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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 5.


Overview

The information technology (“IT”) industry is transforming, moving from a 
hardware-based traditional model to one of a software-defined infrastructure. 
We are a leader in virtualization and cloud infrastructure solutions utilized 
by organizations to help transform the way they build, deliver and consume IT 
resources. Over the years, we have increased our product offerings beyond 
compute virtualization to include offerings that allow organizations to manage 
IT resources across private clouds and complex multi-cloud, multi-device 
environments by leveraging synergies across three product categories: 
Software-Defined Data Center (“SDDC”), Hybrid Cloud Computing and End-User 
Computing. Our portfolio supports and addresses the four key IT priorities of 
our customers: modernizing data centers, integrating public clouds, empowering 
digital workspaces and transforming security. 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 are the basis for the private cloud environment 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. While overall sales of our VMware vSphere 
(“vSphere”) offerings have remained strong, the majority of our license sales 
originate from products and services solutions across our portfolio beyond our 
compute products. We continue to experience growth in sales of VMware NSX 
(“NSX”), our network virtualization solution, and VMware vSAN (“vSAN”) 
products. We expect compute license sales to remain stable, while total compute 
sales are expected to grow slightly over the next few years.

Hybrid 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. During the first half of 
fiscal 2018, hybrid cloud computing was comprised of VMware vCloud Air Network 
(“vCAN”) and VMware vCloud Air (“vCloud Air”) offerings. During the second 
quarter of fiscal 2018, we completed the sale of our vCloud Air business to OVH 
US LLC (“OVH”). We continue to see revenue growth derived from our vCAN 
offering. End-User Computing Our End-User Computing solution consists of VMware 
Workspace ONE (“Workspace ONE”), our digital workspace platform, which includes 
VMware AirWatch (“AirWatch”) and VMware Horizon (“Horizon”). Our AirWatch 
business model includes an on-premises solution that we offer through the sale 
of perpetual licenses and an off-premises solution that we offer as 
software-as-a-service (“SaaS”). Our mobile and desktop products and services 
within Workspace ONE continued to contribute to the growth of our End-User 
Computing product group during the first half of fiscal 2018.

Change in Fiscal Year End As a result of the change to our fiscal year from a 
fiscal year ending on December 31 of each calendar year to a fiscal year ending 
on the Friday nearest to January 31 of each year, the period that began on 
January 1, 2017 and ended on February 3, 2017 was a transition period (the 
“Transition Period”). Our first full fiscal year 2018 is a 52-week year that 
began on February 4, 2017 and will end on February 2, 2018. As permitted under 
SEC rules, prior-period financial statements have not been recast as we believe 
(i) the three and six months ended June 30, 2016 are comparable to the three 
and six months ended August 4, 2017; and (ii) recasting prior-period results 
was not practicable or cost justified. We have included certain unaudited 
condensed consolidated financial statements for the Transition Period in this 
Form 10-Q and will include audited financial statements for the Transition 
Period in the Form 10-K filed for the fiscal year ended February 2, 2018.

Results of Operations Approximately 70% of our sales are denominated in the 
U.S. dollar, however, in certain countries we also invoice and collect in the 
following currencies: euro; British pound; Japanese yen; Australian dollar; and 
Chinese renminbi. In addition, we incur and pay operating expenses in 
currencies other than the U.S. dollar. As a result, our financial statements, 
including our revenue, operating expenses, unearned revenue and the resulting 
cash flows derived from the U.S. dollar equivalent of foreign currency 
transactions, are affected by foreign exchange fluctuations.

