VMware Inc (VMW) 2013 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time, all participant lines are in listen-only mode. After today's presentation, you'll have the opportunity to ask questions.

(Operator Instructions)

Today's conference call is being recorded. If you have any objections to this, please disconnect at this time. And now, I would like to turn the call over to your host, Mr. Paul Ziots. Sir, you may begin.

Welcome to VMware's first-quarter 2013 earnings conference call. On the call we have Pat Gelsinger, Chief Executive Officer; Carl Eschenbach, President and Chief Operating Officer; and Jonathan Chadwick, Chief Financial Officer and Executive Vice President. Following their prepared remarks, we will take questions. Our press release was issued after the 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.

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 in isolation from GAAP measures. Our non-GAAP measures exclude the effect of 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, acquisition-related items, and realignment costs.

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 second-quarter 2013 quiet period begins at the close of business on June 14, 2013. Unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2012. With that, let me hand it over to Pat.

Thanks, Paul, and good afternoon, everyone. Q1 was a solid start to the year, despite a mixed economic environment. I'm very pleased with my team's performance this quarter, particularly in light of recent results from many of our industry peers. Total revenues for Q1 increased 13% to $1.19 billion with a non-GAAP operating margin of 32.5%.

Looking ahead, we see tremendous opportunity based on our unique role in the industry. VMware's vision is to empower people and organizations by radically simplifying IT through virtualization software. Our customers are looking to us to help them solve some of the toughest challenges in IT in simple and elegant ways, thereby delivering new levels of efficiency, control and agility. To do this, we will continue to introduce new innovations and offerings that will empower IT as a broker of services that drive speed of business and competitive advantage.

This vision is based on a laser focus on what VMware does best, and our ability to enter 2013 execution-ready with full strategic alignment across the leadership team. Our realignment actions are ahead of schedule and nearly complete, and we are proud of the VMware team for navigating these changes so well. We have focused the entire Company around our innovation priorities without skipping a beat on business results throughout the realignment.

This includes the successful integration of our cloud application platform assets into the new Pivotal organization of the Paul Maritz's leadership. We are excited to engage with Pivotal as a strategic partner and investor, and congratulate the new team as they hit the ground running. Based on this operational momentum, execution in Q1, and our view on the macroeconomic conditions for the year, we believe we're on track to achieve the full-year FY '13 guidance provided at our Strategic Forum for Investors on March 13. Jonathan will detail these areas and address our FY '13 expectations again during his section of the call.

VMware is strategy is firmly in place with our three growth priorities -- software-defined data center, hybrid cloud, and end-user computing -- serving as the core missions that will drive our execution for 2013 and beyond. We are on a multi-year journey as we guide our customers' technology and business transformation. We believe this IT transformation presents VMware with a $50 billion total addressable market opportunity by 2016.

With this core strategy and market opportunity in mind, I'd like to double-click briefly on our momentum, our perspective on the industry, and the increasing role we play within the IT sector. First, we are pleased with our continued progress with the software-defined data center opportunity. We continue to deliver innovations and networking security storage and management as powerful as those we lead and continue to lead in server virtualization, comprehensively delivered through the vCloud Suite.

Extending our network footprint, we recently outlined our intentions to merge the VMware vCloud Networking and Security product line with the Nicira Network Virtualization Platform into a single product family based on a common technology foundation to be named VMware NSX. We're also set to further deliver against the software-defined data center architecture and the second half of the year, with broadened software-defined storage solutions both as stand-alone products and within the vCloud Suite.

Our unique ability to radically simplify our customers day-to-day operations through the software-defined data center is enabled by closely weaving management and automation innovation as part of the vCloud Suite. We're happy with our progress with these solutions, including early customer response to our recently announced vSphere Operations Management solution.

And while the large majority of customers prefer an integrated cloud offering from VMware, some consider assembling a cloud solution using multiple technologies. To help them manage and automate this complexity, we engage across the rich ecosystem of vendors and open source solutions.

We see OpenStack emerging as a framework for assembling a cloud infrastructure, and intend to enable our best-of-breed networking, compute storage, and management technologies to be integrated into OpenStack and other environments, thereby extending the addressable market opportunity for VMware while providing additional choice for our customers.

For example, last week we announced vSphere Support as a virtualization platform for the latest of OpenStack release. Further expanding on the software-defined data center opportunity and on VMware's ability to offer customers choice, we have seen significant interest from both customers and partners in response to our intention to extend this architectural approach into a hybrid cloud service offering.

This new offering will extend the value of VMware from the inside out, leveraging a common management, orchestration, networking, and security model into the public cloud without requiring changes to existing applications. As we outlined at the Strategic Forum, we expect to launch of VMware vCloud Hybrid Service mid-year, and intend to make it available through our existing service provider channel, systems integrator, and outsourcing partner ecosystem to accelerate customers' journey to the cloud.

