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October 13, 2010
VMware Inc




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  1. 1. MORGAN STANLEY RESEARCH NORTH AMERICA Morgan Stanley & Co. Incorporated Adam Holt Adam.Holt@morganstanley.com +1 (1)415 576 2320 Munish Jain Munish.Jain@morganstanley.com +1 (1)415 576 8728 Keith Weiss, CFA October 13, 2010 Keith.Weiss@morganstanley.com +1 (1)212 761 4149 Stock Rating VMware Inc Kelvin Wu Kelvin.K.Wu@morganstanley.com +1 (1)415 576 2322 Overweight Industry View Expanding Footprint Should In-Line Drive Solid Q3 Key Ratios and Statistics Reuters: VMW.N Bloomberg: VMW US Software / United States of America Conclusion: Our checks suggest that VMW’s Q3 Price target $90.00 closed well and results should be at least in line with our Shr price, close (Oct 12, 2010) $77.92 lic./rev./billings/EPS ests. of $321M / $693M / $768M / Mkt cap, curr (mm) $33,097 $0.34, which are below seasonal, although we believe 52-Week Range $89.15-37.71 VMW may manage Q3 to build visibility for Q4. We believe Q3 was paced by solid ELAs, improved Fiscal Year ending 12/09 12/10e 12/11e 12/12e transactional rev. (particularly SMB) and Enterprise Plus ModelWare EPS ($) 0.51 0.89 1.20 1.52 sales. At 21x EV/FCF, VMW trades below our FCF EPS ($)** 1.00 1.38 1.74 2.04 growth est. of 27% in FY10, and we remain buyers. P/E** 42.3 56.4 44.9 38.2 Revenue, net ($mm) 2,024 2,773 3,405 3,900 Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare What’s new: Based on our conversations with large framework (please see explanation later in this note). ** = Based on consensus methodology resellers and our survey of 90 resellers, we believe Q3 e = Morgan Stanley Research estimates will be at least in line with our rev./EPS of $693M / $0.34, although the trend of beating the high end of guidance pushes expects higher. We did not pick up signs of increased discounting to close deals or back end loading, indicating healthy demand & a strong pipeline. Checks point to solid Q. 63% of surveyed resellers expected to meet/beat Q3 targets—in line with 62% in Q2 when VMW beat the midpoint of guidance by 4%— while 78% of large resellers ($1M+ in VMW biz) met or beat their Q3 targets. Strength in vSphere was driven by: 1) demand for Enterprise Plus, 2) increased traction in the SMB SKU, and 3) interest in mgmt modules like Site Recovery Manager. View 4.5 is seeing increased interest but we did not hear of large deals in rev (we saw some in seats). Europe and Federal segments likely came in line with expectations. Seasonality provides cushion: With a EUR/USD avg. of 1.29 in Q3, nearly unchanged since guidance, we est. a FX benefit of <$2M on Q3 rev. guidance of $680M-$705M and our billings est. of $768M (up 43% YoY). In addition, cons. Q3 rev. of $697M, up 3% QoQ, Morgan Stanley does and seeks to do business with is well below the 5-yr avg. of 13% QoQ. companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may Guidance: Cons. looks for 11% QoQ growth in Q4 rev., have a conflict of interest that could affect the which is below how VMW guided in the past 2 yrs (+13% objectivity of Morgan Stanley Research. Investors and +12% QoQ). The guide should be at least in line should consider Morgan Stanley Research as only a with cons. of $774M/$0.39. We do believe VMW will single factor in making their investment decision. remind us about Q1 seasonality, and cons. of -1% is For analyst certification and other important above the Q1 guide of -3 to -8% QoQ over the last 2 yrs. disclosures, refer to the Disclosure Section, located at the end of this report.
