VMware Inc (VMW) 2013 Q4 法說會逐字稿

Welcome, and thank you for standing by. At this time, all participants are in a listen only mode until the question and answer session of today's conference.

(Operator Instructions)

I would like to advise all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the conference over to Mr. Paul Ziots, Senior Director Investor Relations. Thank you. You may begin.

Thank you. Good afternoon, everyone, and welcome to VMware's fourth 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. Slides which accompany this webcast can be viewed in conjunction with live remarks and can also downloaded at the conclusion of the webcast from ir.vmware.com. We have also included in our earnings release and posted on our website historical data for revenue and unearned revenue, excluding revenues in each period attributable to the products and services contributed to Pivotal software and the products and services associated with divestitures consummated by VMware in 2013.

On this call today, we will make forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially as a result of various risk factors including those described in the 10-Ks, 10-Qs and 8-Ks VMware files with SEC.

In addition, during today's call, we will just of 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 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-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 first quarter 2014 quiet period begins with the close of business March 14, 2014. 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 will turn it over to Pat.

Thank you, Paul, and good afternoon, everyone.

Last week we announced preliminary results for Q4 2013 in conjunction with our announcement of our intent to acquire AirWatch. Q4 was a very strong finish to a great 2013 for VMware, and I'm extremely pleased with our team's performance this year. Our Q4 total revenue was $1.5 billion, up 20% year-over-year, excluding Pivotal and divestitures. VMware's total revenue for the full fiscal year 2013 was $5.2 billion, up 17%, excluding Pivotal and divestitures.

Over the course of 2013, we did exactly what we said we would do in every aspect of the business, including financial performance. Attracting and retaining top talent and most importantly, bringing breakthrough innovation to market that provides strategic business advantage for our customers.

With our strong performance in Q4 and in 2013 as a whole, we have accelerated VMware's growth and positioned the Company well for a strong 2014. We now have significant customer momentum across all three of our strategic priorities as we continue are focus on leading the industry with the software defined data center, hybrid cloud and end-user computing.

VMware continues to build momentum globally because we are uniquely positioned to help our customers transform to the mobile cloud era of computing. With our portfolio of solutions that extend from the desktop to the data center to the cloud, we are enabling IT teams to liberate resources from their client server environments while building the mobile cloud infrastructure that will power their businesses into the future. Our strong performance in Q4 and in 2013 is clear validation that our customers have confidence in our ability to help them address the IT requirements of both today and tomorrow.

We are laser focused at VMware on three strategic priorities and we continue to execute well. I want to highlight some areas where we made significant progress in 2013 to accelerate VMware's growth and deliver against our long-term strategy. For the software defined data center, the rate of customer adoption is accelerating, and it's clear that the industry is strongly embracing our SDDC strategy. Carl will provide more detail in a moment on the value that SDDC is delivering for specific customers around the world.

In August, we officially launched NSX, our network virtualization platform, and global brands like McKesson, Starbucks, Medtronic, Best Buy and China Telecom have spoken with clarity and conviction about how they're using the NSX platform to make their networks more agile and efficient. A critical component of SDDC is IT management, and throughout 2013, we grew rapidly, gained share and added new cloud management capabilities to our portfolio, empowering IT teams to move at a higher velocity to support top priority business objectives.

One of the most exciting milestones in 2013 was our launch of vCloud Hybrid Service in May, followed by general availability in the US in September, and beta availability in the UK in December. We've recently completed the buildout of vCloud Hybrid Service in four US data centers and one UK site, and we also secured our first franchise partner in Savvis. Most importantly, the early response from our customers has been overwhelmingly positive. There is growing consensus that the hybrid cloud will be the delivery platform for the future of IT. No other player in the market is better positioned than VMware to deliver on the promise of the hybrid cloud.

Our end-user computing group also put a bold stake in the ground. Just last week, we announced that we have entered into a definitive agreement to acquire AirWatch, the leading provider of enterprise mobile management and security solutions. With this acquisition, VMware is adding a foundational element to our end-user computing portfolio. With the addition of AirWatch, we will be positioned to accelerate VMware's long-term growth in a significant way by delivering a complete and proven enterprise class solution for empowering the mobile workforce.

Over the course of 2013, we made several significant moves to accelerate our end-user computing group. We reinvigorated our EUC leadership team and continued to gain share in desktop virtualization. In October, we announced our acquisition of Desktone, making VMware a clear leader in desktop as a service. The market response has been strong with the rapidly growing partner community, including tier 1 service providers and a strong pipeline of customers modernizing and moving their desktop infrastructure to the cloud.

These are just a few highlights of the many that demonstrate the momentum behind all three legs of our strategy. I couldn't be more proud of my leadership team and the entire Company. We continue to hire the best and brightest in the industry and will continue to make aggressive moves in 2014 because we see the opportunity here and now.

Our industry has entered a dramatic new phase. Customers need to reduce cost in their existing IT environments while simultaneously building out the mobile cloud infrastructure that will power their businesses in the future. VMware is one of the few companies that can simultaneously help them address these two challenges.