We've created the new Hybrid Cloud Services business unit and recently welcomed cloud services veteran, Bill Fathers, as Senior Vice President and General Manager.

And finally, we are aggressively moving forward with our end-user computing business, a natural extension of the core principles of virtualization, to create a truly virtual workspace for seamless connection across any device, any workload, and any cloud. The VMware Horizon Suite is a comprehensive platform for workforce mobility using virtualization to transform silos of data, applications, and desktops into centralized IT services. As a result, IT can easily provision, manage, and deliver applications to end-users on the devices of their choice.

Over 500,000 customers run their business on our infrastructure, supported by one of the richest ecosystems on the planet, and over 36 million virtual machines supporting both foundational and mission critical apps run on VMware's platform. This puts VMware and our customers in an enviable leadership position as the industry moves from the client server era to the mobile cloud era.

VMware is the virtualization software infrastructure company, and the only company capable of providing an end to end infrastructure solution designed to bridge our customers' legacy client server apps and desktops to next-gen apps for the mobile cloud role. We continue to execute against our strategies and our position in the market is clear as we embark on this multi-year journey with our customers.

We don't take this position for granted. And again, I'd like to thank our customers, partners, and our people for their passion and engagement as we lead into our aspirational goal of becoming the greatest infrastructure software company of this decade. With that, I'll turn it over to Carl.

Thanks, Pat. I'd also like to congratulate employees and partners for achieving Q1 performance in conjunction with simultaneous execution of both the Pivotal transition and our broader realignment efforts. As indicated in our last earnings call, I have never seen VMware more focused. Our three growth priorities -- the software-defined data center, hybrid cloud, and end-user computing -- have alignment across all functions in the Company as well as our partner community.

We continue to build our industry thought leadership, which is evident by the industry support of the software-defined data center launched at VMworld last August. Operationally, we are consistently meeting our short-term goals as we build a deeper foundation for VMware's future. We continue to bring world-class software engineers, executives, and broad- based talent into VMware, while simultaneously building an environment for our employees that foster both personal and professional growth from training and development programs to our focus on giving back to the communities we serve.

We view these investments as a fundamental win-win for VMware, our employees, and our customers, and we'll continue to build these programs in support of our aspirational goal, Pat just referenced, to become the greatest infrastructure software company of this decade.

As per the results this quarter, we are pleased with our performance in Q1 and delighted with the team's execution, particularly in light of muted expectations for the US and Europe, along with uncertainty in the US federal government spending due to sequestration. Results were in line with our expectations in all three regions, the Americas, EMEA, and Asia-Pacific. This performance was a result of solid execution across the entire Company. Our customer operations teams around the world did an outstanding job closing ELAs in what is typically a seasonally tough quarter for technology companies.

Q1 was the second full quarter of availability for the vCloud Suite. We exceeded our internal bookings plan in Q1, and as expected, approximately 75% of vCloud Suite bookings were part of enterprise license agreements. Customers are excited about the tremendous efficiency benefits they are realizing from the Suite. For example, Symantec Corporation uses vCloud Suite and has been able to reduce the time it takes to create environments from 20 to 30 hours, down to just 10 to 15 minutes. Symantec has now deployed over 145,000 virtual machines leveraging the vCloud Suite.

Enterprise license agreements were approximately 29% of total first-quarter bookings. This is up from approximately 22% last Q1, and demonstrates customers' commitments to investing in VMware's expanded solution offerings. We were able to accelerate and close two ELAs greater than $10 million in the quarter, had a healthy mix of new ELAs as well as ELA renewals, and continue to see a nice attach rate of non-vSphere solutions to our ELAs.

As we expected, blended ASPs for vCloud Suite were more than three times the blended ASP for vSphere in Q1, which is a strong indication of the incremental value VMware brings to customers with one integrated suite comprised of vSphere management and automation and network and security functionalities.

We're very pleased with the renewal rates within the quarter, as we achieved an all-time high in percentage of renewals within any Q1, and the second-highest in-quarter renewal rate of all time. This reflects a vote of confidence from our customers in our products and solutions, technical support, and upcoming product enhancements. The momentum in continued strength of renewals across our ELA and renewals businesses reinforces VMware's role as a long-term strategic partner to our customers.

Transactional bookings were up modestly year over year, despite the effect of softening x86 server shipments on our OEM business. We're pleased by initial customer reaction to the recent launch of vSphere Operations Management and vSphere Data Protection at our Partner Exchange event in February where we hosted more than 4,100 registered attendees from partners around the world. We continue to put in place programs that help drive additional transactions via our channel partners and also continue to work with the channel partners to increase uptake of adjacent products.