  2. 2. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc Investment Case Exhibit 1 Exhibit 4 Below Seasonal Expectations Provide Cushion To 78% of Large Resellers ($1M+ in VMware Revenues) Q3 Estimates Expected to Meet or Beat Their Q3 Targets Total Revenue Seasonality Q3 Results vs. Plan By Resellers Size 100% 20% 11% 14% 14% 2010e 5-year avg 80% 15% 43% 60% 67% 71% 10% 40% 20% 43% 5% 22% 14% 0% $1M+ $500K-$1M <$500K 0% 1Q 2Q 3Q 4Q Below Inline Above Source: Morgan Stanley Research Source: Company data, Morgan Stanley Research Exhibit 5 Exhibit 2 63% of Resellers Expected to Meet or Beat Their Q3 Weighted Average Growth of 12% with 50% of Targets vs. 76% in Blow Out Q1, 62% in Blow Out Q2 Resellers Expecting Over 5% YoY Growth in Q3 Q3 Revenue Growth Expectations (YoY) Overall Results vs. Plan 30% 100% 100% Expected growth wt. avg: 12% 11% 16% 13% 13% 13% 50% expected ≤ 5% growth 90% 25% 80% 50% expected > 5% growth 80% % of respondents % of Respondents Cumulative % 20% 70% 50% 49% 49% 60% 45% 60% 63% 50% expect over 15% 50% 5% YoY 40% %n 40% 10% Cum 30% 20% 39% 39% 38% 37% 5% 20% 24% 10% 0% 0% 0% 3Q09 4Q09 1Q10 2Q10 3Q10 Below Inline Above 0% 0% 0% 0% % % % % 0% % 0% 20 40 60 80 00 -8 -6 -4 -2 10 -1 Source: Morgan Stanley Research YoY Growth Exhibit 3 Source: Morgan Stanley Research 53% of Resellers Expected to Meet or Beat Their VDI Targets vs. 62% in the Previous Quarter Desktop Virtualization Results vs. Plan 100% 7% 9% 8% 13% 15% 80% % of respondents 45% 35% 48% 54% 40% 60% 40% 48% 50% 43% 47% 20% 38% 0% 3Q09 4Q09 1Q10 2Q10 3Q10 Below Inline Above Source: Morgan Stanley Research 2
  3. 3. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc Exhibit 6 Survey Demographics Weighted Average Growth Expectations of 12% with Exhibit 8 47% Expecting Over 5% YoY Growth in Q4 Survey Characteristics by Rev. from VMW Practice Q4 Revenue Growth Expectations (YoY) 30% 100% Revenue from VMware Practice Expected growth wt. avg: 12% 90% 53% expected ≤ 5% growth 25% 80% 47% expected > 5% growth $1M+ % of Respondents Cumulative % 70% 12% 20% 60% 47% expect over 15% 5% YoY 50% $250K-$1M %n 40% 25% 10% Cum 30% 5% 20% 10% 0% 0% <$250K % % % % % % 0% 0% 0% 0% 0% 63% 20 40 60 80 0 00 -8 -6 -4 -2 10 -1 YoY Growth Source: Morgan Stanley Research Source: Morgan Stanley Research Exhibit 9 Survey Characteristics by Geography Exhibit 7 Storage vMotion Saw the Highest Interest Among Survey Characteristics vSphere Features Interest Level in vSphere Features 100% Latin America 7% 9% 9% 11% North America 25% 28% 35% 18% 80% Asia Pacific 11% 52% 43% 53% 60% 42% 38% 44% 40% EMEA 60% 47% 20% 41% 34% 38% 34% 22% 0% Adv. Ent. Ent+ FT Sto.VM vSwitch Source: Morgan Stanley Research Low Moderate High Source: Morgan Stanley Research Valuation and Risks Our price target assumes the stock trades at 25x our CY11 FCF/share, at ~15% discount to our 30% unlevered FCF growth rate in CY11. Key Concerns: Pricing pressure and lengthy sales cycle from increased competition; larger acquisitions can be dilutive and increase risk. 3
