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. InDecember 2019 ,VMware completed the acquisition of Pivotal, formerly a subsidiary ofVMware's parent company, Dell. The acquisition was accounted for as a transaction between entities under common control in accordance with Accounting Standards Codification 805-50, Business Combination - Related Issues, which requires retrospective combination of entities for all periods presented, as if the combination had been in effect since the inception of common control. As such, prior period financial information has been recast. The recast financial statements combineVMware's historical financial results with those of Pivotal. Refer to Note B to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information. Additionally, effective with the fourth quarter of fiscal 2020,VMware presented new revenue and new cost of revenue line items entitled, "subscription and SaaS revenue" and "cost of subscription and SaaS revenue" in this Annual Report on Form 10-K. Previously, subscription and SaaS revenue was allocated between license revenue and services revenue on the consolidated statements of income. In light of the Company's recent acquisitions, management decided that revenue recognized from subscription and SaaS offerings will be presented separately as it provides a more meaningful representation of the nature of its revenue. Period-over-period changes are calculated based upon the respective underlying, non-rounded data. We refer to our fiscal years endedJanuary 29, 2021 ,January 31, 2020 ,February 1, 2019 andFebruary 2, 2018 as "fiscal 2021," "fiscal 2020," "fiscal 2019" and "fiscal 2018," 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 their business 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 transformation. We help customers manage their IT resources across private clouds and complex multi-cloud, multi-device environments by offering solutions across three categories:Software-Defined Data Center ("SDDC"), Hybrid and Multi-Cloud Computing and Digital Workspace-End-User Computing ("EUC"). This portfolio supports and addresses the key IT priorities of our customers including accelerating their cloud journey, modernizing their applications, empowering digital workspaces, transforming networking and embracing intrinsic security.VMware enables customers to digitally transform their operations as they ready their applications, infrastructure and employees for constantly evolving business needs. Effective with the fourth quarter of fiscal 2020, we are presenting new revenue and cost of revenue line items entitled, "subscription and SaaS revenue" and "cost of subscription and SaaS revenue" in this Annual Report on Form 10-K. Previously, subscription and SaaS revenue was referred to as "hybrid cloud subscription and SaaS revenue" and was allocated between 40
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license revenue and services revenue in the consolidated statements of income.
In light of our recent acquisitions, management decided that revenue recognized
from subscription and SaaS offerings will be presented separately as it provides
a more meaningful representation of the nature of its revenue. The new
subscription and SaaS revenue line item includes revenue from our VMware Cloud
Provider Program ("VCPP") cloud offerings that are billed to customers on a
consumption basis, revenue from Pivotal and other offerings that are billed on a
subscription basis as well as revenue from SaaS offerings, such as VMware
Workspace ONE ("Workspace ONE") and VMware Cloud on AWS. Revenue and its related
costs from prior periods have been reclassified to conform to the fiscal 2020
presentation.
We sell our solutions using enterprise agreements ("EAs") or as part of our
non-EA, or transactional, business. EAs are comprehensive volume license
offerings, 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, including renewals of our EAs, resulting in additional license
sales of both our existing and newer products and solutions.
SDDC or Software-Defined Data Center
Our SDDC technologies 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 fiscal
2020, we continued to see growth in sales of our SDDC solutions. Future sales
growth rates may fluctuate period to period, depending largely upon the extent
to which SDDC technologies are included in our larger EAs. For example, sales
from our management products were positively impacted during fiscal 2020 as a
result of being included in some of the larger strategic deals.
Hybrid and Multi-Cloud Computing
Our overarching cloud strategy contains three key components: (i) continue to
expand beyond compute virtualization in the private cloud; (ii) extend the
private cloud into the public cloud; and (iii) connect and secure endpoints
across a range of public clouds. Subscription offerings were primarily comprised
of VCPP and included VMware Cloud Services, which enable customers to run,
manage, connect and secure their applications across private and public clouds.
During fiscal 2020, revenue growth in our subscription and SaaS offerings was
primarily driven by our Pivotal and VCPP offerings. We expect CloudHealth by
VMware ("CloudHealth") and VMware Cloud on AWS to contribute to revenue growth
in fiscal 2021.
During the third quarter of fiscal 2020, we acquired Carbon Black, Inc. ("Carbon
Black") to grow our intrinsic security portfolio across network, workload,
endpoint, identity and analytics. Also, during the fourth quarter of fiscal
2020, we acquired Pivotal, which we will combine with Heptio technology to
deliver an enterprise-grade, Kubernetes-based portfolio for modern applications.
We expect both the Carbon Black and Pivotal acquisitions to contribute to the
growth of our revenue derived from subscription and SaaS offerings. In addition,
we expect operating margin will be negatively impacted in fiscal 2021 as a
result of our incremental investment in our subscription and SaaS portfolio,
including consideration of the recent Carbon Black and Pivotal acquisitions.
During the fourth quarter of fiscal 2020, we saw an increase in the portion of
our sales occurring through our subscription and SaaS-based 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. We expect
our license revenue line item to have a slower growth rate than it has
historically to the extent customers adopt our cloud-based offerings which are
now be recorded in the new subscription and SaaS line item. Accordingly, 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, that historically have had a
large license revenue impact. As a result, the rate of growth in our license
revenue which has been viewed as a leading indicator of our business performance
may be less relevant and we believe that growth in the combination of license
and subscription and SaaS revenue will become a better indicator of our future
growth prospects.
Digital Workspace-End-User Computing
Our complete EUC solution, Workspace ONE, is a digital workspace platform
powered by Unified Endpoint Management and VMware Horizon. Our Unified Endpoint
Management business model includes an on-premises solution that we offer through
the sale of perpetual licenses, subscription and SaaS solutions. EUC sales
continued to increase during fiscal 2020, driven by the adoption of our
subscription offerings such as Workspace ONE.
