates" of our Annual Report on Form 10-K filed onMarch 26, 2021 involve a higher degree of judgment and complexity in their application than our other significant accounting policies. Our senior management has reviewed our critical accounting policies and related disclosures with the Audit Committee of the Board of Directors. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical fact could be deemed forward-looking statements, and words such as "expect," "anticipate," "target," "goal," "project," "intent," "plan," "believe," "momentum," "seek," "estimate," "continue," "potential," "future," "endeavor," "will," "may," "should," "could," "depend," "predict," and variations or the negative expression of such words and similar expressions are intended to identify forward-looking statements. Forward-looking statements in this report include, but are not limited to, statements relating to expected industry trends and conditions; future financial performance, trends or plans; anticipated impacts of developments in accounting rules and tax laws and rates;VMware's expectations regarding the timing of tax payments and the impacts of changes inVMware's corporate structure and alignment; plans for and anticipated benefits ofVMware products, services and solutions and partner and alliance relationships; plans for, timing of and anticipated impacts and benefits of corporate transactions, acquisitions, stock repurchases and investment activities; the outcome or impact of pending litigation, claims or disputes; the continuing impact of the COVID-19 pandemic on the global economy as well as any related effects on our business operations, financial performance, results of operations and stock price; future plans with respect to Dell's ownership interest in us, including the proposed Spin-Off of its ownership to Dell stockholders and the related Special Dividend to be paid by us and the sources of funding for such Special Dividend and the commercial framework for our future relationship with Dell;VMware's commitment and ability to maintain an investment-grade credit rating; and any statements of assumptions underlying any of the foregoing. These statements are based on current expectations about the industries in whichVMware operates and the beliefs and assumptions of management. These forward-looking statements involve risks and uncertainties and the cautionary statements set forth above and those contained in the section of this report entitled "Risk Factors" identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof. We assume no obligation to, and do not currently intend to, update these forward-looking statements. Available Information Our website is located at www.vmware.com, and our investor relations website is located at http://ir.vmware.com. Our goal is to maintain the investor relations website as a portal through which investors can easily find or navigate to pertinent information about us, all of which is made available free of charge, including: •our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file that material with or furnish it to theSecurities and Exchange Commission ("SEC"); •announcements of investor conferences, speeches and events at which our executives discuss our products, services and competitive strategies; •webcasts of our quarterly earnings calls and links to webcasts of investor conferences at which our executives appear (archives of these events are also available for a limited time); •additional information on financial metrics, including reconciliations of non-GAAP financial measures discussed in our presentations to the nearest comparable GAAP measure; •press releases on quarterly earnings, product and service announcements, legal developments and international news; 36 -------------------------------------------------------------------------------- Table of Contents •corporate governance information including our certificate of incorporation, bylaws, corporate governance guidelines, board committee charters, business conduct guidelines (which constitutes our code of business conduct and ethics) and other governance-related policies; •other news, blogs and announcements that we may post from time to time that investors might find useful or interesting; and •opportunities to sign up for email alerts and RSS feeds to have information pushed in real time. The information found on our website is not part of, and is not incorporated by reference into, this or any other report we file with, or furnish to, theSEC . TheSEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with theSEC . 37
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