  4. 4. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc Exhibit 10 Income Statement ($ Millions, Except Per-Share Data) 2009 2010 FY07 FY08 3/09 6/09 9/09 12/09 FY09 3/10 6/10 9/10E 12/10E FY10E FY11E FY12E Licenses 905 1,178 257 228 240 304 1,029 312 324 321 359 1,316 1,504 1,621 Year over year % change 84% 30% -13% -20% -16% -3% -13% 21% 42% 34% 18% 28% 14% 8% Quarter over quarter % change - - -18% -11% 5% 27% - 3% 4% -1% 12% - - - Services 420 703 213 228 249 304 994 321 350 372 413 1,456 1,901 2,279 Year over year % change 98% 67% 48% 32% 33% 52% 41% 51% 54% 49% 36% 46% 31% 20% Quarter over quarter % change - - 7% 7% 10% 22% - 6% 9% 6% 11% - - - Total Revenue 1,326 1,881 470 456 490 608 2,024 634 674 693 772 2,773 3,405 3,900 Year over year % change 88% 42% 7% 0% 4% 18% 8% 35% 48% 42% 27% 37% 23% 15% Quarter over quarter % change - - -9% -3% 7% 24% - 4% 6% 3% 11% - - - Gross Income 1,171 1,655 413 399 428 536 1,775 557 589 617 681 2,444 3,003 3,441 Gross Margin 88% 88% 88% 87% 87% 88% 88% 88% 87% 89% 88% 88% 88% 88% R&D 293 433 111 109 108 113 442 124 136 146 153 558 689 793 % of revenues 22% 23% 24% 24% 22% 19% 22% 20% 20% 21% 20% 20% 20% 20% S&M 422 599 140 154 169 213 676 200 215 226 252 893 1,092 1,227 % of revenues 32% 32% 30% 34% 34% 35% 33% 32% 32% 33% 33% 32% 32% 31% G&A 118 154 40 40 43 52 175 58 51 57 65 231 271 289 % of revenues 9% 8% 9% 9% 9% 9% 9% 9% 8% 8% 8% 8% 8% 7% Total Operating Expenses 832 1,186 292 302 319 379 1,292 382 402 428 469 1,681 2,051 2,309 Year over year % change 90% 42% 6% 6% 6% 16% 9% 31% 33% 34% 24% 30% 22% 13% Operating Income 338 469 121 96 109 158 484 175 187 189 212 762 952 1,132 Operating Margin 26% 25% 26% 21% 22% 26% 24% 28% 28% 27% 27% 27.5% 28.0% 29% EBITDA 442 627 162 141 164 214 682 229 245 239 263 975 1,167 1,360 EBITDA Margin 33% 33% 35% 31% 34% 35% 34% 36% 36% 34% 34% 35% 34% 35% Other Income 5 7 (1.4) 0.9 2.8 (4) (2) (5) (4) (0) (0) (10) 15 34 Income Before Taxes 343 475 120 97 112 154 482 170 182 188 212 753 967 1,166 Income Tax Expense 49 60 20 18 16 27 81 37 40 41 47 166 213 256 Tax Rate 14% 13% 17% 18% 15% 18% 17% 22% 22% 22% 22% 22% 22% 22% Net Income 295 416 100 80 95 127 401 133 142 147 165 587 754 909 Pro Forma EPS - Operating 0.82 1.05 0.25 0.20 0.24 0.31 1.00 0.32 0.34 0.34 0.38 1.38 1.74 2.04 Diluted Shares Outstanding (Operating) 359 395 391 396 403 411 400 417 422 430 430 425 434 445 Source: Company data, Morgan Stanley Research e = Morgan Stanley Research estimates 4