Dell Go -to-Market Initiatives
We continue joint marketing, sales, branding and product development efforts
with Dell and other Dell companies to enhance the collective value we deliver to
our mutual customers. Our collective business built with Dell continued to
create opportunities that benefited our sales during fiscal 2020.
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Coronavirus (COVID-19) Impact The worldwide spread of the COVID-19 virus is expected to result in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also disrupting sales channels and marketing activities for an unknown period of time until the disease is contained. We expect this to have a negative impact on our sales and our results of operations, the size and duration of which we are currently unable to predict. Results of Operations Approximately 70% of our sales are denominated inthe United States ("U.S.") dollar, however, in certain countries, 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 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Revenue: License$ 3,181 $ 3,042 $ 2,628 $ 139 5 %$ 414 16 % Subscription and SaaS 1,877 1,303 927 574 44 376 41 Total license and subscription and SaaS 5,058 4,345 3,555 713 16 790 22 Services: Software maintenance 4,754 4,351 3,919 403 9 431 11 Professional services 999 917 862 82 9 56 6 Total services 5,753 5,268 4,781 485 9 487 10 Total revenue$ 10,811 $ 9,613 $ 8,336 $ 1,198 12$ 1,277 15 Revenue: United States$ 5,405 $ 4,696 $ 4,200 $ 709 15 %$ 496 12 % International 5,406 4,917 4,136 489 10 781 19 Total revenue$ 10,811 $ 9,613 $ 8,336 $ 1,198 12$ 1,277 15 Revenue from our subscription offerings consisted primarily ofVMware's VCPP cloud offerings that are billed to customers on a consumption basis and revenue from Pivotal 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 ONE and newer SaaS offerings, such as VMware Carbon Black Cloud platform,CloudHealth and VMware SD-WAN byVeloCloud . License revenue relating to the sale of perpetual 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 recognized on a consumption basis or over a period of time. License Revenue License revenue increased during fiscal 2020 compared to fiscal 2019 and during fiscal 2019 as compared to fiscal 2018. License revenue continued to benefit from broad-based growth across our diverse product portfolio and across ourU.S. and international geographies. Strength in our large EAs also contributed to license revenue growth during fiscal 2020 compared to fiscal 2019. Subscription and SaaS Revenue Subscription and SaaS revenue increased in fiscal 2020 compared to fiscal 2019 and fiscal 2019 compared to fiscal 2018. Revenue growth from our Pivotal and VCPP offerings continued to contribute to subscription and SaaS revenue growth during fiscal 2020 and 2019. Strength in our EA renewal business and product offerings acquired as part of our acquisitions such as 42
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VeloCloud Networks, Inc. ("VeloCloud"), also contributed to subscription and SaaS revenue growth during fiscal 2019 compared to fiscal 2018. We continue to expect growth in our subscription and SaaS offerings over the next fiscal year. Services Revenue During fiscal 2020 and fiscal 2019, software maintenance revenue continued to benefit from strong renewals of our EAs, maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with new software license sales. In each period presented, customers purchased, on a weighted-average basis, approximately three years of support and maintenance with each new license purchased. Professional services revenue increased 9% in fiscal 2020 and 6% in fiscal 2019. Services we provide through our technical account managers and our continued focus on solution deployments, including our VMware NSX ("NSX") products, management solutions as well as other emerging technology products, 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): January 31, February 1, 2020 2019 Unearned license revenue $ 19 $ 15 Unearned subscription and SaaS revenue 1,534 916 Unearned software maintenance revenue 6,700 5,741 Unearned professional services revenue 1,015 767 Total unearned revenue$ 9,268 $ 7,439 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. Previously, unearned subscription and SaaS revenue was allocated between unearned license revenue and unearned software maintenance revenue in prior periods and has been reclassified to conform with current period presentation. Unearned software maintenance revenue is attributable to our maintenance contracts and is generally recognized over time on a ratable basis over the contract duration. The weighted-average remaining contractual term as ofJanuary 31, 2020 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 customer contracts at the end of any given period. As ofJanuary 31, 2020 , the aggregate transaction price allocated to remaining performance obligations was$10.3 billion , of which approximately 54% is expected to be recognized as revenue over the next twelve months and the remainder thereafter. As ofFebruary 1, 2019 , the aggregate transaction price allocated to remaining performance obligations was$8.7 billion , of which approximately 55% was expected to be recognized as revenue during fiscal 2020, 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. As ofJanuary 31, 2020 , our total backlog was$18 million . Backlog primarily consists of licenses, maintenance and services. Our backlog related to licenses was$5 million , which we generally expect to deliver and recognize as revenue during the following quarter. The amount excluded from the remaining performance obligations because such contracts are subject to cancellation until fulfillment of the performance obligation occurs was not material as ofJanuary 31, 2020 . As ofFebruary 1, 2019 , total backlog was approximately$449 million and our backlog related to licenses was approximately$147 million . Backlog totaling$34 million as ofFebruary 1, 2019 was excluded from the remaining 43
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performance obligations because such contracts are subject to cancellation until
fulfillment of the performance obligation occurs.
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
salaries and headcount, both organic and through acquisitions, across most of
our income statement expense categories for fiscal 2020. We expect increases in
cash-based employee-related expenses to continue.