Q1 was a strong quarter for our management and automation product lineup. Stand-alone management and automation license bookings were up double digits year over year. This does not take into account, management and automation functionalities sold within the vCloud Suite. It is important to note that as vCloud Suite and vSphere Operations Management or vSOM an increasingly large portion of our total license bookings, stand-alone management and automation bookings must be viewed in conjunction with vCloud Suite and vSOM in order to understand our expanding footprint in this product area.

vCenter Operations Management Suite continues to be one of VMware's fastest-growing products since vSphere and our investments in channel recruitment enablement and sales incentive have been paying off. vCloud automation center has been gaining traction particularly well with our financial services customers. vCenter Operations Management Suite and vCloud Automation Center work in both vSphere and non-vSphere environments.

Our end-user computing license bookings were up in the mid-teens year over year. We continued to make investments across the board in end-user computing go-to-market activities, including increased focus on verticals such as financial services, the public sector, and healthcare. In Q1, we launched an integrated VMware Horizon Suite, the industry's most comprehensive platform for workforce mobility. We are pleased with the initial response to this suite, as both existing and new customers look to leverage Horizon functionality to serve their end-user needs.

As Pat mentioned earlier, network virtualization is one of the next big steps for our customers on the path to the software-defined data center. We expect to launch NSX in the second half of 2013, and it will represent the full potential of network virtualization working across VMware and non-VMware hypervisors and cloud management systems as well as underlying networking hardware. By virtualizing the network, VMware NSX will allow customers to accelerate application deployment, lower both capital and operational costs, and transform network operations in a non-disruptive manner.

We are aggressively aligning all assets and go-to-market efforts to take advantage of the strong demand for a significantly better approach to networking enabled by virtualization. And, I'm very pleased with the reaction from customers who are on the leading edge of adopting this next wave of virtualization technology.

In addition to existing companies such as Rackspace and eBay, Intel, NaviSite, a Time Warner company, and Colt, a major European service provider, are a few of the companies currently deploying or actively exploring proof of concepts with VMware's network virtualization technology. As I've said on previous earnings calls, we are in the early days of this market, but I am increasingly bullish on the opportunity to monetize our lead in virtualization of the network. And, we will continue to provide updates on how this market is evolving over the coming quarters.

Our VMware Service Provider Program once again tracked well in the quarter, as public cloud providers continue to leverage our cloud infrastructure program for their service delivery. As we've stated previously, we believe this ecosystem of providers is second only to Amazon in public cloud market share and this program is one of the faster-growing parts of our business with bookings growth over 100% for Q1 2013 versus Q1 2012.

In addition, as we laid out at our recent strategic forum event in March, our customers want to leverage cloud and cloud services for both existing applications as well as next-generation applications, and they want to do it in a way that's consistent in how they manage, operate, and deliver IT services today from their existing data center. Our partner community has also been telling us that as they talk to VMware's customers, there's a big desire for a VMware public cloud offering that is in synchronization with what they're running in their data center today.

Because we already had been successful in the private cloud, we want to extend upon that success and move to a hybrid cloud offering where we see a massive market opportunity in satisfying customer demand. We plan to launch VMware vCloud Hybrid Services on May 21 and look forward to providing more detail about these services at that time.

In summary, our Q1 operational momentum and results put VMware in a solid position to achieve our business technology and financial goals for 2013. Our large install base gives us an exciting opportunity to demonstrate our commitment to helping customers transform the way they deliver IT services through innovation and world-class support.

We are pleased that our customers are expressing excitement about our product deliverables later this year. These new products include the next generation of vSphere, vCloud Operations Suite, and Horizon Suite, as well as VMware NSX for network virtualization, vSAN for storage virtualization, and vCloud Hybrid Services, all of which are in customers' hands with beta versions.

Our operational momentum is strong and our leadership team is focused. We are energized for a strong 2013 for our customers and partners, our employees and our investors. With that, let me turn it over to Jonathan.

Thanks, Carl. As Pat and Carl said, we accomplished what we said we would do in Q1, despite a mixed economic environment and achieved solid results for license revenue, total revenue, and non-GAAP operating margin. Total revenues for the first quarter were $1.19 billion, up 13% from a year ago, on both a US dollar and constant currency basis. US revenues increased by 17% and international revenues increased by 9% year over year.

License revenues rose in Q1 to $488 million, near the high end of our guidance range. Software maintenance and support revenues increased 23% to $605 million year over year. Customers continued to buy on average more than 24 months of support and maintenance with each new license purchased, which demonstrates a strong commitment to VMware as a core element of their data center strategies.

