VMWARE, INC. The following management's discussion and analysis is provided in addition to the accompanying consolidated financial statements and notes to assist in understanding our results of operations and financial condition.
Our fiscal year is the 52 or 53 weeks ending on the Friday nearest toJanuary 31 of each year. We refer to our fiscal year endingFebruary 3, 2023 and fiscal years endedJanuary 28, 2022 ,January 29, 2021 andJanuary 31, 2020 as "fiscal 2023," "fiscal 2022," "fiscal 2021," and "fiscal 2020," respectively. Fiscal 2023 is a 53-week fiscal year, while fiscal 2022, fiscal 2021 and fiscal 2020 were each 52-week fiscal years. Period-over-period changes are calculated based upon the respective underlying non-rounded data. 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." 38
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Discussion regarding our financial condition and results of operations for fiscal 2021 as compared to fiscal 2020 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2021 , filed with theSEC onMarch 26, 2021 .
Overview
We originally pioneered the development and application of virtualization
technologies with x86 server-based computing, separating application software
from the underlying hardware, and then evolved to become the private cloud and
mobility management leader. Building upon that leadership, we are focused on
becoming the multi-cloud leader. Information technology ("IT") driven innovation
continues to disrupt markets and industries. Technologies emerge faster than
organizations can absorb, creating increasingly complex environments.
Organizations' IT departments and corporate divisions are working at an
accelerated pace to harness new technologies, platforms and cloud models,
ultimately guiding businesses and their product teams through a digital
transformation. To take on these challenges, we are helping customers drive
their multi-cloud strategy by providing the multi-cloud platform for all
applications, enabling digital innovation and enterprise control.
Our portfolio supports and addresses our customers' key priorities, including
modernizing their applications, managing multi-cloud environments, accelerating
their cloud journey, modernizing the network using commodity hardware, embracing
zero-trust security and empowering anywhere workspaces. We enable digital
transformation of customers' applications, infrastructure and operations for
their constantly evolving business and employee needs.
End users can purchase the full breadth of our subscription, SaaS, license and
services portfolio through discrete purchases or through enterprise agreements
("EAs"). EAs are sold to our direct customers and through channel partners and
can include our license, multi-year maintenance and support, subscription and
SaaS offerings. We continue to experience strong renewals resulting in
additional sales of both our existing and newer products and solutions.
During fiscal 2022, 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 as perpetual licenses. We expect this trend to
continue and as a result, 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 this trend
continues, 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 standalone basis, and we believe that the overall growth rate of
our combined license and subscription and SaaS revenue and annual recurring
revenue for subscription and SaaS, as well as the growth in the current portion
of our remaining performance obligations, will become better indicators of our
future growth prospects. In addition, we expect our operating margin to be
negatively impacted in fiscal 2023 as a result of our incremental investment in
our subscription and SaaS portfolio.
Global Events
Suspension of Business Operations in
In response to Russian military actions inUkraine occurring subsequent to fiscal 2022, we suspended business operations inRussia andBelarus , including suspension of sales, support on existing contracts and professional services in both countries. Furthermore, theU.S. and other countries have imposed sanctions onRussia that could impact the fulfillment of our existing orders and our future revenue streams from impacted customers. The impact to our fiscal 2022 financial statements was not material, and we are unable to estimate the financial impact of these events on our operations in future periods. We will closely monitor the impact of these events on all aspects of our business.
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. 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 into fiscal 2023. We continue to closely monitor the impact of the pandemic on all aspects of our business.
Spin-Off and Special Dividend
OnNovember 1, 2021 , the Spin-Off from Dell was completed, and, in accordance with the Separation Agreement, upon the satisfaction of all conditions and immediately prior to the Spin-Off, we paid an$11.5 billion cash dividend, pro rata, to each of the holders of Common Stock, including Dell (the "Special Dividend"), as of the close of business onOctober 29, 2021 (the "Record Date"). Based upon the number of shares of Common Stock held by Dell as of the Record Date, approximately$9.3 billion in cash was paid to Dell. Automatically as a result of the Spin-Off, each share of ClassB Stock converted into one 39
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fully paid and non-assessable share of Class A Stock. Refer to Note A to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding the Spin-Off and Special Dividend.
As we were a majority-owned and controlled subsidiary of Dell through
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):
For the Year Ended Fiscal Year Fiscal Year
January 28, January 29, January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Revenue:
License $ 3,128 $ 3,033 $ 3,181 $ 95 3 % $ (149) (5) %
Subscription and SaaS 3,205 2,587 1,877 617 24 711 38
Total license and
subscription and SaaS 6,333 5,620 5,058 713 13 562 11
Services:
Software maintenance 5,356 5,105 4,754 252 5 351 7
Professional services 1,162 1,042 999 120 11 43 4
Total services 6,518 6,147 5,753 371 6 394 7
Total revenue $ 12,851 $ 11,767 $ 10,811 $ 1,084 9 $ 956 9
Revenue:
United States $ 6,232 $ 5,878 $ 5,405 $ 354 6 % $ 473 9 %
International 6,619 5,889 5,406 730 12 483 9
Total revenue $ 12,851 $ 11,767 $ 10,811 $ 1,084 9 $ 956 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 Workspace ONE
Unified Endpoint Management, VMware Carbon Black Cloud, VMware Cloud on AWS,
VMware SD-WAN by VeloCloud and CloudHealth by VMware .