Without a doubt, the coming years will be highly disruptive for many in our industry. At VMware, we are uniquely positioned to transform IT once again. In closing, I'd like to thank our customers, partners and employees for their passion and engagement in Q4 as we carry our momentum into 2014.

I will now turn it over to Carl.

Thank you, Pat.

I'm very proud of our performance in Q4 and 2013. We delivered consistently according to our guidance throughout each quarter and the full year. Q4 went as planned. Excluding Pivotal and divestitures, licensed bookings grew in the very high single-digits and total bookings grew in the mid-teens year-over-year. This is consistent with the guidance commentary that Jonathan provided on the Q3 call.

Consistent with previous quarters, I will provide some color on performance across the region with growth rates excluding Pivotal and divestitures. The Americas region had an especially strong bookings growth of 20% year-over-year in Q4, fueled by a continued robust uptake of ELAs.

Total bookings for Q4 in EMEA grew in the low double-digits year-over-year, which we believe reflects continued strong performance versus our peers in a mixed environment. The UK had a very strong quarter as we began to see improvement in the banking and finance vertical. Adjusting for the effects of currency, Asia Pacific bookings grew in the high teens year-over-year in Q4. It's worth noting that total bookings in China were up over 20% year-over-year in Q4, and up over 20% for each of the last two fiscal years.

One area I would like to highlight is our strong performance in the US Federal markets throughout 2013. For the full-year, we grew total bookings over 25% in what was a tougher vertical for many this year. In summary, we are growing across all geos in both mature and emerging markets.

In Q4, ELAs continue to be a way for us to extend our strategic relationship with customers. ELAs increase our ability to sell more products in a wider range of products. For example, in Q4, we saw customers begin expanding the content of ELAs to include both NSX and vCloud Hybrid Service in addition to vCloud suites, management, automation and EUC products.

We had five record highs in Q4 pertaining to ELAs and renewals. First, as we predicted, we had a record quarter for ELAs, representing 40% of total bookings. Secondly, we closed 10 ELAs greater than $10 million. Third, Q4 tied for a highest ever in quarter renewal rate for ELAs. Our fourth record was our record high in quarter renewal rate for support, and finally, the average term for support tied in all-time high and remains well above 24 months.

In addition, 2013 was a year of great momentum for vCloud Suites and vSphere with Operations Management, as we exceeded our plan for both products. In Q4, nanagement and automation was once again our fastest-growing product group. We had our largest ever cloud management and automation product launch, which contributed to management license bookings growth of over 40% for the full year 2013. Even with the success of our management automation products thus far, we believe our customer base is only 10% penetrated, reflecting ample run rate for growth.

In addition, for 2013, we more than doubled the number of partners who make it a specific business to sell management automation from VMware. We continue to believe that the path to the software defined data center goes through management automation, and this will continue to be a key driver of our growth in 2014 and beyond.

Turning to our end-user computing group, as we expected, licensed bookings returned to strong growth. Worldwide, Q4 license bookings grew nearly 30% year-over-year in Q4, and grew greater than 40% year-over-year in the Americas geography alone.

For the full-year, 2013 versus 2012, EUC licensed bookings grew in the mid-teens which, we believe clearly reflects that we are gaining share. Our pending acquisition of AirWatch brings a number one asset in the enterprise mobile management and security space into VMware and further increases the full range of data center to device functionality we can offer to our customers.

In 2013, VMware also took big steps to present a vision for the future of the data center and the transformation of the network. Our network virtualization platform, VMware NSX, became generally available in October, and we expect NSX will do for networking what vSphere and server virtualization did for compute.

The majority of our NSX pilots have been turning into sales. As an example, in Q4, the first quarter of availability for NSX, we closed deals with three of the top five global investment banks, and couldn't be more pleased with this ringing endorsement of our network virtualization architecture.

As Pat mentioned earlier, NSX was also purchased by some of the most respected global enterprise and telecommunications firms such as McKesson, Starbucks, Medtronic, Best Buy and China Telecom. The deals we close in the fourth quarter signal that innovative companies are making the architectural decisions that place network virtualization and the software defined data center at the heart of their data center strategies, and we are winning the architectural battle.

Since general availability in September, customers and partner acceptance of our hybrid cloud positioning has been nothing short of remarkable. During Q4, we added hundreds of customers to our VCHS business, and we couldn't be more excited with the level of participation in the US. We also announced VCHS market entrance into the UK where we saw strong customer demand for our beta in December and anticipate general availability in February.

In addition, we are seeing significant interest from service providers around the world who want to partner with us on our hybrid cloud, and we expect to have important announcements to make during Q1 and throughout 2014 in this regard. In Q4, we continue to see significant growth in our hybrid cloud, which once again grew over 100% year-over-year, and now operates in more than 95 countries around the world.

In summary, we executed well against our plan for both Q4 and 2013. We are pleased with our performance, but even more importantly, we are energized by the enthusiasm coming out of our customer interactions.

As we look into 2014, we have the strongest portfolio of products, services and solutions for the mobile cloud era that we've ever seen. Momentum is with us, and we are looking forward to the year ahead and beyond.