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 the physical and electronic 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 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018
2020 2019 2018 $ Change % Change $ Change % Change
Cost of
license
revenue $ 165 $ 149 $ 133 $ 16 11 % $ 16 12 %
Stock-based
compensation 1 1 2 - 45 (1 ) (50 )
Total
expenses $ 166 $ 150 $ 135 $ 16 11 $ 15 11
% of License
revenue 5 % 5 % 5 %
Cost of license revenue increased in fiscal 2020 compared to fiscal 2019 and in
fiscal 2019 compared to fiscal 2018, but remained relatively consistent as a
percentage of license revenue.
Cost of Subscription and SaaS Revenue
Cost of subscription and SaaS revenue primarily includes personnel costs and
related overhead associated with the physical and electronic delivery of our
products and all hosted services supporting our SaaS offerings. Additionally,
cost of services revenue 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 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018
2020 2019 2018 $ Change % Change $ Change % Change
Cost of
subscription
and SaaS
revenue $ 387 $ 273 $ 195 $ 114 42 % $ 78 40 %
Stock-based
compensation 13 7 5 6 83 2 46
Total
expenses $ 400 $ 280 $ 200 $ 120 43 $ 80 40
% of
Subscription
and SaaS
revenue 21 % 21 % 22 %
Cost of subscription and SaaS revenue increased during fiscal 2020 compared to
fiscal 2019. The increase was primarily due to growth in costs associated with
hosted services to support our SaaS offerings of $46 million , resulting from an
increase in demand for technical support and services, as well as in increase in
cash-based employee-related expenses of $25 million , driven by incremental
growth in headcount and salaries. The increase was also driven by increased
equipment, depreciation and facilities costs, as well as increased amortization
of intangible assets of $14 million .
Cost of subscription and SaaS revenue increased during fiscal 2019 compared to
fiscal 2018. The increase was primarily due to an increase in costs associated
with third-party hosted services of $35 million to support our SaaS offerings in
fiscal 2019, amortization of intangible assets of $28 million and growth in
cash-based employee-related expenses of $13 million , driven by incremental
growth in headcount and salaries.
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Cost of Services Revenue
Cost of services revenue primarily includes the costs of personnel and related
overhead to physically and electronically 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 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018
2020 2019 2018 $ Change % Change $ Change % Change
Cost of
services
revenue $ 1,150 $ 1,064 $ 1,019 $ 86 8 % $ 45 4 %
Stock-based
compensation 83 58 53 25 42 5 10
Total
expenses $ 1,233 $ 1,122 $ 1,072 $ 111 10 $ 50 5
% of
Services
revenue 21 % 21 % 22 %
Cost of services revenue increased during fiscal 2020 compared to fiscal 2019.
The increase was primarily due to growth in cash-based employee-related expenses
of $65 million , driven by incremental growth in headcount and salaries, as well
as an increase in third-party professional services costs of $16 million ,
resulting from an increase in demand for technical support and services.
Equipment, depreciation and facilities costs of $12 million , and stock-based
compensation expense of $25 million , primarily driven by an increase in
restricted stock unit awards granted after the first quarter of fiscal 2019,
also contributed to the increase.
Cost of services revenue increased during fiscal 2019 compared to fiscal 2018.
The increase was primarily due to an increase in cash-based employee-related
expenses of $42 million , driven by incremental growth in headcount and salaries.
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 our key growth areas, including NSX and VMware vSAN,
while also investing in areas that we expect to be significant growth drivers in
future periods, such as VMware Cloud on AWS.
Research and development expenses during the periods presented were as follows
(dollars in millions):
For the Year Ended Fiscal Year Fiscal Year
January 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018
2020 2019 2018 $ Change % Change $ Change % Change
Research and
development $ 2,063 $ 1,782 $ 1,554 $ 281 16 % $ 228 15 %
Stock-based
compensation 459 391 363 68 17 28 8
Total
expenses $ 2,522 $ 2,173 $ 1,917 $ 349 16 $ 256 13
% of Total
revenue 23 % 23 % 23 %
Research and development expenses increased in fiscal 2020 compared to fiscal
2019. The increase was primarily due to growth in cash-based employee-related
expenses of $227 million , driven by incremental growth in salaries and
headcount, both organic and through acquisitions. The increase was also driven
by an increase of stock-based compensation of $68 million , primarily driven by
an increase in restricted stock unit awards granted after the first quarter of
fiscal 2019, as well as increased equipment, depreciation and facilities related
costs of $51 million , in fiscal 2020.
Research and development expenses increased in fiscal 2019 compared to fiscal
2018. The increase was primarily due to growth in cash-based employee-related
expenses of $173 million in fiscal 2019, driven by incremental growth in
headcount and salaries, and an increase in stock-based compensation of
$28 million , primarily driven by an increase in performance stock unit awards
granted in fiscal 2019. The increase was also driven by increased equipment,
depreciation and facilities-related costs of $50 million , primarily including
costs associated with third-party hosted services related to research and
development, and a decrease in capitalized internal-use software development
costs of $26 million .
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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 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018
2020 2019 2018 $ Change % Change $ Change % Change
Sales and
marketing $ 3,384 $ 3,004 $ 2,518 $ 377 13 % $ 489 19 %
Stock-based
compensation 293 226 205 69 30 19 9
Total
expenses $ 3,677 $ 3,230 $ 2,723 $ 446 14 $ 508 19
% of Total
revenue 34 % 34 % 33 %
Sales and marketing expenses increased in fiscal 2020 compared to fiscal 2019.