Professional services revenues were $98 million in Q1, up 21% year over year, as customers increasingly leveraged our professional services expertise for architectural leadership when embarking upon their cloud implementations.

We're also pleased with the progress we're making in priorities beyond stand-alone vSphere. In Q1, end-user computing license bookings were once again greater than 10% of total license bookings. When combining EUC license bookings and additional license bookings outside stand-alone vSphere, such as management automation and vCloud Suite, greater than 30% of total license bookings in Q1 came from products outside our stand-alone vSphere offerings.

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 and are reconciled to our GAAP results in the press release tables and posted on our Investor Relations website. Our Q1 operating profit measured on a non-GAAP basis was $388 million or 32.5% of revenue, as compared with 32.8% in Q4 and 32.6% in Q1 2012. Our non-GAAP operating margin exceeded our expectation in Q1 due to slightly higher than anticipated revenue and good ongoing expense controls.

We ended the quarter with approximately 13,000 employees, down roughly 800 from the beginning of the quarter. This reflects the net impact of our realignment actions initiated in Q1. Our non-GAAP tax rate was 18.5% for Q1. On a GAAP basis, we had an income tax benefit of $9 million, reflecting the retroactive reinstatement of the R&D tax credit in Q1. Diluted non-GAAP EPS for Q1 was up 11% year over year to $0.74 a share on 433 million shares.

Now, moving on to our balance sheet and cash flow metrics. Our balance sheet remained strong, with cash and short-term investments at quarter end of $4.94 billion, up $306 million quarter over quarter. Our operating cash flows remained strong as well, and we're $676 million, up 17% year over year. DSO was 57 days in Q1, compared to 60 days in Q4. The improvement reflected record collections from our seasonally strong Q4, plus strong cash collections performance in the quarter. The quality of our receivables portfolio remains high.

Our total cash spending on CapEx for Q1 was $78 million. As previously noted, we're continuing the build-out of our Palo Alto campus which will continue through 2013. Free cash flows were $599 million in Q1, up 10% year over year. During the quarter, we repurchased approximately 2.4 million shares of our stock for a total of $182 million under our share repurchase program, at an average price of $77.05 per share.

Total unearned revenue ended the quarter at $3.49 billion, up 24% from Q1 2012 and an increase of 1% quarter over quarter. Long-term unearned revenue is now $1.3 billion, as customers continue to purchase multiple years of maintenance and as more unearned license revenue is recognized over time. 80% of our unearned revenue is software maintenance and will be recognized ratably. 13% of unearned revenue is software license revenue which is recognized either ratably or upon product delivery.

At the end of Q1, over 51% of the total unearned license revenue balance is to be recognized ratably. In addition, 7% of unearned revenue is the result of prepaid professional services, including training, which is recognized as the services are delivered. Considering all these elements, 88% of our total deferred revenues are to be recognized ratably.

Now, I'd like to make a few comments about the calculated bookings figures, which many of you routinely calculate by adding our quarterly revenue to the sequential change in unearned revenue each quarter. Typically, these calculated bookings and associated growth rates have been a reasonable proxy for our actual bookings and actual bookings growth rates over time.

In Q1, however, these calculated growth rates were significantly lower than our actual growth rates. This is due to a number of factors, which include the removal of unearned revenue associated with the VMware Protect business we exited as part of our realignment activities, as well as the timing of OEM bookings. Given these various items, we want to make clear that our actual license bookings for Q1 grew at a rate of greater than 10%, and that our actual total bookings also grew at a rate of greater than 10% in Q1.

Now, turning to a couple of operational updates. At this time, our headcount realignment activities are ahead of schedule and nearly complete. Additionally, we expect any remaining product divestitures to conclude over the next few months. I'd like to thank all of our employees for their focus and dedication in accomplishing the fastest and most effective realignment project I've ever seen.

Regarding Pivotal, consistent with what I communicated previously, the transaction became effective on April 1, which is the beginning of our fiscal second quarter. This means you will still see Pivotal assets and employees included in our Q1 financial statements. Approximately 500 employees are transferring from VMware to Pivotal in Q2.

As I mentioned on March 13 at our Strategic Forum, substantially all revenues and costs associated with our contribution to Pivotal will be eliminated from VMware's P&L statements from Q2 onwards. Furthermore, you'll see the effect of approximately $70 million in unearned revenue transferred from VMware to Pivotal in our Q2 balance sheet. Approximately $32 million of this unearned revenue is unearned license revenue.

Now, moving to guidance. As we noted 90 days ago when we first revised or 2013 outlook, we see an uncertain economic outlook for the upcoming year. Since the time of that call, a number of our peers have made similar observations. We remain cautious in the short term and our 2013 revenue guidance remains in the range of $5.12 billion to $5.24 billion, or an increase of 11% to 14%. This revenue guidance takes into account the removal all of Pivotal revenue from Q2 onwards.

