VMware Inc (VMW) 2013 Q2 法說會逐字稿

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

(Operator Instructions)

Today's conference call is being recorded. If you have any objections, please disconnect at this time. Now I will turn the call over to your host, Paul Ziots, Director, Investor Relations. You may begin.

Thank you. Good afternoon everyone, and welcome to VMware's Second 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 close of market, and is posted on our website, where this call is being simultaneously webcast. Beginning this quarter, slides which accompany this webcast can be viewed in conjunction with live remarks, and can also be downloaded at the conclusion of the webcast from ir.vmware.com.

Now that we are finished with all realignment-related divestitures, we have also included in our earnings release and posted on our website, six quarters of historical data for revenue and unearned revenue, excluding Pivotal and all 2013 divestitures, such Shavlik and Zimbra. This is to assist those of you who routinely estimate bookings or billings by adding our revenue to the sequential change in unearned revenue each quarter. You should be aware that beginning with Q3, we will providing forward-looking guidance during earnings webcasts only, and guidance will not be included in earnings press releases, as been our practice in the past.

Statements made on this call today 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 demands 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 an 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-related net gains and charges.

As mentioned we have presented historical data for revenue and unearned revenue excluding Pivotal and all 2013 divestitures. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in the press release and on our Investor Relations 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 third quarter 2013 quiet period begins at the close of business September 16, 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, I'll turn it over to Pat.

Thank you Paul, and good afternoon everyone. Q2 was a strong finish to a solid first half of 2013 for VMware. I am very pleased with our team's performance. Q2 total revenues grew 11% year over year, and exceeded the high end of our guidance range and non-GAAP operating margin of 33.5% reached a record high. Excluding Pivotal and divestitures, total revenues grew at an even faster rate of 15% year over year. The Company is aligned and focused. We are now substantially complete with our realignment activities. With these actions behind us, the energy and momentum of VMware is building as we focus on driving growth in the second half of 2013 and beyond. We congratulate Pivotal on a successful launch, and are proud to be a big, involved stakeholder in an exciting new IT segment.

VMware continues to succeed because we are uniquely positioned to help our customers move from the client server era to the mobile cloud era of computing. Each new era requires a new generation of infrastructure for the enterprise. VMware is positioned to deliver this infrastructure, as we have the most comprehensive solution for the private, public, and hybrid cloud. We do this with the richest ecosystems of partners in the industry, and with increasing multi-cloud support, giving our customers both choice and agility. Importantly, as we help customers bridge to this new mobile cloud world, we also help them capture significant cost savings by modernizing their existing applications and client server investments. Thus, our strategy is aligned with the IT requirements of both today and tomorrow. Our strong performance in Q2 is a clear validation of our customers' belief in this vision.

Our continuing goal is to empower people and organizations by radically simplifying IT through virtualization software. We intend to realize that goal by focusing on a combined $50 billion addressable market opportunity across three strategic growth priorities -- software-defined data center, hybrid cloud, and end-user computing. In Q2, our products that expand the portfolio beyond standalone vSphere represented more than 35% of licensed bookings.

I want to share with you some concrete examples of how we're driving momentum and customer adoption in each of our three strategic growth areas. With the software defined data center, Carl will give details on the great momentum we are seeing with vCloud Suite and our channel-oriented bundle, vSOM, or vSphere with Operations Management. Both of these demonstrate the increasing value our customers are capturing as we broaden our product portfolio. We are also seeing the industry strongly embrace our SDDC strategy.

During Q2 we announced an SAP strategic partnership. VMware will sell SAP HANA and core applications as a subscription service on vCloud hybrid service, and on premise with the vCloud suite. We also gained momentum in network virtualization with the announcement that NTT Communications will deploy VMware network virtualization as a core technology for its new cloud service. In addition, we are pleased with the incremental opportunities presented to us by OpenStack, and our ability to capture this opportunity.

Our second growth area is vCloud hybrid service, which delivers a public cloud infrastructure as a service that is completely interoperable with existing VMware virtualized infrastructure. In May, we launched an early-access program for vCloud hybrid service, and the program is generating tremendous interest from our customers. At the same time, we achieved greater than 100% bookings growth year over year in our VMware Service Provider Program, or VSPP, which enables partners to build and manage VMware-compatible cloud computing services on top of VMware technology.

In end-user computing, our Horizon View virtual desktop infrastructure product was granted Target Platform status by Epic Systems. This is a significant partnership, as Epic offers an integrated suite of health care software to large health care organizations, and VMware is the only VDI provider to achieve Target Platform status. We already have 12 customers running Epic on VMware View, including Providence Health Systems, Kettering Health Systems, and Hackensack Medical Center. We're also excited to announce later this month a new version of our Horizon Suite. These are just a few examples of many we could point to as proof points that all three legs of our strategy are gaining momentum. Overall, our new products that extend the portfolio beyond stand alone vSphere demonstrate a strong double-digit growth, clear evidence that we are continuing to accelerate customer adoption.