  5. 5. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc Exhibit 11 Operational Metrics ($ Millions, Except Per-Share Data) 2009 2010 FY07 FY08 3/09 6/09 9/09 12/09 FY09 3/10 6/10 9/10E 12/10E FY10E FY11E FY12E Total Billings 1,572 2,198 518 473 537 944 2,479 649 767 768 1,029 3,252 3,985 4,663 % YoY change 82% 40% -2% -12% 1% 56% 13% 25% 62% 43% 9% 31% 23% 17% % QoQ change -14% -9% 14% 76% -31% 18% 0% 34% License Billings 894 1,149 257 227 241 311 1,037 312 325 321 363 1,320 1,506 1,621 % YoY change -5% -18% -15% -1% 21% 43% 34% 16% % QoQ change -18% -12% 6% 29% 0% 4% -1% 13% Maint. & Services Billings 678 1,050 260 245 304 633 1,442 355 464 447 666 1,932 2,479 3,042 % YoY change 91% 55% 2% -5% 22% 119% 37% 36% 89% 47% 5% 34% 28% 23% % QoQ change -10% -6% 24% 108% -44% 31% -4% 49% Transactional Billings 1,336 1,746 419 402 457 755 2,041 551 614 615 844 2,663 3,362 3,936 % YoY change 57% 31% 0% -6% 6% 62% 17% 32% 53% 35% 12% 30% 26% 17% % QoQ change -10% -4% 14% 65% -27% 11% 0% 37% Total Revenue 1,326 1,881 470 456 490 608 2,024 634 674 693 772 2,773 3,405 3,900 License revenue 905 1,178 257 228 240 304 1,029 312 324 321 359 1,316 1,504 1,621 % YoY change 84% 30% -13% -20% -16% -3% -13% 21% 42% 34% 18% 28% 14% 8% % QoQ change - - -18% -11% 5% 27% - 3% 4% -1% 12% - - - License - ELAs 118 217 48 35 39 92 215 48 77 77 93 294 311 364 % of total License 13% 18% 19% 15% 16% 30% 21% 15% 24% 24% 26% 22% 21% 22% License - Transactional / non-ELAs 787 961 209 193 201 212 815 265 247 244 266 1,022 1,192 1,258 % of total License 87% 82% 81% 85% 84% 70% 79% 85% 76% 76% 74% 78% 79% 78% Maint. & Services Revenue 420 703 213 228 249 304 994 321 350 372 413 1,456 1,901 2,279 % YoY change 98% 67% 48% 32% 33% 52% 41% 51% 54% 49% 36% 46% 31% 20% % QoQ change - - 7% 7% 10% 22% - 6% 9% 6% 11% - - - Total Deferred 553 870 917 934 990 1325 1,325 1358 1473 1,548 1,805 1,805 2,386 3,148 % YoY change 80% 57% 43% 30% 27% 52% 52% 48% 58% 56% 36% 36% 32% 32% % QoQ change 5% 2% 6% 34% 2% 8% 5% 17% Short-term Deferred 363 544 577 598 645 909 909 934 1011 1,037 1,227 1,227 1,622 2,109 % YoY change 50% 50% 43% 33% 34% 67% 67% 62% 69% 61% 35% 35% 32% 30% % QoQ change 6% 4% 8% 41% 3% 8% 3% 18% Long-term Deferred 189 326 341 336 344 416 416 424 462 511 578 578 763 1,039 % YoY change 196% 72% 43% 24% 15% 28% 28% 25% 37% 48% 39% 39% 32% 36% % QoQ change 5% -1% 2% 21% 2% 9% 11% 13% Source: Company data, Morgan Stanley Research e = Morgan Stanley Research estimates 5
  6. 6. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc Exhibit 12 Operational Metrics – ELAs ($ Millions, Except Per-Share Data) FY07 FY08 3/09 6/09 9/09 12/09 FY09 3/10 6/10 9/10E 12/10E FY10E FY11E FY12E Enterprise License Agreements Total ELA Revenues $138 $305 $82 $72 $80 $141 $375 $99 $133 $137 $155 $524 $575 $670 Total ELA License Revenues $118 $217 $48 $35 $39 $92 $215 $48 $77 $77 $93 $294 $311 $364 Total ELA Maint/Svcs Revenues $20 $88 $34 $37 $40 $48 $160 $51 $56 $60 $63 $231 $264 $307 ELA Revenues - Server $129 $276 $72 $59 $63 $121 $315 $82 $112 $113 $125 $432 $391 $414 ELA License - Server $111 $195 $41 $25 $27 $77 $170 $36 $63 $60 $72 $230 $182 $192 % of total ELAs license 94% 90% 85% 72% 67% 83% 79% 75% 