VMware Inc (VMW) 2010 Q1 法說會逐字稿

Good afternoon. Welcome to VMWare's first quarter 2010 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. At this time I'd like to turn the call over to Mr. Mike Haase, Vice President of Investor Relations. Mr. Haase, you may begin your conference.

Thank you and welcome to VMWare's first quarter 2010 earnings conference call. Here at Palo Alto, we have Paul Maritz, our CEO, and Mark Peak, our CFO, and dialed in from the road, Tod Nielsen, our COO. Following their prepared remarks, we will take your questions. This call is being simultaneously webcast on our website. Our press release was issued after close of market and is posted on the website. Statements made on this call that are not statements of historical fact are forward-looking statements subject to Safe Harbor provisions. This includes statements with the words, will, believes, expects, continues and similar phases that denote future expectation or intent. This includes but is not limited to statements regarding our financial outlook, future product offerings and future demand.

These statements are based on current expectations as of the date of this call and are subject to uncertainties and changes in condition, significance, value, and affect, as well as other risks detailed in documents filed with the Securities and Exchange Commission including our annual report on Form 10-K for the period ending December 31, 2009, that may cause actual results to differ materially from those set forth in our statements. In addition during today's call we will discuss certain non-GAAP financial measures.

These non-GAAP financial measures which are used as measures of VMWares performance should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Our non-GAAP measures exclude the affect on our GAAP results of stock based compensation, amortization of intangible assets, employer payroll tax on employee stock transactions, the net effect of amortization and capitalization of software and acquisition related items. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP measures in our earnings release for the period ended March 31, 2010, and on the Investor Relations page of our website.

The webcast replay of this call will be available for the next 30 days on our Company website under the Investor Relations link. Our second quarter quiet period begins at the close of business June 16, 2010. Also unless otherwise stated all financial comparisons in this call will be in reference to our results for the comparable period of 2009. With that let me hand it over to Mark.

Thanks, Mike, and good afternoon everyone. VMWare had a great first quarter with record free cash flows, revenue and operating profit. Our business was particularly strong in Europe, China and Japan. The demand we witnessed in the December quarter somewhat unexpectantly carried over into the March quarter. We are not ready to assume that the world's economy is robust and believe that we continue to benefit from pent customer demand on the heels of a long dry period.

Our field execution was outstanding across the board and we're seeing the benefits of our international investments particularly in Japan and China. In Europe, we closed an eight figure ELA that includes over $8 million of licensed bookings. This is our largest ELA since Q1 2009. We maintain strong discipline on product discounting, and even though our mix shifted from Enterprise Plus towards the SMB focused vSphere packages, we were able to maintain our blended ASP's at similar levels to those in 2009.

Customers continue to adopt the vSphere platform as a strategic investment that delivers substantial cost savings, improved efficiency and flexibility for their business. Our message is clear and is resonating with our customers. Cloud computing is not a destination, it is an architecture. The foundation of that architecture is vSphere which enables customers to leverage their existing IT investment and greatly simplify their data centers while providing the flexibility to take advantage of the offerings from vCloud service providers. During the March quarter, we closed the acquisitions of RTO software and Zimbra.

In early April, we acquired certain of the management products, technology and people from EMC's Ionics Group. Combined, we welcome the nearly 500 new people that these acquisitions bring to VMWare and look forward to bringing new products to our customers.

These acquisitions complement our virtualization solutions. We continue to invest in our core virtualization platform to maintain and extend our multi generational lead over commodity virtualization offerings. We plan to release updates of both View and vSphere during the year.

We ended the quarter with nearly $2.8 billion of cash and $1.4 billion of deferred revenue. Strong revenue performance, improved operating leverage and capital efficiency led to trailing 12 month free cash flows just short of $1 billion, growth over year of 40%. We're pleased with the quarter and want to think all of the people at VMWare, our partners and our customers.

Now, I'll walk you through the details. Total revenue for the first quarter was $634 million up 35% from a year ago. Total license revenue was $312 million, an increase of 21% from the first quarter of a year ago. Clearly revenue surpassed our expectations as IT spending was sponger than expected driven by a carry over of the pent up demand we witnessed in the December quarter.

We also benefited from strong sales across our global regions and all customer segments. In particular, Europe was stronger than expected and the team closed an eight figure ELA with a large customer that netted over $8 million of licensed bookings. In addition, our OEM partners had a very strong December finishes for the US resulting in better than anticipated revenue.