In closing, I'd like to thank our customers, partners, and employees for their passion and engagement in Q2, as we continue to execute against our aspirational goal of becoming the greatest infrastructure software Company of this decade. I hope to see many of you at our annual VMworld event during the week of August 25 in San Francisco, and at our Financial Analyst Day on Monday, August 26. We have a lot of exciting product and partner announcements to share at VMworld. I will now turn it over to Carl.

Thank you, Pat. I couldn't be more pleased with our performance in Q2. Following a solid Q1, we delivered another strong quarter in Q2, and continue to execute against our three growth priorities -- the software-defined data center, hybrid cloud, and end-user computing. We saw strong alignment to these priorities across all functions in the Company and across our partner community. Operationally, we are consistently meeting our short-term goals as we continue to build a deep foundation for VMware's future.

Getting into the details, Q2 was a strong quarter for bookings. Results were in line or above expectations in all three of our geographic regions -- Americas, EMEA, and Asia Pacific. Removing the effect of Pivotal and our 2013 divestitures, we saw Asia Pacific lead the way, with year over year growth of total bookings in excess of 40%. The Americas demonstrated strong growth of approximately 20%, and EMEA grew in the mid-teens, despite the economic situation across much of Europe. We also continued to receive high marks in customer satisfaction. Supporting our own customer satisfaction reports, the May 2013 tech vendor net promoter score from Temkin, which surveyed over 800 large North America companies, ranked VMware as the highest net promoter score amongst a list of 54 technology vendors. VMware's rating was well above our industry peers and competition.

Overall, we are out-performing on multiple fronts. We closed six deals above $10 million, and our field teams around the world did an outstanding job of closing ELAs. Approximately 37% of total Q2 bookings were ELAs, which is a record high for any quarter. Furthermore, Q2 was the highest ever in-quarter renewal rate for ELAs in terms of number of deals renewed. Approximately 75% of vCloud suites were sold with ELAs. We believe the strong performance across our ELAs and vCloud suites is a clear indication of our customers' long-term commitment to VMware and the software-defined data center strategy.

Our professional services business was also a strong performer in Q2. Increasingly, customers are leveraging VMware as a strategic enabler to help them through the transition that Pat mentioned earlier, from a client server to a mobile cloud era. They are looking to VMware to help them design and implement many aspects of the software-defined data center. We also continue to see a solid attach rate of professional services to our ELA business.

Our overall ASPs have gone up, both on a year-over-year and sequential basis. VSphere with Operations Management, or VSOM, contributed to an improvement in our transactional business in Q2. In its first full quarter of availability, ASPs for VSOM tracked at approximately 1.3 times the ASPs for vSphere stand-alone. As a result, our transactional business ASPs have gone up sequentially. Our strategy to strengthen the channel and broadly seed the market with our management products is off to a good start. Our support in subscription end-quarter renewal rate reached all time high for any Q2, and the second-highest rate of all time. This is a strategic part of our portfolio. It's highly profitable and a reflection of strong ongoing customer commitment to VMware.

Management and automation licensed bookings were our strongest-growing product area this quarter, and we are pleased with the sales teams' and the channels' capability to sell our management solutions. As VMware's customers become more virtualized, their needs increase for management, automation, and operations products. Our customers continue to share with us their desire to get these products from their existing data center virtualization partner. VCenter Operations Management Suite remains our largest management product, followed by vCloud Automation Center. Increasingly, Management is helping to drive adoption of the software-defined data center. This is reflected in the fact that a larger and larger portion of management is sold within vCloud Suite and vSphere with Operations Management. Based on the opportunity in front of us and the traction we have seen to date, we will be building out a significant management specialist sales organization in the second half of 2013.

Our end-user computing license bookings were up in the mid-teens year over year. This follows upon mid-teens year-over-year growth performance in Q1. We continue to make investments across the board in end-user computing go-to-market activities. Our teams have done a great job around the world hiring top talent, many of whom have come from established companies in the industry. Our investments in this area are paying off, and we believe we are continuing to gain market share.

We also continue to be excited about our large service provider and enterprise customer proof of concepts under way in network virtualization. Our success rate in these proof of concepts continues to be very high. Last quarter we had design wins with NTT, WorldPay, and a number of others. Unlike many technologies in the market place, our NSX technology is in production use today in supporting some of the largest deployments in the world, at large customers such as Intel, Rackspace, Colt, NaviSite, and eBAY.

As Pat said, initial customer interest in vCloud hybrid service is high. Customers like Nexon, a free-to-play online game company that is 100% virtualized on vSphere; Digital River, the revenue growth experts in global cloud commerce; and Harley Davidson Dealer Systems are just a few of the examples of early access customers. These customers want a seamless extension of their private cloud to the public cloud, built on the trusted foundation of vSphere.

In addition, 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 have stated previously, we believe these 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 once again of over 100% year over year.

In summary, we executed well in the first half of 2013, and are entering the second half of the year with strong momentum. We are delivering industry-changing innovation in the software-defined data center, hybrid cloud, and end-user computing. We are pleased that customers are expressing significant excitement about our product deliverables later this year. Our leadership team is focused, energized, and ready to deliver a strong second half for our customers and partners, our employees, and our investors. With that, let me turn it over to Jonathan.