The increase was primarily due to growth in cash-based employee-related expenses
of $268 million , driven by incremental growth in salaries and headcount, both
organic and through acquisitions, as well as higher commission costs resulting
from increased sales volume. The increase was also driven by an increase in
stock-based compensation of $69 million in fiscal 2020, primarily driven by an
increase in restricted stock unit awards granted after the first quarter of
fiscal 2019, increased amortization of intangible assets of $39 million , and
increased equipment and depreciation of $27 million . In addition, increased
costs incurred for sales enablement-based initiatives of $17 million and
increased marketing costs of $18 million also were main drivers in the change in
sales and marketing expense for fiscal 2020 compared to fiscal 2019.
Sales and marketing expenses increased in fiscal 2019 compared to fiscal 2018.
The increase was primarily due to growth in cash-based employee-related expenses
of $363 million in fiscal 2019, driven by incremental growth in headcount and
salaries, as well as higher commission costs, resulting from increased sales
volume and headcount. The increase during fiscal 2019 was also driven by an
increase in amortization of intangible assets of $40 million , an increase in
costs incurred for sales enablement-based initiatives of $30 million and an
increase in travel-related expenses primarily driven by incremental growth in
headcount. An increase in equipment, depreciation and facilities-related costs
of $20 million and an increase in stock-based compensation of $19 million in
fiscal 2020, primarily driven by an increase in restricted stock unit awards
granted after the first quarter of fiscal 2019, also contributed to the increase
in sales and marketing expenses during fiscal 2019.
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, including certain charitable
donations to the VMware Foundation .
General and administrative expenses during the periods presented were as follows
(dollars in millions):
For the Year Ended Fiscal Year Fiscal Year
January 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018
2020 2019 2018 $ Change % Change $ Change % Change
General and
administrative $ 1,125 $ 729 $ 638 $ 396 54 % $ 91 14 %
Stock-based
compensation 168 117 84 51 43 33 29
Total expenses $ 1,293 $ 846 $ 722 $ 447 53 $ 124 17
% of Total
revenue 12 % 9 % 9 %
General and administrative expenses increased in fiscal 2020 compared to fiscal
2019. The increase was primarily due to an accrual of $237 million recognized
for the Cirba Inc. patent lawsuit against VMware , as well as growth in
cash-based employee-related expenses of $78 million , driven by incremental
growth in headcount and salaries. Additionally, the increase was driven by
increased costs of $59 million , relating to installment payments to certain
employees as part of acquisitions, subject to the achievement of specified
future employment conditions, increased stock-based compensation expense of
$51 million , primarily driven by an increase in restricted stock unit awards
granted after the first quarter of fiscal 2019, and increased
acquisition-related costs of $32 million , primarily relating to the fiscal 2020
acquisitions. These increases in costs
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were partially offset by decreased third-party professional services costs of$11 million and telecommunication costs of$10 million . General and administrative expenses increased in fiscal 2019 compared to fiscal 2018. The increase was primarily due to$45 million of costs incurred in connection with the Special Dividend and an increase in stock-based compensation of$33 million , primarily driven by an increase in performance stock unit awards granted in fiscal 2019. An increase in IT-related costs, including telecommunication, of$23 million also contributed to the increase in general and administrative costs during fiscal 2019. The increase was also driven by growth in cash-based employee-related expenses of$10 million . Realignment and Loss on Disposition Realignment expenses and loss on disposition during the periods presented were as follows (dollars in millions): For the Year Ended Fiscal Year Fiscal Year January 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Realignment and loss on disposition $ 79 $ 9$ 104 $ 70 777 %$ (95 ) (91 )% % of Total revenue 1 % - % 1 % During the fourth quarter of fiscal 2020, we approved a plan to streamline our operations, with plans to better align business priorities and shift positions to lower cost locations. As a result of these actions, approximately 1,100 positions were eliminated during the year endedJanuary 31, 2020 . We recognized$79 million of severance-related realignment expenses during the year endedJanuary 31, 2020 on the consolidated statements of income. Actions associated with this plan are expected to be completed during fiscal 2021. During the second quarter of fiscal 2018, we completed the sale of ourVMware vCloud Air business toOVH US LLC . The loss recognized in connection with this transaction was$104 million during fiscal 2018 and included the impairment of deferred commissions of approximately$13 million . Investment Income Investment income during the periods presented was as follows (dollars in millions): For the Year Ended Fiscal Year Fiscal Year January 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Investment income $ 60$ 161 $ 120 $ (101 ) (63 )%$ 41 34 % % of Total revenue 1 % 2 % 1 % Investment income decreased during fiscal 2020 compared to fiscal 2019. The decrease was primarily due to a decrease in interest income driven by the decline in our cash equivalents and short-term investments as a result of the liquidation of our fixed income investments that were used primarily to fund the$11.0 billion special cash dividend paid during the fourth quarter of fiscal 2019. Investment income increased in fiscal 2019 compared to fiscal 2018, primarily driven by increased interest income earned on our cash equivalents and short-term investments resulting from higher yields and from higher average invested balances. During fiscal 2019, our cash, cash equivalents and short-term investments declined significantly as a result of the liquidation of investments used to primarily fund$11.0 billion Special Dividend paid onDecember 28, 2018 . In connection with the liquidation of investment securities, we recognized a loss of$53 million . Interest Expense Interest expense during the periods presented was as follows (dollars in millions): For the Year Ended Fiscal Year Fiscal Year January 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Interest expense $ 149$ 134 $ 74$ 15 11 %$ 60 81 % % of Total revenue 1 % 1 % 1 %
Interest expense increased in fiscal 2020 as compared to fiscal 2019, primarily
due to increased interest expense incurred when we entered into the senior
unsecured term loan facility in