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.
As customers adopt our subscription and SaaS offerings, license and software maintenance revenue may be lower and subject to greater fluctuation in the future, driven by a higher proportion of our sales occurring through our subscription and SaaS offerings as well as the variability of large deals between fiscal quarters, which deals historically have had a large license revenue impact.
License Revenue
License revenue increased during fiscal 2022 compared to fiscal 2021, primarily driven by an increase in term license revenue, which was$442 million during fiscal 2022 compared to$119 million during fiscal 2021. The growth in term license was primarily due to certain customers moving from perpetual license to term license. 40
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Subscription and SaaS Revenue
Subscription and SaaS revenue increased during fiscal 2022 compared to fiscal
2021, primarily due to increased sales of our VCPP, Workspace ONE, VMware Tanzu,
VMware Carbon Black Cloud, vRealize Cloud Management and VMware Cloud on AWS
offerings.
Annual recurring revenue ("ARR") represents the annualized value of our
committed customer subscription and SaaS contracts as of the end of the
reporting period, assuming any contract that expires during the next 12 months
is renewed on its existing terms, except that, for consumption-based
subscription and SaaS offerings, ARR represents the annualized quarterly revenue
based on revenue recognized for the current reporting period. ARR is an
operating measure we use to assess the strength of our subscription and SaaS
offerings. ARR is a performance metric and should be viewed independently of,
and not as a substitute for or combined with, revenue and unearned revenue. ARR
was $3.6 billion as of January 28, 2022 and $2.9 billion as of January 29, 2021 .
Services Revenue
During fiscal 2022 and fiscal 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 three years of support and maintenance with each new license purchased. Professional services revenue increased during fiscal 2022 compared to fiscal 2021. Services we provide through our consultants and 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. The timing of services rendered 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):
January 28, January 29,
2022 2021
Unearned license revenue $ 19 $ 15
Unearned subscription and SaaS revenue 2,669 1,998
Unearned software maintenance revenue 7,208 7,092
Unearned professional services revenue 1,326 1,209
Total unearned revenue $ 11,222 $ 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 ofJanuary 28, 2022 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. As ofJanuary 28, 2022 , the aggregate transaction price allocated to remaining performance obligations was$12.0 billion , of which approximately 57% 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
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services. As of
As ofJanuary 29, 2021 , our total backlog was$93 million and our backlog related to licenses was$23 million . Backlog totaling$18 million as ofJanuary 29, 2021 was excluded from the remaining performance obligations because such contracts are subject to cancellation until the performance obligation is fulfilled. 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
Collectively, our cost of license revenue, cost of subscription and SaaS
revenue, cost of services revenue and operating expenses primarily reflected
increasing cash-based employee-related expenses, driven by incremental growth in
headcount and salaries across most of our income statement expense categories
during fiscal 2022.
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):
For the Year Ended Fiscal Year Fiscal Year
January 28 , January 29 , January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Cost of license revenue $
151
(7) % $ (3) (2) %
Stock-based compensation 1 1 1 - (14) - 2
Total expenses $ 152 $ 163 $ 166 $ (11) (7) $ (3) (2)
% of License revenue 5 % 5 % 5 %
Cost of license revenue decreased slightly in fiscal 2022 compared to fiscal 2021.
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):
For the Year Ended Fiscal Year Fiscal Year
January 28, January 29, January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Cost of
subscription and
SaaS revenue $ 669 $ 569 $ 387 $ 100 18 % $ 182 47 %
Stock-based
compensation 21 19 13 2 9 6 45
Total expenses $ 690 $ 588 $ 400 $ 102 17 $ 188 47
% of Subscription
and SaaS revenue 22 % 23 % 21 %
Cost of subscription and SaaS revenue increased in fiscal 2022 compared to
fiscal 2021. The increase was primarily driven by growth in costs associated
with hosted services to support our SaaS offerings of $53 million and growth in
cash-based employee-related costs of $43 million , which was primarily driven by
incremental growth in headcount. These increases were partially offset by
decreased amortization of intangible assets of $15 million .
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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):
For the Year Ended Fiscal Year Fiscal Year
January 28, January 29, January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Cost of services revenue $ 1,337 $ 1,193 $ 1,150 $ 143 12 % $ 42 4 %
Stock-based compensation 92 99 83 (7) (7) 16 20
Total expenses $ 1,429 $ 1,292 $ 1,233 $ 137 11 $ 59 5
% of Services revenue 22 % 21 % 21 %
Cost of services revenue increased in fiscal 2022 compared to fiscal 2021. The
increase was primarily due to growth in cash-based employee-related expenses of
$110 million , primarily driven by incremental growth in headcount and salaries.