As a reminder, on an apples-to-apples basis, our total revenue growth for 2013 would be between 14% and 16%, when taking into account the removal of Pivotal from both 2012 and 2013. In addition, our original guidance for 2013 included approximately $110 million of Pivotal-related revenues associated with Q2 through Q4 2013. On March 13, we removed this $110 million from our 2013 guidance. We noticed that many of you have not fully removed this $110 million from your models, and do suggest you consider doing so at this time.

Switching to license revenue, our growth expectation for the full year remains within a range of approximately 6% to 9%. As I mentioned on March 13, this takes into account the removal of Pivotal revenues from Q2 through Q4 of 2013, but of course includes Pivotal revenues for the entirety of 2012. On an apples-to-apples basis, our licensed revenue growth in 2013 would be between 8% and 11% when taking into account the removal of Pivotal from both 2012 and 2013.

Regarding operating margins, as you now know, we experienced stronger non-GAAP operating margin results in Q1 than anticipated. Taking into account our adjustments to GAAP operating income that Paul discussed at the start of the call and the Pivotal-related assets, which moved from VMware to Pivotal on April 1, we now expect non-GAAP operating margins to be in the range of 33% to 34% for the full year, which is up an additional 50 basis points from the range we provided on March 13.

GAAP operating margins for 2013 are expected to be approximately 12 percentage points to 15 percentage points lower than non-GAAP operating margins. We expect headcount at the end of 2013 to be up by approximately 500 people from the start of the year. This takes into account approximately 500 people that will transfer to Pivotal in Q2, as well as the impact of our realignment activities. At this time, we continue to project that our non-GAAP tax rate will be 18.5% for the year.

We anticipate that our 2013 fully diluted weighted average share count to be between 431 million to 435 million shares, and expect capital expenditures on a cash basis to range between $330 million and $370 million. Other revenues for Q2 are expected to range from $1.21 billion to $1.24 billion, or a growth of between approximately 8% to 10%. We currently anticipate Q2 license revenue to be between $515 million and $535 million.

On an apples-to-apples basis, our total revenue growth for Q2 would be between 11% and 14% after taking into account the removal of Pivotal from both 2012 and 2013. Please note that deferred revenue will be reduced by approximately $100 million in Q2. Approximately $70 million is attributable to the Pivotal transaction. The balance of approximately $30 million takes into account anticipated remaining divestitures of businesses under our realignment plan.

As Pat said, we see a tremendous market opportunity ahead and we will make continued investments throughout the year related to product development and global market expansion. Consequently, and taking to into account our adjustments to GAAP operating income that Paul discussed at the start of the call, we expect the non-GAAP operating margin for Q2 to range from 32.5% to 33.5%.

GAAP operating margins for the second quarter are expected to be approximately 12 percentage points to 15 percentage points lower than non-GAAP operating margins. For Q2, we estimate our non-GAAP tax rate to be 18.5%. And finally, we anticipate our second-quarter 2013 fully diluted weighted average share count to be between 431 million to 435 million shares. And with that, I'll turn it back to Paul.

Thanks, Jonathan. Operator, we're going to begin the Q&A process. Let's begin.

(Operator Instructions)

Kash Rangan, Merrill Lynch.

It looks like good results comparing to the rest of the tech sector. I was curious on your guidance for the rest of the year. Obviously, implies a very significant reacceleration to the business in the second half of the year. Can you speak to the different factors that give you confidence in the second half pick-up in the business? And also, if you could touch upon OpenStack? There's a lot of FUD in the marketplace regarding OpenStack. Is it a complete removal of the virtualization and the management layer with an open source product? You seem to indicate that it's more of an interfacing strategy with a framework, not exactly a product. If you could just clarify on these two items that would be great. Thank you very much.

Very good. Thank you, Kash. Before I let Jonathan pick up the reacceleration and I'll take the OpenStack, I do want to make a few general comments as we start the Q&A. First, I'm just very pleased with our team's performance in Q1. Your results were in line with expectations across all of our regions, indicating very balanced performance. Our product machine is performing very well. We started the year on very solid footing, maintained our guidance for the year. This is a very solid way to begin 2013 and I'm very proud of our year for doing that. Jonathan, maybe you want to take on the question of the acceleration in second half.

Sure. Hi, Kash. So second half growth, the drivers really have not change from what we shared in just 90 days ago. As we talked back then, we continue to make investments in both our product portfolio and also in our go-to market activities, in particular, emerging markets, but also in our end user computing dedicated sales teams. We do, as many of you also track, we do see an ELA tailwind opportunity in the second half of 2013. Frankly, we are also looking for a little bit of a modest uptick with respect to the economy. And in particular, we're looking forward to the federal third quarter helping the second half. And then finally, not least of which, we have had a solid start to the fiscal year. So we believe our solid bookings performance in Q1 gives us a nice foundation on which to build the full year.