With that, let me turn it over to Jonathan.

Thank you, Carl.

We are very pleased with our Q4 and 2013 results meeting or exceeding our expectations for the quarter and the year. Before I get into more details around Q4 and guidance, I want to summarize how we performed in 2013. 12 months ago, we provided guidance for the full year. Each and every quarter, we did what we said we were going to do according to the plan we laid out. I couldn't be more proud of how the VMware team executed in 2013.

Our goal was acceleration of both license and total revenue growth as the year progressed, and we achieved that goal. For example, excluding Pivotal and divestitures, license growth accelerated from 1% year-over-year in Q1 to 18% year-over-year in Q4. At the same time, we've increased the diversification of our businesses non-standalone vSphere license bookings and now greater than 45% of total license bookings compared to greater than 30% in Q4 2012.

In addition, non-GAAP operating margin expanded by approximately 160 basis points, from 32.4% in 2012 to 34% in 2013, reflecting strong performance of our portfolio while investing aggressively for future growth. As an example, we increased our investments in sales coverage and product development, with total headcount up as expected by 500 people in 2013. We ended the year with approximately 14,300 employees, right on target.

And finally, cash flow from operations was up 34% in 2013, reflecting the continued strength of VMware's business model. In summary, we did what we said we were going to do in 2013, and I'm very proud with these results.

Given our positive preannouncement of results last week, I will now focus on key additional highlights that will be helpful in your understanding the Q4 performance. As Paul mentioned, I'd encourage you to refer to the slides and financial tables accompanying this earnings call for further details on our results.

Diluted non-GAAP EPS for Q4 was up 25% year-over-year to $1.01 on approximately 434 million shares. Our balance sheet remained strong with cash and short-term investments at quarter end of $6.2 billion, up $337 million sequentially. Our operating cash flows of $688 million in Q4 were up 40% year-over-year.

We spent $98 million on CapEx and consequently, free cash flow was $590 million, up 44% year-over-year. Our cash flows all year reflected our robust operating performance with strong collections activities while continuing to invest in our business.

During the quarter, we repurchased approximately 1.4 million shares of our stock for a total of $160 million at an average price of around $82 a share. For the full-year, we repurchased approximately 6.6 million shares, for a total cash outlay of just over $0.5 billion at an average price of approximately $77 per share. Total unearned revenue ended the quarter at $4.09 billion, up 18% from Q4 2012, and of which $1.53 billion is long-term, up 21% year-over-year.

As expected, 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.

Now, I will briefly summarize and augment the guidance we provided last week. As I mentioned, we expect revenue for 2014 to be between $5.940 billion and $6.100 billion, or up 14% to 17% year-over-year. This revenue and growth range includes our expectations of approximately $75 million from AirWatch.

Excluding Pivotal and divestitures, and including AirWatch, our total growth for 2014 is expected to be up 16% to 18.5% versus 2013. License revenues for the full year are expected to be between $2.550 billion and $2.630 billion, or up 12% to 16% year-over-year. This revenue and growth range includes our expectations of approximately $50 million of license revenues for AirWatch.

Excluding Pivotal and divestitures, and including AirWatch, our license growth rate for 2014 is expected to be up 13% to 17% versus 2013. The Q1 2014 we expect total revenue to be between $1.330 billion and $1.370 billion, or up 12% to 15% year-over-year. This revenue and growth range includes our expectations of approximately zero to $10 million from AirWatch.

Excluding Pivotal and divestitures, and including AirWatch, our total growth rate for Q1 is expected to be up 16% to 19% versus Q1 2013. License revenues for Q1 are expected to be between $545 million to $555 million, or up 12% to 14% year-over-year. This revenue and growth range includes our expectations of [$3 million] of license revenue for AirWatch. Excluding Pivotal and divestitures, and including AirWatch, our license growth rate for Q1 is expected to be up 14.5% to 17% versus Q1 2013.

Finally, and to assist you with your models, I will make a comment regarding non-GAAP operating margin seasonality in 2014. As we factor in the full dilutive effect of AirWatch from Q2 onwards, we expect Q2 non-GAAP operating margin to be lower than Q1 by 150 basis points to 200 basis points. We then expect non-GAAP operating margin to increase in the second half of 2014, resulting in approximately 31% for the full year 2014. Remaining guidance for Q1 and the whole of 2014 and the reiteration of our 2015 and 2016 guidance provided on our AirWatch conference call last week is included in the slide deck posted on our Investor Relations website.

In summary, we did what we said we were going to do throughout 2013. We accelerated revenue growth, grew operating margin and generated robust cash flow from operations. We continue to see significant opportunity ahead and are excited about the prospects for our customers, partners, shareholders and employees.

And with that, I will turn it back to Paul.

Thanks, Jonathan.

Before we begin the Q&A, I will ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible.

Operator, let's get started.

(Operator Instructions)

Brent Thill with UBS.

Carl, you'd mentioned NSX starting to have an impact on ELAs. I'm just curious if you could give us a sense of what type of impact you are starting to feel? And maybe more for Jonathan, your view in terms of the full year of the NSX contribution. I know a lot of investors have a lot of questions around this. Any color you could add would be helpful. Thank you.