The increase was also driven by increased third-party professional services
costs of $26 million .
Research and Development Expenses
Research and development expenses include the personnel and related overhead associated with the development of our products and services 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):
For the Year Ended Fiscal Year Fiscal Year
January 28 , January 29 , January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Research and development $
2,529
10 % $ 228 11 %
Stock-based compensation 528 524 459 4 1 65 14
Total expenses $ 3,057 $ 2,816 $ 2,522 $ 241 9 $ 294 12
% of Total revenue 24 % 24 % 23 %
Research and development expenses increased in fiscal 2022 compared to fiscal
2021. The increase was primarily due to growth in cash-based employee-related
expenses of $229 million , primarily driven by incremental growth in headcount
and salaries, as well as increased equipment and depreciation of $42 million and
increased third-party professional services cost of $16 million . These increases
were partially offset by increased capitalized internal-use software development
costs of $63 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):
For the Year Ended Fiscal Year Fiscal Year
January 28 , January 29 , January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Sales and marketing $
3,765
11 % $ 7 - %
Stock-based compensation 302 322 293 (20) (6) 28 9
Total expenses $ 4,067 $ 3,711 $ 3,677 $ 356 10 $ 34 1
% of Total revenue 32 % 32 % 34 %
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Sales and marketing expenses increased in fiscal 2022 compared to fiscal 2021. The increase was primarily due to growth in cash-based employee-related expenses of$264 million , primarily driven by incremental growth in headcount and salaries, as well as higher commission costs of$106 million resulting from increased sales volume. The increase was also driven by increased equipment and depreciation of$17 million . These increases were partially offset by decreased stock-based compensation of$20 million , primarily due to the vesting of awards associated with prior acquisitions, offset in part by an increase in restricted stock unit awards granted to our employees.
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):
For the Year Ended Fiscal Year Fiscal Year
January 28 , January 29 , January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
General and administrative
54 % $ (515) (46) %
Stock-based compensation 131 157 168 (26) (17) (11) (6)
Total expenses $ 1,068 $ 767 $ 1,293 $ 301 39 $ (526) (41)
% of Total revenue 8 % 7 % 12 %
General and administrative expenses increased in fiscal 2022 compared to fiscal
2021. The increase was primarily driven by the absence of the $237 million
accrued litigation loss derecognized in fiscal 2021 in connection with certain
patent litigation. The increase was also driven by certain costs incurred during
fiscal 2022 related to the Spin-Off, such as legal and advisory fees, of
$73 million . Additionally, cash-based employee-related expenses increased by $51
million , primarily driven by incremental growth in headcount and salaries.
These increases were partially offset by a decrease in acquisition-related costs
of $63 million and decreased stock-based compensation of $26 million , which was
primarily due to the vesting of awards associated with prior acquisitions.
Refer to Note E to the consolidated financial statements in Part II, Item 8 of
this Annual Report on Form 10-K for
a description of certain claims and litigation.
Realignment
Realignment expenses during the periods presented were as follows (dollars in
millions):
For the Year Ended Fiscal Year Fiscal Year
January 28 , January 29 , January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Realignment $ 1 $ 42 $ 79 $ (41) (97) % $ (36) (46) %
% of Total revenue - % - % 1 %
During the third quarter of fiscal 2021, we approved a plan to streamline our
operations and better align resources with our business priorities. As a result
of this action, approximately 280 positions were eliminated in fiscal 2021. We
recognized $42 million of severance-related realignment expenses in fiscal 2021
on the consolidated statements of income. Actions associated with this plan were
substantially complete by the end of fiscal 2021.
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Interest Expense
Interest expense during the periods presented was as follows (dollars in
millions):
For the Year Ended Fiscal Year Fiscal Year
January 28 , January 29 , January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Interest expense $ 252 $ 204 $ 149 $ 48 24 % $ 56 38 %
% of Total revenue 2 % 2 % 1 %
Interest expense increased in fiscal 2022 compared to fiscal 2021. The increase
was primarily driven by the five series of unsecured senior notes issued during
the third quarter of fiscal 2022 in the aggregate principal amount of
$6.0 billion . We expect the annual interest expense associated with these senior
notes to be approximately $100 million .
Other Income (Expense), net
Other income (expense), net during the periods presented was as follows (dollars
in millions):
For the Year Ended Fiscal Year Fiscal Year
January 28 , January 29 , January 31, 2022 vs. 2021 2021 vs. 2020
2022 2021 2020 $ Change % Change $ Change % Change
Other income (expense), net $ (52) $ 191 $ 86 $ (242) (127) % $ 107 126 %
% of Total revenue - % 2 % 1 %
The change in other income (expense), net in fiscal 2022 compared to fiscal 2021
was primarily driven by gains and losses, whether realized or unrealized, on our
investments in equity securities. During fiscal 2022, net losses of $31 million
were recognized on our investments in equity securities compared to net gains of
$157 million recognized during fiscal 2021. The change was primarily due to the
absence of a gain of $163 million recognized during fiscal 2021 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.
