VMware Inc (VMW) 2014 Q1 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to Mr. Paul Ziots, Vice President Investor Relations. Go ahead, sir. You may begin.

Thank you. Good afternoon, everyone. Welcome to VMware's first-quarter 2014 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 be 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 attributed to 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 the SEC.

In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for, or in isolation from, GAAP measures. Our non-GAAP measures exclude the effect of our GAAP results of stock-based compensation, amortization of intangible assets, employer payroll tax on employee stock transactions, the net effect of amortization and capitalization of software, acquisition-related items, and realignment-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 second-quarter 2014 quiet period begins at the close of business on June 13, 2014. Unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2013.

With that, I'll turn it over to Pat.

Thank you, Paul. Good afternoon, everyone. Our first quarter has been a solid start to 2014, with both license and total Q1 revenues, excluding Pivotal and divestitures, growing 18% year over year. We continue to deliver the results we said we would deliver. Our road map of product innovation is unparalleled and stronger than ever before, and we are attracting and retaining the brightest and best talent in the industry.

Our industry is going through an unprecedented shift, as IT transforms from client-server computing to the mobile-cloud era, offering customers secure, seamless and instantaneous access to the applications and data they care about. To stay ahead of this shift, IT teams are increasingly choosing to replace their hardware-defined data centers with software-defined data centers, where all core components are virtualized, and infrastructure is highly automated and delivered via software.

During this period of change, VMware is uniquely positioned to help customers unlock the tremendous value embedded in a software-defined future. Across both on-site and off-site infrastructures, and from the data center to the device, no one is better suited to help companies move seamlessly between their public and private clouds with the same consistent environment. And no one has a more complete vision and offering for managing and securing the ever-expanding range of end-user devices, and customers agree.

At VMware, we are laser focused on our three strategic priorities: the software-defined data center, hybrid cloud, and our End-User Computing business. I want to highlight some areas where we made significant progress in Q1 to accelerate our growth, and deliver against our long-term strategy. As we talk to customers, one thing is becoming clear: They not only see the value of the software-defined data center, they increasingly believe that this approach will become the model for leading data centers in the world.

Recently, I was joined on stage at Interop Las Vegas by IT leaders from Nexon America, the US Department of Agriculture, and WestJet, who shared the dramatic impact that our NSX platform is having on their IT organizations. We also described our vision for how the software-defined data center, with compute and network virtualization at its foundation, will enable enterprises to address modern security needs in a profound new way. We continue to see strong customer momentum, new customer pilots, and increased production use of NSX.

February also marked a major milestone with the launch of VMware Virtual SAN, a new, radically simple storage solution optimized for virtual environments. With VMware Virtual SAN, we delivered our first software-defined storage products; an important milestone, given that storage represents the last remaining piece of our SDDC strategy.

We continue to rapidly execute on our hybrid cloud vision with vCloud Hybrid Service becoming generally available to UK customers on February 25. At the UK launch event, we were joined by IT leaders from Betfair and Cancer Research UK, who spoke about how vCloud Hybrid Service is enabling their organizations to seamlessly extend their data centers to the cloud.

On April 15, we launched vCloud Hybrid Service Disaster Recovery, a unique, hybrid cloud-based service that provides a simple and affordable way for customers to protect their data centers. Early customer feedback has been extremely positive, making us confident that hybrid cloud-based disaster recovery services represent a significant business opportunity.

Our End-User Computing group continues to push the pace of innovation. We have added a foundational element to our End-User Computing portfolio with the successful completion of the acquisition of AirWatch, the leading provider of enterprise mobile management and security solutions. I am excited to report that we have seen accelerated customer momentum in the weeks following the acquisition, with AirWatch now at about 12,000 customers.

We continue to believe that we are gaining share in desktop virtualization. We are seeing strong customer interest in Horizon DaaS, a new cloud-based desktop service introduced in Q1, which delivers enterprise-class virtual desktops running on VMware vCloud Hybrid Service.

On April 9, we announced VMware Horizon 6, a highly integrated solution that delivers published applications and desktop virtualization on a single platform. Horizon 6 features highly differentiated integration with our software-defined data center components like Virtual SAN and cloud management. It is the industry's most comprehensive solution for centralized management of everything from physical desktops and laptops, to virtual desktops and applications.

Expect us to continue to be aggressive, pushing the pace of innovation, as we are just in the early stages of a tectonic shift, transitioning from the previous client-server platform to the mobile-cloud era.

I'll now turn it over to Carl to talk more about our business performance in Q1. Carl?