Thank you, Carl. We are very pleased with our Q2 results, meeting or exceeding our goals for the quarter. Our strategy is in place, and we are executing the plan we have shared with you. Starting with revenues, Q2 total reported revenue growth of 11% year over year exceeded the high end of our guidance, and license revenue of $531 million came near the upper end of our guidance, up 3% year over year. Excluding Pivotal and all divestitures, total revenues grew 15% year over year in Q2, accelerating from 13% in Q1. Licensed revenues grew 5% year over year, up from 1% in Q1. Also note the currency negatively impacted both license and total revenue year over year growth rates in the quarter by approximately 1%. Services revenue grew 18% year over year, reflecting robust maintenance and services performance, and ongoing momentum in subscription-type businesses.

Moving to operating expenses and profitability. 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. Operating margin was 33.5%, a record high for any quarter in VMware's history, and at the top end of our guidance range. Diluted non-GAAP EPS for Q2 was up 16% year over year to $0.79 a share, on 432 million shares. We ended the quarter with approximately 12,900 employees, which is down slightly from the beginning of the quarter, and takes into account the transfer of Pivotal employees. We have substantially completed our realignment plan outlined in January, and are now focused on continuing investment into our top strategic growth areas -- the software-defined data center, end-user computing, and the hybrid cloud.

Now moving to our balance sheet and cash-flow metrics. Our balance sheet remains strong, with cash and short-term investments at quarter end of $5.323 billion, up $386 million sequentially. Our GAAP operating cash flows remain strong as well, and were $534 million, up 36% year over year. Our total cash spending on CapEx was $76 million, and free cash flow was $458 million in Q2, up 32% year over year. I will remind you that cash flow can be lumpy, and I will talk more about this when I get to guidance.

During the quarter, we repurchased approximately 1.6 million shares of our stock for a total of $120 million under our share repurchase program, at an average price of about $73 a share. Total unearned revenue ended the quarter at $3.6 billion, up 22% from Q2 2012, of which $1.37 billion is long term. Note that this reported number is after the removal of $101 million of unearned revenue in Q2, 2013, associated with the formation of Pivotal and our divestitures. Of the $101 million, $39 million was unearned license revenues. Approximately 88% of our unearned revenues will be recognized ratably over future quarters. The unearned revenue mix is in line with prior periods, and is primarily a reflection of our strong maintenance business. Customers continue 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.

Before I move to guidance, I'm going to expand on our earlier bookings commentary. We were very pleased with our bookings performance in the quarter. Many of you routinely estimate bookings or billings by adding our quarterly revenue to the sequential change in unearned revenue each quarter. Over time, these calculated bookings and associated growth rates have been a reasonable proxy for our actual bookings. That being said, the divestitures in 2013 have made like-to-like growth rate comparison difficult, since the business realignments have had some impact on our reported revenue, and also our reported unearned revenue numbers. The revenue and unearned revenue tables accompanying the press release should help you understand the underlying growth rates better.

I'll also share that excluding Pivotal and divestitures, our license bookings for Q2 once again grew at a rate of greater than 10% year over year, and our total bookings grew at a rate of greater than 20% year over year. A significant portion of the double-digit bookings increase is as a result of our success in products beyond stand-alone vSphere. This includes management and automation, end-user computing, vSphere with Operations Management, vCloud suites, and the VMware service provider program.

In Q2, end-user computing bookings were once again greater than 10% of total licensed bookings. In total, including EUC, over 35% of our licensed booking in Q2 were from these product areas beyond stand-alone vSphere. This figure is up from approximately 25% in Q2, 2012, and reflects the significant up-take in our newer products, including the success of suite strategy with vCloud Suite and VSOM. Again, we are pleased with our bookings growth overall, and the momentum in our suites and newer products.

Now moving to guidance. Given our strong performance in Q2, we are increasing the high end of our guidance for the full year to $5.260 billion, for a range of $5.120 billion to $5.260 billion, representing year over year growth of 11% to 14%. Excluding Pivotal and our divestitures, our total revenue growth for 2013 is expected to be between 15% and 18%. Licensed revenue is expected to grow 6% to 10% for the full year as reported, and 8% to 12% excluding Pivotal and divestitures. We expect non-GAAP operating margin to be in the range of 33% to 34% for the full year. As a reminder, we intend to continue to invest in our strategic priorities, and still expect head count at the end of 2013 to be up by approximately 500 people from the start of the year. GAAP operating margins for 2013 are expected to be approximately 12 to 15 percentage points lower than non-GAAP operating margins. We continue to project that our non-GAAP tax rate will be 18.5% for the year, and we anticipate that our 2013 fully diluted weighted average share count will be between 431 million to 435 million shares.

Regarding cash flows, while we do not provide cash-flow guidance, I'll say that I am comfortable with a range of $2.1 billion to $2.35 billion for total operating cash flow for 2013. But I want to emphasize again that cash flow can be lumpy from quarter to quarter due to various factors, including the timing of tax payments, linearity of bookings, and other factors. In addition, we continue to expect capital expenditures on a cash basis to range between $330 million and $370 million for the year.