The change was also driven by the loss on extinguishment of debt of $21 million
associated with the redemption of $1.5 billion unsecured senior note due August
21, 2022 recognized during fiscal 2022.
Pursuant to a tax matters agreement entered into with Dell effective April 14,
2021 (the "Tax Matters Agreement"), we have agreed to indemnify one another for
certain tax liabilities or tax benefits relating to periods prior to the
Spin-Off and certain adjustments to these amounts that will be recognized in
future periods will be recorded in other income (expense), net on the
consolidated statements of income. We cannot reasonably predict the amount that
we may receive or pay in future periods and it could introduce significant risk
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):
For the Year Ended
January 28, January 29, January 31,
2022 2021 2020
Income tax provision (benefit) $
265
12.7 % 13.6 % N/M
N/M - Effective tax rate is not considered
meaningful.
The decrease in our effective income tax rate in fiscal 2022 compared to fiscal
2021 was primarily driven by the discrete tax impact related to our book and tax
basis difference on our investment in equity securities, which provided a
discrete tax benefit of $31 million recognized in fiscal 2022 as compared to a
discrete tax expense of $52 million recognized in fiscal 2021. The decrease was
partially offset by an increase in effective income tax rate due to 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 fiscal 2021.
Prior to the Spin-Off, our financial results were included in the Dell
consolidated tax return for
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transactions between us and Dell being assessed using consolidated tax return rules. As a result of the Spin-Off, we are no longer a member of the Dell consolidated tax group and ourU.S. federal income tax will be reported separately from that of the Dell consolidated tax group. We and Dell have agreed to indemnify one another, pursuant to the Tax Matters Agreement, for certain tax liabilities or tax benefits relating to periods prior to the Spin-Off and certain adjustments to these amounts that will be recognized in future periods will be recorded in other income (expense), net on the consolidated statements of income. The actual amount that we may receive from or pay to Dell could vary depending on the outcome of tax matters arising from Dell's future tax audits, which may not be resolved for years. Refer to Note P to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information. 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 inU.S. and non-U.S. jurisdictions. Our future effective tax rate may be affected by such factors as: changes in our business changes in tax laws or statutory rates; changing interpretation of existing laws or regulations; the impact of accounting for stock-based compensation; 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; shifts in the amount of earnings in theU.S. compared with other regions in the world; overall levels of income before tax; changes in our international organization; as well as the expiration of statute of limitations and settlements of audits. Beginning in fiscal 2023, the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act") eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for domestic expenses and fifteen years for certain foreign expenses. If the existing statute is not deferred, modified or repealed or repealed retroactively as we expect, our effective income tax rate in fiscal 2023 could increase materially. The actual impact will depend on if and when this statute is deferred, modified, or repealed byCongress , including if such legislative action would be retroactively applied, and the amount of research and development expenses paid or incurred in fiscal 2023, among other factors.
Our Relationship with Dell
Following the Spin-Off, entities affiliated withMichael Dell (the "MSD Stockholders"), who serves asVMware's Chairman of the Board and chairman and chief executive officer of Dell, and entities affiliated withSilver Lake Partners (the "SLP Stockholders"), of whichEgon Durban , aVMware director, is a managing partner, became owners of direct interests inVMware . Transactions with Dell continue to be considered related party transactions following the Spin-Off due to the MSD Stockholders' and SLP Stockholders' direct ownership in bothVMware and Dell, as well asMr. Dell's executive position with Dell. OnNovember 1, 2021 , in connection with the Spin-Off, we and Dell entered into the Commercial Framework Agreement to provide a framework under which we and Dell will continue our strategic commercial relationship, particularly with respect to projects mutually agreed by the parties as having the potential to accelerate the growth of an industry, product, service or platform that may provide the parties with a strategic market opportunity. The Commercial Framework Agreement has an initial term of five years, with automatic one-year renewals occurring annually thereafter, subject to certain terms and conditions.
The information provided below includes a summary of transactions with 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.
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During fiscal 2022, fiscal 2021 and fiscal 2020, revenue from Dell accounted for
38%, 35% and 31% of our consolidated revenue, respectively. During fiscal 2022,
fiscal 2021 and fiscal 2020, revenue recognized on transactions where Dell acted
as an OEM accounted for 13%, 12% and 12% of total revenue from Dell,
respectively, or 5%, 4% 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
For the Year Ended As of
January 28, January 29, January 31, January 28, January 29,
2022 2021 2020 2022 2021
Reseller revenue $ 4,764 $ 4,053 $ 3,288 $ 5,550 $ 4,952
Internal-use revenue 56 63 82 39 45
Sales through Dell as a distributor, which is included in reseller revenue, comprise the largest route-to-market for our sales.