Finally, we saw enthusiastic demand for essentials and essentials plus primarily in the SMB markets. Despite the unit mixed shift to lower price package discipline around our discounting allowed us to maintain our blended ASPs flat to Q4.

Software maintenance and support revenue was $267 million, an increase of 52% from last year. Our maintenance recovery program has now been in place for a full year. And although down sequentially from Q4, back maintenance revenue almost doubled from Q1 a year ago. As the program will see it's anniversary in Q2, we expect back maintenance for the balance of 2010 to be lower compared to the same period of 2009. In total, renewal bookings grew approximately 56% compared to the first quarter of 2009.

Professional services revenue was $54 million, an increase of 44% from last year, and stronger than our expectations. Customers consumed professional service credits, primarily for training and to assist in planning and implementation of vSphere deployments. Our deferred revenue related to professional services declined sequentially by $7 million.

US revenues increased 30% from a year ago to $317 million, representing half of total revenue. International revenue grew 40% to $317 million, driven by strong demand across geographic particularly Europe, China and Japan. Enterprise license agreements were in the midteens as a percentage of total bookings and transactions with order values worth less than $50,000 represented approximately half of total orders. As a reminder, late in Q2 2009, we started to bill and collect in euro, pound sterling, yen and the Aussi dollar. Until we have a full quarter of prior year comparables, we won't be able to provide you with a constant currency revenue impact.

I'll now provide some details on our operating expenses. Unless otherwise noted, all references to our expenses and operating results are on a non-GAAP basis, which are reconciled in the press release tables and posted on our Investor Relations website.

Total operating expenses including cost of services and cost of license increased 2% sequentially to $459 million, driven largely by increased head count, the seasonal impact of payroll taxes and a robust set of internal IT initiatives to deliver productivity tools to our field and support organizations aimed at significantly improving customer and partner experience. As a percentage of first quarter revenue, cost of revenues were 12.2% consistent with our 2009 run rate.

First quarter R&D expenses increased sequentially to $124 million or 19.5% of revenues as compared with 18.7% in the fourth quarter of 2009. Most of the increase was head count related.

Sales and marketing expenses were $200 million or 31.6% of revenues compared with 35.1% in the fourth quarter. The decline is largely the result of Q4 variable sales compensation.

G&A expenses were $58 million or 9.1% of revenue, compared to 8.5% of revenue in Q4. The sequential increase was significantly influenced by contractor costs associated with IT projects in progress and our global leadership meetings and 2010 kick off events.

Our operating profit measured on a non-GAAP basis increased 11% sequentially to $175 million or 27.6% of revenue. This beat our forecast range due primarily to operating leverage from our revenue performance. The quarter benefited by approximately 60 basis points from FX rates as compared to Q4, but was negatively impacted by approximately 130 basis points from our Zimbra and Spring Source acquisitions.

The non-GAAP diluted EPS was $0.32 a share on 417 million diluted shares. Our share repurchase program did not have an impact on EPS during the first quarter.

Now, on to our balance sheet and cash flows statement. Our balance sheet remains strong with cash at quarter end of nearly $2.8 billion, a sequential increase of $270 million, driven primarily by the seasonal collection of accounts receivable from the December quarter billings. During the March quarter, we used nearly $200 million for capital spending, M&A activity and our share repurchase program. During the quarter, we announced authorization to repurchase up to $400 million of our class A common stock through 2011. The objective of the VMWare program is to partially offset the dilution from employee stock issuance. Total deferred revenues were $1.4 billion up 48% from the same period last year, and a 2% sequential increase. As a reminder, over 90% of our deferred revenue is recognized with the passage of time or the delivery of professional services. The remainder is solely tied to product release events.

At the end of the quarter, we had approximately 7,400 people, an increase of 300 from the beginning of the year. Approximately a third of these were from the acquisitions of Zimbra and RTO. However, the M&A activity of early April related to Ionics increases our Q2 beginning of quarter head count to approximately 7,700 people, a 9% increase from the beginning of the year. Non-GAAP operating cash flows which exclude adjustments for capitalization of software development costs and excess tax benefits from stock compensation were $357 million for the quarter, and nearly $1.1 billion for the trailing 12 months ended March 31. Precash flows for the quarter were $326 million and $972 million for the trailing 12 months. Free cash flow per share was $0.78 for the quarter. Free cash flow per share for the trailing 12 months was $2.39.