Revenue Hybrid cloud, including vCAN and vCloud Air, and our SaaS offerings, 
which include our AirWatch mobile solutions, increased to approximately 9% of 
our total revenue during the three and six months ended August 4, 2017 from 
approximately 8% during the three and six months ended June 30, 2016. vCAN 
revenue is included in license revenue, and SaaS revenue, including vCloud Air 
and our AirWatch mobile solutions, is included in both license and services 
revenue. We completed our sale of vCloud Air business during the second quarter 
of fiscal 2018. License revenue relating to the sale of perpetual licenses that 
are part of a multi-year arrangement is generally recognized upon delivery of 
the underlying license, whereas revenue derived from our hybrid cloud and SaaS 
offerings is recognized based on consumption or over a period of time. License 
Revenue During the three and six months ended August 4, 2017, license revenue 
benefited from balanced performance in all major geographies and broad strength 
across our product portfolio. License revenue growth during the three and six 
months ended August 4, 2017 compared to the three and six months ended June 30, 
2016 continued to be driven by sales of our NSX and vSAN offerings, as well as 
growth in our End-User Computing and vCAN offerings. Strength in renewals of 
our EAs also contributed to license revenue growth during the three and six 
months ended August 4, 2017 compared to the three and six months ended June 30, 
2016. Services Revenue During the three and six months ended August 4, 2017, 
software maintenance revenue benefited 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, more than two and 
a half years of support and maintenance with each new license purchased. 
Professional services revenue increased 14% and 18% during the three and six 
months ended August 4, 2017, respectively, as compared to the three and six 
months ended June 30, 2016. We have continued our focus on solution 
deployments, including our products such as NSX and vSAN, which attributed to 
the increase in professional services revenue. Our professional services 
revenue will vary based on the delivery channels used in any given period as 
well as the timing of service engagements.

Unearned Revenue

Unearned license revenue is generally recognized upon delivery of existing or 
future products or services, or is otherwise recognized ratably over the term 
of the arrangement. Future products include, in some cases, emerging products 
that are offered as part of product promotions where the purchaser of an 
existing product is entitled to receive the future product at no additional 
charge. To the extent the future product has not been delivered and 
vendor-specific objective evidence (“VSOE”) of fair value cannot be 
established, the revenue for the entire order is deferred until all product 
delivery obligations have been fulfilled. If the arrangement does not include 
professional services, unearned license revenue may also be recognized ratably, 
if the customer is granted the right to receive unspecified future products or 
VSOE of fair value on the software maintenance element of the arrangement does 
not exist. Unearned license revenue derived from commitments to future products 
that have not been delivered represents a significant portion of total unearned 
license revenue as of August 4, 2017. We expect unearned license revenue to 
substantially decline upon the adoption of Topic 606. Unearned software 
maintenance revenue is attributable to our maintenance contracts and is 
generally recognized ratably over the contract period. The weighted-average 
remaining term as of August 4, 2017 was approximately two years. Unearned 
professional services revenue results primarily from prepaid professional 
services, including training, and is generally recognized as the services are 
delivered. Unearned license and software maintenance revenue will fluctuate 
based upon a variety of factors including sales volume, the timing of both 
product promotion offers and delivery of the future products offered, and the 
amount of arrangements sold with ratable revenue recognition. Additionally, the 
amount of unearned revenue derived from transactions denominated in a foreign 
currency is affected by fluctuations in the foreign currencies in which we 
invoice. In connection with the disposition of vCloud Air, approximately $35 
million of total unearned revenue, including $18 million of unearned license 
revenue, was transferred to OVH during the second quarter of fiscal 2018.

Cost of License 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 headcount 
and increasing compensation across most of our income statement expense 
categories during the three and six months ended August 4, 2017. 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 software, royalty costs in connection with technology 
licensed from third-party providers and amortization of intangible assets. The 
cost of fulfillment of our software includes personnel costs and related 
overhead associated with the physical and electronic delivery of our software 
products.

Cost of license revenue was flat during the three and six months ended August 
4, 2017 compared to the three and six months ended June 30, 2016. 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 to provide professional services. 
Additionally, cost of services revenue includes depreciation on equipment 
supporting our service offerings.

Cost of services revenue increased during the three and six months ended August 
4, 2017 compared to the three and six months ended June 30, 2016. The increase 
was primarily due to growth in cash-based employee-related expenses of $23 
million and $46 million during the three and six months ended August 4, 2017, 
respectively, driven by incremental growth in headcount and salaries, as well 
as increased IT development costs of $11 million during the six months ended 
August 4, 2017. These increased costs were offset in part by a decrease in 
equipment, depreciation and facilities-related costs of $15 million and $16 
million during the three and six months ended August 4, 2017, respectively. 
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.

Research and development expenses increased during the three and six months 
ended August 4, 2017 compared to the three and six months ended June 30, 2016. 
The increase was primarily due to growth in cash-based employee-related 
expenses of $69 million and $114 million during the three and six months ended 
August 4, 2017, respectively, driven by incremental growth in headcount and 
salaries. In addition, stock-based compensation increased by $15 million and 
$26 million, respectively, primarily driven by an increase in restricted stock 
unit awards granted after the second quarter of 2016. These increases were 
partially offset by an increase in capitalized internal-use software 
development costs of $18 million and $34 million during the three and six 
months ended August 4, 2017, respectively. 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 and services 
offerings, as well as the cost of product launches and marketing initiatives. 
Sales commissions for our license offerings are generally earned and expensed 
when a firm order is received from the customer. In the event of a multi-year 
EA or our SaaS offerings, sales commissions are generally expensed over the 
term of the arrangement.

