(Mark One)

For the quarterly period ended May 5, 2017

OR

For the transition period            from            to

Commission File Number 001-33622

_______________________________________________________

(Exact name of registrant as specified in its charter)

_______________________________________________________

(650) 427-5000

(Registrant's telephone number, including area code)

_____________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☑     No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   ☑     No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   ☑

As of June 2, 2017 , the number of shares of common stock, par value $0.01 per share, of the registrant outstanding was 408,423,739 , of which 108,423,739 shares were Class A common stock and 300,000,000 were Class B common stock.

TABLE OF CONTENTS

VMware, vCloud, vCloud Air, vCloud Air Network, Cross-Cloud Services, vSphere, NSX, VMware vSAN, AirWatch, Workspace ONE, Horizon, Horizon Suite, Photon, Photon OS and vSphere Integrated Containers are registered trademarks or trademarks of VMware or its subsidiaries in the United States and other jurisdictions. All other marks and names mentioned herein may be trademarks of their respective companies.

PART I

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in millions, except per share amounts, and shares in thousands)

(unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

The accompanying notes are an integral part of the condensed consolidated financial statements.

VMware, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

A. Overview and Basis of Presentation

Company and Background

VMware, Inc. ("VMware" or the "Company") is a leader in virtualization and cloud infrastructure solutions that enable businesses to transform the way they build, deliver and consume information technology ("IT") resources in a manner that is based on their specific needs. VMware's virtualization infrastructure solutions, which include a suite of products and services designed to deliver a software-defined data center, run on industry-standard desktop computers, servers and mobile devices and support a wide range of operating system and application environments, as well as networking and storage infrastructures.

Change in Fiscal Year End

On October 25, 2016, the VMware Board of Directors approved a change to VMware's fiscal year from a fiscal year ending on December 31 of each calendar year to a fiscal year consisting of a 52- or 53-week period ending on the Friday nearest to January 31 of each year. The change in VMware's fiscal year was effective January 1, 2017 . The period that began on January 1, 2017 and ended on February 3, 2017 is reflected as a transition period (the "Transition Period"). VMware's first full fiscal year 2018 under the revised fiscal calendar is a 52-week year that began on February 4, 2017 and will end on February 2, 2018 .

The Company has included its unaudited condensed consolidated financial statements for the Transition Period in this report on Form 10-Q. As permitted under SEC rules, prior-period financial statements have not been recast as management believes (i) the three months ended March 31, 2016 are comparable to the three months ended May 5, 2017 ; and (ii) recasting prior-period results was not practicable or cost justified.

Accounting Principles

The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments and accruals, for a fair statement of VMware's condensed consolidated results of operations, financial position and cash flows for the periods presented. Results of operations are not necessarily indicative of the results that may be expected for the full fiscal year 2018. Certain information and footnote disclosures typically included in annual consolidated financial statements have been condensed or omitted. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in VMware's 2016 Annual Report on Form 10-K. 

Effective September 7, 2016, Dell Technologies Inc. ("Dell") (formerly Denali Holding Inc.) acquired EMC Corporation ("EMC"), including EMC's majority control of VMware (the "Dell Acquisition"). As a result of the Dell Acquisition, EMC became a wholly-owned subsidiary of Dell and VMware became an indirectly-held, majority-owned subsidiary of Dell. As of May 5, 2017 , Dell controlled 81.8% of VMware's outstanding common stock and 97.6% of the combined voting power of VMware's outstanding common stock, including 34 million shares of VMware's Class A common stock and all of VMware's Class B common stock.

As VMware is a majority-owned and controlled subsidiary of Dell, its results of operations and financial position are consolidated with Dell's financial statements. Transactions prior to the effective date of the Dell Acquisition represent transactions only with EMC and its consolidated subsidiaries ("Parent").