Free cash flow per share can be volatile in the short term, so we believe looking at it over a trailing 12 months is a better indicator of progress. We are paying increasing attention to the metric as a measure of financial progress in our business as it balances operating results, cash management, capital efficiency, and share dilution.

The fully diluted share count increased to 417 million shares for the first quarter driven by the impact of a higher share price on the calculation of diluted securities. We expect our Q2 diluted weighted average share count will be approximately 425 million shares and approximately 430 million shares for the full year.

Before I hand it off to Tod, I want to share with you how we were looking at the business to give you some assistance in developing your estimates. During the first quarter, we were the beneficiary of pent up customer demand that carried over from the fourth quarter. We did not forecast the eight figure ELA and we don't have anything of this size in our current second quarter pipeline. Make no mistake, Q1 was a great quarter and we're encouraged by the up take in SMB demand and the strong preference of our customers when faced with competitive options. Given this, we're planning for the future, assuming the economic recovery, and IT spending will be gradual. We are increasing our revenue and operating margin guidance as a result of our increased near term visibility and the expected incremental revenue from our M&A activities. We expect second quarter revenues of between $635 million and $665 million, flat to up 5% sequentially, and a sequential decline in license revenue. Revenue from our recent M&A activity represents low single digit percentage of our guidance.

As a reminder, the second quarter comparable to last year is relatively easy and over the last two years licensed revenue has declined in Q2 relative to Q1 primarily as a result of our reporting of OEM revenue. We expect the acquisitions we have made to be further dilutive to our non-GAAP operating margins.

Our 2010 merit increases take effect in Q2 and will cost 120 basis points of margin. Taking into account our adjustments to GAAP operating income that Mike disclosed at the start of the call, we expect second quarter non-GAAP operating margins to be between 25% and 27%. We expect our GAAP operating margin to be approximately 13 to 14 percentage points lower than our non-GAAP operating margin.

We have established a high bar given our performance over the past two quarters relative to expectations. The second half of 2010 is a much more difficult comparable than the first half particularly in the fourth quarter which in 2009 included the impact of our promotion to upgrade customers to Enterprise Plus. We continue to set 6 month quota plans and operate our business in a half yearly rhythm, but expect Q3 license revenue to be flat to slightly down from Q2 reflecting seasonality. We also expect a currency headwind on revenue in the second half as we have the anniversary of our local currency billing and collection. We are currently planning on 2010 revenue of between $2.625 billion and $2.725 billion or growth of 30% to 35% for the year. From a margin perspective, we will continue to invest both organically and through acquisitions.

Our current expectation for the full year non-GAAP operating margin is a range of 25% to 27% but this could be disrupted by M&A activity. We expect our 2010 GAAP operating margin to be approximately 14 to 15 percentage points lower than our non-GAAP operating margin.

To summarize, Q1 was a great quarter and we were pleased with our execution and solid performance. We are planning for the future assuming the economic recovery will be gradual. We continue to manage our resources prudently while making the key investments necessarily to maximize our long term growth in free cash flow per share. Tod?

Thanks, Mark. Good afternoon. As you just heard from Mark, it appears the technology industry is broadly benefiting from pent up customer demand. And VMWare is no exception. But as we look at our first quarter performance, VMWare also benefited from strong field execution around the world and solid product line performance across all customer segments. Further, we are experiencing not just revenue growth, but an overall strengthening of our existing enterprise relationships and are making progress expanding our footprint within the government sector as well as the small and medium business market. vSphere continues to gain relevance as customers are increasingly utilizing the advanced features of our core virtualization platform as they progress to their next phase of their virtualization journey.