Total revenues for Q3 are expected to range from $1.270 billion to $1.300 billion, or a growth of between approximately 12% to 15%. We currently anticipate Q3 license revenue to be between $535 million and $555 million, representing growth of between 9% and 13%. Excluding Pivotal and divestitures, total revenue growth for Q3 is expected to be between 17% and 20%, and licensed growth is expected to be between 12% and 16%. We expect operating margin in Q3 to be in the range of 32.5% to 34%. We see a tremendous market opportunity ahead, and continue to make investments in product development and regional expansion. GAAP operating margins for the third quarter are expected to be approximately 12 to 15 percentage points lower than non-GAAP operating margins. For Q3, we estimate our non-GAAP tax rate to be 18.5%; and we anticipate our third quarter 2013 fully diluted weighted average share count to be between 431 million to 435 million shares.

In summary, we are very pleased with Q2. Our goal is predictable consistent growth accelerating throughout the year, and we saw that in Q2. We had strong bookings performance, we added to our deferred revenue, and we delivered strong cash flow and operating margin. We expect Q3 growth will be higher than Q2, and we have set a solid base in the first half of 2013, leading into a stronger second half. With that, I'll turn it back to Paul.

Thanks Jonathan. Before we begin the Q&A, I'll ask you to limit yourselves to one question, consisting of one part, so that we can get to as many people as possible. Operator, let's get started.

Thank you.

(Operator Instructions)

Our first question will come from Brian Marshall of the ISI Group. Your line is open.

Great, thanks guys. It looks like we'll going to return in the back half of the year to double-digit license revenue growth. Can you talk a little bit about the visibility you have in this rebound? It would be great if you could perhaps give a little color on how ELA renewals are going to play part of that process, and how this is going to impact the overall license revenue growth in the back half? Thank you.

Great. Thank you, Brian. This is Pat. As we start the Q&A time, I just want to again emphasize how proud I am of the team and the performance in Q2. As we look to the second half as you are questioning, Brian, we see that the first half has just presented us with a great opportunity to enter that second half with significant momentum. That's across the entire business, and across all of the geographies.

A few specific points from that first half obviously as we look to the second half growth are beyond stand-alone vSphere, where it was very strong, as that continues to be a stronger portion of our overall bookings. We also see that there's significant ELA opportunities. Our Q2 ELA performance, as Carl commented upon, clearly gives us confidence about the ELA cycle as we go into the second half of the year. So those combinations right -- the momentum, the ELA opportunity, and the beyond vSphere products clearly presents us with a great opportunity to deliver on exactly what we said we would. The second-half acceleration and our Q2 is clear evidence that we are on track for that.

Thank you.

I'd like to add a couple things. Thanks for the question, Brian. We also are continuing to see our go-to-market investments pay off, specifically in Asia-Pacific in the emerging markets, like China, Japan, and Southeast Asia. Also, we are excited about the investment we made in the first half of the year around our end-user computing go-to-market, and we expect to see acceleration in that business in the second half of the year, as well.

As we have always indicated, we do expect to see an acceleration in the federal business in the second half of the year, primarily in Q3, due to it being fiscal year end. Based on our pipeline, we do expect that to be the case. When you combine all that with what Pat had mentioned around the momentum coming out of that Q2, we feel very confident in our guidance for the second half of the year.

Thank you, Brian. Next question please.

Our next question comes from Raimo Lenschow of Barclays.

Thank you, and congrats on the great quarter. I wanted to dig a bit deeper. Carl, you mentioned already on the end user computing for the second half. Can you just talk a little bit about drivers, there? One thing I would assume is that you start building up the sales force in Q4, Q1. If I do the mechanics, they should start getting productive in the second half. Is that one of the ways to think about that second-half momentum there, and what do you see in terms of pipeline build there? Thank you.

Yes, sure. Indeed. Our investments in end-user computing are clearly starting to pay off. Once again, in Q2 we saw mid-teens growth in bookings and end-user computing. That's following on similar growth in Q1. As we go to the second half of the year, we absolutely expect our end-user computing sales force and specialization sales force that we built out there to have an impact. That is clearly one of the drivers of how we see acceleration in the second half taking place. It is around end-user computing. We're excited about the pipeline that we're starting to build. I would say the teams around the world have done an amazing job at hiring some great talent from the market, both from some of the industry veterans out there, as well as some of our competitors are joining us, because they see the opportunity that VMware represents in the end-user computing space as we go forward.

Thank you. Next question, please.

Our next question comes from Kash Rangan of Merrill Lynch. Your line is open.

Thank you very much. When I did the adjusted bookings calculation, or billings growth rate calculation, it looks like it came in high 20s. That looks very strong. But my question is again related to the management and automation opportunity. Pat and Management team, could you comment on how long is it going to take for mainstream adoption of management and automation, and where would you like your business to be in terms of percentage of new business billings coming from management and automation -- one, two years? What are your longer-term targets for that metric? Thank you very much.

Kash, this is Jonathan. Let me quickly clarify. As we do the bookings calculation, you should come up to a number north of 20 if you do the calculation, but not high 20s. We can help with that offline if you like. But for everyone's benefit we are seeing total bookings north of 20. Carl, do you want to take the second part?