Sales and marketing expenses increased during the three and six months ended 
August 4, 2017 compared to the three and six months ended June 30, 2016. The 
increase was primarily due to growth in cash-based employee-related expenses of 
$92 million and $122 million during the three and six months ended August 4, 
2017, respectively, driven by incremental growth in headcount and salaries, as 
well as higher commission expense resulting from increased sales volume.

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 VMware’s Foundation.

General and administrative expenses were relatively flat during the three 
months ended August 4, 2017 compared to the three months ended June 30, 2016. 
During the six months ended August 4, 2017, general and administrative expenses 
decreased compared to the six months ended June 30, 2016. The decrease was 
primarily driven by decreased contractor spending of $15 million, as well as 
decreased IT development costs of $20 million. These decreases were partially 
offset by decreased capitalization of internal-use software development costs 
of $24 million, as well as increased cash-based employee-related expenses of 
$18 million, resulting primarily from incremental growth in headcount and 
salaries during the six months ended August 4, 2017.

Realignment and Loss on Disposition

During the second quarter of fiscal 2018, we completed the sale of vCloud Air 
to OVH. Losses recognized in connection with this transaction were $36 million 
and $86 million during the three and six months ended August 4, 2017, 
respectively. Losses recognized on the disposition of vCloud Air include the 
impairment of fixed assets identified as part of the sale, as well as the costs 
associated with certain transition services, which primarily include 
employee-related expenses and costs associated with data-center colocation 
services. Transition services are to be provided over a period of 18 months, 
starting from the date of the sale. On January 22, 2016, we approved a plan to 
streamline our 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 
six months ended June 30, 2016. We recognized $49 million of severance-related 
realignment expenses during the six months ended June 30, 2016 on the condensed 
consolidated statements of income. Additionally, we consolidated certain 
facilities as part of this plan, which resulted in the recognition of $3 
million of related expenses during the six months ended June 30, 2016. Actions 
associated with this plan were substantially completed by December 31, 2016.

Interest expense with Dell On August 21, 2017, we issued three unsecured senior 
notes pursuant to a public debt offering in the aggregate amount of $4,000 
million. Upon closing, a portion of the net proceeds from the offering was used 
to repay certain promissory notes payable to Dell in the aggregate principal 
amount of $1,230 million. We expect interest expense to increase by 
approximately $50 million during the second half of fiscal 2018 compared to the 
second half of 2016 due to the issuance of public debt, partially offset by a 
reduction in interest expense with Dell. Other Income (Expense), net Other 
income (expense), net during the periods presented was as follows (dollars in 
millions):

During the second quarter of fiscal 2018, we acquired all of the outstanding 
shares of Wavefront, Inc. (“Wavefront”). Prior to the closing of the 
acquisition, we held an ownership interest in Wavefront. Upon completion of the 
step acquisition, we recognized a gain of $34 million in other income 
(expense), net for the remeasurement of our ownership interest to fair value. 
Transition Period In conjunction with our change in fiscal year end, we had a 
Transition Period of 34 days that began on January 1, 2017 and ended on 
February 3, 2017. The most comparable prior-year period, the one month ended 
January 31, 2016, had a duration of 31 days.

During the Transition Period, total revenue increased and license sales 
declined when compared to the one-month period ended January 31, 2016. 
Operating loss during the Transition Period reflected costs related to our 
global sales event, as well as increases in employee-related expenses compared 
to the one month ended January 31, 2016. Factors contributing to the increase 
in employee-related expenses include both incremental headcount and costs 
associated with three additional days of expense included in the Transition 
Period. The income tax benefit recognized during the Transition Period was 
driven by the pre-tax loss incurred during the period and our Internal Revenue 
Code Section 199 deduction (“Deduction”), which reflected the impact of 
claiming a higher Deduction for two of our U.S. tax return periods compared to 
the Deduction for the year ended December 31, 2016, which was calculated on a 
stand-alone basis. We were required to file two U.S. tax returns covering the 
period prior to the Dell Acquisition from January 1, 2016 to September 7, 2016 
and the period following the Dell Acquisition through Dell’s fiscal year ended 
February 3, 2017. The Deduction was greater during the two U.S tax return 
periods due to higher taxable income resulting from the acceleration of income 
recognized from unearned revenue for tax purposes.