82% 79% 77% 78% 59% 53% ELA Maint/Svcs - Server $18 $81 $31 $34 $37 $44 $145 $46 $49 $52 $54 $202 $208 $223 % of total ELAs Maint/Svcs 15% 35% 62% 93% 89% 46% 65% 93% 64% 68% 58% 68% 67% 61% ELA Revenue - Desktop $9 $30 $10 $13 $17 $20 $60 $17 $21 $24 $30 $93 $185 $256 ELA License - Desktop/VDI $7 $23 $7 $10 $13 $16 $45 $12 $14 $17 $21 $64 $129 $172 % of total ELAs license 6% 10% 15% 28% 33% 17% 21% 25% 18% 21% 23% 22% 41% 47% ELA Maint/Svcs - Desktop/VDI $2 $7 $3 $3 $4 $4 $15 $5 $7 $8 $9 $29 $56 $84 % of total ELAs Maint/Svcs 2% 3% 6% 9% 9% 4% 6% 11% 9% 10% 10% 10% 18% 23% Source: Company data, Morgan Stanley Research e = Morgan Stanley Research estimates 6
  7. 7. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc Exhibit 13 Balance Sheet ($ Millions, Except Per-Share Data) 2009 2010 FY07 FY08 3/09 6/09 9/09 12/09 FY09 3/10 6/10 9/10E 12/10E FY10E FY11E FY12E Assets Cash & Cash Equivalents 1,231 1,841 2,031 2,276 2,176 2,486 2,486 2,756 2,069 2,284 2,692 2,692 4,175 6,020 Short-Term Investments 711 711 711 711 711 711 Accounts Receivable 284 338 264 257 256 534 534 353 430 403 550 550 718 752 Deferred Income Taxes 54 45 48 51 55 63 63 80 86 86 86 86 86 86 Due from EMC - 111 111 23 - 29 29 4 23 23 23 23 23 23 Prepaids & Other Current Assets 34 56 46 66 75 69 69 87 104 113 124 124 138 151 Total Current Assets 1,603 2,390 2,501 2,673 2,562 3,182 3,182 3,281 3,423 3,621 4,186 4,186 5,852 7,743 PP&E 277 418 416 415 408 402 402 406 413 397 383 383 338 286 Goodwill 639 771 771 768 1,113 1,116 1,116 1,190 1,511 1,561 1,611 1,611 1,811 2,051 Intangibles 32 57 54 50 99 95 95 127 177 177 177 177 177 177 Deferred Income Taxes 72 68 72 77 100 103 103 104 103 103 103 103 103 103 Other Non-Current Assets 72 135 160 178 161 169 169 172 170 170 170 170 170 170 Total Assets 2,696 3,839 3,974 4,162 4,443 5,067 5,067 5,279 5,797 6,028 6,630 6,630 8,451 10,529 Liabilities Accounts Payable 62 89 64 39 36 51 51 46 60 72 67 67 91 91 Accrued Expenses 174 198 180 215 238 324 324 272 373 318 448 448 651 752 Deferred Revenue 363 544 577 598 645 909 909 934 1,011 1,037 1,227 1,227 1,622 2,109 Taxes Payable to EMC 72 49 52 49 28 10 10 2 - - - - - - Total Current Liabilities 670 880 873 901 947 1,294 1,294 1,255 1,444 1,427 1,743 1,743 2,365 2,952 Long-term Deferred Revenue 189 326 341 336 344 416 416 424 462 511 578 578 763 1,039 Deferred Income Taxes 27 48 49 50 63 60 60 62 24 24 24 24 24 24 Income taxes payable to EMC/Other 18 66 74 78 89 103 103 110 112 112 112 112 112 112 Note payable to EMC 450 450 450 450 450 450 450 450 450 450 450 450 450 450 Total Liabilities 1,355 1,769 1,785 1,814 1,894 2,324 2,324 2,300 2,492 2,523 2,906 2,906 3,714 4,577 Total Stockholder's Equity 1,341 2,070 2,188 2,347 2,549 2,743 2,743 2,979 3,306 3,505 3,724 3,724 4,737 5,952 Total Liabs & Stockholder's Equity 2,696 3,839 3,974 4,162 4,443 5,067 5,067 5,279 5,797 6,028 6,630 6,630 8,451 10,529 Source: Company data, Morgan Stanley Research e = Morgan Stanley Research estimates 7