Management believes the assumptions underlying the condensed consolidated financial statements are reasonable. However, the amounts recorded for VMware's intercompany transactions with Dell and its consolidated subsidiaries may not be considered arm's length with an unrelated third party. Therefore, the financial statements included herein may not necessarily reflect the results of operations, financial position and cash flows had VMware engaged in such transactions with an unrelated third party during all periods presented. Accordingly, VMware's historical financial information is not necessarily indicative of what the Company's results of operations, financial position and cash flows will be in the future if and when VMware contracts at arm's length with unrelated third parties for products and services the Company receives from and provides to Dell.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of VMware and its subsidiaries. All intercompany transactions and account balances between VMware and its subsidiaries have been eliminated in consolidation. Transactions with Dell and its consolidated subsidiaries are generally settled in cash and are classified on the condensed consolidated statements of cash flows based upon the nature of the underlying transaction.

Use of Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, trade receivable valuation, marketing development funds and rebates, useful lives assigned to fixed assets and intangible assets, valuation of goodwill and definite-lived intangibles, income taxes, stock-based compensation, and contingencies. Actual results could differ from those estimates.

New Accounting Pronouncements

Topic 606, Revenue from Contracts with Customers

During May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). In 2016, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12, which provide interpretive clarifications on the new guidance in Topic 606 (collectively, "Topic 606"). The updated revenue standard replaces all existing revenue recognition guidance under GAAP and establishes common principles for recognizing revenue for all industries. It also provides guidance on the accounting for costs to fulfill or obtain a customer contract. The core principle underlying the updated standard is the recognition of revenue based on consideration expected to be entitled from the transfer of goods or services to a customer. The updated standard is effective for interim and annual periods beginning after December 15, 2017 and permits the use of either the full retrospective or cumulative effect transition method.

VMware plans to adopt Topic 606 using the full retrospective transition method when it becomes effective for the Company in the first quarter of fiscal 2019. While the Company is continuing to assess the potential impacts of Topic 606, VMware currently expects unearned license revenue related to the sale of perpetual licenses will decline significantly upon adoption. Currently, VMware defers all license revenue related to the sale of its perpetual licenses in the event certain revenue recognition criteria are not met. However, under Topic 606, the Company would generally expect that substantially all license revenue related to the sale of its perpetual licenses will be recognized upon delivery. Topic 606 is also expected to impact the timing and recognition of costs to obtain contracts with customers, such as commissions. Under the new standard, incremental costs to obtain contracts with customers are deferred and recognized over the expected period of benefit. As a result, VMware expects deferred commission costs to increase. The Company is continuing to evaluate the effect that Topic 606 will have on its consolidated financial statements and related disclosures, and preliminary assessments are subject to change.

ASU No. 2016-02, Leases

During February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The updated standard also requires additional disclosure regarding leasing arrangements. It is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures, and expects that most of its lease commitments will be subject to the updated standard and recognized as lease liabilities and right-of-use assets upon adoption.

ASU No. 2016-16, Income Taxes

During October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires entities to recognize at the transaction date the income tax consequences of intra-entity asset transfers. Previous guidance required the tax effects from intra-entity asset transfers to be deferred until that asset is sold to a third party or recovered through use. The updated standard is effective for annual and interim periods beginning after December 15, 2017 and requires a modified retrospective transition method. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

ASU No. 2016-09, Compensation

VMware adopted ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), on a prospective basis, effective February 4, 2017. Prior periods have not been reclassified to conform to the fiscal 2018 presentation. Net excess tax benefits

recognized in connection with stock-based awards are now included in the income tax provision on the condensed consolidated statements of income. Net excess tax benefits recognized during the three months ended May 5, 2017 were $31 million . Prior to adopting the updated standard, such amounts were recognized in additional paid-in capital on the Company's condensed consolidated balance sheets.

Additionally, all tax-related cash flows resulting from stock-based awards are reported as operating activities in the statement of cash flows. Prior to adopting the updated standard, excess tax benefits were reported as a cash inflow from financing activities in the statement of cash flows.

B. Related Parties

The information provided below includes a summary of the transactions entered into with Dell and Dell's consolidated subsidiaries including EMC (collectively, "Dell"). Transactions prior to September 7, 2016 reflect transactions only with EMC and its consolidated subsidiaries.