Yes, so hi, Kash, how are you doing? I hope you are well. We see significant opportunity around management organization and orchestration, as indicated by us in my prepared remarks saying it's our fastest-growing product line. Because of that, we've decided to actually invest in our go-to-market for management and automation in the second half of the year, in a very similar way that we did with end-user computing in the first half of the year. We are very pleased to see the growth -- and that's without a specialized sales force. Going forward, we expect to see continued growth.

Also, we are very excited to see the up-tick and the continued growth of both our vSOM product, which launched for the first time in Q2, as well as our vCloud Suite, because as you know, a lot of our management automation products are part of those suites or bundles, and we saw great traction within the quarter. All of that, combined with our go-to-market efforts that we are going to be building around with management automation, gives us a lot of confidence that we will continue to see that grow into the future.

Thank you, Kash. Next question, please.

Our next question comes from John DiFucci of JPMorgan. Your line is open.

Thank you. First of all, thanks for all that supplemental information in the back of the press release. It's really helpful, given everything that's happening at VMware. When I exclude things from things that are no longer part of VMware, I come up with license bookings growth of about 13%, Jonathan, which is pretty impressive here. There is a lot of confusion, I think, in the investment community about what the opportunity is left in your core business. You said -- I think Pat said that licensed bookings outside core vSphere accounted for about 35% of licensed bookings.

My question is what does this mean for the core vSphere business? There -- we know that x86 work loads are somewhere north of 60%, has already been virtualized. That doesn't mean that the compute capacity or the number of cores have been virtualized is anywhere near that. But it also implies that the core growth here was less than 13%, but we don't know. If you could maybe shine a little bit of light? I'll just stop talking here.

John, let me confirm if you do the calculation you do, you're in the right range based on the numbers we've shared. I do appreciate you making the comment about the detail we provided in the press release. That's a lot of quarters of data, and I'm glad it was helpful.

I'll start, and ask Carl to help me here. Overall, our strategy as we've laid out is to focus on the delivery of the broader than just vSphere opportunity. With that, we expect that strong install base that we have to really be a spring board for the rest of the vCloud Suite, vSOM, and increasingly delivering software-defined data center going forward; thus the individual components become less important, as the emphasis shifts to focus on the overall software-defined data center. As such, it really is largely just breaking out what the components of that would be, which increasingly becomes more and more arbitrary as the real value is delivered in that complete set of technologies coming together.

We will say that the growth continues inside of the core. The amount of sockets and the amounts of our core vSphere business has continued to grow. Carl commented on the increase in the ASPs per socket, which was clear evidence of the strategy playing out, as well. Overall, we do believe that the strength of the opportunity for us is to move into these new areas, which we saw substantial growth in this quarter. Carl, additional comments?

Yes Pat, let me just reiterate a couple things there, because I do think it's important that we do view the core vSphere business as an opportunity for growth in the future. One of the ways we measure that is by actually the unit growth year over year. Within the quarter, we did see solid growth in vSphere units year over year. That, combined with the fact that we saw an increase in our ASPs both sequentially and on a year-over-year basis, means we are getting more per socket per license sold. When you combine all of that John, and you combine the fact that vSphere is always included in both our vSOM suite, as well as our vCloud suite solutions, we are very bullish on the opportunity for the core vSphere business to continue to grow in the second half of the year.

Thank you, John. Next question please.

Our next question will come from Brent Thill of UBS. Your line is open.

Good afternoon. Jonathan, if you go to your Q4 implied license guidance, that would effectively put you back on par with coming out of the recession in '09. You haven't seen that type of license re-acceleration. I am curious -- I think a number of clients believe that that still is a stretch. Why do you feel that is not a stretch from what you are seeing from the data that you are seeing internally?

Brent, thank you for the question, and it's a follow-on to the very first question we were asked. Again, when you look at the acceleration we've seen, and the performance we've seen in Q2, the year is playing out as we said it would. We're executing as we expected. It's important, and this is why -- to John's question just previously -- why we've shared the data underlying our growth rate, and the core parts of our business that are after Pivotal and after the divestitures.

We've spent a lot of time over the last six months preparing ourselves for the opportunity ahead, and by focusing ourselves on software-defined data center, end-user computing, and the opportunity presented by the hybrid cloud, the underlying growth rates in our business are accelerating. We saw licensed bookings growth north of 10%. You will calculate a number roughly around 13% from the data we shared. We've also seen total bookings in excess of 20% this quarter. These are all signs of momentum, and indicators of why we think the back half will continue to perform. The year is playing out as we anticipated, and we're confident with the guidance we've given.

Thank you, Brent. Next question please.

Our next question is from Phil Winslow low of Credit Suisse. Your line is open.

Hi, guys. You obviously mentioned an expectation for strength in the ELA business going into the second half. Just two questions beyond that. First, on just the transactional side, what did you see this quarter, and your outlook there for the second half? As far as the ELA business goes, and what's embedded in expectations, how much of there is baked into obviously a strong renewal cycle, but also strong renewal cycle plus up-sell of vCloud suite? Any sort of acceleration, or just -- versus first half, or any commentary would be great?

