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VMware(VMW) - 2023 Q4 - Annual Report
VMWVMware(VMW)2023-03-28 20:01

Tax Liabilities and Agreements - The company is subject to potential tax liabilities due to its former controlling ownership by Dell, which could adversely affect its operating results and financial condition[91]. - The company has entered into Tax Agreements with Dell that govern its potential liabilities for other members of the consolidated tax groups, which could impact its financial condition[91]. - The 2017 Tax Cuts and Jobs Act requires the company to amortize research and development expenditures over five to fifteen years, increasing its cash taxes starting in fiscal 2023[93]. - The company is undergoing audits by the IRS for fiscal years 2015 through 2019, which may result in additional tax assessments that could materially affect its financial condition[93]. - The Inflation Reduction Act introduces a 15% corporate alternative minimum tax on adjusted financial statement income for companies with profits exceeding 1billion,effectivefromfiscal2024[94].−ThecompanymaybeliablefortaxliabilitiesiftheSpin−Offislaterdeterminedtonotbetax−free,whichcouldmateriallyaffectitsoperatingresults[92].−VMware′sincometaxprovisionwillbereportedseparatelyfromDell′sconsolidatedtaxgroupfollowingtheSpin−Off,impactingfuturetaxreporting[255].−VMware′sunrecognizedtaxbenefitsincreasedto1 billion, effective from fiscal 2024[94]. - The company may be liable for tax liabilities if the Spin-Off is later determined to not be tax-free, which could materially affect its operating results[92]. - VMware's income tax provision will be reported separately from Dell's consolidated tax group following the Spin-Off, impacting future tax reporting[255]. - VMware's unrecognized tax benefits increased to 575 million as of February 3, 2023, from 527millionasofJanuary28,2022[357].−VMware′spaymentstoDellundertheTaxAgreementswere527 million as of January 28, 2022[357]. - VMware's payments to Dell under the Tax Agreements were 49 million for the year ended February 3, 2023, compared to 36millionfortheyearendedJanuary28,2022[353].−AsofFebruary3,2023,amountsduetoDellrelatedtotheTransitionTaxwere36 million for the year ended January 28, 2022[353]. - As of February 3, 2023, amounts due to Dell related to the Transition Tax were 445 million, down from 504millionasofJanuary28,2022[354].CybersecurityRisks−Cybersecurityrisksareincreasing,withpotentialbreachesthreateningproprietaryinformationandITserviceinterruptions,impactingthecompany′soperations[95].−Thecompanyreliesonthird−partysystemsforvariousbusinessfunctions,increasingexposuretocyberrisksandvulnerabilities[95].−ThecompanyisconsideredanessentialsupplierinthedigitalsupplychainfortheU.S.government,makingitatargetforcyber−attacks[95].−VMwarefacessignificantcybersecurityrisksduetoincreasedremoteworkandgeopoliticaltensions,whichmayleadtodelaysindetectionandresponsetocyber−attacks[96].−ThecomplexityofVMware′stechnicalenvironmentincreasestheriskofundetectederrorsandvulnerabilitiesinproducts,potentiallyimpactingcustomersecurity[97].−VMware′srelianceonthird−partyinformationsystemsforbusinessoperationsposesrisks,asfailurescoulddisruptorderprocessingandservicedelivery[99].−Ongoinglegalandregulatoryinquiries,includingthoserelatedtocybersecurityincidents,coulddivertmanagementresourcesandnegativelyimpactVMware′sreputationandfinancialcondition[100].FinancialPerformance−TotalrevenuefortheyearendedFebruary3,2023,was504 million as of January 28, 2022[354]. Cybersecurity Risks - Cybersecurity risks are increasing, with potential breaches threatening proprietary information and IT service interruptions, impacting the company's operations[95]. - The company relies on third-party systems for various business functions, increasing exposure to cyber risks and vulnerabilities[95]. - The company is considered an essential supplier in the digital supply chain for the U.S. government, making it a target for cyber-attacks[95]. - VMware faces significant cybersecurity risks due to increased remote work and geopolitical tensions, which may lead to delays in detection and response to cyber-attacks[96]. - The complexity of VMware's technical environment increases the risk of undetected errors and vulnerabilities in products, potentially impacting customer security[97]. - VMware's reliance on third-party information systems for business operations poses risks, as failures could disrupt order processing and