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OnAugust 21, 2017 , we issued the Senior Notes pursuant to a public debt offering in the aggregate principal amount of$4.0 billion . Upon closing, a portion of the net proceeds from the offering was used to repay two of the notes payable to Dell in the aggregate principal amount of$1.2 billion . Interest expense increased by$60 million in fiscal 2019 compared to fiscal 2018 due to the issuance of the Senior Notes, offset in part by a reduction in interest expense on the notes payable to Dell. 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 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Other income (expense), net $ 86 $ (1 ) $ 68$ 87 (8,700 )%$ (69 ) (101 )% % of Total revenue 1 % - % 1 % The increase in other income (expense), net in fiscal 2020 as compared to fiscal 2019 was primarily driven by unrealized gains of$31 million related to our other strategic investments in privately held companies, as well as the net gain of$31 million resulting from foreign exchange transactions, recognized in fiscal 2020. The change in other income (expense), net in fiscal 2019 as compared to fiscal 2018 was primarily driven by the absence of gains recognized on two step acquisitions completed in fiscal 2018. During fiscal 2018, we completed two step acquisitions,Wavefront, Inc. ("Wavefront") andVeloCloud , which resulted in an aggregate gain of$42 million for the remeasurement of our respective ownership interest in each company. Additionally, an unrealized loss of$14 million was recognized for an equity security in fiscal 2019, compared to an unrealized gain of$11 million in fiscal 2018. Net Loss Attributable to Non-controlling Interests Net loss attributable to non-controlling interests during the periods presented was as follows (dollars in millions): For the Year Ended Fiscal Year Fiscal Year January 31, February 1, February 2, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Net loss attributable to non-controlling interests $ 56 $ 60 $ 12 $ 4 6 %$ 48 400 % % of Total revenue 1 % 1 % - % Net loss attributable to non-controlling interests consisted of net loss in Pivotal attributable to the holders of Pivotal's Class A common stock. Concurrent with the acquisition of Pivotal from Dell,VMware acquired the non-controlling interests in Pivotal from the holders of Pivotal Class A common stock, and as ofJanuary 31, 2020 holds 100% of controlling financial interest in Pivotal. Income Tax Provision For the Year Ended January 31, February 1, February 2, (Amounts in table in millions) 2020 2019
2018
Income tax provision (benefit)$ (4,918 ) $ 239$ 1,152 Effective tax rate N/M 13.1 % 73.1 % N/M - Effective tax rate is not considered meaningful. During the second quarter of fiscal 2020, we completed an intra-group transfer of our IP to our Irish subsidiary, where our international business is headquartered (the "IP Transfer"). The transaction will change our mix of international income from a lower non-U.S. tax jurisdiction toIreland , which is subject to a statutory tax rate of 12.5%. The change in our effective tax rate for fiscal 2020 compared to fiscal 2019 was primarily driven by a discrete tax benefit of$4.9 billion that was recognized with a deferred tax asset during fiscal 2020. This deferred tax asset was recognized as a result of the book and tax basis difference on the IP transferred to an Irish subsidiary. The tax amortization related to the IP transferred will be recognized in future periods and any amortization that is unused in a particular year can be carried forward indefinitely under Irish tax laws. The deferred tax asset and the tax benefit were measured based on the Irish tax rate expected 48
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to apply in the years the asset will be recovered. We expect to realize the deferred tax asset resulting from the IP Transfer and will assess the realizability of the deferred tax asset periodically. The impact of the transaction to net cash provided by or used in operating, investing and financing activities on our consolidated statements of cash flows during fiscal 2020 was not material. Our effective income tax rate in fiscal 2019 decreased compared to fiscal 2018 primarily due to a one-time expense of approximately$900 million in fiscal 2018 resulting from theU.S. Tax Cuts and Jobs Act (the "2017 Tax Act"). Key components of the tax expense relating to the 2017 Tax Act included provisional estimates for the mandatory one-time transition tax on accumulated earnings of foreign subsidiaries ("Transition Tax") of approximately$800 million and the remeasurement of our deferred tax assets and liabilities of approximately$100 million resulting from the reduction in theU.S. statutory corporate tax rate from 35% to 21%, effectiveJanuary 1, 2018 . Due to the timing of the enactment and the complexity involved in applying the provisions of the 2017 Tax Act, we made reasonable estimates for the related tax effects and recorded provisional amounts on our consolidated financial statements for fiscal 2018. During fiscal 2019, we collected and prepared necessary data and finalized our income tax accounting analysis based on the guidance and interpretations issued by theU.S. Treasury Department , the Internal Revenue Service ("IRS"), and other standard-setting bodies, and relevant authorities. The adjustment to the provisional amount was not material. 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 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 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. During the fourth quarter of fiscal 2020, we completed the acquisition of Pivotal. Pivotal will continue to file its separate tax return forU.S. federal income tax purposes as it has since left the Dell consolidated tax group at the time of Pivotal's IPO inApril 2018 . Our future effective tax rate 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 subsidiaries 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 is subject to variance arising from changes in international tax laws and may also be significantly affected by such factors, as 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 and tax deficiencies within the income tax provision in the period in which they occur, the impact of accounting for business combinations, changes in the composition 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 the transactions entered into with Dell and Dell's consolidated subsidiaries, includingEMC (collectively, "Dell") from the effective date of the Dell Acquisition throughJanuary 31, 2020 . 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 original equipment manufacturer ("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 through
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.
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• 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.
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 31, February 1, February 2, January 31, February 1,
2020 2019 2018 2020 2019Reseller revenue$ 3,288 $ 2,355 $ 1,464 $ 3,787 $ 2,554 Internal-use revenue 82 41 46 57 29 Collaborative technology project receipts 10 4 - n/a n/a Sales through Dell as a distributor, which is included in reseller revenue, continues to grow rapidly. Customer deposits resulting from transactions with Dell were$194 million and$85 million as ofJanuary 31, 2020 andFebruary 1, 2019 , 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 andsupport 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 the
are recorded as expenses on our 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 certainservices 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 also 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 31, February 1, February 2,
2020 2019 2018
Purchases and leases of products and
purchases of services(1) $ 242 $ 200 $ 142
Dell subsidiary support and administrative
costs 119 145 212
(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.
