VMware Inc (VMW) 2011 Q4 法說會逐字稿

Welcome to the VMware fourth-quarter 2011 earnings call, and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the meeting over to Mike Haase, Vice President of Investor Relations and Treasury.

Welcome to VMware's fourth-quarter and full-year 2011 earnings conference call.

On the call we have Paul Maritz, our CEO, and Mark Peek, our CFO. Following their prepared remarks, we will take questions.

Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast.

Statements made on this call include forward-looking statements, such as those with the words will, believes, expects, continues, and similar phrases that denote future expectation or intent regarding our financial outlook, product offerings, customer demand, and other matters. These statements are based on the environment as we currently see it and are subject to risks and uncertainties. Please refer to the press release and the risk factors and documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-Q and Form 10-K for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. VMware assumes no obligation to and does not currently intend to update any such forward-looking statements after the date of this call.

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 VMware's performance, should be considered in addition to, not as a substitute for or an isolation from GAAP measures. Our non-GAAP measures exclude the effect 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 the press release and on the Investor Relations page of our website.

The webcast replay of this call will be available for the next 60 days on our Company website under the Investor Relations link.

Our first quarter quiet period begins at the close of business March 16, 2012.

Finally, unless otherwise stated, all financial comparisons in this call will be in reference our results for the comparable period of 2010.

With that, let me hand it over to Mark.

Thanks Mike. Good afternoon everyone.

We capped an outstanding 2011 with a great fourth quarter, producing record bookings, revenue, non-GAAP operating margin, and free cash flow. But before we dive into the fourth-quarter details and look ahead to 2012, let's spend a little time looking back on our 2011 accomplishments.

Financially, 2011 was an outstanding year. Total revenue increased 32% to $3.8 billion, and license revenue increased 31% to $1.8 billion. Total unearned revenue is now $2.7 billion, an increase of 46% during the year. Long-term unearned revenue is approaching $1 billion and grew 60% in 2011 as customers continue to purchase multiple years of maintenance and as more unearned license revenue is recognized ratably.

On a non-GAAP basis, we improved our annual operating margins by 250 basis points, while increasing our R&D spend by 23%. As we plan for our long-term growth opportunities, we are making a conscious decision to pause operating margin expansion in 2012 as we increase our investments in emerging markets and product innovation.

We repurchased $650 million of VMware stock during 2011, invested an aggregate of $380 million in CapEx and the long-term expansion of our Palo Alto campus and the Stanford Research Park, and spent over $300 million on eight acquisitions. Yet we ended the year with $4.5 billion of cash and short-term investments, almost entirely in US dollars, and more than half of our cash is available for use in the US without further taxation in the US.

Non-GAAP operating cash flows were $2.2 billion and free cash flows exceeded $1.9 billion. Free cash flows per share were $4.51, growth of 59% during the year. We continue to believe that free cash flow per share is an important and durable measure of our business as it balances operating performance, cash management, capital efficiency and shareholder dilution, while being a measure that every individual at VMware can influence every day.

Importantly, our financial performance was driven by our product performance and 2011 was an outstanding year on many fronts. We successfully launched vSphere 5, View 5, Cloud Foundry, and Virtual Center Ops among other products. We are building off our strong foundation and virtualization and are working to help our customers realize significant savings as virtualization becomes the accepted way of computing in the data center.

We are building out a comprehensive cloud infrastructure suite for the private and public cloud, incorporating new approaches for application development, management, and security. Our application platform layer encompasses vFabric and Cloud Foundry. Our goal is to drive ubiquitous adoption of Cloud Foundry, and we have generally made it available via open source. We are giving our customers the flexibility and choice they will need in the cloud era to provide alternatives to highly vertical stacks. We continue to strengthen our hand in end-user computing, not only with the new release of View, but also building products to allow customers to securely enable end-users in an increasingly mobile and multi-device world.

We made eight acquisitions during 2011 and welcomed more than 600 people from Digital Fuel, PacketMotion, Mozy, SlideRocket, Shablock, Socialcast, NeoAccel, and WaveMaker. We added over 2000 employees net, ending the year with over 11,000 people.

We expanded our international footprint and customer facing capacity, particularly in the key markets of China, Japan, Eastern Europe, Russia, and Latin America. All of this was accomplished while maintaining high standards of product and service quality and improving our 2011 non-GAAP operating margin by 250 basis points. We are pleased with our 2011 accomplishments and want to thank all of the people at VMware, our partners, and our customers.