Receipts from Dell for collaborative technology projects were not material,
Customer deposits resulting from transactions with Dell were
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 consolidated statements of income and primarily include salaries, benefits, travel and occupancy expenses. Dell also incurs certain administrative costs on our behalf in theU.S. that are recorded as expenses on our consolidated statements of income. •Prior to the Spin-Off, in certain geographic regions, Dell filed a consolidated indirect tax return, which included value added taxes and other indirect taxes collected by us from our customers. We remitted the indirect taxes to Dell and Dell remitted 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):
For the Year Ended
January 28, January 29, January 31,
2022 2021 2020
Purchases and leases of products and purchases of
services(1) $
228
Dell subsidiary support and administrative costs 38 74 119
(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.
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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.
During the fourth quarter of fiscal 2020, we entered into an arrangement with Dell to transfer approximately 250 professional services employees from Dell to us. These employees are experienced in providing professional services that deliver our technology and this transfer centralizes these resources within our Company in order to serve our customers more efficiently and effectively. The transfer was substantially completed during the fourth quarter of fiscal 2020 and did not have a material impact to the consolidated financial statements. We also expect that Dell will continue to resell our consulting solutions.
DFS provides 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 the current portion of due from related parties on the 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$29 million ,$60 million and$66 million during fiscal 2022, fiscal 2021 and fiscal 2020, respectively. Due To/From Related Parties As ofJanuary 28, 2022 , the current and non-current amounts due from and due to related parties were presented separately on the consolidated balance sheets, as a right of setoff no longer exists subsequent to the Spin-Off. As ofJanuary 29, 2021 , the current portion of due from related parties was presented net of the current portion of due to related parties on the consolidated balance sheets.
The following table summarizes the current portion of due from and due to
related parties as of
Due from related parties $ 1,558
Due to related parties(1) 120
Current portion of due from related parties $ 1,438 (1) Included an immaterial amount related to our current operating lease liabilities due to Dell.
Amounts in the current and non-current portions of due from related parties and due to related parties on the consolidated balance sheets as ofJanuary 28, 2022 included amounts due to Dell pursuant to the Tax Matters Agreement. Refer to Note P to the consolidated financial statement in Part II, Item 8 of this Annual Report on Form 10-K for more information. Amounts included in the current portion of due from related parties, with the exception of DFS and tax obligations, are generally settled in cash within 60 days of each quarter-end. Special Dividend OnNovember 1, 2021 , we paid an$11.5 billion Special Dividend, pro rata, to each of the holders of Class A Stock and ClassB Stock , including Dell, as of the Record Date. Based upon the number of shares of common stock held by Dell as of the Record Date, approximately$9.3 billion in cash was paid to Dell. Refer to Note A to the consolidated financial statement in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding the Spin-Off.
Notes Payable to Dell
As ofJanuary 29, 2021 , we had an outstanding promissory note payable to Dell in the principal amount of$270 million dueDecember 1, 2022 . We repaid the outstanding balance of$270 million during the third quarter of fiscal 2022. During each of fiscal 2022, fiscal 2021 and fiscal 2020, interest expense on the note payable to Dell was not significant.
Liquidity and Capital Resources
As of the periods presented, we held cash, cash equivalents and short-term investments as follows (table in millions):
January 28, January 29,
2022 2021
Cash and cash equivalents $ 3,614 $ 4,692
Short-term investments 19 23
Total cash, cash equivalents and short-term investments
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Cash equivalents primarily consisted of amounts invested in money market funds. To diversify our credit risk, we limit the amount of our investments with any single issuer, monitor the diversity of the portfolio and limit the amount of investments held at any single financial institution. Short-term investments consisted of marketable equity securities in a company that completed its initial public offering during the third quarter of fiscal 2021. We continue to expect that cash generated by operations will be our primary source of liquidity. We also continue to believe that 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 expect to use free cash flow primarily to repay our outstanding indebtedness through the end of fiscal 2023. 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. Beginning in fiscal 2023, the 2017 Tax Act eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for domestic expenses and fifteen years for certain foreign expenses. If the existing statute is not deferred, modified or repealed or repealed retroactively as we expect, our effective income tax rate in fiscal 2023 could increase materially and our cash taxes could increase by an amount in excess of$500 million . The actual impact will depend on if and when this statute is deferred, modified, or repealed byCongress , including if such legislative action would be retroactively applied and the amount of research and development expenses paid or incurred in fiscal 2023, among other factors. 