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
delivering
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our technology and this transfer centralizes these resources within the 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 resell our consulting solutions. During the third quarter of fiscal 2019, we acquired technology and employees related to the Dell EMC Service Assurance Suite, which provides root cause analysis management software for communications service providers, from Dell. The purchase of the Dell EMC Service Assurance Suite was accounted for as a transaction by entities under common control. The amount of the purchase price in excess of the historical cost of the acquired assets was recognized as a reduction to retained earnings on the consolidated balance sheets. Transition services were provided by Dell over a period of 18 months, starting from the date of the acquisition, which were not significant. During the second quarter of fiscal 2018, we acquired Wavefront. Upon closing of the acquisition, Dell was paid$20 million in cash for its non-controlling ownership interest in Wavefront.Dell Financial Services ("DFS") 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 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$66 million ,$40 million and$25 million during the years endedJanuary 31, 2020 ,February 1, 2019 andFebruary 2, 2018 , respectively. 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):January 31 ,February 1, 2020 2019
Due from related parties, current
161 158
Due from related parties, net, current
(1) Includes an immaterial amount related to our current operating lease liabilities due to related parties as ofJanuary 31, 2020 . 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 consolidated balance sheet as ofJanuary 31, 2020 . Amounts included in due from related parties, net, excluding DFS and tax obligations, includes 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. Special Dividend OnJuly 1, 2018 ,VMware's board of directors declared a conditional$11.0 billion Special Dividend, payable pro-rata toVMware stockholders as of the record date. The Special Dividend was paid onDecember 28, 2018 to stockholders of record as of the close of business onDecember 27, 2018 in the amount of$26.81 per outstanding share ofVMware common stock. Dell was paid approximately$9.0 billion in cash as a result of its financial interest inVMware's common stock as of the record date. The Special Dividend was paid in connection with the closing of a transaction by Dell pursuant to which holders ofDell Class V common stock, which was designed to track the economic performance ofVMware , exchanged the Dell Class V common stock forDell Class C common stock or cash or both, resulting in the elimination of the Dell Class V common stock. Refer to Note Q to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information. Notes Payable to Dell OnJanuary 21, 2014 , we entered into a note exchange agreement with our parent company providing for the issuance of three promissory notes in the aggregate principal amount of$1.5 billion , which consisted of outstanding principal due on the following dates:$680 million dueMay 1, 2018 ,$550 million dueMay 1, 2020 and$270 million dueDecember 1, 2022 . OnAugust 21, 2017 , we repaid two of the notes payable to Dell in the aggregate principal amount of$1.2 billion , representing repayment of the note dueMay 1, 2018 at par value and repayment of the note dueMay 1, 2020 at a discount. The remaining note payable of$270 million dueDecember 1, 2022 may be prepaid without penalty or premium. Interest is payable quarterly in arrears at the annual rate of 1.75%. During the years endedJanuary 31, 2020 andFebruary 1, 2019 , interest expense and amount paid for interest on the notes payable to Dell was not significant. Interest 51
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expense recognized during the year endedFebruary 2, 2018 was$16 million . The amount paid for interest related to the Note was$19 million during the year endedFebruary 2, 2018 . Other Related Party Transactions Prior to the acquisition of Pivotal, certain members of Pivotal's board of directors were executives of Ford Motor Company ("Ford") and General Electric Company ("GE"), and these companies were customers of Pivotal. During the year endedJanuary 31, 2020 , revenue recognized from sales toFord while it was a related party was not significant. During the years endedFebruary 1, 2019 andFebruary 2, 2018 , revenue recognized from sales toFord while it was a related party was$12 million and$31 million , respectively. Accounts receivable related to transactions withFord was not significant as ofFebruary 1, 2019 . During the year endedFebruary 1, 2019 , revenue recognized from sales toGE while it was a related party was not significant. During the year endedFebruary 2, 2018 , revenue recognized from sales toGE while it was a related party was$11 million . Subsequent to fiscal 2019,GE was no longer a related party. Subsequent to our acquisition of Pivotal,Ford was no longer a related party. Liquidity and Capital Resources As of the periods presented, we held cash, cash equivalents and short-term investments as follows (table in millions): January 31, February 1, 2020 2019 Cash and cash equivalents$ 2,915 $ 3,532 Short-term investments - 19
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. 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 investments, 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. As a result of the enactment of the 2017 Tax Act, we have greater flexibility to repatriate foreign earnings in future periods without significantU.S. tax impact. 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 a 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 eliminatesU.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 ofJanuary 31, 2020 was$545 million , which we expect to pay over the next six years pursuant to the Letter Agreement. 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. During fiscal 2020,$85 million was recognized, primarily due to a reduction in Transition Tax liability based on the terms of the Letter Agreement and certain tax attribute determination made by Dell, and the amount was recognized as a component of additional paid-in capital. 52
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Our cash flows summarized for the periods presented were as follows (table in
millions):
For the Year Ended
January 31, February 1, February 2,
2020 2019 2018
Net cash provided by (used in):
Operating activities $ 3,872 $ 3,657 $ 3,101
Investing activities (2,728 ) 4,442 (1,524 )
Financing activities (1,707 ) (10,580 ) 1,129
Effect of exchange rate changes on cash,
cash equivalents, and restricted cash (2 ) 1 (3 )
Net increase (decrease) in cash, cash
equivalents and restricted cash $ (565 ) $ (2,480
)