Now I'll walk you through the financial details of our fourth quarter. Total revenues for the fourth quarter were $1.06 billion, an increase of 27% from a year ago, or 26% on a constant currency basis. Similar to our fourth quarter of 2010, we experienced a very strong Q4 budget flush helping to drive record volume and enterprise license agreements which represented 30% of total bookings for the quarter. This included five transactions greater than $10 million each. We were pleased to see a healthy mix in the quarter from renewals as well as new ELAs. In addition, we continue to see a higher attach rate for our end-user computing and management products as customers renew their ELAs.

License revenues were $514 million, up 22% from last year despite a difficult comp. We experienced strong and balanced performance across all regions.

Despite our record volume ELA performance, which generally offer higher discounts for the volumes purchased, the strong demand for enterprise and enterprise-plus versions of vSphere resulted in an overall ASPs per vSphere unit being flat compared to Q3 and the same period last year.

Within our cloud application platform, we continue to see positive traction with the Cloud Foundry project and anticipate a commercial version later this year.

We were also encouraged to see positive adoption of vFabric during the quarter. Demand for our end-user computing solutions was strong, helping to drive record bookings. Customer adoption of View 5 has been positive and we are seeing especially strong interest within our international markets. We've been encouraged to see several large deals for View with solid business coming from both recurring business, as customers choose to add additional licenses, and from new customers.

Management and automation solutions also achieved record bookings with very positive traction for vCloud Director, vCenter Operations and vShield. We're very pleased that each product category in our management portfolio met or exceeded our Q4 operating plan with healthy contributions from our non-vSphere solutions.

US revenues increased 21% year-over-year to $531 million, and international revenues were $529 million, an increase of 34% compared to 2010, or 32% in constant currency. Demand in our Asia-Pacific region was particularly strong, led by Australia, Japan and China. Our growth in Europe was driven by balanced demand across the region. We're very pleased with our progress in growing our global market presence. The investments we have made and will continue to make in our international market expansion are clearly paying off and we will continue to invest in these markets in 2012.

Software maintenance and support revenue during the fourth quarter was $463 million, up 34% compared to last year. Our renewal business for the full year exceeded $1 billion in bookings. We expect maintenance revenue to continue to grow at a faster rate than license revenue in 2012. Customers continued to buy, on average, more than 24 months of support and maintenance with each new license purchased, illustrating their strong commitment to VMware as a core element of their data center architecture and longer-term private and hybrid cloud strategy.

Professional services revenue was $83 million, up 22% from last year.

Total unearned revenues ended the year at $2.7 billion, up 46% from the end of 2010 and an increase of 21% sequentially. The complexity of our unearned revenue has increased over time as a result of acquisitions, an expanded product portfolio and a broader range of pricing and packaging alternatives. Nearly 80% of our unearned revenue is software maintenance, and will be recognized ratably. Approximately 14% of unearned revenue is software license revenue which will be recognized either ratably, upon product delivery, or upon product release. Increasingly, unearned license revenue is recognized radically ratably, and at year-end represented over 40% of the total unearned license revenue balance. In addition, approximately 7% of unearned revenue is the result of prepaid professional services, including training, which is recognized as the services are delivered.

2011 was a tremendous year for VMware, and we are pleased with our financial results and operating progress. For 2012, we are cautious about the macroeconomic environment and the volatility we are observing in the world economy and individual sovereign nations.

Although we have not observed a slowdown in customer activity like we saw in late 2008 and throughout 2009, we are cautious about the potential for slower IT spending, and remain concerned about the European markets. With this backdrop, we currently expect first-quarter revenues to be within a range of $1.015 billion to $1.040 billion, or year-over-year growth of between 20% and 23%.

License revenues for the first quarter are anticipated to increase approximately 10% to 12% from last year on a very difficult comp. Last year, we benefited from five transactions in excess of $10 million each and do not anticipate this benefit in the first quarter of 2012.

For the year, we are expecting total revenue of between $4.475 billion and $4.6 billion, or growth of 19% to 22% compared to 2011. License revenue in 2012 are expected to grow within a range of 11% to 16%. This contemplates the linearity of license revenue by quarter to be similar to 2011.

I'll now provide some details on our operating margins. 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.