Thanks, and Pat, you're going to talk about OpenStack?

Yes, very specifically. First, with respect to the overall OpenStack environment, the large majority of our customers simply wants an integrated solution and for that the VMware stack overall remains the choice of the vast majority of our customers. However, we do see this emerging framework of OpenStack for customers to assemble their own cloud infrastructure, e.g., for those who want to build their own. And our intention is to enable our best-of-breed to sell our best-of-breed networking, compute, storage, and management technologies into that open framework into that OpenStack environment. We see this as expanding the addressable market for VMware, further providing additional choice, a key value of VMware to our customers. As an example of that, last week, Kash, we announced vSphere Support as part of the latest release of OpenStack or the Grizzly release. And within that, specifically, there is no compute virtualization called for in OpenStack. That's left us an open choice. And now we're delivering vSphere as a preferred solution inside of that OpenStack environment. And this presents additional monetization opportunities for our paid for compute networking storage management software technologies into that OpenStack environment.

John DiFucci, JPMorgan.

My question -- international revenues only grew about 9% year-over-year, which implies that international license probably declined. Is this really just macro issues? Or is there something else happening in international markets? And if it is macro, what gives you the confidence? And I guess this is some follow-up to Kash's question, what gives you that confidence to maintain your annual guidance, especially if some of that is partially due to pick-up in emerging markets, as Jonathan just said?

Jonathan, maybe want to begin with this one. But I'd also emphasize, as we said, we saw very balanced performance in our bookings performance and growth across the world was very balanced. So many of those economic factors we were able to muscle through and see very good performance across all of our geos. So Jonathan, a bit more color on international.

Sure, and Carl, by all means, dive in as well at the end. John, just to reiterate and restate the numbers, for Q1 revenues we saw the US up 17% year-over-year and international was up 9% year-over-year. The international revenues do reflect something of a mixed bag as you think about the various theaters, but in particular, we are obviously seeing softer revenue growth coming out of the European theater, which frankly just reflect the broader macroeconomic conditions in that region. While bookings overall did perform above plan, obviously, the lower growth rates reflect the macroeconomic environment. And then secondly, frankly, the international revenues this quarter had a little bit of a tougher compare year-over-year. They were up 28% in Q1 2012, so that had an impact as well. Carl, anything you want to add on the regions?

Yes, John, I just want to highlight a couple things in our international business, particularly out of the APJ region, which continues to be the fastest growing region in the world for us. We saw continued strength come out of China. We were very pleased with our performance once again. And we were very excited to see a nice rebound in our Australia-New Zealand business, which we'd mentioned in prior calls had been slowing a bit, but we saw a nice rebound this quarter which gives us really good reason for optimism as we look at the international market. As far as the guidance and maintaining a full year, despite the potential slowdown in international because of Europe, it's important to note that we did bake that into all of our operating plans and models internally, and we have taken into account the tougher economic environment were faced with in Europe.

Great, that's really helpful. If I could, just a follow-up for Jonathan since he said that license bookings were up 10% on a -- if you didn't -- you had the issue this quarter with the Pivotal transaction and sale of the Protect business. Can you tell us the exact impact to license -- deferred license from those two issues or even cumulatively?

John, we did not break out the impact on any particular element, specifically on license. And those were just two examples, in any particular quarter, as you know, there can be timing differences and one-off differences. And the two examples I shared were just examples of what we've seen this quarter. I do think it's important to note that we are going to see a similar impact in Q2 as I explained in my prepared remarks. In Q2, we are seeing a specific removal of the Pivotal deferred revenues and also deferred revenues associated with some of other our other business divestiture activities. So the key thing, though, is bookings for both license and total on a year-over-year basis for Q1 were up over 10% year-over-year.

Heather Bellini, Goldman Sachs.

I had a couple questions. The first one, I was wondering, Pat or Carl, if you can talk a little bit about the transactional side of the business and some of the changes you made and introduced at the partner conference in Q1? How fast of an impact can these changes have on that part of the business? Should we start to really get a view from you in the second half of the year? Can you talk a little bit about the progression of the ramp that you expect to see? And then also, given there is so much confusion about the 2Q license guidance, I might have missed this, but could you guys give us the specific impact on 2Q license guidance related to Pivotal? Because, I have to tell you, I think that's one of the reasons why your stock is down 7% or 8% in the aftermarket. And if people didn't adjust their numbers, as you said, if you could just give us some clarity, I think people might be able to then judge the business on an apples to apples basis, if you don't mind.