Operating Activities Cash provided by operating activities increased by$215 million during fiscal 2020 compared to fiscal 2019. Cash provided by operating activities benefited from an increase in cash collections due to increased sales. The increase was offset by increased cash payments for operating expenses and employee-related expenses, including salaries, bonuses and commissions, resulting primarily from growth in headcount, as well as decreased investment income from our available-for-sale securities as a result of the liquidation of our fixed income investments used to fund the payment of the$11.0 billion Special Dividend during the fourth quarter of fiscal 2019. Cash provided by operating activities increased$556 million in fiscal 2019 compared to fiscal 2018. Cash provided by operating activities benefited from an increase in cash collections due to increased sales. These positive impacts were partially offset by increased cash payments for employee-related expenses, including salaries, bonuses and commissions, resulting primarily from growth in headcount, as well as increased cash payments for our employee stock purchase plan. Additionally, cash outflows related to interest on the Senior Notes and tax payments were higher in fiscal 2019 compared to fiscal 2018. Investing Activities Cash used in investing activities is generally attributable to the purchase of available-for-sale securities, business acquisitions and capital expenditures. Cash provided by investing activities is affected by the sales and maturities of our available-for-sale securities. Cash used in investing activities increased by$7.2 billion during fiscal 2020 compared to fiscal 2019, driven primarily by higher business combinations activities during fiscal 2020 primarily due to$2.0 billion paid to acquireCarbon Black . Additionally, cash used in investing activities was also driven by decreased net proceeds from our available-for-sale securities as a result of the liquidation of our fixed income investments used to fund the payment of the$11.0 billion special cash dividend during the fourth quarter of fiscal 2019. Cash provided by investing activities increased$6.0 billion in fiscal 2019 compared to fiscal 2018, driven primarily by the liquidation of our fixed income investments to fund the Special Dividend during fiscal 2019, partially offset by an increase in cash used in business combinations of$267 million as compared to fiscal 2018. The increase was also due to an increase of$57 million in net proceeds from our strategic investments. Financing Activities Cash used in financing activities decreased by$8.9 billion during fiscal 2020 compared to fiscal 2019. The decrease was primarily a result of the payment of the$11.0 billion Special Dividend during fiscal 2019, as well as the borrowing of$3.4 billion and repayment of$1.9 billion of the Term Loan, which resulted in net cash inflow of$1.5 billion , partially offset by the cash payment for the acquisition of Pivotal during fiscal 2020. The decrease was also driven by proceeds from Pivotal's IPO, net of issuance costs paid, of$544 million in fiscal 2019. Cash used in financing activities increased$11.7 billion in fiscal 2019 compared to fiscal 2018. The increase was primarily due to payment of the$11.0 billion Special Dividend in fiscal 2019, partially offset by a decrease of$1.4 billion in repurchases of shares of our Class A common stock in fiscal 2019, as compared to fiscal 2018, due to the temporary suspension of our stock repurchase program. Additionally, the increase in cash used in financing activities was driven by the absence of the net cash proceeds received from the issuance of long-term debt, partially offset by the repayment of two of our outstanding notes payable to Dell in fiscal 2018. 53
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Unsecured Senior Notes OnAugust 21, 2017 , we issued the Senior Notes pursuant to a public debt offering in the aggregate principal amount of$4.0 billion . The carrying value of the Senior Notes as ofJanuary 31, 2020 was as follows (amounts in millions): Senior Notes: 2.30% Senior Note DueAugust 21, 2020 $ 1,250 2.95% Senior Note DueAugust 21, 2022 1,500 3.90% Senior Note DueAugust 21, 2027 1,250 Total principal amount$ 4,000 Interest is payable semiannually in arrears, onFebruary 21 andAugust 21 of each year. During each of the years endedJanuary 31, 2020 andFebruary 1, 2019 ,$122 million was paid for interest related to the Senior Notes. We used a portion of the net proceeds from the offering to repay certain notes payable to Dell dueMay 1, 2018 andMay 1, 2020 . The Senior Notes also include 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. Revolving Credit Facilities 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 ofJanuary 31, 2020 , there were no outstanding borrowings under the revolving credit facility. OnSeptember 8, 2017 , Pivotal entered into a senior secured revolving loan facility in an aggregate principal amount not to exceed$100 million . The revolving loan facility was amended onMay 6, 2019 and terminated onOctober 22, 2019 . During the years endedFebruary 1, 2019 andFebruary 2, 2018 ,$15 million and$20 million , respectively, were borrowed under the revolving loan facility. The total outstanding balance of$35 million was repaid during the year endedFebruary 1, 2019 . Senior Unsecured Term Loan Facility OnSeptember 26, 2019 , we entered into the Term Loan with a syndicate of lenders that provides us with a borrowing capacity of up to$2.0 billion , for general corporate purposes. We may borrow against the Term Loan two times up to its borrowing capacity of$2.0 billion untilFebruary 7, 2020 . The Term Loan matures on the 364th day following the initial funding under the Term Loan. The Term Loan bears interest at theLondon interbank offered rate plus 0.75% to 1.25%, or an alternate base rate plus 0.00% to 0.25%, depending on our external credit ratings. As ofJanuary 31, 2020 , the weighted-average interest rate on the outstanding Term Loan was 2.54%. During the year endedJanuary 31, 2020 , we drew down an aggregate of$3.4 billion and repaid an aggregate of$1.9 billion . As ofJanuary 31, 2020 , the outstanding balance on the Term Loan of$1.5 billion , net of unamortized debt issuance costs, was included in current portion of long-term debt and other borrowings on the consolidated balance sheets, with no remaining amount available for additional borrowings. The Term Loan contains certain representations, warranties and covenants. Commitment fees paid were not significant during the year endedJanuary 31, 2020 . Interest expense for the Term Loan, including amortization of issuance costs, was$15 million during the year endedJanuary 31, 2020 . 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 II, Item 7 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 can 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. 54