Income Tax Provision Our quarterly effective income tax rate is based on our 
estimated annual income tax rate forecast and discrete tax items recognized in 
the period. Our effective income tax rate was 17.9% and 14.9% during the three 
and six months ended August 4, 2017, respectively. For the three and six months 
ended June 30, 2016, our effective tax rate was 21.4% and 20.7%, respectively. 
Our estimated annual effective income tax rate for fiscal 2018 decreased 
slightly when compared to the annual effective tax rate for the year ended 
December 31, 2016. Our effective income tax rate for the three and six months 
ended August 4, 2017 declined primarily due to certain discrete tax items, 
including $25 million related to a non-taxable gain recognized on the step 
acquisition of one of our strategic investments and deductible losses from the 
disposition of vCloud Air during the second quarter of fiscal 2018. In 
addition, we recognized excess tax benefits of $13 million and $44 million for 
the three and six months ended August 4, 2017, respectively, in connection with 
our adoption of Accounting Standards Update (“ASU”) No. 2016-09, 
Compensation-Stock Compensation (Topic 718) during the first quarter of fiscal 
2018. Prior to adopting the updated standard, such amounts were recognized in 
additional paid-in capital on the condensed consolidated balance sheets. We 
expect upcoming reductions in unrecognized tax benefits resulting from 
expiration of statutes of limitation during fiscal 2018, which would reduce our 
fiscal 2018 annual income tax rate. Our rate of taxation in non-U.S. 
jurisdictions is lower than our U.S. tax rate. Our non-U.S. earnings are 
primarily earned by our subsidiaries organized in Ireland, and as such, our 
annual effective tax rate can be significantly affected by the composition of 
our earnings in the U.S. and non-U.S. jurisdictions. We have historically been 
included in EMC’s consolidated group for U.S. federal income tax purposes, and 
with the closing of the Dell Acquisition, we are now included in Dell’s 
consolidated tax group. We 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. 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 group for U.S. federal 
income tax purposes, and our U.S. federal income tax would be reported 
separately from that of the Dell consolidated group. Although our results are 
included in the Dell consolidated return for U.S. federal income tax purposes, 
our income tax provision is calculated primarily as though we were a separate 
taxpayer. However, certain transactions that we and Dell are parties to are 
assessed using consolidated tax return rules. Our future effective tax rate may 
be affected by such factors as changes in tax laws, 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, shifts 
in the amount of earnings in the United States 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 As of August 4, 2017, Dell 
controlled 33 million shares of Class A common stock and all 300 million shares 
of Class B common stock, representing 81.4% of our total outstanding shares of 
common stock and 97.5% of the combined voting power of our outstanding common 
stock.

Transactions with Dell We engaged with Dell in the following ongoing 
intercompany transactions, which resulted in revenue and receipts and unearned 
revenue for us: • Pursuant to ongoing reseller arrangements with Dell, Dell 
bundles our products and services with Dell’s products and sells them to end 
users. Reseller revenue is presented net of related marketing development funds 
and rebates paid to Dell.

• Dell purchases products and services from us for internal use.

• We provide professional services to end users based upon contractual 
agreements with Dell.

• Pursuant to an ongoing distribution agreement, we act as the selling agent 
for certain products and services of Pivotal Software, Inc. (“Pivotal”), a 
subsidiary of Dell, in exchange for an agency fee. Under this agreement, cash 
is collected from the end user by us and remitted to Pivotal, net of the 
contractual agency fee.

• We provide various services to Pivotal. Support costs incurred by us are 
reimbursed to us and are recorded as a reduction to the costs incurred by us.

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):

We engaged with Dell in the following ongoing intercompany transactions, which 
resulted in costs to us: • We purchase and lease products and purchase services 
from Dell.

• In certain geographic regions where we do not have an established legal 
entity, we contract with Dell subsidiaries for support services and 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 condensed consolidated statements of income and primarily include salaries, 
benefits, travel and occupancy expenses. Dell also incurs certain 
administrative costs on our behalf in the United States that are recorded as 
expenses on our condensed consolidated statements of income.