Brent, thanks. This is Pat, and I will just get us started here by just, first welcoming everyone to the Q&A session. But overall, by emphasizing just how happy we are with overall Q4 performance and just how strong a finish it was to the year and just how we are seeing a building momentum across all of the areas of the Company.

One of those, of course, was NSX, that you are asking about. Carl, maybe you can give a few our comments on it. But just overall, we really feel like, as Carl said in his formal remarks, that the architectural wins are shifting in our favor as we see the adoption of some of these brand names, three of the five largest banks. This is really a powerful transition that's underway. Carl, a few more details for Brent?

Yes, Brent. To answer your question specifically, you asked about NSX and ELAs. And NSX just came to market, as you know, and was leased in Q4. We saw a nice uptake of NSX becoming part of our ELAs.

In fact, in a number of ELAs, NSX was actually driving the ELA itself as people really view VMware rounding out all three pillars of the software defined data center from compute to now networking and ultimately storage. So, NSX is the driver of ELAs, and again, we are pleased with the uptake of NSX in ELAs within the quarter.

A strong performance overall from NSX, and, as Pat said, people truly do see this as an architectural shift in how networking will be deployed in the future. NSX is being a part of their decision on how they will do that.

And Brent, just to specifically address your question, this is Jonathan. We still expect 2015 to be the year where we expect to see more meaningful revenue growth contribution, in terms of overall contribution to our performance. We're are really pleased, as both Carl and Pat have pointed out, with the as expected progress with the architectural wins, and those are the key things to watch right now. The architectural wins, key logos, key names, and we performed as we expected and probably a little bit better, actually, which is great.

Thank you, Brent. Next question, please.

Walter Pritchard of Citigroup.

Jonathan, I wonder if you could walk us through, just on the license deferred revenue. Obviously, that accountant has moved around a lot, historically. It looks like even if I adjust for Pivotal, it was up about half on a sequential basis of what it was a year ago in the fourth quarter. I'm wondering if you could talk through that and also, what sort of things impact that account as we look at it.

Unlicensed deferred, sure. I think the key thing to know is, if I step back and look at overall bookings numbers, which obviously feed into overall deferred. First of all, Brent, I just want to -- I'm sorry, Walter, I just want to point out that the overall bookings did grow very solidly in that mid-teens growth rate, which is fairly consistent with our guide going into 2014.

My sense does reflect the first full quarter of the vCloud suite in 2012 in Q4. And again, as Carl pointed out, the strong performance we saw in ELAs, in particular ELA renewals in Q4, with over 40% of our bookings in ELAs in Q4 plus a significant in quarter renewal rate of ELAs.

Don't forget, there's a higher maintenance mix of -- in our ELAs when they first come through from a renewal, especially if we are doing second or third time renewals. And 9 of our top 10 ELAs were renewals this quarter. The top 10 ELAs we talked about were renewals.

That's good. It shows the overall strength of our relationship with the customers. It is a slightly higher weighting toward maintenance overall, which is why mentioned the overall bookings number. But I couldn't be more pleased with how the overall bookings and license performed in Q4.

Thank you, Walter. Next question, please.

Heather Bellini of Goldman Sachs.

I just had a couple questions. I guess the first one is related to seasonality on license in Q1. Jonathan, knowing that you came in at the high end of your range, I think there's some questions due to seasonality being a little bit more than what you thought when you guided to it sequentially back on the Q3 call.

And then the second question is really for Pat or Carl. You talked about, I believe, management being 10% penetrated, is I believe the quote you gave. What percentage of your install base do you think that product set applies to? Thank you.

Hello. Because you asked, I think that question just a couple of days ago, I am going to repeat the answer I gave at the time. The main reason for Q1, in particular., appearing like it's seasonally slightly deeper is because we beat in Q4. We had a stronger performance in the overall year than we expected just three months ago, which is really gratifying to see, and our guide for Q1 and the full year is entirely consistent with what we anticipated, seeing that.

So, it's really a question of a stronger compare the Q4 period reflecting the strong Q4 2013 results.

With respect to management, Heather, we have this mantra of no naked vSphere. We really believe that there are -- that the management tools apply to essentially 100% of the customers. The point of the 10% is obviously up from the 5% that we cited six months ago.

We are clearly making progress, but the runway is the rest of the 90%, and that's what we are excited about, that we have a long way to go. And it's not even one management tool, but as we broaden our management suite, it's selling more of the management tools, provisionings, operations management, financial management, application management, we have a long way to go in this category.

Great. Thank you.

Thank you. I will remind everybody one question, please. We are just trying to be fair get as many questions as possible onto this call. Next question, please.

Kash Rangan, Merrill Lynch.

It looks like you've delivered what you told us in the beginning of the year. That's great.

On the license deferral, Jonathan, can you tell us if we should stop expecting this dynamic to continue? I can clearly see that you had a tough comp to your vCloud suite introduction Q4 2012. Was it just that? Or is there some other change in the way you are building your customers, perhaps? You're booking but not billing?