Bill, hate to be stickler here, but would you like the ELA side or the transactional side? We're going to keep it to one per person for the call, to get through as many as we can.

I guess we'll do ELA then.

Thank you.

Hi Phil, this is Carl. Let me first reiterate something we said. I guess Jonathan, Pat, and I have all said we were pleased with all aspects of our business in Q2, both our ELA business and our transactional business. Our ELA business in Q2 represented 37% of our bookings, which was an all-time high. Another point that I mentioned in my prepared remarks was the fact that we had our highest-ever end-quarter renewal rate of ELAs, which is a very positive sign that our customers are looking to invest and strategically align with us for their ongoing data center needs.

I also talked about the fact that we had six deals greater than $10 million in the quarter. Four of them were actually renewals, so customers continue to renew with us on an ongoing basis. That was a very strong sign. As you know, in any given quarter, ELA business can be lumpy, but across the world I was very pleased with the team's ability to execute and drive ELAs to closure in the quarter. We did see a very nice attach rate of vCloud Suites to our ELAs. About 75% of our vCloud suites actually were in conjunction with ELA, so our strategy to drive ELAs with vCloud Suite is paying off.

If you take that momentum coming out of Q2 and look at the second half of the year, where we had indicated about two-thirds of our ELA renewal opportunity would take place, we feel very confident in the second-half guidance, and we do expect to have a very strong ELA renewal cycle in the second half of the year. It's also important to note that the ELA renewals are only one portion of our ELA business. We're actually seeing more and more customers enter into ELAs for the first time. As they become more virtualized and look for more management automation solutions, they're actually now entering into multi-year enterprise agreements with us to get all of their needs for a two-to-three-year horizon.

Great. Thank you for understanding, Phil, on the one question. Let's go to the next question, please.

Certainly. Our next question comes from Heather Bellini of Goldman Sachs. Your line is open.

Great. I'll take the transactional side of the business. It looks like you guys saw a slight improvement in the year-over-year growth rate this quarter versus last. I guess I'm just wondering if you could share with us what type of growth range you think is reasonable for the transactional business in the second half of the year? I guess specifically I'm wondering if we should start seeing accelerating growth in this segment on a year-over-year basis, now that vSOM is in the market and appears to be gaining some good initial traction. Thank you.

Yes Heather, let me take that. This is Carl. As I indicated in our prepared remarks, our overall ASPs were actually up year over year and sequentially, and our transactional ASPs were up sequentially, which was a good sign for us. That was off the backs of a strong first quarter of availability of our vSOM bundle, which is vSphere with vCloud operations management. We are very pleased with our results in Q2. As you know, we don't provide any type of specific guidance around our transactional business, or our ELA business for that matter, but we clearly based on results in Q2 expect to see some continued incremental growth and improvement in our transactional business in the second half of the year. As I said earlier, when you're growing your units as well as you're increasing your ASPs, that is a good sign that the health of the transactional business is in place.

Thank you, Heather. Next question please.

Our next question comes from Jason Maynard of Wells Fargo. Your line is open.

Hi guys, good afternoon. Carl, just one question for you. There is a perception in the market place clearly that VMware is having a harder time making the transition, if you will, to this level above the core vSphere product line. I know vSOM being out is going to be a good thing. But if you go talk to some of the -- I'll say some of the more early-edge customers, they're all looking to move towards open stack. There is a lot of talk about if you will replicating a Google- or Facebook-like infrastructure. How do you position effectively, or how do you tell that story that VMware is not, if you will, just locking you into this proprietary V stack, and there are advantages against this growing movement around open stack? Thanks.

Sure. Let me start, and then I'll -- Jason --and then I will turn it to Carl to add to it. Open stack has clearly become a topic of many of our customer conversations. As VMware's goal is to be this cloud infrastructure software leader, we've also made clear statements that we are building a strategy that will support open stack in a very effective way. We call it our component strategy, where we are embracing the open stack APIs, adding them to our product, and then selling our best in class common technologies into this open stack framework.

While it's early, and the open stack offering is immature, we see this as an incremental opportunity, largely to these large-scale internet providers and service providers, that they're looking for this open stack environment; and thus, where you can sell our additional best-of-class technologies into that environment. We've made a number of announcements around vSphere, around management, and of course our networking products as embracing this strategy.

In fact, we looked carefully at the open stack customers, those who have publicly made some statements around open stack. Our business grew for year on year by the quarter and the first half, not only grew with them, but in fact grew faster than the rest of VMware's business. As a result, we are seeing that our customers really are embracing the strategy, and we are having great success in selling this component strategy into open stack; thus the options that we're giving them, where the flexibility of choice is being quite effective to date.

Jason, I think the other part of your question was how are we transitioning, transforming, or evolving our sales force in our channel to sell more solution-oriented products into the market. I would say it's going actually quite well. We look at it through multiple lenses. If you look at it through the vCloud suite lens, for the fourth consecutive quarter our vCloud Suite has actually performed, from a booking basis, above our internal plan --which means both our direct sales force and our channel are becoming more and more skilled at selling the full software-defined data center suite. That's number 1.