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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 for the periods presented. Off-Balance Sheet Arrangements and Contractual Obligations Guarantees and Indemnification Obligations We enter into agreements in the ordinary course of business with, among others, customers, distributors, resellers, system vendors and systems integrators. Most of these agreements require us to indemnify the other party against third-party claims alleging that one of our products infringes or misappropriates a patent, copyright, trademark, trade secret or other intellectual property right. Certain of these agreements require us to indemnify the other party against certain claims relating to property damage, personal injury, or the acts or omissions by us and our employees, agents or representatives. We have agreements with certain vendors, financial institutions, lessors and service providers pursuant to which we have agreed to indemnify the other party for specified matters, such as acts and omissions by us and our employees, agents, or representatives. We have procurement or license agreements with respect to technology that we have obtained the right to use in our products and agreements. Under some of these agreements, we have agreed to indemnify the supplier for certain claims that may be brought against such party with respect to our acts or omissions relating to the supplied products or technologies. We have agreed to indemnify our directors and executive officers, to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or officer. Our by-laws and charter also provide for indemnification of our directors and officers to the extent legally permissible, against all liabilities reasonably incurred in connection with any action in which such individual may be involved by reason of such individual being or having been a director or executive officer. We also indemnify certain employees who provide service with respect to employee benefits plans, including the members of theAdministrative Committee of the VMware 401(k) Plan, and employees who serve as directors or officers of our subsidiaries. In connection with certain acquisitions, we have agreed to indemnify the former directors and officers of the acquired company in accordance with the acquired company's by-laws and charter in effect immediately prior to the acquisition or in accordance with indemnification or similar agreements entered into by the acquired company and such persons. We typically purchase a "tail" directors and officers insurance policy, which should enable us to recover a portion of any future indemnification obligations related to the former directors and officers of an acquired company. We are unable to determine the maximum potential amount under these indemnification agreements due to our limited history with prior indemnification claims and the unique facts and circumstances involved in each particular situation. Historically, costs related to these indemnification provisions have not been significant. Contractual Obligations We have various contractual obligations impacting our liquidity. The following represents our contractual obligations as ofJanuary 31, 2020 (table in millions): Payments Due by Period Less than More than Total 1 year 1-3 years 3-5 years 5 years Senior Notes(1)$ 4,552 $ 1,372 $ 1,686 $ 98$ 1,396
Note payable to Dell(2) 283 5 278 - - Term Loan(3) 1,500 1,500 - - - Future Lease Commitments(4) 1,202 144 268
178 612
Purchase obligations 255 168 87 - -
Tax obligations(5) 545 53 104 227 161
Asset Retirement Obligations 13 1 5 2 5
Sub-Total 8,350 3,243 2,428 505 2,174
Uncertain tax positions(6) 479
Total $ 8,829
(1) Consists of principal and interest payments on the Senior Notes. Refer to
"Liquidity and Capital Resources" for a discussion of the public debt
offering we issued on
$4.0 billion . 55
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(2) Consists of principal and interest payments on the outstanding note payable
to Dell. Refer to "Liquidity and Capital Resources" for a discussion of the
agreement from
(3) Consists of the principal on the senior unsecured term loan facility (the
"Term Loan"). The Term Loan can be repaid any time before
Given the variable nature of the interest on the Term Loan, including when
the repayment will take place, interest payments have been excluded from the
table above.
(4) Consists of both operating and finance leases. Our operating leases are
primarily for facility space and land. Amounts in the table above exclude
legally binding minimum lease payments for leases signed but not yet
commenced of $361 million , as well as expected sublease income.
(5) Consists of future cash payments related to the Transition Tax.
(6) As of
excluding interest and penalties. The timing of future payments relating to
these obligations 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
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, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become 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 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. Revenue Recognition We derive revenue primarily from licensing software under perpetual licenses or 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 collectibility of 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, subscription 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. 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 on-premises license software 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 56
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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 services based on observable transactions when the
services are sold on a standalone basis and those prices fall within a
reasonable range. We utilize the residual approach to estimate SSP for products
or services sold to customers due to 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.
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.
Accounting for Income Taxes
We are included in Dell's consolidated tax group for U.S. federal income tax
purposes and will continue to be included in Dell's consolidated 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 for U.S. federal income tax purposes. The percentage of voting power
and value calculated for U.S. federal income tax purposes may differ from the
percentage of 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 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.
During the fourth quarter of fiscal 2020, we completed the acquisition of
Pivotal. Pivotal will continue to file its separate tax return for U.S. federal
income tax purposes as it has since left the Dell consolidated tax group at the
time of Pivotal's IPO in April 2018 .
Our income tax expense and the related income tax balance sheet accounts 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. The difference between the income taxes payable
that is calculated on a separate tax return basis and the amount paid to Dell
pursuant to our tax sharing agreement with Dell is presented as a component of
additional paid-in capital, generally in the period in which the consolidated
return is filed. Our assumptions, judgments and estimates used to calculate our
income tax expense considers current tax laws, our interpretation of current tax
laws and possible outcomes of current and future audits conducted by foreign and
domestic tax authorities.
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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 part of the Dell consolidated group, and separately, we are 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, including fair value estimates, 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;
• 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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