Our Q4 operating profit measured on a non-GAAP basis was a record $338 million, or 31.9% of revenue, compared with 30.3% in Q3 2011, and 29.6% in Q4 2010. We ended the year with approximately 11,200 employees, up 2200 from the beginning of the year and 300 from the beginning of the fourth quarter. We are in a rapidly changing and dynamic environment, and we see much opportunity in the adjacencies to the vSphere platform and in our international markets, so you should expect that we will continue to hire at a brisk pace than 2012 to take advantage of these opportunities.

Diluted non-GAAP EPS was $0.62 a share on 431 million diluted shares. Our non-GAAP tax rate was 20%. The GAAP tax rate was significantly lower at 4% as it reflects a cumulative catch-up for all 2011 as a result of taxable income shifting from the US to international jurisdictions. We expect the non-GAAP tax rate to be approximately 18% for 2012, and the GAAP rate to be a couple of percentage points lower than the non-GAAP rate.

As mentioned last quarter, we are not planning for operating margin expansion in 2012. We anticipate continued investment throughout the year related to product development, global market expansion and go-to-market opportunities. We see significant long-term growth opportunities and will continue investing to take advantage of them. It will take us some time to ramp our investment spending in 2012, and as a result we expect the Q1 operating margin to exceed the operating margin for the full year.

Taking into account our adjustments to GAAP operating income that Mike disclosed at the start of the call, we expect the non-GAAP operating margin for the first quarter to be within a range of 30% to 31%, and the full-year 2012 margin to be within a range of 29.5% to 30.5%. The GAAP operating margins for the first quarter and full year 2012 are expected to be approximately 11 to 14 percentage points lower than the non-GAAP operating margins.

Quickly on a GAAP item, as we shift to product solutions and how these products work together, we have reassessed our development process and its impact on capitalized software development costs. We expect the amount to be capitalized in future periods to decrease significantly and as a result will have a negative impact on our GAAP operating results for the next couple of years as we continue to feel the impact of the amortization of previously capitalized amounts. We expect this impact to be approximately $75 million in 2012 on a GAAP basis.

Now on to our balance sheet and cash flow statement. Our balance sheet remains strong with cash and short-term investments at year-end of $4.5 billion, up $500 million sequentially. During the quarter, we used approximately $90 million in aggregate for capital spending in our share repurchase program.

Non-GAAP operating cash flows, which exclude adjustments for capitalization of software development costs and excess tax benefits from stock compensation, were $588 million for Q4 and $2.2 billion for 2011. We adjust our operating and free cash flows for access tax benefits because it converts to cash or reduces our tax liability.

During 2011, we acquired the lease rights to 70 acres plus buildings on a site adjacent our Palo Alto campus. It is our intent to build out this site over the coming years, and we expect our capital spending for this project in 2012 to be approximately $150 million, bringing our total expected CapEx spend to approximately $325 million to $350 million for 2012.

Free cash flows were $535 million for the quarter and $1.9 billion for the year. Free cash flow per diluted share was $1.24 for the quarter and $4.51 for the year. As we have mentioned, 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.

The fully diluted share count was 431 million shares for the fourth quarter. We expect our first-quarter 2012 diluted weighted average share count will be approximately 430 million to 435 million shares. For the full year, we expect the diluted share count to be approximate 435 million to 445 million shares.

To summarize, we are very pleased with our execution and solid fourth-quarter performance. We continue to manage our resources prudently while making the key investments necessary to maximize our long-term growth and free cash flow per share.

Paul will now make a few remarks before we take questions.

Thanks Mark.

To echo what Mark said, Q4 provided a good end to a good year. I too would like to thank our employees, partners, and customers for their support.

During the course of the year, we continued to demonstrate that we can bring new functionality to our customers in a repeatable and reliable way, as evidenced by major leases in all of our product families. Our customers have taken full advantage of this with the result that a substantial part of the world server applications now run on VMware supplied infrastructure.

But customers now want more than just virtualization. They are looking for ways to become fundamentally more agile and efficient and transform their businesses. They want to spend less time and effort on underlying infrastructure, and devote more focus to transforming their businesses. 2012 will be the year when we expect our customers to accelerate beyond virtualization in significant numbers, and start operating in a cloud-like manner. This presents us with the opportunity to supply our customers and partners with an extended suite of software to address the integration, automation, management, and development capabilities they need. It is for this reason that we continue to invest in our three-part strategy of cloud infrastructure, application platform capabilities for new and renewed applications, and client management capabilities for the post-PC era.