  8. 8. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc Exhibit 14 Cash Flow Statement ($ Millions, Except Per-Share Data) 2009 2010 FY07 FY08 3/09 6/09 9/09 12/09 FY09 3/10 6/10 9/10E 12/10E FY10E FY11E FY12E Operating Activities: Net income (loss) 218 290 70 33 38 56 197 78 75 85 100 337 520 675 Adjustments to Operating Activities: Depreciation & Amortization (PPE & non-PPE) 104 159 41 45 55 57 198 54 59 50 51 213 215 228 Stock Compensation Expense 92 167 50 51 62 68 231 64 68 65 69 265 300 300 Tax Benefit - Issuance of Stock / Ex. of Options - (86) (0) (4) (8) (13) (26) (24) (65) - - (89) - - Non-Cash Restructuring and Other Charges (0) 9 0 0 (3) 5 3 1 4 - - 6 - - Changes in operating assets and liabilities: 138 262 98 119 55 111 382 182 75 50 225 532 625 817 Accounts Receivable (89) (53) 74 7 5 (279) (194) 185 (78) 27 (147) (12) (168) (34) Trade and Other Payables 16 8 (17) (9) (2) 13 (16) (3) 9 12 (4) 14 24 (0) Accrued Expenses 62 18 (15) 26 20 90 122 (51) 78 (56) 130 101 203 101 Other Current Assets (1) (22) 10 (9) (9) (6) (14) (1) (23) (9) (10) (44) (15) (12) Deferred Revenue 242 316 47 17 48 336 447 15 93 75 257 441 581 763 Due to EMC (13) (44) (15) 94 14 (50) 43 26 (21) - - 5 - - Deferred Taxes & Other (78) 39 14 (7) (21) 7 (8) 10 17 0 0 27 0 0 Other - - - - - - - - - - - - - - Net Cash Provided by (used in) Operating Activities 552 800 259 243 199 284 986 355 216 249 445 1,265 1,660 2,020 Pro forma CFO (net of EMC) 565 844 275 149 185 333 942 329 237 249 445 1,260 1,660 2,020 Year over year % change 69.1% 49.4% 99.7% -26.4% -13.0% 14.5% 11.6% 19.9% 58.6% 34.5% 33.4% 33.7% 31.8% 21.7% Cash Flows From Investing Activities Purchase - Property & Equipment (269) (192) (36) (30) (14) (23) (103) (31) (29) (33) (37) (130) (170) (176) Acquisitions, Net of Cash (83) (139) - - (356) - (356) (107) (236) - - (342) - - Capitalized software costs (48) (91) (30) (15) (9) (15) (69) (22) (19) - - (41) - - Other (4) (1) (1) (24) (6) (3) (34) (17) (643) (50) (50) (760) (200) (240) Net Cash Used in Investing Activities (404) (422) (67) (69) (385) (42) (562) (176) (927) (83) (87) (1,274) (370) (416) Cash Flows From Financing Activities Common Stock, Net 1,254 171 5 77 85 61 228 78 (7) 50 50 171 200 240 Debt payment (350) - - - - - - - - - - - - - Other 3 (25) (7) (11) (7) (6) (31) (11) (35) - - (46) (7) - Tax Benefit from Exercise of Stock Options - 86 0 4 8 13 26 24 65 - - 89 - - Net Cash Provided by Financing Activities 906 231 (2) 70 86 68 222 91 23 50 50 214 193 240 Exchange Rate Impact - - - - - - - - - - - - - - Change in Cash and Cash Equivalents 1,055 610 191 244 (99) 310 646 270 (688) 216 408 205 1,483 1,845 Cash, Beginning of Period 176 1,231 1,841 2,031 2,276 2,176 1,841 2,486 2,756 2,069 2,284 2,486 2,692 4,175 Cash, end of period 1,231 1,841 2,031 2,276 2,176 2,486 2,486 