And if you could just add some clarity there, recognizing that your overall bookings growth rate did accelerate. Can you help us understand if we should not have those kinds of expectations about license billings the way your quarters have played out? Thank you.

Kash, thanks. I just wanted to echo your first comment, right? We did what we said we would through the year. And while there was skepticism on our ability to ramp our growth rate over the course of the year, we've delivered on that or exceeded it every quarter of the year. I just couldn't be prouder of my team and the leadership here, to be able to both predict that and then execute against it through the year.

With that, Jonathan, if you could address the specific question.

Sure. Kash, as I think about the coming up year, the year ahead of us, I think you should still expect to see license and growth in deferreds over the course of the year, much like you've seen in the past. There will clearly be an effect of an ELA cycle, from renewals coming into 2014. We saw an effect of that performance in Q4.

Higher ELA percentage from a renewal perspective, higher ELAs overall. In particular from the renewals perspective, you see slightly lower mix of license. But overall bookings and overall license growth should continue to contribute to deferred revenue. Carl do want to add anything to that?

License billings should continue, is what you are saying, Jonathan, right? Because it's more of a tough comp, but you should be able to continue to defer more and more onto the balance sheet from license.

Again, I would look at the flow that we saw over the course of this year. You've clearly seen some quarters where we've had a little bit more, we had in some less. I'd look at the overall growth, and I'd come back to our revenue guide for the entire year. Clearly, you don't grow revenue without growing bookings. That is the net I would step away with.

Kash, this is Carl. The only thing I would add there is, I think just looking at what our deferred is each and every quarter can be challenging. Because depending on the composition of an enterprise license agreement we do with the customer, we may take more of the license renewal in a given quarter. Or if it's a ratable deal, some of it gets pushed out and then gets on the balance sheet and becomes part of the deferred.

And really, the composition of the ELAs is really what drives a lot of what's on the balance sheet versus which goes to deferred in any given quarter. So, I think we have to be a little bit careful as to how we look at deferred and back into what our external bookings are.

Got it. Thank you.

Next question, please.

John DiFucci of JPMorgan.

I have a question about end-user computing. You guys had a huge quarter this quarter, and that was after last quarter being, I think it was flat last quarter. I think Carl said you are gaining share. We all know you've been investing quite a bit here way before AirWatch.

Just curious, is this more a result of that investment and execution on that investment working at this point? Or are there any secular changes that are suddenly happening in the market?

John, thanks. So, if you recall, in Q3 we said with our bookings on our end-user computing business was actually slightly down year over year. And now to bounce back and grow it at 30% in Q4 on a year-over-year basis, up 40% in the Americas, just shows that we did have a strong pipeline coming out of Q3 as we had indicated, and we expected to have a strong quarter here in Q4. When you combine that with what we have done on the investment front to exactly your point, John, we have invested in the go to market strategy significantly in 2014 -- sorry, in 2013, and a lot of those investments are starting to pay off and we are starting to see the productivity take in -- we're starting to see the productivity ramp out of all those investments.

The last thing I would say is, if you just look in Q4, with the acquisition of Desktone and then the recent announcement of our acquisition of AirWatch, we fundamentally believe no one has a stronger portfolio to service the end-user computing market than VMware going forward.

And, Pat, I don't know if you want to add anything?

I would say, the one other thing that we think is giving us more strength and momentum here is the enthusiasm of the new leadership team. And Sanjay, plus the key executive that he's added to the team, combined with the sales investments that Carl mentioned earlier, clearly are just producing a lot more momentum in this category, and we think that's sustainable. And also, the leadership team that gave us the confidence enough to move forward with the AirWatch acquisition.

Great, thanks, guys.

Next question, please.

Brian Marshall of ISI Group.

Jonathan, the operating margin guidance throughout the year was helpful. I was wondering if you could help us with how you view revenue seasonality throughout calendar 2014 in addition to that. Thank you.

Brian, thanks for the question. I'm not actually going to comment specifically on the back half of the year at this point. But perhaps just to help you out. The way I think about Q2, and assuming the midpoint of our Q1 guide, I would expect sequential growth of around 9% to 10%, excluding AirWatch to license. And just over 6%, again, excluding AirWatch, for targets again, just to give you a sense of how I think about Q2 sequential growth rates. We will clearly update you more as we exit Q1 in just 90 days, here.

As a further reminder, don't forget, we are expecting to close AirWatch in Q1. I just want to point out, you noticed it, but if others would just make sure they're going to the slide deck. We had one accompanying this called -- we gave very specific guidance with respect to, what do we expect for AirWatch from a revenue contribution perspective.

And just to clarify, it's the footnotes in slide 11, for anyone that wants to go directly to it. Thank you, Brian. Next question, please.

Ross Macmillan of Jefferies.

Jonathan, coming into 2013, I think we all knew there was a fairly strong ELA renewal that came from roughly the 2010 period because of the three-year nature of those contracts. Could you just comment on how you think the 2011 ELA renewals play out in 2014? And I guess, are you still anticipating that ELAs as a percentage of total bookings will continue to increase? Thanks.