In the dimension of cloud infrastructure, we continue to not only make fundamental enhancements in vSphere, but are pushing to deliver a full cloud infrastructure suite, including management, disaster recovery, and security, delivered via private or public clouds. As Mark noted, sales of these additional capabilities, particularly management, are growing strongly and adding to the value of our ELAs.

In the dimension of the application platform, 2012 was a record year for our vFabric family, growing strongly, albeit off a small base. Cloud Foundry continues to attract developers and we expect that to continue into 2012 as we and partners fill out the offering.

In the dimension of end-user provisioning, we released View 5.0, our VDI offering, which has been very well received by our customers. The longer-term opportunity here is to enable enterprises to securely equip their users in a multi-device mobile world. To address this, we have our Horizon family of investments.

2012 will see us introduce significant new functionality in each of these areas. Our partner ecosystem continues to grow, and we are expecting some 4000 attendees at our partner event in Las Vegas next month. We are confident that these investments will stand us in good stead over both the near and the long haul. Combined with discipline and hard work, they will enable us to stay ahead of our competition and deal with continued uncertain economic times. I am confident that we can grow to be a leader, not just in virtualization, but in IT Transformation in the cloud era.

With that, we'll now open up for questions.

(Operator Instructions). Adam Holt, Morgan Stanley.

Very nice quarter. My first question is about the deferred license revenue which looks like it was up over 40% on a year-on-year basis. Could you talk a little bit about what's driving that? Are you trying to incent customers to move towards deals with either a ratable or a multi-quarter kind of component, maybe drill on that a little bit.

Sure. There is a couple of components to it. Total deferred license revenue is in the neighborhood of $380 million. About half of that is going to be recognized ratably. Much of that is coming from enterprise license agreements in which the terms are such that we have given some concessions to customers where they will receive futures that we hadn't historically given. Part of the motivation on this is that our practice has been when we released new versions of product is that we have not had significant upgrade fees associated with those products. And so in some cases with larger customers, it's been advantageous for us to go ahead and modify terms so that we could have ratable revenue recognition.

If I could just ask a quick follow-up on ELAs, it looks like you're entering a period where your comparisons are a little bit more difficult on the ELA renewals. Is that the case, or does some of the early renewing actually make the comparisons not as difficult as they look? How are you thinking about navigating through the ELA component over the next couple of quarters? Thank you.

Yes, it's certainly the case that most of our ELAs are on a three-year term. And so as a result, the comp we have particularly in the first half of 2012 is a bit more difficult because we are looking at the teeth of the recession for 2009. It will just -- that said, the challenge that we'll have is to continue to sell more than just vSphere, to also sell our end-user computing products as well as management automation products. But we have a strong product portfolio, and so the guidance contemplates a bit of a slower ELA renewal base.

Terrific, thank you.

Kash Rangan, Merrill Lynch.

Hi, thank you very much. Mark, just wanting to review. You've said that the ELA comps are difficult, but maybe to take the flipside of that, you have more opportunity on these renewals, right, because you have probably depressed levels of activity in 2009 first-half time frame. So I would imagine that it actually gives you a bit of a tailwind as opposed to headwind if you just amplify on that.

One for Paul, I think, Paul, you've said you view the current penetration of core virtualization in the base at about 50%, 55%. In light of that, how should we think about the growth reacceleration of VMware? Is it really going to come from management or desktop? Where is I guess your certainty/confidence level higher among the things that can -- around the core business drive reacceleration of your license revenue. That's it for me. Thanks.

Yes, Kash, to your first question on ELA renewals, if you think about the composition of an ELA, at the end of a three-year term, customers typically have a contractual right to renew one year of maintenance at a fixed fee, and so the overall base that we are starting with is relatively low compared to the original contract value. And so we typically will go in, to the extent that the customer has purchased additional licenses over time, [can't] look at opportunities to make that maintenance coterminous. To the extent there is an opportunity for us to reengage with the customer on their automation and desktop needs, we'll do that as well. So there are sales opportunities there in our overall sales motion, but it will be starting with a bit of a lower base, particularly in the first half of 2012.