2,756 2,069 2,284 2,692 2,692 4,175 6,020 CFFO per share (net of EMC) $1.57 $2.14 $0.70 $0.38 $0.46 $0.81 $2.35 $0.79 $0.56 $0.58 $1.03 $2.97 $3.82 $4.54 FCF per share $0.79 $1.54 $0.57 $0.54 $0.46 $0.63 $2.20 $0.78 $0.44 $0.50 $0.95 $2.67 $3.43 $4.14 unlevered FCF per share (net of EMC) $0.81 $1.64 $0.61 $0.30 $0.42 $0.76 $2.10 $0.72 $0.50 $0.50 $0.95 $2.68 $3.40 $4.08 Source: Company data, Morgan Stanley Research, e = Morgan Stanley Research estimates 8
  9. 9. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc 9
  10. 10. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings. Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Adam Holt. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Munish Jain - Symantec (common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of September 30, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Adobe Systems, Autodesk, NetSuite, Red Hat, Inc., Salesforce.com. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Adobe Systems, Fortinet Inc., IntraLinks Holdings, Inc., Microsoft, Oracle Corporation, QLIK Technologies Inc., SolarWinds, Inc., SuccessFactors, Symantec. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Adobe Systems, ArcSight Inc, Autodesk, Fortinet Inc., IntraLinks Holdings, Inc., Intuit, McAfee, Microsoft, Oracle Corporation, QLIK Technologies Inc., Red Hat, Inc., SolarWinds, Inc., SuccessFactors, Symantec. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Adobe Systems, ArcSight Inc, Autodesk, Check Point Software Technologies Ltd., Citrix Systems Inc, DemandTec, Fortinet Inc., Guidance Software Inc., IntraLinks Holdings, Inc., Intuit, McAfee, Microsoft, NetSuite, Oracle Corporation, QLIK Technologies Inc., Red Hat, Inc., RightNow Technologies, Inc., Salesforce.com, SolarWinds, Inc., Sourcefire, SuccessFactors, Symantec, Taleo Corporation, VMware Inc, Websense Inc.. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Autodesk, Microsoft, Oracle Corporation. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Adobe Systems, ArcSight Inc, Autodesk, Check Point Software Technologies Ltd., Citrix Systems Inc, DemandTec, Fortinet Inc., Guidance Software Inc., IntraLinks Holdings, Inc., Intuit, McAfee, Microsoft, NetSuite, Oracle Corporation, QLIK Technologies Inc., Red Hat, Inc., RightNow Technologies, Inc., Salesforce.com, SolarWinds, Inc., Sourcefire, SuccessFactors, Symantec, Taleo Corporation, VMware Inc, Websense Inc.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Adobe Systems, Autodesk, Intuit, Microsoft, Oracle Corporation, Red Hat, Inc., Websense Inc.. Within the last 12 months, an affiliate of Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from RightNow Technologies, Inc.. Morgan Stanley & Co. Incorporated makes a market in the securities of Adobe Systems, Autodesk, Check Point Software Technologies Ltd., Citrix Systems Inc, DemandTec, Fortinet Inc., Guidance Software Inc., IntraLinks Holdings, Inc., Intuit, McAfee, Microsoft, NetSuite, Oracle Corporation, QLIK Technologies Inc., Red Hat, Inc., RightNow Technologies, Inc., Salesforce.com, SolarWinds, Inc., Sourcefire, SuccessFactors, Symantec, Taleo Corporation, VMware Inc, Websense Inc.. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution 10