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 liability related to the Transition Tax as ofJanuary 28, 2022 was$504 million , which we expect to pay over the next four years pursuant to a letter agreement between Dell,EMC and us executed during the first quarter of fiscal 2020. Actual tax payments made to Dell pursuant to the tax sharing agreement may differ materially from our total estimated tax liability calculated on a separate tax return basis. Prior to the Spin-Off, the difference between our estimated liability and the amount paid to Dell was recognized as a component of additional paid-in capital, generally in the period in which the consolidated tax return was filed. Subsequent to the Spin-Off, pursuant to the Tax Matters Agreement with Dell, we have agreed to indemnify one another for certain tax liabilities or tax benefits relating to periods prior to the Spin-Off and certain adjustments to these amounts that will be recognized in future periods will be recorded in other income (expense), net on the consolidated statements of income. Our cash flows summarized for the periods presented were as follows (table in millions): For the Year Ended January 28, January 29, January 31, 2022 2021 2020 Net cash provided by (used in): Operating activities$ 4,357 $ 4,409 $ 3,872 Investing activities (329) (713) (2,728) Financing activities (5,135) (1,957) (1,707) Effect of exchange rate changes on cash, cash equivalents and restricted cash - - (2) Net increase (decrease) in cash, cash equivalents and restricted cash$ (1,107) $ 1,739 $ (565) Operating Activities Cash provided by operating activities decreased by$53 million during fiscal 2022 compared to fiscal 2021, primarily due to increased cash payments for employee-related expenses, including salaries, bonuses and commissions, resulting primarily from growth in headcount and salaries, as well as higher cash outflows related to operating expenses, our employee stock purchase plan and interest on outstanding debts. These activities were partially offset by increased cash collections due to increased sales and decreased tax payments compared to fiscal 2021. Investing Activities Cash used in investing activities decreased by$383 million during fiscal 2022 compared to fiscal 2021, primarily driven by a decrease in cash used in business combinations, as well as an increase in proceeds from sales of our investments in equity securities. These activities were partially offset by an increase in additions to property and equipment compared to fiscal 2021. 49
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Financing Activities
Cash used in financing activities increased by$3.2 billion during fiscal 2022 compared to fiscal 2021, primarily driven by the payment of the$11.5 billion Special Dividend in fiscal 2022, offset in part by an increase in indebtedness incurred, as well as a decrease in the aggregate amount of indebtedness repaid during fiscal 2022 compared to fiscal 2021. In addition, cash used for repurchases of shares of our common stock increased$224 million compared to fiscal 2021. Unsecured Senior Notes The following table summarizes the principal on our series of unsecured senior notes issuedAugust 21, 2017 (the "2017 Senior Notes"), three series of unsecured senior notes issuedApril 7, 2020 (the "2020 Senior Notes") and five series of unsecured senior notes issuedAugust 2, 2021 (the "2021 Senior Notes", collectively with the 2017 Senior Notes and 2020 Senior Notes, the "Senior Notes") as ofJanuary 28, 2022 (amounts in millions):
2017 Senior Notes:
3.90% Senior Note DueAugust 21, 2027 $ 1,250 2020 Senior Notes 4.50% Senior Note DueMay 15, 2025 750 4.65% Senior Note DueMay 15, 2027 500 4.70% Senior Note DueMay 15, 2030 750 2021 Senior Notes: 0.60% Senior Note DueAugust 15, 2023 1,000 1.00% Senior Note DueAugust 15, 2024 1,250 1.40% Senior Note DueAugust 15, 2026 1,500 1.80% Senior Note DueAugust 15, 2028 750 2.20% Senior Note DueAugust 15, 2031 1,500 Total principal amount$ 9,250 Interest on the 2021 Senior Notes is payable semiannually in arrears, onFebruary 15 andAugust 15 of each year, commencing onFebruary 15, 2022 . Interest on the 2020 Senior Notes is payable semiannually in arrears, onMay 15 andNovember 15 of each year, commencing onNovember 15, 2020 . The interest rate on the 2020 Senior Notes is subject to adjustment based on certain rating events. Interest on the 2017 Senior Notes is payable semiannually in arrears, onFebruary 21 andAugust 21 of each year, commencing onFebruary 21, 2018 . During fiscal 2022, fiscal 2021 and fiscal 2020,$185 million ,$170 million and$122 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.
As of
OnJanuary 18, 2022 , we exercised a make-whole call and redeemed the$1.5 billion unsecured senior note dueAugust 21, 2022 at a premium. The loss on extinguishment of debt was$21 million during fiscal 2022 and was recognized in other income (expense), net on the consolidated statements of income. OnMay 11, 2020 , we exercised a make-whole call and redeemed the$1.3 billion unsecured senior note dueAugust 21, 2020 at a premium. The loss on extinguishment of debt was not material during fiscal 2021 and was recognized in other income (expense), net on the consolidated statements of income.
Senior Unsecured Term Loan Facility
OnSeptember 2, 2021 , we received commitments from financial institutions for a three-year senior unsecured term loan facility and a five-year senior unsecured term loan facility that provided us with a one-time aggregate borrowing capacity of up to$4.0 billion (the "2021 Term Loan"). OnNovember 1, 2021 , we drew down an aggregate of$4.0 billion with a weighted average interest rate of 0.90%. The drawdown was used to fund a portion of the Special Dividend. OnJanuary 25, 2022 , we repaid an aggregate of$500 million . As ofJanuary 28, 2022 , the outstanding principal balance on the 2021 Term Loan was$3.5 billion , none of which is payable within 12 months. Given the variable nature of the interest on the term loan facilities, including when the repayment will take place, interest payments have not been included in the aggregate amount payable in future periods. 50
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Revolving Credit Facility
OnSeptember 2, 2021 , 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$1.5 billion for general corporate purposes (the "2021 Revolving Credit Facility"). The 2021 Revolving Credit Facility replaced our existing$1.0 billion revolving credit facility that was entered into onSeptember 12, 2017 and was undrawn. Commitments under the 2021 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. The 2021 Revolving Credit Facility contains certain representations, warranties and covenants.