Thank you, Pat. Having spent time in each of our regions over the past two months, as well as with over 4,000 people at our Partner Exchange conference in February, it's clear we are seeing universal interest and excitement across our global customer and partner base. VMware software-defined data center vision is being embraced by customers and partners alike. They see the value in agility and efficiencies resulting from abstracting, pooling and automating key data-center resources.

In addition, with our recent Horizon 6 launch and the acquisition of AirWatch, we believe we now have the broadest portfolio of end-user solutions in the industry. Customers are also beginning to see hybrid cloud emerge as the leading format for running their infrastructure moving forward. This is why our vCloud Hybrid Service is uniquely positioned to help customers move seamlessly between their public and private clouds.

We are pleased with the increasing breadth and growth of our new product offerings introduced throughout this past year, although sales for these newer products continue to be relatively small as we ramp during 2014. These new products, coupled with our strong presence in cloud management, end-user computing, and compute virtualization, position VMware with the strongest array of product offerings in our history.

Now for more detail on Q1: As Jonathan described on prior calls, we expected to see a stronger Q4 to Q1 seasonal impact associated with our growing size as a company, and the strength of our Q4 performance. In addition, we invested more heavily than usual in Q1 to ensure the sales force was skilled in selling our newer products. This resulted in fewer actual selling days during the first quarter than we had originally anticipated. Finally, as customers look to incorporate more of our expanding product base into ELAs, some of the deals took a little longer to close.

These factors impacted our ELA closure rate in Q1, with ELAs representing approximately 25% of total bookings as compared to 40% in Q4. As a result, both license and total bookings grew less than 10% year over year, excluding Pivotal and divestitures.

None of the deals that failed to close in Q1 were lost to competitors. In fact, we achieved another record in-quarter renewal rate for ELAs, and another record in-quarter renewal rate for support. In addition, the average term for support remained well above 24 months. We closed two ELAs greater than $10 million, the same number as Q1 last year.

Based on the plans we have in place, we expect our bookings performance in Q2 to accelerate from Q1, consistent with the revenue guidance Jonathan will provide in a few minutes. We're off to a solid start in Q2, and have already closed a number of ELAs in April.

Turning a moment to geo commentary, results were relatively consistent for Q1. In constant currency, the Americas, Asia-Pacific and EMEA each grew total bookings less than 10% year over year. In relative performance, the Americas was the strongest region, followed by Asia-Pacific, then EMEA.

While we saw the same effects I described across many of our countries, on a relative basis we continued to see solid growth in most of our countries, including the UK, France, Netherlands and China. Of our largest countries, we saw the greatest effect in Australia and Germany, where growth rates were actually negative. While our growth rates in Japan were better than most of our peers, it was less than our expectation.

Taking a look at product groups, End-User Computing, including AirWatch, grew license bookings over 35% year over year in Q1. As Pat said, we believe we continue to gain share in the desktop market. We also believe AirWatch continues to be number one in the enterprise mobile management and security market by customer count and sales.

In Q1, we also significantly expanded our EUC ecosystem, strategically partnering with Google to provide secure cloud access to Windows desktops, apps and data on Google Chromebooks, delivered by VMware's desktop-as-a-service platform. We also expanded our F5 Networks partnership to provide secure access control for virtual desktop deployments, and with NVIDIA to provide rich graphics performance via desktop-as-a-service.

Cloud management grew license bookings greater than 30% year over year in Q1. This growth was helped by an increasing number of ELAs containing vCloud Suite, and more partners who are transforming their businesses to sell and deliver management along with vSphere, including vSphere with Operations Management. Compared to a year ago, we are pleased with the significant growth and the number of partners now selling management solutions. With cloud management penetrated into just over 10% of our install base, we still see plenty of room to grow.

One additional area of strength we continue to see is in our vCloud Automation Center. This is becoming the overarching cloud orchestration and policy-based management solution for not only vSphere, but also the hybrid cloud industry. Cloud management is also a prime driver of our suite strategy, and we continue to see more customers adopting this software-defined data-center vision. In Q1, approximately 50% of ELAs contained vCloud suites.

Customer interest in VMware NSX, our network virtualization platform, is accelerating. In addition to endorsements from the customers who joined Pat on stage at Interop, we are seeing growing demand for NSX, increasingly because of the data-center security capabilities. Customers understand that threats are outpacing security investments, and they can no longer just buy more boxes to secure their infrastructure. They are exploring fundamental architectural changes, and the virtualization layer is becoming the place for security innovation.