  11. 11. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc (as of September 30, 2010) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1115 42% 394 43% 35% Equal-weight/Hold 1146 43% 413 45% 36% Not-Rated/Hold 14 1% 4 0% 29% Underweight/Sell 381 14% 99 11% 26% Total 2,656 910 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. . Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Adobe Systems, Autodesk, Intuit, McAfee, Microsoft, Oracle Corporation, Symantec. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. The fixed income research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons. 11
  12. 12. MORGAN STANLEY RESEARCH October 13, 2010 VMware Inc With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kong or Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. 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  13. 13. MORGAN STANLEY RESEARCH The Americas Europe Japan Asia/Pacific 1585 Broadway 20 Bank Street, Canary Wharf 4-20-3 Ebisu, Shibuya-ku 1 Austin Road West New York, NY 10036-8293 London E14 4AD Tokyo 150-6008 Kowloon United States United Kingdom Japan Hong Kong Tel: +1 (1) 212 761 4000 Tel: +44 (0) 20 7 425 8000 Tel: +81 (0) 3 5424 5000 Tel: +852 2848 5200 Industry Coverage:Software Company (Ticker) Rating (as of) Price* (10/12/2010) Adam Holt Adobe Systems (ADBE.O) E (09/10/2010) $27.66 Citrix Systems Inc (CTXS.O) E (05/20/2010) $57.44 Fortinet Inc. (FTNT.O) O (01/06/2010) $24.99 Guidance Software Inc. (GUID.O) U (10/02/2008) $5.8 IntraLinks Holdings, Inc. (IL.N) O (09/15/2010) $16.5 Intuit (INTU.O) O (05/03/2010) $46.91 Microsoft (MSFT.O) O (04/24/2009) $24.83 NetSuite (N.N) E (01/14/2010) $21.55 Oracle Corporation (ORCL.O) O (06/23/2008) $27.95 QLIK Technologies Inc. (QLIK.O) O (08/25/2010) $22.59 Red Hat, Inc. (RHT.N) E (12/19/2008) $39.15 Salesforce.com (CRM.N) E (08/12/2009) $105.47 SolarWinds, Inc. (SWI.N) E (07/22/2010) $17.4 Sourcefire (FIRE.O) E (01/14/2010) $28.12 SuccessFactors (SFSF.O) E (12/16/2008) $25.6 Symantec (SYMC.O) E (05/07/2009) $15.39 Taleo Corporation (TLEO.O) O (01/14/2010) $28.99 VMware Inc (VMW.N) O (05/20/2010) $77.92 Keith Weiss, CFA ArcSight Inc (ARST.O) ++ $43.45 Autodesk (ADSK.O) U (09/08/2009) $32.68 Check Point Software Technologies O (09/29/2010) $39.21 Ltd. (CHKP.O) DemandTec (DMAN.O) U (01/08/2010) $10.19 McAfee (MFE.N) ++ $47.14 RightNow Technologies, Inc. E (04/06/2006) $23.48 (RNOW.O) Websense Inc. (WBSN.O) U (09/29/2010) $17.39 Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted. © 2010 Morgan Stanley

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