As of
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. All shares repurchased under our stock repurchase programs are retired. Refer to Note Q to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for stock repurchase authorizations approved by our board of directors during the periods presented.
Contractual Obligations
In addition to the Senior Notes and the 2021 Term Loan discussed earlier, we
have other contractual obligations that impact our liquidity. The following
represents our other contractual obligations as of
•Future Lease Commitments-We have operating and finance leases primarily related to office facilities and equipment. As ofJanuary 28, 2022 , our future minimum lease payments under non-cancellable operating and finance leases were$1.4 billion , with$183 million payable within 12 months. The amounts exclude legally binding minimum lease payments for leases signed but not yet commenced of$29 million , as well as expected sublease income. •Purchase Obligations-Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As ofJanuary 28, 2022 , we had non-cancellable unconditional purchase obligations of$615 million , with$473 million payable within 12 months. •Tax Obligations and Uncertain Tax Positions-As ofJanuary 28, 2022 , future cash payments related to the Transition Tax were$504 million , with$59 million payable within 12 months. As ofJanuary 28, 2022 , we had$527 million of gross uncertain tax benefits, excluding interest and penalties. The timing of future payments relating to the uncertain tax benefits is highly uncertain. Based on the timing and outcome of examinations of our subsidiaries, the result of the expiration of statutes of limitations for specific jurisdictions or the timing and result of ruling requests from taxing authorities, it is reasonably possible that within the next 12 months total unrecognized tax benefits could be potentially reduced by approximately$20 million . •Asset Retirement Obligations-Asset retirement obligations represent the estimated costs to bring certain office buildings that we lease back to their original condition after the termination of the lease. As ofJanuary 28, 2022 , we had asset retirement obligations of$22 million , with an immaterial amount payable within 12 months.
Refer to Note E to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information on our contractual commitments, guarantees and indemnification obligations.
Critical Accounting Policies and Estimates
In preparing our 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 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 below 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 51
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materially from actual results. Refer to Note A to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information on significant accounting policies and estimates used in the preparation of the consolidated financial statements. As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the consolidated financial statements as new events occur and additional information becomes known. To the extent our actual results differ materially from those estimates and assumptions, our future financial statements could be affected.
Revenue Recognition
We derive revenue primarily from licensing software under perpetual and
consumption-based contracts and related software maintenance and support,
software subscriptions ("subscriptions"), hosted services, training and
consulting services. We account for a contract with a customer if all criteria
defined by the guidance are met, including collectability of the consideration
is probable. At inception of a contract with a customer, we evaluate whether the
promised products and services represent distinct performance obligations within
the context of the contract. Performance obligations that are both capable of
being distinct on their own and distinct within the context of the contract are
recognized on their own as distinct performance obligations. Performance
obligations under which both of these two criteria are not met are recognized as
a combined, single performance obligation. Determining whether our licenses,
subscriptions and services are considered distinct performance obligations that
should be accounted for separately or together often involves assumptions and
significant judgments that can have a significant impact on the timing and
amount of revenue recognized.
Revenue is recognized upon transfer of control of licenses, subscriptions or
services to our customer in an amount that reflects the consideration we expect
to receive in exchange for those licenses, subscriptions or services. Control of
a promised license, subscription or service may be transferred to a customer
either at a point in time or over time, which affects the timing of revenue
recognition. Licenses that represent distinct performance obligations are
recognized at a point in time when the software license keys have been made
available to the customer. Licenses sold as part of our subscriptions that do
not represent distinct performance obligations are recognized over time along
with the associated services that form a combined performance obligation with
the software. Management assesses relevant contractual terms in contracts with
customers and applies significant judgment in identifying and accounting for all
terms and conditions in certain contracts.
In addition, revenue from software licenses sold to OEMs is recognized when the
sale to the end user occurs. Revenue is recognized upon reporting by the OEMs of
their sales, and for the period where information of the underlying sales has
not been made available, revenue is recognized based upon estimated sales. Our
VCPP partners license on-premises software from us on a monthly basis under a
usage-based model. Revenue recognition is based on fees associated with reported
license consumption by the VCPP partners and includes estimates for the period
when consumption information has not been made available. Certain contracts
include third-party offerings and revenue may be recognized net of the
third-party costs, based upon an assessment as to whether we had control of the
underlying third-party offering.