Carl, maybe you can take the transactional question and then Jonathan on the Q2 license bookings.

Yes, sure. Thanks, Pat. Let me start off talking, Heather, specifically about the transactional business. As I said in my prepared remarks, the transactional business did experience modest growth year-over-year. In the early indications we're getting from the market with the recent introduction of our vSOM product, which is vSphere plus Operations Management, has been very encouraging both from the customer demand as well as the excitement we are seeing from our channel to sell this into the market as a complete suite or solution going forward.

Also, we continue to invest in our channel. We continue to invest in ways to drive the transactional business to our partners by increasing potential margins that they can enjoy by selling our transactional solutions. And, I think as we get into the second half of the year, you'll start to see the impact of all of these changes or modifications we're making to the transactional business model like vSOM become more relevant. And we'll provide you more color on that as we get into the second half of the year. And, one last point, I'm sorry -- (multiple speakers).

No, go ahead.

One last point I'd make, is we indicated that our OEM business had an impact on our overall transactional business in Q2 because when we look at the transactional business, it includes our OEM business. We did experience a slight decline in our OEM business, which is correlated and directly related to the x86 server shipments, and particularly we saw a decrease in Europe. If we were to exclude the OEM business from our transactional business, the transactional business would have even been up slightly greater.

Before we just slide over to Jonathan to answer the Pivotal impact on 2Q, Carl, I guess one follow-up would be, what type of ASP uplift should we be expecting from the vSOM product versus the typical transactional business you we're doing maybe 12 months ago?

We need to get into this a little bit further, meaning selling the vSOM into the market before we can provide any color around it. We have provided color around the vCloud Suite and indicated that the vCloud Suite has a 3x uplift over traditional vSphere stand-alone. But as a vSOM product, we need to get another quarter under our belt before we can provide the same type of color going forward.

Okay, thank you.

And Heather, on the overall -- just to restate the Q2 guide, reported revenues on an overall basis, 8% to 10%. And on an apples to apples basis, 11% to 14% taking out Pivotal.

Yes, but people -- we need the license impact.

We did not break that out overall, but you should assume --

I know you didn't, but I'm just telling you from the probably 50 e-mails in my inbox, that's what people are looking for.

The reported guide that we gave you a 0% to 3%. You should assume it's going to be slightly higher than that. But that's the extent of what we've said.

Phil Winslow, Credit Suisse.

Just a couple of quick questions. Just first on the business, wonder if you could provide more color just in terms of what you've been seeing in terms of vCloud Suite adoption, particularly with the net promotion you've been running the past two quarters and then also just the pipeline? And then two just quick housekeeping items. First, what was the FX impact this quarter and how are you thinking about that for next quarter? And also, a couple more of these businesses that you divested like the Protect business. How is that affecting the revenue guidance for this year? I'm assuming that's included in the numbers as well, even though it is small. Thanks.

Carl, you want to start?

Yes, let me provide additional color, if you will Phil, as it relates to the overall business and how we saw the quarter unfold. So, first of all, as Pat said, we were very pleased with the performance across all three regions, and we were particularly pleased with the sales execution that we saw around the world. And to be able to get 29% of our bookings coming through ELAs in Q1, which is typically a tough seasonal quarter for technology companies, just shows the sales execution and how we performed around the world. So we were very pleased with sales execution across all three regions. As far as the vCloud Suite, as I indicated in my prepared remarks, about 75% of the vCloud Suite was sold into ELAs, which is exactly what we had expected. And this was the second full quarter of us having the vCloud Suite in the market. And in both Q4 and Q1, we were pleased that our internal bookings beat our internal plan for the vCloud Suite. So the adoption and uptake from our customers has been even stronger than we would've expected, showing improving that customers look to leverage the powerful platform around software defined data center we're bringing into market through the integrated suite known as vCloud Suite.

And on the FX question, Phil, frankly, we did not see a significant impact on overall growth rates in Q1. And as you'll note, I said that both reported and constant currency was the same. Remember, there are about 70% or thereabouts -- approximately 70% of our billings are in US dollars today. So we do see a modest headwind, but not significant, frankly, with respect to overall top line performance in the second quarter. So overall, we are not, at this point, seeing a significant impact on foreign exchange.

Thank you, Phil. And in the interest of time, let's just take one question from the remaining folks. So, next question, please.

Brent Thill, UBS.

Pat, just on the public cloud operators, I believe Carl mentioned bookings were up about 100%. Can you just give us more color on your progress into that channel? Any color will be helpful. Thank you.

Sure. Carl, do want to discuss that?