• From time to time, we invoice end users on behalf of Dell for certain 
services rendered by Dell. Cash related to these services is collected from the 
end user by us and remitted to Dell.

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. During the second quarter of fiscal 2018, we acquired 
Wavefront. Upon closing of the acquisition, Dell was paid $20 million in cash 
for its ownership interest in Wavefront.

Dell Financial Services (“DFS”) DFS provided financing to certain of our end 
customers based on the customer’s discretion. Upon acceptance of the financing 
arrangement by both our end customer and DFS, amounts classified as trade 
accounts receivable are reclassified to due from related parties, net on the 
condensed consolidated balance sheets. Revenue recognized on transactions 
financed through DFS was recorded net of financing fees, which were $7 million 
and $9 million during the three and six months ended August 4, 2017, 
respectively. Financing fees during the Transition Period were not significant. 
Tax Sharing Agreement with Dell

We have made payments to Dell pursuant to a tax sharing agreement.

The timing of the tax payments due to and from related parties is governed by a 
tax sharing agreement. Payments from us to Dell under the tax sharing agreement 
relate to our portion of federal income taxes on Dell’s consolidated tax return 
as well as state tax payments for combined states. The amounts that we pay to 
Dell for its portion of federal income taxes on Dell’s consolidated tax return 
differ from the amounts we 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 pursuant to the tax sharing agreement was not significant 
during the three and six months ended August 4, 2017 and the Transition Period, 
and was $14 million and $15 million during the three and six months ended June 
30, 2016, respectively.

Due To/From Related Parties, Net Amounts due to and from related

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, we entered into a stock 
purchase agreement to purchase $300 million of our Class A common stock from 
Dell. During the first quarter of fiscal 2018, we paid Dell $300 million in 
exchange for an initial delivery 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 we 
received an additional 0.7 million shares. The aggregate number of 3.4 million 
shares purchased was determined based upon the volume-weighted average price 
during a defined period, less an agreed upon discount. On December 15, 2016, we 
entered into a stock purchase agreement to purchase $500 million of our Class A 
common stock from Dell. We 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. On August 23, 2017, we entered into a stock purchase agreement 
to purchase $300 million of our Class A common stock from Dell. Purchases under 
this agreement are expected to occur during fiscal 2018. The aggregate number 
of shares purchased will be determined based upon a volume-weighted average 
price during a defined period, less an agreed upon discount. Notes Payable to 
Dell We entered into a note exchange agreement with our 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 August 4, 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 and six months ended August 4, 
2017, $7 million and $13 million, respectively, of interest expense was 
recognized. During the three and six months ended June 30, 2016 and the 
Transition Period, $7 million, $13 million and $2 million, respectively, of 
interest expense was recognized. On August 21, 2017, we repaid certain of the 
notes payable to Dell in the aggregate principal amount of $1,230 million. The 
aggregate principal amount included repayment of the note due May 1, 2018 at 
par value and repayment of the note due May 1, 2020 at a discount. Refer to 
Note N in Part I, Item 1 of this Quarterly Report on Form 10-Q for further 
information regarding subsequent events.

Liquidity and Capital We hold a diversified portfolio of money market funds and 
fixed income securities. Our fixed income securities are denominated in U.S. 
dollars and primarily consist of highly liquid debt instruments of the U.S. 
Government and its agencies, municipal obligations, mortgage-backed securities 
and U.S. and foreign corporate debt securities. 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. As of August 4, 2017, our cash, cash equivalents 
and short-term investments held outside the United States were $7,967 million. 
If these overseas funds were needed for our operations in the U.S., we would be 
required to accrue and pay U.S. taxes on substantially all of the undistributed 
earnings to repatriate these funds. However, our intent is to indefinitely 
reinvest our non-U.S. earnings in our foreign operations and our current plans 
do not demonstrate a need to repatriate them to fund our U.S. operations. We 
expect that cash generated by operations will be our primary source of 
liquidity. We also believe that existing cash and cash equivalents, together 
with any cash generated from operations, will be sufficient to fund our 
operations for at least the next twelve months. While we believe these cash 
sources will be sufficient to fund our operations, our overall level of cash 
needs may be affected by the number and size of acquisitions, investments and 
stock repurchases. On August 21, 2017, we issued three unsecured senior notes 
pursuant to a public debt offering in the aggregate amount of $4,000 million, 
consisting of outstanding principal due on the following dates: $1,250 million 
due August 21, 2020, $1,500 million due August 21, 2022, and $1,250 million due 
August 21, 2027. The notes bear interest, payable semi-annually, at annual 
rates of 2.30%, 2.95% and 3.90%, respectively. In aggregate, the annual 
interest expense related to the three notes is expected to be approximately 
$130 million. We used a portion of the net proceeds from the offering to repay 
certain notes payable to Dell due May 1, 2018 and May 1, 2020, and intend to 
use the remaining proceeds to fund additional purchases of up to $1,000 million 
of our Class A common stock through August 31, 2018, and for general corporate 
purposes, including mergers and acquisitions and repaying other indebtedness.