To go to your question about where is the growth going to come from in the future, Kash, first of all, core virtualization continues to grow, so we are continuing to see customers invest in that technology, so we still have a growth opportunity there. But as we've said on several occasions before, we see the opportunity to not only sell virtualization, but to sell what we call the adjacencies around that, the other capabilities that people need for IT Transformation. It's for that reason that we have, in addition to vSphere, created these product lines around management and automation, around end-user computing, and around the application platform. Those businesses, or those product lines are growing at a faster rate than our core vSphere business. We expect to see that continue.

We were also, as Mark noted, were pleased in the fourth quarter to see a significant attach of both our managed and automation, our end-user product line as well as our application platform product line, significant attach of those product lines to our ELAs in the fourth quarter. So, the growth will come from a combination of continued growth in core virtualization, but with these so-called adjacencies growing at a higher growth rate.

Thanks Paul.

John DiFucci, JPMC.

Thank you. Mark and Paul, you guys have done an impressive job sort of maneuvering or managing the current environment, doing what you can control -- taking care of what you can control. At the same time, you've said several times here that there's a lot of uncertainty out there. I saw a quote from -- it says Mark Bloomberg that guidance assumes no macro deterioration. First of all, is that accurate? Then does that include financial services? I guess in other words, does that imply that financial services spending will trend similar to last year?

When we put guidance together for 2012, the basic assumption that we made is that the macro environment, particularly in Europe, isn't going to worsen, and it isn't going to improve. Now, we haven't broken that out by individual sectors other than to look at our overall product pipeline, customer pipeline, and our knowledge about the ELAs that are going to renew. So as we look ahead to the full year, we of course approach it more cautiously because we have less visibility, but our basic assumption is that Europe won't fall into a full-fledged recession.

But does that -- what about even -- there is some concern here in the US over the financial services. Obviously, financial services vertical, obviously you guys didn't see much concern this quarter at all. That's great. The jump in deferred revenue sounds like even the future business feels pretty good. But I'm just curious maybe if you can comment, even on US financial services, if you've seen any changes in that particular vertical and region.

Yes, we basically don't breakout bookings by any particular vertical, but the financial services industry has been a leader in data center innovation over time. So, they've always been really a strong bookings sector for us. But -- and we had a strong fourth quarter overall, including the financial services sector. As we look ahead, we're just assuming that IT growth is in the low single digits, and that server growth is going to be about at 8%.

Okay, great. Thanks, nice job guys.

Heather Bellini, Goldman Sachs.

Great, thank you very much. Paul, I was wondering if you could share this -- I have a couple of questions here. How fast do you see workloads growing on average per annum as a driver of your core vSphere growth?

Then I guess the other part of my question would be if you could talk about your management offerings in light of those offered by the competition and kind of share with us the value proposition of one of your customers going with your management offerings, if they are already using vSphere versus someone else's. Then I guess to Mark, last part was if you can just maybe update us on what percentage of bookings are related to management tools versus what you disclosed back at the analyst day in August. Thank you.

This is Paul. Our -- your question about application workloads growing, and remember we are essentially eating out of two pools there. One is applications that are coming -- existing applications that are coming over from the physical world today to the virtual world, and then the creation of new application workloads. We see those continuing -- that growth and workloads continuing to outpace server growth, which is the reason that we're forecasting our license revenue to be above the server growth rate that Mark spoke about.

In terms of our management offerings versus competition, I think there's a couple of factors there. First of all, we are squarely focusing our management automation offerings at the need of customers in running private cloud on top of virtualized infrastructure. That private cloud on top of virtualized infrastructure is becoming a bigger and bigger percentage of the footprint inside people's data centers, so we see it increasing, willingness of people to look at the management offerings and say that we need something that is highly optimized for the virtualized/private cloud world. We've done a lot of work there in introducing some significant innovative function there, particularly around the vCenter operations there.

Secondly, we are working to develop an integrated suite. We think that customers view infrastructure as incredibly important, but it's not the thing that they want to spend more of their time and money on. Instead, they would rather be able to redirect their focus towards things that really are going to differentiate them in the marketplace versus their competition. When that happens, customers tend to place a greater premium on getting a complete suite of functionality, and that's what we are doing for virtualized infrastructure and for private clouds. So, we are highly optimized with the environment and we believe we are better integrated as the two bottom lines.