Yes, as I indicated, Brent, in my prepared remarks, we did see 100% growth in our of VSPP, which is our VMware Service Provider Program, bookings in the quarter, which shows our continued growth in offering a public cloud through our strategic partners around the world. At the same time, as you know, we introduced the notion of VMware entering the market with a hybrid cloud solution called vCloud Hybrid Service at the Strategy Day in New York back in March. And as Pat and I have been touching a lot of customers in the last few weeks, I can tell you there is very much a level of excitement from our customers and partners about VMware entering the market with a VMware branded hybrid cloud service. And we'll be providing a lot more detail around this on May 21 when we do the official launch of this hybrid cloud service at that time. Pat, anything to add in what you're experiencing from customers?

Yes, just echoing Carl's comments that the customer interest in our inside out strategy for our hybrid cloud service, this ability of being able to have a compatible cloud environment that extends their internal private cloud into the public cloud. This idea is resonating very strongly. And the interest that we're seeing from that, the beta customers that we're putting on the service today, are reaffirming that our strategy is strong and it meets a unique need in the marketplace. And again, being reinforced by our channel partners, we think that this is on track to really have a very differentiated positioning to meet a growing interest in public and, uniquely, the hybrid cloud service market. Thank you, Phil.

Thank you, Brent. Let's take another question, please.

Keith Weiss, Morgan Stanley.

I wanted to dig into that figure that you gave of 30%, I believe, of license bookings were outside of the core vSphere Suite. Just one clarification in that, does that include vCloud as well in that number? And the actual question, outside of the clarification is, can you give us a sense of how that number has changed over time? Maybe where that was a year ago and maybe where that was in Q4?

Yes, let me just start, and then I'll ask Jonathan to fill in some more details. As we laid out in the Strategy Day, we see that we are broadening of the VMware opportunity, and in particular, with software defined data center and network storage management, hybrid cloud service, end-user computing. And thus, we're extending from really a compute virtualization market to the $50 billion plus TAM that we laid out for this broader market opportunity. And this idea of giving this metric, this 30%, greater than 30% metric, to us is important to help you have evidence that we are accomplishing that evolution of our business model. And that's why we're giving this as a new indicator and one that you can expect to see from us going forward. Jonathan, maybe a bit more color?

Yes, Keith, thanks for the question on the clarification. The total license bookings contribution from areas outside of stand-alone vSphere is a metric we'll continue, first of all, to share with you going forward. And as you'd expect, the growth rates that we've been seeing from the areas outside of just stand-alone vSphere have generally speaking been growing at a fast rate. The percentage penetration has been picking up over the course of the last few quarters. I think it's important that we continue to focus on that because our strategy continues to be to bring suites to the market and also to provide bundled offerings. We're not just about stand-alone vSphere anymore.

I'm going to take the opportunity to spend one second just to clarify the answer that I gave earlier on license revenues for Q2 in response to Heather's question. I said modestly up, and I'm going to specify the exact amount, just to remove any confusion. We expect on an apples to apples basis that license revenues, taking out the effect of the full year of Pivotal year-over-year, will be up 2% to 5%, which compares to 0% to 3% rough guide or the guidance range we gave on a reported basis. So helpfully that helps clarify. Again, up 2% to 5% for Q2 year-over-year license growth.

Okay, let's take one more question, operator.

Walter Pritchard.

Just wondering on, again, on the 30% and talking about the vSphere businesses. When you think about the second half, do we need to see vSphere actually return to growth? It looks like vSphere probably didn't grow in the quarter given that mix and the overall, especially license growth rate of slightly positive. I'm wondering, do we -- should we think about vSphere here as a business that won't grow going forward and we need to see those other products drive the growth? Or do you expect that vSphere returns to growth in the second half to help drive that reacceleration that you're guiding to.

Carl, maybe you want to take that one?

Yes, Walter, thanks for the question. Because I do think it's important that we clarify how we think about vSphere today and going forward. vSphere is a core component of our compute strategy, and as you could expect, it is part of all of the suites that we're bringing to market, specifically, at the vCloud Suite and now the vSOM solution. So when we think about vSphere, we think about it in a context of providing a full solution for our customers. Were not looking at it as a stand-alone basis. One of the reasons we're not is because a lot of the people who would traditionally just buy vSphere are now buying the vCloud Suite and vSOM, so therefore the metric around stand-alone vSphere is no longer as relevant as it once was in the past.

All right, Walter, thank you for the question. Before we finish, Pat is going to have a few closing remarks.

Thank you, Paul. As I began, I'm very pleased with our team. Despite a challenging environment, we performed at the high end of our revenue guidance, exceeded our already raised margin guidance, and are well on track for the year with our next-generation products that are clearly aligned with our three focus growth strategies. We appreciate your time and thank you for joining us today.

This concludes today's conference call. Thank you for your participation, and at this time, all parties may disconnect.