Ross, thank you. Look, I think there's probably three or four points I want to make on ELAs. Carl, feel free to jump in, obviously.

First is, as we've continued to experience and we continue to enjoy ELAs very strategic for us, indication of deeper relationships with customers, generally three years in length or thereabouts, 40% of our total bookings in Q4.

As Carl and I and Pat have commented, we can see this getting towards the 50% level, probably over the next 12 to 24 months. The in quarter renewal rates was one of the highest, if not the highest we've seen, with respect to renewals. The renewal opportunity in dollar terms in 2014 is higher than the renewal opportunity we even had in 2013. The dollar renewal volume is higher in 2014 than it was even in 2013. The rate of increase over 2013 is a little bit lower as a percentage, but still the dollar value is very encouraging.

And then last but absolutely not least, I just want to point out that the new ELA mix is actually greater than 50%. So, while renewals are a great way for us to have that ongoing recurring relationship with customers, that new ELA opportunity continues to be very strong. Hopefully that helps you think about 2014 the right way.

Thank you.

Thank you, Ross. Next question, please.

One moment. Phil Winslow, Credit Suisse.

Pat, glad to see you're taking a stance against VM nudity. Just along those lines, I want to talk about some management and vSOM versus vClouds sweeps. In terms of what you saw this year, adoption of those two, I know one was launched before the other. But as you're thinking about 2014, which of those two do you have higher expectations for and why? Thanks.

So, throughout the year we've been giving you updates on how well both vCloud suite and vSOM has been performing. In Q4, we saw another strong quarter of adoption of both of those, if you will, suites. VCloud suite continues to be sold with ELAs. Approximately 50% of our ELAs included vCloud suites and about 70% of the dollars associated with vCloud suites were in ELAs, as well.

So, strong adoption of ELAs associated with vCloud suite. So, the notion of the software defined data center and getting all the components of it is resonating with our customers, and they are locking us into longer-term agreements around those ELAs.

As it relates to the vSOM update, we continue to see our channel become more skilled, and I will use the reference that Pat did earlier at selling non-naked vSphere. And they do continue to sell vSOM into the market at a very aggressive rate, and the adoption has been really strong throughout both Q2, Q3 and Q4, and we expect that to continue as we head into 2014.

Thank you, Phil. Next question, please.

Matt Hedberg of RBC Capital Markets.

Clearly, you guys are having success with NSX, which is great to hear. My question is in regards to VSAN, which I believe is still in beta. I'm wondering if you could give us an update on that product and potentially how disrupted that could be, as well.

Sure. I will take that. VSAN is in beta. It has gotten tremendous response from customers. And it really -- the place that it has just been so spectacular has been the vAdmin is able to execute and manage storage, right, as just part of their normal workflow.

That's just been -- that elegance and simplicity has been extremely well received by customers. It will go GA a this quarter. So, we are expecting an acceleration of that product, given how well the beta has gone.

And as we've said, we expect it to ramp over the course of the year and really start to materially contribute next year to revenue growth. But, we do expect that customer uptick for it. And the focus use cases around vAdmin driven storage for low tier use cases, test and VDI and other things that we've seen from our customers has clearly resonated, right, for that value proposition, which we do expect to grow over the next couple of releases of that product.

Thank you, Matt. Next question, please.

Daniel Ives of FBR.

Could you talk about Pivotal and your thoughts on how that's ramping? Thanks.

Carl, do you want to take that one?

Yes, so I think EMC will probably cover this a bit more tomorrow on their call. But from our perspective, we've been very pleased with how Pivotal is ramping. We have in Q4 announced two different types, if you will, go to market partnerships with Pivotal.

The first is we will take their platform, their platform-as-a-service and deliver it behind the firewall as a VMware SKU. If someone wants a cloud boundary behind the firewall in their own data center, VMware can deliver that. And secondly, we have announced that the Pivotal platform will run on top of our vCloud Hybrid Service, which allows us to offer a pass platform on top of our infrastructure as a service vCloud Hybrid Service.

We are very pleased with our partnership with Pivotal. Their growth and -- we are excited to take them to market, both behind the firewall and in the public cloud going forward.

Thanks.

Thank you. Next question, please.

Michael Turits of Raymond James.

I was wondering if you are able to give us any more granularity or visibility into (inaudible) into AirWatch on more of a pro forma basis? $75 million contribution, maybe how much was the write down and what the bookings look like, so that we could get more sense of what the growth really is?

Michael, thank you. At this point, it's probably premature for us to do that.

We did talk about 2012 being in excess of $100 million bookings run rate for AirWatch. And I also shared just a few days ago that it's clearly a high growth business. Remember they've added over 10,000 customers in a relatively short space of time, 1,600 plus employees. If you take that $100 million and stretch it back just a few years, you can get a sense of the momentum and the growth rate that they've been enjoying.

Clearly, going into 2014, we are going to have just a partial year. We are going to have a lagging indicator being revenue. And I want to get through the close of the acquisition before we give you any more granularity as to how they're really going to performance, especially given purchase accounting on the close of the deal, as well.