Our most recent customer survey showed strong adoption of what we considered the more unique and innovative vSphere functionality most directly associated with the business production phase of the virtualization journey. For example, within the last year, we saw the usage of a feature which enabled the automated load balancing of VMs increased from being used by 35% of customers to 56% of customers surveyed. Similarly, the usage of storage vMotion nearly doubled and increased from 25% to 49%. We also saw a very fast uptake of the new features we bought to market with the release of vSphere four in Q2 of last year. Of the customers who upgraded to vSphere four by the end of 2009, 34% were already using fall tolerance in production and 29% were using vStorage Thin Provisioning in production. These statistics illustrate adoption points along the virtualization journey. Further, as we learn more about our customer's real world experiences in deployments, we taylor our solutions, professional services, and go to market strategies to help them accelerate their adoption and progress on the journey. We are also beginning to see the SMB market increasingly value our most innovative technologies. In general, the SMB market once it begins the virtualization journey it's progressing along at a much faster pace than enterprises. Partly because they have fewer servers, but also they have fewer people, processes and cultural implications to deal with as they transform their IT departments.

We certainly expect completive pressures to grow in the SMB market but as of today, we continue to see good growth in this market segment and have maintained our blended ASPs over the past several quarters. We are investing on all fronts to take advantage of our momentum. We are seeing the rewards of this investment especially in Japan, China, Russia, and across Europe where we are now fully executing an aggressive expansion effort. As an example, in Japan in Q1, we saw year-over-year revenue growth of 100%.

The desktop virtualization market continues to show promise with an increasing portion of our field organization engaging with customers on desktop evaluations and running proof of concepts. Further, we are seeing our early adopter customers broaden their desktop deployments, some into several thousand and even to 10,000 plus desktops. A specific example, in Q1 2010, one of the largest banks in the world made the decision to expand their virtual desktop deployment to 30,000 seats up from their initial 3,000 seat deployment. Key drivers for them were centralized management, lock down security, while delivering the best user experience through VMWare views protocol, PC over IP.

While we have a number of success stories, this market opportunity has not yet tipped. And our challenge remains in moving the broader market from evaluation to purchase. We expect to learn more about how this market will unfold over the coming quarters and remain excited by and focused on the desktop opportunity.

Overall, I'm pleased with our performance and results in Q1. From an operations perspective our goal is to consistently strike the right balance of executing on our quarterly plans while building the foundation of our business that will allow us to scale and grow over the coming years. With that, I'll hand the call over to Paul. Paul.

Thanks, Tod. As Mark and Tod have noted, we saw very positive results during Q1 as our customers responded to their fundamental value proposition of virtualization, as being not only the way to increase efficiency in the short term, but also being the strategic evolutionary path to a better way of providing IT services in the future. We see increasing numbers of customers not only wishing to push for deeper virtualization but to now reach for a true private cloud which will enable them to operate like internal service providers, a concept we refer to as IT as a service.

As we've outlined before, our goal is to be able to offer the software to not only build these private clouds, but to manage them, to develop for them, to offer core services that will sit on top of them and to be able to enable hybrid clouds which span both the private and the public cloud. During the course of 2010 then, we'll see significant releases and updates of all of our majored products to enable these goals. We'll update our core vSphere product line which offers the foundation for both increased usage of virtualization and the private cloud. As Tod noted we are pleased with the way our customers are adopting and exploiting the new functionality that we introduced in vSphere 4.0 last year. We will build on these capabilities, as we seek to further increase scalability and deepen the level of automation we can offer in the data center.

We'll also extend our vCenter management product line, in addition to the internal development we have already underway we announced during the quarter that we had acquired certain assets from EMC that pertain to configuration control, compliance management, application discovery and service management. These assets will be integrated with our current management offerings to offer a more complete solution for managing both private and hybrid clouds. We'll also significantly update our view desktop virtualization product line. As Tod noted we continue to see strong customer interest in activity here, with some customers pushing ahead with very large deployments.

We will see both updated and new products coming from our recent acquisitions. In particular we are pleased with the progress the SpringSource Group is making, maintaining their lead in the Java and open source development space. As shown by the recent acquisition of their Rabbit MQ messaging team and technology, we intend to build on this lead and expand our range of offerings that are useful in the context of both the private and the public cloud. The Zimbra team has now been part of VMWare for a quarter. We expect to build on their position as the leading open source mail and collaboration product. Zimbra will provide an important scalable solution that can be hosted on the private and the public cloud by businesses and service providers.

In summary, we remain convinced that the industry is in the beginnings of a major and far reaching transition from the PC client server era to the cloud era. And that virtualization offers the bridge between the two. This is a huge opportunity for VMWare and we remain committed to making the investments in our organization, in organic development, in technology acquisitions, in sales and marketing capabilities, and the partnerships necessary to realize it.