service delivery[99]. - Ongoing legal and regulatory inquiries, including those related to cybersecurity incidents, could divert management resources and negatively impact VMware's reputation and financial condition[100]. Financial Performance - Total revenue for the year ended February 3, 2023, was 13.35 billion, an increase from 12.85billionin2022,representingagrowthofapproximately3.912.85 billion in 2022, representing a growth of approximately 3.9%[205]. - Subscription and SaaS revenue reached 4.01 billion, up from 3.21billioninthepreviousyear,markingasignificantincreaseof25.13.21 billion in the previous year, marking a significant increase of 25.1%[205]. - Net income for the year was 1.31 billion, a decrease from 1.82billionin2022,reflectingadeclineof27.81.82 billion in 2022, reflecting a decline of 27.8%[205]. - Operating income for the year was 2.02 billion, down from 2.39billionin2022,adeclineof15.32.39 billion in 2022, a decline of 15.3%[205]. - Research and development expenses increased to 3.32 billion, up from 3.06billioninthepreviousyear,reflectingagrowthof8.53.06 billion in the previous year, reflecting a growth of 8.5%[205]. - The effective income tax provision for the year was 478 million, compared to 265millionin2022,representinganincreaseof80.8265 million in 2022, representing an increase of 80.8%[205]. - VMware's total assets increased to 31,237 million in fiscal 2023 from 28,676millioninfiscal2022,representingagrowthof5.528,676 million in fiscal 2022, representing a growth of 5.5%[212]. - Cash and cash equivalents rose to 5,100 million in fiscal 2023, up from 3,614millioninfiscal2022,markinganincreaseof41.03,614 million in fiscal 2022, marking an increase of 41.0%[212]. - VMware's total liabilities slightly increased to 29,703 million in fiscal 2023 from 29,552millioninfiscal2022[212].−Thecompanygenerated29,552 million in fiscal 2022[212]. - The company generated 4,300 million in net cash from operating activities in fiscal 2023, a decrease of 1.3% from 4,357millioninfiscal2022[215].−VMware′sunearnedrevenuegrewto4,357 million in fiscal 2022[215]. - VMware's unearned revenue grew to 7,079 million in fiscal 2023, up from 6,479millioninfiscal2022,indicatinganincreaseof9.36,479 million in fiscal 2022, indicating an increase of 9.3%[212]. - VMware's stockholders' equity improved to 1,534 million in fiscal 2023, compared to a deficit of 876millioninfiscal2022[212].−VMware′slong−termdebtdecreasedto876 million in fiscal 2022[212]. - VMware's long-term debt decreased to 9,440 million in fiscal 2023 from 12,671millioninfiscal2022,areductionof25.512,671 million in fiscal 2022, a reduction of 25.5%[212]. Governance and Ownership - The company has restrictions on taking certain actions post-Spin-Off that could impact its strategic transactions without Dell's consent[92]. - Potential conflicts of interest exist within VMware's Board of Directors due to overlapping relationships with Dell, which may affect corporate opportunities[105]. - MSD Stockholders and SLP Stockholders hold significant influence, owning 39.5% and 9.8% of VMware's outstanding stock respectively, totaling 65.5% of Dell's outstanding stock as of March 21, 2023[106]. - The company has a stockholders agreement allowing MSD Stockholders to nominate two board members and SLP Stockholders to nominate one, potentially impacting governance[106]. - Anti-takeover provisions in Delaware law and company bylaws may delay or prevent changes in control, potentially affecting stockholder interests[108]. ESG and Sustainability - The company is committed to its 2030 Agenda for ESG goals, focusing on sustainability, equity, and trust, which may impact reputation and financial performance if not met[115]. - The company is actively developing internal systems to ensure accurate and timely reporting on ESG progress, aligning with emerging standards[115]. - Climate change poses long-term risks to business operations, including potential disruptions from extreme weather events and increased operational costs[113]. Revenue Recognition and Contracts - VMware's revenue is derived from licensing software, maintenance and support, subscriptions, hosted services, training, and consulting services, with significant judgments impacting revenue recognition timing and amounts[229]. - License revenue is recognized at a point in time upon delivery, while subscription and SaaS revenue is recognized ratably over the contract term, reflecting a shift in revenue