NSX enables a new approach, where security is automated, and baked in versus bolted on. Our ecosystem strategy is driving this trend as well. In Q1, we extended our partnership with Palo Alto Networks to deliver an integrated solution that unifies security across customers' physical and virtual environments, with a single point of management.

In regards to storage, Virtual SAN was available for only 14 selling days in Q1, but we couldn't be more pleased with customer interest. Customers see Virtual SAN as a compelling storage platform for Tier 2 and Tier 3 workloads, VDI deployments, disaster recovery, and for test and development. We have already closed a sizable storage-only ELA in Q2 with a large retailer, who is looking at deploying Virtual SAN as a solution in their stores and distribution centers.

Finally, hybrid cloud: Once again, we grew our hybrid cloud business greater than 100% year over year. As a reminder, this includes our VMware Service Provider Program, or VSPP, and our vCHS hybrid cloud offerings. In addition to the momentum described by Pat regarding last week's launch of vCloud Hybrid Service Disaster Recovery, we went live in March with VMware's Horizon DaaS, the industry's first hybrid desktop-as-a-service.

We also announced that VMware vCloud Government Service is expected to be generally available in the second half of 2014. This is significant because VMware will be delivering a hybrid cloud service to US federal government customers under the same hybrid cloud architecture as vCloud Hybrid Service. This distinguishes VMware from the competition as the only hybrid cloud which incorporates both desktop-as-a-service and disaster recovery-as-a-service.

In conclusion, we could not be more excited about the future, and are well positioned to lead the industry with the most complete portfolio in the Company's history. Our customers have been responding enthusiastically to our new products. We are confident about our outlook for Q2 and beyond.

With that, I'll turn it over to Jonathan.

Thank you, Carl. We are pleased with our Q1 financial results, meeting or exceeding our revenue and non-GAAP operating margin guidance for the quarter. As we look forward, we are maintaining our expectations for revenue and non-GAAP operating margin for Q2 and the full-year 2014.

Before I get into specifics regarding Q2 and full-year 2014 guidance, I want to speak in more detail about Q1. Excluding Pivotal and divestitures, Q1 total revenue growth was 18% year over year, above the midpoint of our guidance range. License revenues of $561 million were also up 18% year over year, and exceeded the upper end of our guidance. Total reported revenues grew 14% year over year in Q1, with license revenues up 15%.

AirWatch contributed approximately $5 million to total revenue in Q1, with 50% between license and services revenue. Given the size of the business, we are not planning on breaking out AirWatch separately after Q1, but will provide appropriate color going forward as part of our commentary on End-User Computing.

We remain pleased with the diversification of our Business, with non-stand-alone vSphere license bookings again greater than 45% of total license bookings, as compared with greater than 30% in Q1 2013. Also, as expected, Q1 non-GAAP operating margin was 31.1%, reflecting the addition of AirWatch to VMware in late February, and our continuing investments for future growth. Diluted non-GAAP EPS for Q1 was up 9% year over year to $0.80 per share on approximately 435 million shares. In summary, we did what we said we were going to do in Q1, and are proud of these results.

I'll now focus on key additional highlights that will be helpful in understanding our Q1 performance. Our balance sheet remains strong, with cash and short-term investments at quarter end of $6.6 billion, up $441 million sequentially. This reflects the acquisition of AirWatch and incurrence of additional debt.

Our operating cash flows of $750 million in Q1 were up 11% year over year. And free cash flows were $673 million, up 12% year over year. Favorability in our free cash flows reflects a slightly slower start in CapEx than originally anticipated. During the quarter, we repurchased approximately 1.8 million shares of our stock for a total of $169 million at an average price of around $96 per share.

Total unearned revenue ended the quarter at $4.17 billion, up 20% from Q1 2013, and of which $1.6 billion is long term, up 23% year over year. A total of $64 million of unearned revenue at the end of the quarter relates to AirWatch. $45 million was transferred from the opening balance sheet at the close of the acquisition, and we added an additional $19 million, net of revenue recognized of $5 million, between closing and quarter end. License unearned revenue accounts were approximately 50% of the total unearned revenue for AirWatch.

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. I'd encourage you to refer to the slides and financial tables accompanying this earnings call for further details on our results.

Now turning to guidance: As I said in my opening comment, we are reaffirming our 2014 guidance for revenue and non-GAAP operating margin. We continue to expect revenue for 2014 to be between $5.940 billion and $6.100 billion, or up 14% to 17% year over year. Excluding Pivotal and divestitures, and including AirWatch, we continue to expect our total revenue growth rate for 2014 to be up 16% to 18.5% versus 2013.