Number 2, we have put in place a large enablement plan, both for our own sales force and the channel. An indication of that is last quarter we brought our top partners from around the world together, and did nothing but spend time in talking to them about how to sell the vCloud Suite, and specifically sell the software-defined data center component. I'm bullish on the fact that we're enabling our direct sales force and our channel to be more skilled at selling the complete solution that we have associated with the vCloud Suite.

Thank you, Jason. Next question, please.

Our next question will come from Rob Owens of Pacific Crest. Your line is open.

Great, thank you very much. I wanted to ask a little bit about the hybrid cloud and what you are seeing in terms of early adoption -- some of your successes, and also what pricing looks like as it seems some of the competition has been cutting pricing fairly aggressively. Thanks.

Our early response from the hybrid cloud has actually been very strong from customers. As we've said, we are in the early access program; and thus, we are still very early in this, but we've had overwhelming interest from customers to be part of that program. It's still very early, but their response to it clearly gives us an indication that this idea of the transparent hybrid cloud, the ability to manage same security, same policies, flexibly move across that environment for both their existing workloads and their emerging workloads has been highly effective. As a result, we believe we really have hit the nail on the head with the value proposition that the enterprise customers are interested in. Carl, a few points to add?

No, I think Pat you hit most of them. I do believe we have a unique offering in the market, and we're truly the only Company out there that can deliver a hybrid cloud in a seamless way for enterprise-class customers. We are working hard to enable our sales force and our channel to be capable of selling this, and it goes into full GA in Q4. As you indicated, Pat, the early interest in the vCloud hybrid service is quite strong, and our pipeline continues to build as we head towards general availability in Q4.

Thank you, Rob. Next question, please.

Our next question comes from Shaul Eyal of Oppenheimer. Your line is open.

Thank you. Congrats on a very solid quarter. Back on Thursday your probably runner-up in the server virtualization market reported mixed results, at best. I think also in their server and tool division. What are you seeing from your perspective as it's related to kind of the competitive landscape?

Thank you, Shaul. I assume you're referring to Microsoft in that.

Yes, I was being gentle.

Frankly, the competitive dynamic hasn't changed at all as we see Microsoft. When we go head to head with them, we rarely if ever see ourselves losing. We tend to see them compete at the low end of the market place, where we have offering for more limited vSphere conditions or product lines, additions at the lower end of the market place. As we focus more and more on the differentiation of the complete software-defined data center as we're doing, we see the differentiation that we have being more substantial and increasing compared to Microsoft or other competitors. Thus, we continue to execute our play book. Given our results, I think they speak for themselves vis-a-vis Microsoft or anybody else.

Thank you, Shaul. Next question, please.

Our next question comes from Matt Hedburg of RBC Capital Markets.

Thanks, guys. In terms of software-define data center, I'd love to hear maybe some early customer feedback, as well as how the sales force ultimately is going to be incentivized to sell these products, and maybe how it should contribute to your large-deal portfolio?

Yes, hi Matt, this is Carl. Thanks for the question. As I indicated earlier, this is the fourth quarter we've had the vCloud suite in the market, and for the fourth consecutive quarter, we have beat our internal plans. Clearly, there is customer demand and pull from the market. As I said, we continue to enable and bring skill set to both our direct sales force and our channel, to get them better positioned and skilled to drive the software-defined data center value proposition into our customer base.

As far as early -- if you will -- implementations, we have a number of customers that have implemented the entire suite, and are starting to see, if you will, the first generation of the software-defined data center through the vCloud Suite At VMworld this year, we expect to showcase a number of customers who have implemented the entire suite, and share the success of what we're doing with the vCloud Suite.

Thank you, Matt. Next question, please.

Our next question comes from Gregg Moskowitz of Cowen. Your line is open.

Okay, thank you. Carl, your comment earlier about seeing more and more customers enter into ELAs for the first time would, I would imagine, come as a surprise to most of the people on the call. Can you just discuss the pipeline, as well as the overall opportunity for getting more of your large-customer install base to embrace ELAs?

Yes, so to be honest Greg I don't think it should be that big of a surprise. You've seen our ELA business continue to grow throughout the years, and it really is driven by the adoption of virtualization. As more and more customers become more virtualized, they're looking for the full suite of solutions from VMware. When they do that, they mostly enter into an ELA so they can get friction-less deployments of our technology on an ongoing basis.

So we're not surprised. We're seeing more and more customers enter into ELAs with us. When you combine that with the success of our renewal rates of ELAs that expire either in quarter or within the year, we are very pleased with our ELA business, and we expect it to be a big portion of our success going forward. It's not a surprise to us. We're delivering to our customers a very good solution that they're interested in. It shows a strong commitment from our customers to strategically align with us over a two- to three-year horizon.

Thank you, Greg. Next question, please.

Our next question is from Rick Sherlund of Nomura. Your line is open.

Thanks. Yes, the question is on your market opportunity going forward. I wonder if you can characterize for us maybe what percentage of your vSphere market is running a broader suite solution, and maybe some idea of the road map going forward in terms of product deliverables as you deliver more on software-defined storage, and software-defined networking. When would we expect to see more product flow and revenue generation from those products?