Our sales performance over the final months of 2009 and in the past quarter is certainly very good news and a testament to great products and good execution by our sales teams. Things look positive as we look forward. But as Mark commented, I am not sure if we have sufficient data points to accurately predict the slope of the curve coming out of the recession and to banish the uncertainty that persists in the macro economic picture. We are more than holding our own versus our competitors. But we also know that they are determined and have deep pockets. So while we remain fundamentally positive, we know that we cannot relax and we need to resist the temptations of exuberance. So, with that we'll open up for questions now.

Operator, let's start the polling process please.

Today's question and answer session will be conducted electronically. (Operator Instructions) And we'll go first to Israel Hernandez with Barclays Capital.

Good afternoon everyone. I have a question on your comments around your focus on the SMB. Obviously, pretty green feel opportunity for VMWare. You recently introduced some price promotions in March. In terms of how that promotion is going and how do you see the opportunity unfolding over the coarse in the next several quarters?

I'll take that first. This is Tod. Our SMB promotion, we put into place at the beginning of March. And are seeing great up particular of our vSphere essentials product. As Mark mentioned we actually moved sign saw increase in net volume so there was a shift from the Enterprise and Enterprise Plus products to Essentials and Essentials Plus. And so we're seeing good adoption, good strength in that market, channels working well with us, and we're very encouraged. We are also encouraged that even with this price promotion that we were able to manage our discounting such that over all, our blended ASPs were able to stay the same as they were in 2009.

And was the focus, was the focus there really to go after the green field as opposed to to any competitive pressures that you may be starting to see?

Correct. The focus was it's the green field opportunity. There's a lot of of around the world, lot of SMB out there, and it's a great opportunity for us to great our product in their hands.

Great. Good stuff. Thanks a lot.

And we'll go next to Brent Thill with UBS.

Good afternoon. Mark I was wondering if you could address the conservative Q2 license guide from our perspective. Also if you look at the maintenance catch up program, can you bring us up to speed? It soundings like you expect it to tail off. But certainly it seems like you are adding a lot of new licenses. So I would expect that that carry forward and maintenance would also help the out going forward. Can you just address those, thanks.

First. On the sequentially license decline, a number of factors. First, the large ELA that we booked during Q1 was about $8 million and that wasn't in our original forecast. If you look back to Q1 of last year we had a similar phenomenon with some large government deals that we booked and then Q2 declined sequentially. Secondly our OEM license is seasonal so we benefited from December shipments of the 86 system vendors in our Q1, and just even though server shipments are strong, they're down sequentially in Q1. Finally we have a bit of license revenue uptick from the acquisitions, but it's not enough to offset the other two. So this is really consistent with the past two years of license revenue declining in Q2 sequentially from Q1.

With respect to maintenance recoveries, the way that that program works is it was focused on companies that had not renewed upon their renewal period. We got very disciplined operationally beginning in Q2 of last year to make sure that we were reaching out to customers that hadn't renewed automatically. And so the recovery revenue that we expect, in other words, going back and capturing maintenance that isn't within the period upon the renewal, we just expect that maintenance to decline over time as we capture new licensed as they're booked on an annual basis.

Just to be clear, you had two government transactions in Q1 of last year worth $20 million and this Q1 you had an $8 million transaction so there were no other large transactions. It's a $20 million versus $8 million contrast.

Yes, and that's license revenue. So a year ago we had just short of about $20 million of license revenue. This quarter, one large one. But a little bit, a bit of a robust business on ELAs.

All right. Thank you.

And we'll go next to Phil Winslow with Credit Suisse.

Hi guys, good quarter. Just have a couple questions. Here just on the desktop side. Wonder if you can talk about trends in desktop virtualization you are seeing. And when you start to think that that's going to actually see an point occur? Is it this year or next year? And what do you actually think you need to see in the market? And then also just from a spending perspective, clearly your raising your operating margin guidance from the full year. Where do you expect most of that leverage to come from? Thanks.

This is Tod, I'll take the desktop one and let Mark address the margin. With respect to desktop, we're seeing a lot of interest from customers. Most every customer we're engaged with wants to hear about our desktop virtualization strategy. Many are running proof of concepts. We've got our field organization and our partner organization, really ramped up to drive and provide the information our customers need to evaluate. I think another driving factor is going to be that the current desktop fleet out there is aging. And with the pending windows 7 upgrade, many customers are saying if they're going to upgrade to windows 7 they want to virtualize at the same time. Exactly when this market is going to tip, though, we don't know. We're staying engaged and focused on it but I couldn't tell you if it's going to be at the end of the year or next year or exactly when that's going to be. But our eyes are certainly on the ball and we're going to make sure when it does tip, we're there to take advantage of it.