(multiple speakers)

With respect to management and automation bookings, it was -- the fourth quarter was our strongest quarter yet for management and automation products. Overall, it represented more than 10% of our license bookings, but with a strong attach to ELAs and ELA renewals, so selling into our installed base of customers that had deployed vSphere in production environments, and so it was a very good quarter for the management products.

Thank you very much.

Brian Marshall, ISI Group.

Thanks. I was wondering. Two questions I guess, the first one for Paul. Paul, would it ever make sense for server virtualization to be in an environment that you could characterize by one of homogeneous workloads?

Then the second question for Mark, can you talk about any sort of outside ELAs that may have happened in the quarter? I know you mentioned five deals greater than $10 million, but were there any that were significantly larger than $10 million? Thanks.

This is Paul. I'm not sure exactly what you mean by homogeneous workloads, so I'll take a stab at answering your question. If not satisfactory, feel free to drop me an e-mail or call me afterwards.

What -- if you mean by homogeneous that all of the applications are going to be exactly like each other, we think that what we are trying to do with our infrastructure is provide a common underlying substrate on which customers can run both legacy and future applications. So, we are trying to provide an environment that addresses a legacy world that is relatively heterogeneous, have lots of different kinds of applications there, but also think of the future world where people think more of the scale-out applications that consist of many repeated components that look exactly like each other. But if you have something else in mind, let's take it off-line.

With respect to any outside deals, all I'll say, because we haven't called out any individual customers, is that the aggregate value of the five transactions over $10 million was less than $100 million.

Thanks guys.

Walter Pritchard, Citigroup.

Thanks guys. Just a question on the guidance, and sort of if I look at the first half of the year, it looks like you guys blew through the high end of your quarterly guidance pretty handily and both Q1 and Q2. In Q3 and Q4, you were right at the high end of guidance. I'm just wondering, as you look back on the year, what drove the disparity in performance versus your guidance first half versus second half? Then how should we look at the way you've guided for Q1 and then for the year in terms of how conservative, looking at both then first half and second half of '11?

I think, when we look back on 2011, we started the year with an annual guide of 21% to 24% and then ended up with 32% revenue growth for the year. It was really the first quarter we significantly over performed, and that was driven by five ELAs that were over $10 million. When we had looked at the original pipeline in giving guidance for the quarter, we didn't have a single ELA in excess of $10 million. So that drove first-quarter performance, gave a base of maintenance revenue and deferred revenue that sort of went on throughout the year. And so as we looked at the second half of the year, we tended to tighten the range as the year moved on and then achieved more towards the upper end of the range.

As we look ahead at 2012, we are trying to be realistic in our guidance. We think, as you look at the maintenance streams and the maintenance and professional services runoff, there's not a lot of mystery to it when you take the guidance and then look at what's on the balance sheet as that rolls off through the year. So the real range of forecast accuracy comes into license bookings and we are giving a fairly broad range of 11% to 16% for the year and believe, at this point, that it's a reasonable estimate.

Then just on the profitability, you mentioned that we shouldn't expect to see -- or you are not planning on margin expansion. In the event you do see results on the topline that are better, should we expect it will flow through or should we expect that you would spend that and still not see margin expansion in 2012? Thanks.

Yes, it's -- our spending and our investments that we are making tend to not tie directly to revenue in any particular given quarter so that if there is upside in revenue in a particular quarter, you would expect operating leverage as a result.

Got it, thanks.

Brent Thill, UBS.

Thanks. Mark, the contribution for non-vSphere products -- I know you mentioned to Heather on her question about management was more than 10% of bookings. I was curious if you could just take all the non-vSphere products. Is there a simple number that you can give us that relates to the suite beyond vSphere?

Yes, we are still not to the point where we are breaking out individual product revenue. VSphere continues to be the biggest drivers of bookings. Even when you look at ELAs, they start with vSphere and then there is stronger attach to management and automation as well as end-user computing.

Okay. For Paul, just to follow up on View, there's a number of large deals that you saw in the quarter. Can you give us a sense of where you think we are in the evolution and what we should expect for this year?

We continue to expect our View business to grow strongly this year, as Mark said. We think, in View 5, we have a fighting product. Customers are responding well to it, and we continue to expect to see success there.

Philip Winslow, Credit Suisse.

Hi guys. Great quarter. Two quick questions. First, Paul, I'm wondering if you could give us an update on desktop virtualization, just what trends you're seeing there and how that business is doing for you guys.