Likewise, we also continue to expect license revenues for the full year to be between $2.550 billion and $2.630 billion, or up 12% to 16% year over year. Excluding Pivotal and divestitures, and including AirWatch, we continue to expect our license revenue growth rate for 2014 to be up 13% to 17% versus 2013. We also continue to expect that non-GAAP operating margin for 2014 will be approximately 31%.

Having completed the AirWatch acquisition this quarter, and while it's early days, we now see the opportunity for around $100 million of total revenue contribution from AirWatch this year. This is already included in our revenue guidance range, as I just mentioned. In addition, consistent with Q1 actual performance, we now expect to split a 50/50 between license and services revenue for AirWatch, versus our prior expectation that two-thirds of the revenue would be license. To assist you with your models, we have provided an updated outlook for AirWatch in the tables accompanying this call.

Moving on to operating cash flow: We now expect operating cash flows for the year to be between $2.55 billion and $2.75 billion for the entire year. We still expect approximately $350 million of CapEx for 2014. Remaining guidance for 2014 is included in the slide deck posted on our investor relations website. I'll remind you that we expect increased interest expense over the course of 2014 due to the additional debt associated with AirWatch, and, as a result, expect other income and expense for the full-year 2014 to be approximately zero.

For Q2 2014, we expect total revenue to be between $1.425 billion and $1.465 billion, or up 15% to 18% year over year. License revenues for Q2 are expected to be between $605 million and $615 million, or up 14% to 16% year over year. As I indicated on the Q4 call, we expect non-GAAP operating margin for Q2 to be between 29% and 29.5%. Finally, including interest payments on debt related to the AirWatch acquisition, other income and expense is expected to be an expense of approximately $2 million in Q2.

In summary, we did what we said we were going to do in Q1. We have the fullest portfolio of products in the Company's history, and remain optimistic about the prospects for the balance of the year and beyond.

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 we can get to as many people as possible. Operator, let's get started.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

John DiFucci, JPMorgan.

There's a lot of numbers there and I appreciate all the detail, Jonathan. I'll start off with my one question, which is -- and I think I got through the math with the Carl. I was a little confused. I think it has to do with the AirWatch deferred revenue to make those adjustments for the licensed billings growth. Maybe I'll ask a question for Jonathan on maintenance. So maintenance in this quarter was flattish quarter over quarter, which is a little surprising, given the good results I think. I would assume there's very little foreign exchange effect this quarter? What else are we seeing there? Because typically I would expect to see it grow a little bit.

John, thank you for the question. You're right, although I would just point out that the actual results in maintenance are basically slap bang right where I talked about. I think it was $799 million versus $800 million for the quarter, so it's right at what we guided to into the quarter. You're correct, we didn't see a significant net foreign exchange effect this quarter. It netted out between a couple of different currencies having ups and downs, some strength in Europe and some weakness in particular in the Asia-Pacific region, but overall nothing really to call and highlight. I think the strength that you're pointing to was around the licensed revenue where we were over $10 million, which really just was a -- we were very proud of that number overall. I don't really have any additional color other than it was as expected. Probably the positive news was around license performance.

We should probably expect to see that grow a little bit, though, going forward, the maintenance?

Well, again, along the lines of the guidance I've given. I think we're comfortable with those numbers I just shared, not just for Q2 but for the full year.

Okay. Great. Thank you.

Thank you, John. Jonathan, what I might do here, since I'm sure this is going to come up is, the question that John thought he had answered with the AirWatch deferreds, which would probably be the question of the calculated bookings that many on the Street have calculated a as compared to Carl's comments about less than 10% growth, did you want to just make a brief comment about why there might exist the difference like that?

Yes, sure. First of all, I would note that the calculation you're doing of revenue plus sequential change in deferred would probably result in numbers of around 13% license and a total of 15%. This includes AirWatch's effect. Some of you may have a number as high as 18% if you don't take out the assumed deferred revenue. We're obviously pleased with those numbers. What Carl was talking about was our consistent transparency we provided with respect to the color around internal bookings metrics. We've been doing that now for a number of quarters really to give you a sense of operationally what's going well and what needs a little bit of work. The external metric's a great proxy. There always are, as we consistently talked about, some differences, and that's really what you're seeing here.

Thank you. Let's go to the next question, please.

Raimo Lenshow, Barclays.

If you stay on that subject a little bit, Carl, can you maybe elaborate a little bit on the ELA performance in Q1 and why you're so comfortable that that will come back and accelerate in the second quarter? Thank you.