We enter into revenue contracts with multiple performance obligations in which a
customer may purchase combinations of licenses, maintenance and support,
subscriptions, hosted services, training, consulting services and rights to
future products and services. For contracts with multiple performance
obligations, we allocate total transaction value to the identified underlying
performance obligations based on relative standalone selling price ("SSP"). We
typically estimate SSP of performance obligations based on observable
transactions when the obligations are sold on a standalone basis and those
prices fall within a reasonable range. We utilize the residual approach to
estimate SSP primarily for offerings when sold to customers at highly variable
pricing. Changes in assumptions or judgments used in determining standalone
selling price could have a significant impact on the timing and amount of
revenue we report in a particular period.
Professional services include design, implementation, training and consulting
services. Professional services performed by us represent distinct performance
obligations as they do not modify or customize licenses sold. These services are
not highly interdependent or highly interrelated to licenses sold such that a
customer would not be able to use the licenses without the professional
services. Revenue from professional services engagements performed for a fixed
fee, for which we are able to make reasonably dependable estimates of progress
toward completion, is recognized based on progress. We believe this method of
measurement provides the closest depiction of our performance in transferring
control of the professional services.
Rebate Reserves
We offer rebates to certain channel partners, which are recognized as a
reduction to revenue or unearned revenue. Rebates based on actual partner sales
are recognized as a reduction to revenue as the underlying revenue is
recognized. Rebates earned based upon partner achievement of cumulative level of
sales are recognized as a reduction of revenue proportionally for each sale that
is required to achieve the target.
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The estimated reserves for channel rebates and sales incentives are based on channel partners' actual performance against the terms and conditions of the programs, historical trends and the value of the rebates. The accuracy of these reserves for these rebates and sales incentives depends on our ability to estimate these items and could have a significant impact on the timing and amount of revenue we report.
Deferred Commissions
Sales commissions, including the employer portion of payroll taxes, earned by our sales force are considered incremental and recoverable costs of obtaining a contract and are deferred and generally amortized on a straight-line basis over the expected period of benefit. The expected period of benefit is generally determined using the contract term or underlying technology life, if renewals are expected and the renewal commissions are not commensurate with the initial commissions. The determination of the expected period of benefit requires us to make significant estimates and assumptions, including the life of the underlying technology and the estimated period of contract renewal. We believe the assumptions and estimates we have made are reasonable. Differences in the estimated period of benefit could have a significant impact on the timing and amount of amortization expense recognized.
Income Taxes
Prior to the Spin-Off, our financial results were included in the Dell consolidated tax return forU.S. federal income tax purposes. Our income tax provision or benefit was calculated primarily as though we were a separate taxpayer, with certain transactions between us and Dell being assessed using consolidated tax return rules. The difference between the income taxes payable that was calculated on a separate tax return basis and the amount paid to Dell pursuant to our tax sharing agreement with Dell was presented as a component of additional paid-in capital. As a result of the Spin-Off, we are no longer a member of the Dell consolidated tax group and ourU.S. income tax will be reported separately from that of the Dell consolidated tax group. We establish reserves for income taxes to address potential exposures involving tax positions that could be challenged by federal, state and foreign tax authorities, which may result in proposed assessments. In the ordinary course of our global business there are many intercompany transactions, including the transfer of intellectual property, where the ultimate tax determination could be challenged by the tax authorities. In the instance of transfers of intellectual property, the related deferred tax asset recognized is based on the intellectual property's current fair value. Management applies significant judgment when determining the fair value of the intellectual property, which serves as the tax basis of the deferred tax asset, and in evaluating the associated tax laws in the applicable jurisdictions. Our assumptions, estimates and judgments used to determine the reserve relating to these positions considers current tax laws, interpretation of current tax laws and possible outcomes of current and future examinations conducted by tax authorities. As a result of the Spin-Off, we are no longer a member of Dell's consolidated tax group, however, we are still subject to potential tax liabilities for the periods prior to the Spin-Off. We are also subject to the periodic examination of our income tax returns by theIRS and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our reserves and any potential adjustments that may result from the current and future examinations. We believe such estimates to be reasonable; however, the final determination from examinations and changes in tax laws could significantly impact the amounts provided for income taxes in the consolidated financial statements. Our deferred tax assets reflect our estimates of the amount and category of future taxable income, such as income from operations and capital gains, and also take into account valuation allowances that consider other key factors that might restrict our ability to realize the deferred tax assets. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate.
Business Combinations
We allocate the purchase price of acquirees to the identifiable assets acquired, the liabilities assumed and any noncontrolling interests in an acquiree, which are measured based on the acquisition date fair value.Goodwill is measured as the excess of consideration transferred over the net amounts of the identifiable tangible and intangible assets acquired and the liabilities assumed at the acquisition date. The allocation of the purchase price requires us to make significant estimates and assumptions to determine the fair value of assets acquired and liabilities assumed and the related useful lives of the acquired assets, when applicable, as of the acquisition date. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•future expected cash flows from sales, maintenance agreements and acquired developed technologies;
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•the acquired company's trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company's product portfolio; and
•discount rates used to determine the present value of estimated future cash flows.
These estimates are inherently uncertain and unpredictable and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. Additionally, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.
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