And Phil this is Mark. Our guide in January for the full year was to continue to target around the 25% range in operating margins, which is low end of the guidance that we provided today of 25% to 27%. With that said, expectations on operating leverage are going to come from the recognition of deferred revenue as maintenance amortizes off, as we've been building that balance over most of the quarters. As well as our professional services revenue which has lower general margins, isn't growing as quickly as the rest of the business.

And we'll go next to John DiFucci with JPMorgan.

Thank you. Mark, I want to circle back to the guidance. And you obviously put up some good numbers so looking sequentially, it's not that surprising to expect something to come down, the license to come down. Last year truly was an anomaly with the economy deteriorating, continuing to deteriorate from the March to the June quarter. And then if you look at 2008, if I look back at my notes anyway, it was a very disappointing quarter for you. When I look back the last couple years before that, you actually had an increase and that's normally would you expect IT spending from first to second quarter. I guess you also are saying you expect it to be flattish to perhaps down in the third quarter. Not to take anything away from what you've done in the last couple of quarters but when I look at it and there's not a lot of history for you guys but it looks like you've been putting up sort of normal seasonality. And to just excluding last year. To sort of depart from that, it just sort of begs the question, and I would understand if you are trying to be a little more conservative but given the kind of results you put up the last couple of quarters, wonder if you can just talk a little more qualitatively about that.

Sure, John. The fact is that you know we believe we benefited in Q1 from the pent up demand we saw in the fourth quarter and there were significant surges in buying in the first quarter. On top of that, it's been a year since we've had an eight figure enterprise license agreement. As you saw our ELA percentage is a total of bookings was in the midteens this quarter and at times it's crossed the 20% or 25% range. That accelerates the recognition of license revenue. We are also just in the throws of planning the back half of 2010. And as we look ahead, although we're optimistic we're still cautious with respect to what the economy has in store for us, as well as the fact that we do have competitors who are willing throw money at the market. And so, we are just approaching 2010 with caution and assuming both the economy and IT spending will improve gradually.

Okay. Thanks.

This is Paul. I just wanted to add a comment there. I think it's still too soon to say that we're back in normal waters. I think we're still going to suffer somewhere in waves coming out of the recession last year. And we're just uncomfortable in saying that's all behind us. We're back to normal patterns, etc.

Okay that's fair. Thank you.

And we'll go next to Derrick Bingham with Goldman Sachs.

Hey everybody. Congratulations. Mark, just on Q1 license again. On the last quarter or two, has there been a meaningful amount of license revenue that comes off the balance sheet that makes this sequential compared harder?

No.

Okay. Also wanted to ask about cash flow. Your cash flow generation is extraordinary relative to your net income and relative to peers. And as that gets more and more focused going forward this year, could you give us any thoughts on how you would expect cash flow to grow relative to net income. In 2009, cash flow grew I think over 20% even though non-GAAP income was down a little. Can it outpace again this year? What are the dynamics that will affect its relative growth of cash from ops?

Yes, it's a metric that internally we are more and more focused on because it encompasses all of the elements of running our business. Certainly first and foremost is bookings. And we have been very successful, perhaps much more so than our peers in being able to get multi-years of maintenance when we sell a new license. So that's the primary driver on the input side.

We've also had discipline in our cost execution. We have good receivables management. We've kept accounts receivable days, DSL under 50 days for some time. So it's really just across the board focus on cash flow as a measurement and at a metric for the business. That said, the MNA activity does put pressure on cash flows. But that's something we're willing to live with because capital investment. We're investing for the future and building out products that will help us in this marketplace.

Okay. Just one more follow-up on that. Could you talk a little bit about the ELA renewal waive that everybody has been talking about. How much of that have you already started to see? And is that something where it's you've got ELA renewals coming on top of now your run rate new ELAs. Is that kind of one more thing that keeps cash flow generation strong this year, even accelerates it further?