Thanks very much.

So, stay tuned on that.

Thank you, Michael. Next question, please.

Pat Walravens with JMP Securities.

Great. Thank you. Pat, moving to the big picture here, what key points would you make to investors who worry about competition from Amazon web services?

Thanks, Patrick. And as we think about the entire cloud services space for enterprise customers, it's just immature. Customers, there's a lot of tire kicking, a lot of experimentation, test and dev. Overall, anybody in the enterprise space, this is still very early days.

With that, what we've said is VCHS is very uniquely focused for enterprise use cases. It's a truly seamless hybrid cloud, and that value proposition of a hybrid cloud that's an extension of what they're doing on premise with the 40 million VMs that we have running on the VMware software stack today, common management, security, networking and all of those attributes, as we've described, it's just dramatically differentiated from AWS or anybody else in the marketplace.

So, while generally we see this large pool of public cloud services, our position is quite differentiated, and that is resonating with customers. And we do expect there will be some competition with AWS over time for different workloads and customers. But today, we are largely pursuing different customers with different value propositions. And, as Carl mentioned in his comments, we are seeing extraordinary response from those customers.

Thank you, Pat. I think Jonathan wants to just make a slight alteration to the prior comment.

Michael, I'm letting my enthusiasm for the AirWatch business just get slightly ahead of myself. So, it's 2013 that we are estimating $100 million. Still extremely strong progress, but $113 million -- or $100 million in 2013 with respect to AirWatch.

Greater than $100 million in 2013.

Should have just let you correct me (laughter). There you go.

All right. Next question, please.

Gregg Moskowitz of Cowen and Company.

Just a follow-up for either Pat or Carl on the VCHS. I know it's early, but you guys mentioned you did add hundreds of customers in Q4. Can you give us a little color on the types of engagements that you're having with customers so far, and whether you are seeing more interest so far in dedicated workloads or in virtual private cloud. Thank you.

You want to start with that Carl?

Sure. We are seeing interest from our customers on multiple dimensions. Number one, they're interested in renting capacity on demand in a multitenant environment. At the same time, we are seeing customer demand for a dedicated private cloud instance on top of vCloud Hybrid Service. So, we are actually are seeing both of the operating models for the public cloud come through from our customers.

What I think we are probably most interested in and excited about is the fact that we are getting big brand-name logos to adopt vCloud hybrid service as their public cloud offering and truly create the hybrid cloud that no one else has, that allows them to very easily federate their workloads with the common underlying architecture from management to networking to compute to security. And that's what our customers are telling us they like most about that.

I should also point out that, that is without us having a lot of new services on top of the platform that we will bring to market this year, including a platform-as-a-service with cloud foundry, including desktop-as-a-service with Desktone. We are just coming out of beta on DR as a service so our customers want to back up their VMs into our public cloud offering. So, we are seeing a lot of excitement from our customers, even before we get a lot of these rich services on top of vCloud hybrid service that will all come over the next couple of quarters.

Then, the last thing I would say is we mentioned that we went into beta in London in the UK, with our vCloud hybrid service. And very quickly, after announcing our beta, it filled up with some of the largest brands and logos in the UK market, which again showed strong demand for our hybrid service on a global basis.

Just two other comments to add to that, Carl. One is, is that as we are gaining momentum on the vCloud hybrid service, the partnership discussions are gaining momentum, as well. As we said in the formal remarks, we expect to have a number of service provider announcements this quarter and through 2014 as that goes -- those relationships and that value proposition is so distinct that we are seeing service providers really anxious to participate and extend our global footprint as a result.

Then the last comment here is, we really think about vCloud Hybrid Service, our franchise partner relationships as well as VSPP as a holistic view of our hybrid cloud. That business grew over 100% year on year in Q4 and is just demonstrating the strength of the value proposition that VMware has for the public cloud and really reaching into the enterprise customers in a unique way.

Thank you, Gregg. Next question, please.

Shaul Eyal, Oppenheimer.

Question on the desktop, on the VDI product. I know it's a small contributor of overall revenue, but Pat, Carl, any color you can share with us on that would be greatly appreciated.

Yes, I mentioned this earlier. If you recall in Q3, we said our bookings on EUC was just slightly down. But, we also indicated that we had a very strong and robust pipeline as we headed into Q4, and it played out exactly as we expected. We grew the business 30% year over year in Q4, really off the back of a strong performance in the Americas, which grew the business 40% in Q4 alone.

And we are absolutely seeing customers continue to adopt VDI to help modernize their desktops. And we do believe we are taking market share against the competition, growing at 30% on a global basis, growing it 40% in the Americas is actually faster than the market is growing in general. So, we feel like we are doing quite well, and our investments that we made in 2013 on the go to market side are truly starting to pay off for us in Q4 in 2014 and beyond.

Update as well on that, is the desktop-as-a-service, or the Desktone acquisition, which beat our estimates in Q4 and really has a very substantial pipeline as we go into 2014. So, we feel like this is another area of unquestioned leadership for VMware, and another opportunity for us to extend our strategic partnerships with our channel, as well as our service provider partners.