Let me -- maybe I'll address somewhat the sequencing of the technology in SDDC, and then let Carl add a few comments on the vSphere opportunity -- specifically in the size of that SDDC opportunity. Overall, what we said is we see this as a very large expansion of our market as we move into networking, security, storage, availability, and management and automation.

Clearly, the management and automation, we're still very early in that attach rate -- and that's the fastest growing one, so that one is now becoming substantive as part of our product revenues. We see networking and security, those events of a size before in that area, that this year is about those early lighthouse wins and getting early traction. We really don't expect that to be a meaningful contributor on revenue until beginning in '14 and beyond.

Storage is of those elements will be the latest one, as we are just beginning to deliver those technologies this year at VM World, so we really don't expect that to contribute substantively to our opportunity until the latter part of '14 or into '15, when that starts to pick up. Each of these will have their natural gestation cycles, with vSphere the most mature, management, network security, and then storage and availability, in that order, over time. Carl?

I think the other question, Rick, was specifically about the opportunity for vSphere and how are we doing and upgrading them either to vSOM or vCloud Suite. I would say at this point, although we've had a lot of success with vCloud Suite and now with vSOM last quarter, we see a significant opportunity to go and upgrade our install base of vSphere, which you all know is very rich out there, and sell them these additional solutions going forward. I can tell you we have a very low penetration rate at this time with both vCloud Suite and vSOM, so we see a rich opportunity going forward to upgrade them to a lot of the components of the software-defined data center.

Thank you, Rick. Next question, please.

Our next question is from Patrick Walravens of JMP Securities. Your line is open.

Great, thank you. Pat, one comment that I hear increasingly from portfolio managers is they don't -- or worry about owning names that compete with Amazon web services. They look at what Amazon did to the retail industry, and they worry maybe it will do something similar to IT. Can you address at a high level how you would respond to those concerns? Thank you.

Well, when we've launched our vCloud hybrid service, we've explained very clearly to the market why this is different and unique for the enterprise customer. The enterprise market is very immature for taking advantage of any public cloud. There is a whole bunch of reasons for that around SLAs, around GRC, around proprietary interfaces. What they really want is a seamless hybrid cloud. They're not interested in a public cloud that doesn't allow them that flexibility to move back and forth, be able to address today's applications as well as tomorrow. This for us is the opportunity.

As we're still early, we don't have all of the financial metrics to demonstrate this, but I'll tell you from the customers that we have interacted with, their response to this messaging has been overwhelmingly positive. We really believe that that positioning for the enterprise customer is unique and powerful, and they're looking at us as their trusted partner to deliver the software-defined data center on premise, in the cloud, and in federation with each other, the hybrid cloud service of tomorrow.

Thank you, Pat. Next question, please.

Our next question is from Michael Turits of Raymond James. Your line is open.

Yes. My question is about ELA. The question that's been asked before from a metric perspective is where are you coming in on ELAs relative to sort of a benchmark of 120% of new ELA value versus old. Is that about where you're coming in, and has that been increasing -- that increase this quarter versus last quarter?

Michael, this is Jonathan. Thank you for the question. What we have consistently said is that ELAs' renewal rates have stayed very consistent. Obviously, we talked this quarter about a strong quarter for renewals, but we also said that consistently on a 12-month basis, the overall renewal value is over 100%. That's what we've shared in the past. I can tell you that metric is as true today as it has been. As Carl shared with you on this call, we have been very encouraged by the renewal experience this quarter, which is one of the number of reasons why we're very confident about the back half of the year, as well.

Thank you, Michael. I think we're going to have one last question. The last question, please.

Certainly. Our last question comes from Daniel Ives of FBR. Your line is open.

Yes, thanks. Mainly from a high level, obviously, there has been a lot of transition with the new Management team, new people in different places. Talk about maybe the organization today at VMware relative to where it was six months ago, Pat, from how you see it?

Sure. Thank you very much, Daniel. Clearly, the industry's in a period of transition. VMware has laid out -- and we've really asserted a set of changes we need to make to focus VMware. With that, we're actively strengthening our leadership team internally and externally. We're attracting new talent. We've added over 500 people in the first half of the year to the Company, a very quality of people. We have a fabulous campus that we're building out here. We continue to be viewed as a serial innovator in the industry of disruptive and radical technologies. This focused effort has brought just incredible clarity to the organization of what we are out to accomplish in the industry and with our customers. As I said at the out set, the momentum is building, and the Company is focused and excited as we never have been before.

Before we conclude, Pat will have some final remarks.

In closing, I'm very pleased with our team's performance in Q2. We exceeded the high end of our total revenue guidance. We achieved a record non-GAAP operating margin. Overall, we're executing to the plan we shared with you. The Company, like the last question asked, right? We're aligned, focused. The energy and momentum is building as we focus on the second half of '13 and beyond. We invite you again to VM World. I look forward to seeing you all there. We appreciate your time, and thanks for joining the call today.

Thank you for your participation on today's conference call. At this time, all parties may disconnect.