recognition for certain term-based licenses[231][232]. - VMware's subscription and SaaS offerings typically have durations of one month, one year, or three years, with revenue recognized based on customer consumption or ratably over the contract term[232]. - The company introduced termination for convenience clauses in certain enterprise agreements, affecting revenue recognition for term-based licenses, which are now recognized as subscription and SaaS revenue[232]. - VMware evaluates contracts with multiple performance obligations and allocates total transaction value based on relative standalone selling prices[235]. - The allowance for credit losses was not significant as of February 3, 2023, and January 28, 2022, indicating a stable collection environment[244]. - VMware's return policy generally does not allow product returns for refunds, with reserves for product returns recorded based on historical return rates[237]. - The company recognizes revenue from professional services based on progress made toward total project effort, with fixed fee engagements recognized accordingly[234]. Foreign Exchange and Investments - The company is exposed to foreign exchange risks due to operations in multiple currencies, which may adversely affect revenue[110]. - VMware's foreign subsidiaries primarily use the U.S. dollar as their functional currency, with net gains and losses from foreign exchange transactions recorded in other income[239]. - VMware utilized derivative financial instruments, primarily foreign currency forward contracts, to manage foreign exchange risk associated with approximately 30% of sales denominated in foreign currencies[190]. - A hypothetical adverse foreign currency exchange rate movement of 10% could have resulted in a potential loss of 233 million in the fair value of forward contracts as of February 3, 2023[190]. - The carrying value of VMware's strategic investments was 87millionasofFebruary3,2023,downfrom87 million as of February 3, 2023, down from 163 million in the previous year, indicating a decrease of 46.7%[191]. - VMware's forward contracts had a total notional value of 677millionand677 million and 642 million as of February 3, 2023, and January 28, 2022, respectively[328]. Legal and Regulatory Matters - VMware's legal proceedings include ongoing litigation related to patent infringements, with a jury awarding approximately 237millionindamagesinapreviouscase[284].−Non−compliancewithgovernmentcontractingregulationscouldleadtopenalties,includingcontractterminationandsuspensionfromfuturegovernmentcontracts[104].OtherFinancialMetrics−AdvertisingexpensesfortheyearendedFebruary3,2023,were237 million in damages in a previous case[284]. - Non-compliance with government contracting regulations could lead to penalties, including contract termination and suspension from future government contracts[104]. Other Financial Metrics - Advertising expenses for the year ended February 3, 2023, were 24 million, down from 35millionin2022and35 million in 2022 and 33 million in 2021, indicating a decrease of 31.4% year-over-year[252]. - Total billings for the year ended February 3, 2023, were 10.5billion,comparedto10.5 billion, compared to 9.1 billion in 2022, reflecting a year-over-year increase of 15.4%[270]. - The aggregate transaction price allocated to remaining performance obligations as of February 3, 2023, was 13.6billion,withapproximately5413.6 billion, with approximately 54% expected to be recognized as revenue over the next twelve months[271]. - Customer deposits as of February 3, 2023, totaled 1.1 billion, which included 681millionincustomerprepaymentsand681 million in customer prepayments and 405 million in cloud credits[267]. - Deferred commissions included in other assets were 1.5billionasofFebruary3,2023,upfrom1.5 billion as of February 3, 2023, up from 1.2 billion in 2022, indicating a growth of 25%[268]. - Reseller revenue for the year ended February 3, 2023, was 5,039million,anincreaseof5.85,039 million, an increase of 5.8% from 4,764 million in 2022[275]. - Internal-use revenue decreased to 54millionin2023from54 million in 2023 from 56 million in 2022[275]. - VMware's minimum contractual commitments as of February 3, 2023, totaled $261 million, including purchase obligations and asset retirement obligations[288]. - VMware's ongoing related party transactions with Dell include purchasing products and services, which incurred costs primarily related to salaries and benefits[277].