This is Tod, I'll take that. As you know, we've started kind of in earnest our ELA program in 2007. And the majority of them were three year terms. So many of them will be expiring in the back half of this year, and will be up for renewal. In Q1 we renewed the majority of the ones that were coming due as well we were adding new ones to the list as well. We expect over the course of the year to renew as they come forward.

One of the things we've been asked, we're not doing aggressively is pulling things forward. We're pulling some forward as the customers engage with us, but we're working at the customer's pace and tracking carefully the deployments and where are they with respect to their license consumption and making sure we can not only renew the deal with respect to maintenance but also up sell them some of our management products and our desktop products as well.

Thank you.

This is Paul. Just to add a comment on that. We've been very gratified by the response we're seeing from customers in terms of renewing those ELAs, almost without exception, the ELAs that have come due that have renewed. Those that are coming due we're seeing very encouraging signs from the customers that they intend to renew.

Thanks, Paul.

And we'll go next to Adam Holt with Morgan Stanley.

Great. Thank you. If I could just ask a question or two about the MNA commentary. First of all could you remind us what percentage of your $2.8 billion of cash is in the US? Secondly as we think about MNA obviously a couple of deals year to date, should we expect you to be more aggressive? Should we expect deals to get larger? And generally, obviously without naming names, what should we be thinking about strategically that you'd like to add into the portfolio?

Adam, just on the cash comment, a majority, more than 50% of our cash is US based and available for purposes in the US.

I think, this is Paul, in terms of our direction, obviously we're not going to go raise prices up there. But the general rule is we are seeking to invest for future capability that and so we're seeking to look at things that can strategically add to our technology repetoir rather than bulking up on revenue.

If I could ask a follow-up on the product mix. Enterprise Plus, it sounds like you saw a little bit of a shift towards some of the lower end skews. Do you think that's primarily driven by the incentive programs in the quarter? Or is that more of where you are in the product cycle? And how should we be thinking about mix going forward as we get through the promotions in the back half of the year? Thanks.

In respects to the shifts, I think it's partly because the SMB market is so large, as far as the opportunity and number of customers are to touch; And with our promotion, we certainly helped accelerate some of the focas on that space by us and our channel partners. So, I don't think it's indicative we're going to see things shift like enterprises are using lower end skews. But more just as that market opportunity grows and matures in SMB, we'll expect to see continued growth in the skews that are targeted on that market.

Great. Thank you.

And we'll next to Heather Belini with ISI.

Hi. I had a follow-up question on the ELA renewal comment. Then I had another question about ASP. On the ELAs, I was wondering, Paul or Mark, if you could share with us the renewals on average, the ones you're seeing from 2007, are they coming in at a higher amount than the original ELA, just to give people a sense of a book to bill on that? And then I have a follow-up.

Heather, this is Mark. In general, ELAs are coming in at amounts larger than the amounts that we booked.

OK, thank you. And then the follow up would be can you talk about your expectations on ASPs going forward. And also I think you mentioned that you're going to have an update to the product portfolios in the second half of the year. Could you talk to us a little bit about the potential pricing changes we might see or the skew changes we might see when you release your new enterprise products later in the year?

Just expectations on ASPs, we have programs in place to make sure we're doing a good job of managing discounts against list. And we were very successful this quarter and we expect the success to continue by the field organization. Certainly, it's largely dependent upon how the SMB market does and if we continue to grow the SMB there will continue to be downward pressure on over all ASPs. With respect to packaging and pricing, we're just not ready to talk about anything until we announce it first to our channel and to our field. And we're also exploring how we might best optimize pricing.

Great. Thank you.

We'll go next to Walter Pritchard with Citigroup.

Just had one follow-up on the ELA question. Just want to clarify, I guess as I understand it the ELA the customer comes in and renews the maintenance. You mention you are seeing an up particular in terms of the ELA side at the time of renewal. Is that actual to the dollars paid or the foot print of the deployment?

It's really both. The total size of the enterprise agreements are growing and we are seeing new license sales into those organizations.

Just to help us understand the Q2 dynamic. But I think it would be helpful if we could get a sense of the order of magnitude contributions from the OEMs as those partners have an impact, delayed impact on Rev ramp, just to help us understand the Q2 sequential decline possibility.

Sure. Like the large ELA, we booked this quarter, it's single digit millions.

I guess what I was trying to get at is percentage of the business coming through OEMs.