Operating Activities Cash provided by operating activities increased $98 
million during the six months ended August 4, 2017 compared to the six months 
ended June 30, 2016. Cash provided by operating activities benefited from a net 
increase in cash collections due to increased sales, a decrease in federal tax 
payments and the absence of severance payments related to the January 2016 
realignment plan. These positive impacts were partially offset by an increase 
in cash payments for employee-related expenses, including salaries, bonuses and 
commissions, resulting primarily from growth in headcount. Cash provided by 
operating activities of $361 million during the Transition Period primarily 
reflected cash provided by cash collections, partially offset by cash payments 
for employee-related expenses. 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 decreased $239 
million during the six months ended August 4, 2017 compared to the six months 
ended June 30, 2016, driven primarily by the increase in net cash provided by 
our available-for-sale securities, partially offset by the increase in cash 
used in business combinations, as well as the disposition of vCloud Air. 
Financing Activities Cash used in financing activities increased $503 million 
during the six months ended August 4, 2017 compared to the six months ended 
June 30, 2016, primarily as a result of the increase in our repurchase of 
common stock. During the first half of 2016, we did not repurchase any shares 
of our common stock. Cash provided by financing activities of $62 million 
during the Transition Period was driven by cash proceeds from the issuance of 
common stock of $61 million, resulting primarily from our employee stock 
purchase plan.

Disposition of our vCloud Air Business As a part of the sale of vCloud Air, we 
agreed to provide certain transition services to OVH. Transition services 
consist primarily of payroll-related support services covering the migration of 
our vCloud Air customers to OVH. We expect to continue to make payments related 
to these transition services over the next 18 months from the date of the sale. 
In addition, we expect to make payments associated with the settlement of 
certain leases related to vCloud Air. Costs associated with transition services 
were included in the losses recognized in connection with the sale of vCloud 
Air recorded in realignment and loss on disposition on the condensed 
consolidated statements of income during the three and six months ended August 
4, 2017. Notes Payable to Dell We entered into a note exchange agreement with 
our 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. The notes bear interest, payable 
quarterly in arrears, at the annual rate of 1.75%. During the six months ended 
August 4, 2017 and June 30, 2016, $16 million and $13 million, respectively, 
was paid for interest related to these notes. As of August 4, 2017, $680 
million was classified as a current liability. On August 21, 2017, we repaid 
certain of the notes payable to Dell in the aggregate principal amount of 
$1,230 million. The aggregate principal amount included repayment of the note 
due May 1, 2018 at par value and repayment of the note due May 1, 2020 at a 
discount. 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. During January 2017, our board of 
directors authorized the repurchase of up to $1,200 million of our Class A 
common stock through the end of fiscal 2018. Subsequent to the fiscal quarter 
ended August 4, 2017, our board of directors authorized the repurchase of up to 
an additional $1,000 million of Class A common stock through August 31, 2018. 
The authorization is in addition to our $1,200 million stock repurchase program 
authorized in January 2017, of which $900 million remained available for 
repurchase as of August 4, 2017. Refer to Note K to the condensed consolidated 
financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q 
for further discussion. On August 23, 2017, we entered into a stock purchase 
agreement to purchase $300 million of our Class A common stock from Dell. 
Purchases under this agreement are expected to occur during fiscal 2018. The 
aggregate number of shares purchased will be determined based upon a 
volume-weighted average price during a defined period, less an agreed upon 
discount. Critical Accounting Policies and Estimates In preparing our condensed 
consolidated financial statements in accordance with accounting principles 
generally accepted in the 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 condensed 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 within 
Item 7 of our 2016 Annual Report on Form 10-K 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. Forward-Looking Statements

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