Also, Mark, one of the things that was highlighted obviously was the increase you in deferred license revenue on the balance sheet, just a higher mix of license going there. When you think about your guidance for this year, did you factor sort of an increased deferral rate in there? Maybe if you could provide more color there, that would be great. Thanks.

This is Paul commenting on desktop virtualization. I think there is a -- there are near-term and then medium-term directions there. In the near term, as I said, we continue to see success in traditional desktop virtualization, which is the notion of running a Windows workload or a Windows desktop in a virtual machine connected to some kind of a non-PC or thin client device. That is something that is particularly strong in certain verticals where security and control is important. So financial services, healthcare, education, the military tend to be the major drivers of growth there. We expect that to continue.

What we see happening in the medium term is that business, what we call our end-user computing or end-user provisioning business, is beyond desktop virtualization. It becomes part of a larger opportunities, which is to provide customers or enterprises with the capability to equip users with the services that they need, the applications and data, and have those services appropriately and securely mapped to whatever device the user happens to hold in his or her hands. Those services could be both Windows applications, SAS applications, new applications, and the devices include everything from laptops through thin client terminals, tablets, smart phones etc. So, we see the desktop virtualization business becoming a segment of a broader end-user computing/multi-device/mobile provisioning world.

On deferred license revenue, our guidance assumes that we will not be eroding deferred license revenue balances. Our deferred license revenue is really made up of two separate components. The first is a result of product promotions that we may run in a quarter or any particular product announcements that we make ahead of release in which that license revenue is deferred until we actually ship the product. That's about half of the deferred license revenue we have. Then the other half, as I spoke about previously, is ratable based on Ts and Cs, particularly in enterprise license agreements.

Great, thanks.

Rick Sherlund, Nomura.

Thanks. On ELAs, what's the opportunity to renew early on ELAs? Do you see that very often, that people run out of capacity or have expanded needs, and so maybe the term is shortened? Also just on the discounts that are being offered on ELAs, has there been any change there?

Yes. Overall, the best look we have at discounts on ELAs is really the ASPs around vSphere. We haven't seen erosion of ASPs on vSphere either sequentially or year-over-year. We'll have different customer behavior on early renewals or on carryover of ELAs that terminate and they tend to balance each other out. So as we closed the fourth quarter, we had some ELAs that were renewed early from the first half of -- what normally would've termed in the first half of 2012, but we also have some carryover of ELAs that expire during the fourth quarter which we are still in negotiation with customers on either an expansion of the product offering or just the length of the term.

Is it possible for this next six-month period to accelerate some of the renewals that might be coming earlier, either the customer is in a position to expand and is motivated to do so?

Yes, we certainly can engage with the customers on that, although typically the sales cycle has more pressure around it as the ELA terms and as we hit the termination date and beyond.

Great, thank you. Good quarter.

Operator, we're going to take two more please.

Shaul Eyal, Oppenheimer.

Thank you guys for taking my question. Good quarter.

Paul, just a quick word if you could share with us what the competitive dynamics look like.

Sure. We haven't seen a major shift in the competitive dynamics over the course of 2011. Of course, we are expecting a release by Microsoft of their Hyper-V3 Windows 8 product in the latter part of this year. We expect them to come back at us again, and we are prepared for that, which is one of the reasons that I mentioned that one of the things we've worked very hard at VMware is to be able to reliably and predictably and frequently deliver new functionality. In the past, we've been able to turn our crank faster than Microsoft can turn theirs, and we are hoping that will stand us in good stead in the future.

Thank you and good luck.

Robert Breza, RBC Capital Markets.

Hi, good afternoon. Thanks for squeezing me in here. I really just wanted to follow up, Mark, if you could talk about cash flow and how we should think about the seasonality or how we should think about that maybe tracking revenue or license growth, that would be great. Thanks.

Sure. It's -- you know, the cash flow comp for 2012 is going to be a challenge relative to 2011. We had a good year in bookings and as you look at the deferred license revenue growth, it was very strong. We also have some CapEx in front of us with respect to the campus buildout that we are doing in 2012 in which we expect to spend $150 million or so on the Palo Alto campus. But that said, we expect cash flows to grow in line with revenues, offset a bit by the operating margin guidance we've provided.

Great, thank you.

Okay, great. Thanks everyone.

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