Transactions with Dell

VMware and Dell engaged in the following ongoing intercompany transactions, which resulted in revenue and receipts and unearned revenue for VMware:

Information about VMware's revenue and receipts, and unearned revenue from such arrangements, for the periods presented consisted of the following (table in millions):

VMware and Dell engaged in the following ongoing intercompany transactions, which resulted in costs to VMware:

Information about VMware's costs from such arrangements during the periods presented consisted of the following (table in millions):

VMware also purchases Dell products through Dell's channel partners. Purchases of Dell products through Dell's channel partners were not significant during the periods presented.

Dell Financial Services ("DFS")

DFS provided financing to certain of VMware's end customers based on the customer's discretion. Upon acceptance of the financing arrangement by both VMware's end customer and DFS, amounts classified as trade accounts receivable are reclassified to due from related parties, net on the condensed consolidated balance sheets. Financing fees recognized on these arrangements were not significant during the three months ended May 5, 2017 and the Transition Period .

Tax Sharing Agreement with Dell

VMware has made payments to Dell pursuant to a tax sharing agreement. The following table summarizes the payments made during the periods presented (table in millions):

The timing of the tax payments due to and from related parties is governed by a tax sharing agreement. Payments from VMware to Dell under the tax sharing agreement relate to VMware's portion of federal income taxes on Dell's consolidated tax return as well as state tax payments for combined states. The amounts that VMware pays to Dell for its portion of federal income taxes on Dell's consolidated tax return differ from the amounts VMware would owe on a separate tax return basis and the difference is presented as a component of stockholders' equity. The difference between the amount of tax calculated on a separate return basis and the amount of tax calculated per the tax sharing agreement was not significant during the three months ended May 5, 2017 and March 31, 2016 and the Transition Period .

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):

Amounts included in due from related parties, net, which are unrelated to DFS and tax obligations, are generally settled in cash within 60 days of each quarter-end.

Stock Purchase Agreements with Dell

On March 29, 2017, VMware entered into a stock purchase agreement with Dell to purchase $300 million of VMware Class A common stock. During the three months ended May 5, 2017 , VMware paid Dell $300 million in exchange for an initial delivery of shares of 2.7 million shares, or approximately 80% of the expected total shares to be received and retired under the arrangement. On May 10, 2017, the stock purchase agreement with Dell was completed and VMware received an additional 0.7 million shares. The aggregate number of shares of 3.4 million purchased was determined based upon the volume-weighted average price during a defined period, less an agreed upon discount.

On December 15, 2016, VMware entered into a stock purchase agreement with Dell to purchase $500 million of VMware Class A common stock. VMware purchased 4.8 million shares for $375 million through December 31, 2016. On February 15, 2017, the stock purchase agreement with Dell was completed. A total of $500 million was paid in exchange for 6.2 million shares. The aggregate number of shares purchased was determined based upon the volume-weighted average price during a defined period, less an agreed upon discount.

Notes Payable to Dell

VMware entered into a note exchange agreement with its Parent on January 21, 2014 providing for the issuance of three promissory notes in the aggregate principal amount of $1,500 million . The three notes issued may be prepaid without penalty or premium, and outstanding principal is due on the following dates: $680 million due May 1, 2018 , $550 million due May 1, 2020 and $270 million due December 1, 2022 . As of May 5, 2017 , $680 million was classified as a current liability.

The notes bear interest, payable quarterly in arrears, at the annual rate of 1.75% . During the three months ended May 5, 2017 and March 31, 2016 and the Transition Period , $7 million , $7 million and $2 million , respectively, of interest expense was recognized.

C. Definite-Lived Intangible Assets, Net

Definite-Lived Intangible Assets, Net

Amortization expense on definite-lived intangible assets was $32 million , $34 million and $10 million during the three months ended May 5, 2017 and March 31, 2016 and the Transition Period , respectively.

Based on intangible assets recorded as of May 5, 2017 and assuming no subsequent additions, dispositions or impairment of underlying assets, the remaining estimated annual amortization expense over the next five fiscal years and thereafter is expected to be as follows (table in millions):

D. Realignment and Loss on Disposition

Disposition of VMware vCloud Air Business

On April 4, 2017, VMware announced the sale of its VMware vCloud Air business ("vCloud Air") to OVH US LLC ("OVH"). In connection with the transaction, the fair value of the fixed assets of $3 million identified as part of the sale was reclassified to assets held for sale in other current assets on the condensed consolidated balance sheets as of May 5, 2017 . The initial loss recognized in connection with this transaction was $51 million and is included in realignment and loss on disposition on the condensed consolidated statements of income. In addition, the unearned revenue of $35 million associated with vCloud Air will be assumed by OVH and has been reclassified to accrued expenses and other on the condensed consolidated balance sheets as of May 5, 2017 .

