VMware (VMW)

Q4 2011 Earnings Call

January 23, 2012 5:00 pm ET


Paul A. Maritz - Chief Executive Officer, Director and Member of Mergers & Acquisitions Committee

Mark S. Peek - Chief Financial Officer and Co-President of Business Operations

Michael Haase -


Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Brent Thill - UBS Investment Bank, Research Division

Adam H. Holt - Morgan Stanley, Research Division

Brian Marshall - ISI Group Inc., Research Division

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Walter H. Pritchard - Citigroup Inc, Research Division



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Welcome to the VMware Fourth Quarter 2011 Earnings Call, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Mr. Mike Haase, Vice President of Investor Relations and Treasury.

Michael Haase

Welcome to VMware's fourth quarter and full year 2011 Earnings Conference Call. On the call, we have Paul Maritz, our CEO; and Mark Peek, our CFO. Following their prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast.

Statements made on this call include forward-looking statements such as those with the words will, believes, expects, continues and similar phrases that denote future expectation or intent regarding our financial outlook, product offerings, customer demand and other matters. These statements are based on the environment, as we currently see it, and are subject to risks and uncertainties. Please refer to the press release and the risk factors and documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-Q and Form 10-K for information on risks and uncertainties that may cause actual results to differ materially, from those set forth in such statements.

VMware assumes no obligation to and does not currently intend to update any such forward-looking statements after the date of this call. In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for or an isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of intangible assets, employer payroll tax and employee stock transactions, the net effect of amortization and capitalization of software and acquisition-related items. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in the press release and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our first quarter quiet period begins at the close of business, March 16, 2012. Finally, unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2010. With that, let me hand it over to Mark.

Mark S. Peek

Thanks, Mike, and good afternoon, everyone. We capped an outstanding 2011 with a great fourth quarter producing record bookings, revenue, non-GAAP operating margin and free cash flow. But before we dive into the fourth quarter details and look ahead to 2012, let's spend a little time looking back on our 2011 accomplishments. Financially, 2011 was an outstanding year. Total revenue increased 32% to $3.8 billion, and license revenue increased 31% to $1.8 billion. Total unearned revenue is now $2.7 billion, an increase of 46% during the year. Long-term unearned revenue is approaching $1 billion and grew 60% in 2011 as customers continue to purchase multiple years of maintenance and as more unearned license revenue is recognized ratably.

On a non-GAAP basis, we improved our annual operating margin by 250 basis points, while increasing our R&D spend by 23%. As we plan for our long-term growth opportunities, we are making conscious decision to pause operating margin expansion in 2012, and so we increase our investments in emerging markets and product innovation. We repurchased $650 million of VMware stock during 2011, invested in aggregate of $380 million in CapEx and the long-term expansion of our Palo Alto campus in the Stanford Research Park and spent over $300 million on 8 acquisitions. Yet, we ended the year with $4.5 billion of cash and short-term investments, almost entirely in U.S. dollars, and more than half of our cash is available for use in the U.S. without further taxation in the U.S.

Non-GAAP operating cash flows were $2.2 billion, and free cash flows exceeded $1.9 billion. Free cash flow per share were $4.51, growth of 59% during the year. We continue to believe that free cash flow per share is an important and durable measure of our business as it balances operating performance, cash management, capital efficiency and shareholder dilution, while being a measure that every individual at VMware can influence every day. Importantly, our financial performance was driven by our product performance, and 2011 was an outstanding year on many fronts. We successfully launched vSphere 5, View 5, Cloud Foundry and Virtual Center Ops among other products. We are building off our strong foundation in virtualization and are working to help our customers realize significant savings as virtualization becomes the accepted way of computing in the data center.

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