Next question, please.

Rajesh Ghai, Maquarie.

I just wanted to delve a little deeper into the comment around the 10% (inaudible) from management and automation. Is that by customer, or is that by the install base of virtual machines? How do you really calculate it, given that you have such a wide spectrum of management and automation products, starting from vSOM on the low-end to the vCloud suite in its entirety?

Rajesh, this is Jonathan. Thanks for the question. Again, just to restate the stats, what we've talked about is, as we've looked at the install base and the opportunity to attach the install base of CPUs at there, we are estimating that we are now 10% or less penetrated with management products. And that includes management products that are sold on a standalone basis or sold as part of vSOM or sold as part of vCloud suite.

It's a little bit hard to estimate it with precision, but the main point here is, as Pat pointed out, it's not 90%. We've got 90% of the way to go, and the penetration rate, at this point, along with the momentum we've been seeing with the attach rate, shows that we've got a good growth driver and a driver for 2014 and beyond.

Jonathan, I would like to add that we brought a complete refresh of our cloud management and automation platform to market in Q4, our largest refresh of that platform, ever. And we have seen really good uptake by our customers throughout the quarter, especially in our ELAs.

Also, I'd like to add that IDC, in their latest research paper, talked about VMware being the clear cloud leader for management and automation. And that's a great sign for us as our customers who are highly penetrated with VMware and vSphere are moving now and adopting the rest of our management automation platform, as well.

Thank you, Rajesh. Next question, please.

Rob Owens of Pacific Crest.

As you guys look at some of your new opportunities through NSX and VCHS, which do think could be larger for 2014? At what point do think we get some material contribution from either category? Thanks.

Rob, thanks.

When I think about the revenue contributors, again, to 2014, I'd come back to the same drivers we've been talking about in terms of material contributions, end-user computing for all the reasons we have talked about, even before AirWatch. The refresh of the product line, the significant investments we've made from a go to market perspective, and the refresh of the leadership team, Sanjay in particular, coming in. That, I think, is a very significant driver of growth continuing for us in 2014. We're very pleased with the progress we are seeing there. That's one.

Management, as we've just talked about, growing very healthfully this quarter and continuing into 2014. And again, I think the key things to understand from a VCHS perspective, even VSAN as we move to GA, and as we think about NSX going into -- moving from architectural wins with dollars attached to them. These are really things going to be contributing in a more material nature as we think about 2015. The key thing is penetrating the marketplace today and starting off from a low base, but seeing what we predict to be relatively significant growth, but of a lower base contributing more materially in 2015 and beyond.

And I will just add. If we could take you back to that TAM analysis that we had given you at last year's financial analysts day, the TAM opportunity in the networking area was, we estimated on the order of $8 billion. That TAM opportunity in the storage area was of similar size. The TAM opportunity that we saw in the hybrid cloud was on the order of $16 billion.

Clearly, the hybrid cloud of that TAM is the largest incremental one, even as it materializes over 2015, 2016 and beyond, as we see that occurring. But these are all independently very large market opportunities that we are pursuing. So, even though the revenue contributions in 2014 are modest, the incremental growth opportunity for us in 2015, 2016 and beyond is very substantial.

I will just mention, I think was $14 billion, Pat?

Sorry.

It's been a little while since we put that out there for hybrid cloud.

Thank you, Paul.

We love you Paul. Carl, you're next.

(Laughter) One last question, please.

Abhey Lamba, Mizuho Securities.

Carl, I think you touched upon this a little bit. Clearly, end-user computing is a big area of focus for you.

Can you give us more color on your go to market strategy for those solutions? Are you reaching out to the same groups who make decisions on the server infrastructure and they are influencing end-user computing? Or are you building new relationships within the Company? It would be helpful if we can get some color on selling motion and strategies for both desktop and mobility as a server side. Thanks.

Sure, so as you know, we invested pretty heavily on the go to market side of EUC last year, hiring hundreds of people to help us deliver our platform into the market. When we sell into the market, we are actually selling into two different folks.

First there's the infrastructure folks who have now taken over responsibility for end-user computing. Or, we sell to an end-user computing organization who is responsible for desktops and mobility. One of the things that lead us so attractively to AirWatch, as we started to really dive deeper and really engage with the end-user computing community inside of our customers. We were winning VDI deals, but we were not participating in, if you will, mobility opportunities, which, every time we asked them, who you are looking at and who may you be going with, the name AirWatch came up, which was what led us to the strategic acquisition of AirWatch to round out our end-user computing portfolio.

So, net-net, we are selling to multiple people in the account. Either infrastructure people who have taken over responsible for end-user computing, or there is an end-user computing organization itself that does exist in a lot of the large enterprise accounts globally.

Thank you.

Before we conclude, Pat will have final remarks.

Thank you all for the good questions. In closing, I'm just proud of our team's performance in Q4 and 2013. In 2014, we will continue bringing breakthrough innovations to market as we help our customers transform to the mobile cloud era of computing. We appreciate your time today. Thank you very much for joining us.

That concludes today's conference. Thank you for participating. You may disconnect at this time.