Realignment

On January 22, 2016, VMware approved a plan to streamline its operations, with plans to reinvest the associated savings in field, technical and support resources associated with growth products. As a result of these actions, approximately 800  positions were eliminated during the three months ended March 31, 2016 . VMware recognized $50 million of severance-related realignment expenses during the three months ended March 31, 2016 on the condensed consolidated statements of income. Additionally, VMware consolidated certain facilities as part of this plan, which resulted in the recognition of $3 million of related expenses during the three months ended March 31, 2016 .

The following table summarizes the activity for the accrued realignment expenses for the period presented (table in millions):

E. Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common shares outstanding and potentially dilutive securities outstanding during the period, as calculated using the treasury stock method. Potentially dilutive securities primarily include unvested restricted stock units, including performance stock units, and stock options, including purchase options under VMware's employee stock purchase plan. Securities are excluded from the computations of diluted net income (loss) per share if their effect would be anti-dilutive. VMware uses the two-class method to calculate net income (loss) per share as both classes share the same rights in dividends, therefore basic and diluted earnings per share are the same for both classes.

The following table sets forth the computations of basic and diluted net income (loss) per share during the periods presented (table in millions, shares in thousands):

(1) During the Transition Period, VMware incurred a net loss. As a result, all potentially dilutive securities were anti-dilutive and excluded from the computation of diluted net loss per share.

The following table sets forth the weighted-average common share equivalents of Class A common stock that were excluded from the diluted net income (loss) per share calculations during the periods presented , because their effect would have been anti-dilutive (shares in thousands):

F. Cash, Cash Equivalents and Investments

Cash, cash equivalents and investments as of the periods presented consisted of the following (tables in millions):

VMware evaluated its available-for-sale investments as of  May 5, 2017 , December 31, 2016 and February 3, 2017 for other-than-temporary declines in fair value and did not consider any to be other-than-temporarily impaired. The realized gains and losses on investments during the three months ended May 5, 2017 and March 31, 2016 and the Transition Period were not significant.

Unrealized losses on cash equivalents and available-for-sale investments as of the periods presented , which have been in a net loss position for less than twelve months, were classified by sector as follows (table in millions):

As of May 5, 2017 , December 31, 2016 and February 3, 2017 , unrealized losses on cash equivalents and available-for-sale investments in the other investment categories, which have been in a net loss position for less than twelve months, were not significant. Unrealized losses on cash equivalents and available-for-sale investments, which have been in a net loss position for twelve months or greater, were not significant for the periods presented.

Contractual Maturities

The contractual maturities of fixed income securities held as of May 5, 2017 consisted of the following (table in millions):

G. Fair Value Measurements

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

Certain financial assets and liabilities are measured at fair value on a recurring basis. VMware determines fair value using the following hierarchy:

VMware's fixed income securities are primarily classified as Level 2, with the exception of some of the U.S. Government and agency obligations that are classified as Level 1. Additionally, VMware's Level 2 classification includes forward contracts, notes payable to Dell and the estimated fair value of assets held for sale in connection with the disposition of vCloud Air. As of May 5, 2017 , December 31, 2016 and February 3, 2017 , VMware's Level 2 investment securities were generally priced using non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. The fair value of assets held for sale in connection with the disposition of vCloud Air was based upon the terms of the sale between VMware and OVH and was immaterial as of May 5, 2017 .

VMware did not have any significant assets or liabilities that fell into Level 3 of the fair value hierarchy for the periods presented, and there have been no transfers between fair value measurement levels during the periods presented.

The following tables set forth the fair value hierarchy of VMware's cash equivalents, available-for-sale securities and derivatives that were required to be measured at fair value as of the periods presented (tables in millions):