We haven't split out by channel what percentage is coming out. But if you look at the sequential move between Q1 and Q1, we expect it to be a single digit million.

Okay. Thank you very much.

We'll take our next question from Jonathan Dorrus with Raymond James.

You mentioned that you are seeing a contraction with View. Could you maybe provide roughly how much you did during the quarter and how much View is baked into 2010 guidance?

Yes. We're not breaking out by product category our revenues or bookings. View is certainly has an aggressive business plan inside, and that's appropriately baked into the guidance as well as into the pipeline.

You guys talked about maybe seeks deployed out there?

At the end of Q4, was that, of the roughly 1.5 million virtualized desktops that were out there, we had over a million of them. So we felt strong in the VDI space. But that's the last data we have talked publicly about.

Thanks.

And we'll take our next question from Tim Klasell with Thomas Weisel Partners.

Good afternoon everybody, wanted to jump over to the international portion of this, which did quite well. Can you give us some, how far along your international customers are in virtualization? What products are doing better, so should this trend continue, what changes to the business or revenues throw flows should we be thinking about?

What we're seeing in Japan and China and Eastern Europe and some of the expansion markets, early phases of virtualization. So in the first part of the journey, it's typically around capex reduction. And the value proposition is incredible, where you can buy ten servers or buy one. So it's still early stages just like VMWare was four or five years ago. We're not seeing as much of in general the advance products around management or state recovery manager. And more folks are looking at View and core vSphere as they're building their business virtualization to get through phase one. As mentioned we're seeing a strong up particular and seeing good results from these investments. And expect that as they get through this stage of the journey, they'll catch up and look at some of the more advanced features to building a private cloud like Paul talked about.

Okay. Great. Thank you.

And we'll go next to Brian Marshall with Broad Point. Mr. Marshall, your line is open. Please check your mute function. We are unable to hear you at this time. Once again, Mr. Marshall we're unable to hear you at this time. Please check your mute function. And we'll take our next question from Shal Lau with Oppenheimer and Company.

Good afternoon guys, good quarter. Congrats. Two questions on my end. The eight digit contract, the European customer is that an existing customer, an extension of a existing contract or a new customer?

Existing customer.

Got it. And generally speaking in terms of not necessarily ASPs, but more state cycles, are they lengthening or kind of shortening right now, what's the view on that point?

I'm sorry, I lost part of that question. Could you repeat it.

I was asking about the state of cycles, are they lengthening or shortened right now.

For vSphere, the sales cycles are about where we've seen them. On the desktop side, they're consistent with other desktop sales cycles but they're certainly a longer cycle than we see with vSphere. So within the product line we're seeing consistency across the sales cycle durations. But there is definitely a difference between selling a View deployment versus vSphere.

Got it. Thank you.

Operator we're going to take one more question, please.

Great. We'll go next to Brent Williams with Benchmark Company.

Thanks for letting me slide in under the wire. Wanted to talk about some products in the cloud division. You hired a guy in March that's the leader of the reddest open source memory cache. That's one of those technologies that go under the no sequel tag, so it's that movement that all the cool kids are getting caught up in. And I'm an old database guy, so I know they're unsuitable for storing stuff in the cloud. And there's a lot of small players. By taking this on are you really tipping your hand by entering the sort of the emerging or alternative database market? Not trying to compete with Oracle but by saying that stuff doesn't work. And can you give us any sort of larger thoughts about the storage architectures for the cloud that you were thinking about. Not talking about storage management and integrating that with vSphere. I'm talking about more advanced technologies like that.

This is Paul. We'd be happy for you to come around and have a cup of coffee with me and we could discuss that for several hours. The very, very short answer to your question is we are we are not trying to get into the database business per se. We are trying to be into the business of enabling applications for the cloud, both private and public. And as I said, building off our Spring Source acquisition, we are adding to the repertoire of underlying middle wear and technologies that we think are going to be needed to generate and to develop a new generation of applications. So in that sense, our hiring of the gentleman in question, is a further indication as was the Rabbit MQ acquisition of our intend to build a very compelling suite to enable you to build cloud based applications. If you want to get into the whole database and database storage discussion, swing by and we can have a long debate about that.

Love to take you up on that. Thanks for taking the question.

Great. Thanks for that. That does concludes the call.

This does conclude todays conference. Thank you for your participation and have a great day.