Yes, thanks, Ramero, for the question. Let me reiterate something Jonathan said earlier. We are quite pleased with our financial results for Q1, beating the midpoint on total revenues and beating the high end of our range on license, and right on track with what we guided for operating margin. We were pleased to be able to once again reaffirm our revenue guidance for both Q2 and the full year. So once again, we did exactly what we said we'd do. At the same time, we've heard, Ramero, from folks like yourself and many of you on the call that you've always really been appreciative of our transparency. We've always shared with you a number of the different metrics internally that we track. This quarter we shared with you that our license and total bookings were less than 10%.

It was really driven around a couple things. First, seasonality, and Jonathan has talked about seasonality going into Q1, both on our Q3 and Q4 earnings call. We did see more seasonality than we expected. We also took a conscious decision to educate, enable and training our field so they had greater skills in delivering to our customers all the great products and solutions that we rolled out late last year and into Q1 of this year. So we actually had less selling capacity and time in Q1 to drive some of the larger ELAs to closure.

Lastly, we continue to be quite excited about the interest our customers are showing around ELAs and they continue to expand both the size and scope of our ELAs because they're including a lot of our new products. As we got towards the end of the quarter, there's a number of ELAs that actually went into Q2 that we were not able to close, but I'm pleased to say two things. None of the ELAs that went from Q1 into Q2 were lost to a competitor. Secondly, we have already closed a number of those ELAs in the quarter, here in Q2, and we're pleased with the pipeline and the metrics we're tracking. We have confidence that we'll reaccelerate our bookings growth in Q2 over Q1.

Just to pile on to that a bit. We did invest substantially in training, also our leadership, our partners to start the year, given this incredible breadth of product line that you've heard us roll out over the year. We really see ourselves as uniquely positioned to deliver that into the industry. Just having spent a lot of time in the field over the last few weeks, customers are really responding to that. As Carl said, Q2's off to a strong start and we really look forward to this execution as we've described for the year.

Thank you, Raimo. Next question, please.

Brent Thill, UBS.

Just to follow on, on the ELA renewal pool. Carl, I just wanted to check, I think you'd mentioned last year that the pool this year in 2014 is bigger than 2013. Does that still apply in terms of what you're seeing in your pipeline?

Yes. A couple things, so I indicated on my prepared remarks that we had another record in-quarter renewal rate of ELAs. We were very pleased with our ability to renewal customers and their ELAs on a timely manner. When we look at the full year of ELA opportunity, we did say, I think on the last earnings call, that from a dollar value, we see a larger opportunity in FY14 over FY13 from a dollar value of ELAs up for renewal. We see a similar split between the first half and the second half of the year, very similar to what we saw in FY13. We have a larger percentage of our renewal opportunity in the second half of the year versus the first half of the year. Very consistent with what we saw last year. Again, we're pleased with our ELA renewal rates being all-time high here in Q1.

Can I just add one point to this, Brent? Don't forget though that ELA renewals are a portion of the ELAs that we do overall. In fact, the majority does continue to be new ELAs. Renewals, I understand the focus on it. The renewals are good opportunity, but there's a broader opportunity around new business as well.

Okay, just so I'm clear, just to follow up. There's nothing unusual you're hearing in customer buying behavior that there's anything they're concerned about? This is just more seasonality in your view?

Yes. I think, Brent, nothing's changed in our business model. Nothing's changed in our customer's desire and excitement to enter into ELAs with us in Q1 versus FY13. In fact, we're seeing the size and scope of the ELAs continues to expand as they look to add more and more of our products into these ELAs. As I indicated, we did take more time in Q1 to train our sales force so they're better prepared for FY14. With that we just had less selling capacity as we got towards the end of the quarter and a handful of deals went from Q1 into Q2, some of which I already mentioned closed here this quarter.

Great. Thank you.

Thank you, Brent. Next question, please.

Kash Rangan, Merrill Lynch.

Just one observation and then a question. It just stands to reason that given that ELA as a percentage of billings was a little bit lighter than your transactional billings must have been really off the charts. Just correct me if I misspoke there? But the question is, are you still sticking with your longer-term acceleration of your top line, which I think you folks laid out very eloquently at your March Strategic Forum last year? If that's the case, how should we think about the way you rank order the different drivers of that acceleration? Be it core, maybe your core's going to grow fast because the workload growth rate and the high end of the enterprise is going to be supportive of that assumption? Maybe some of that comes from ELAs, maybe some of that comes from the newer products, such as vSAN, you see management and automation? I know it's a bit of a tough question to ask, and tougher question to answer, but to the extent you can give us any color on this, that would be appreciated. Thank you.

Sure. I'll start, Kash, with that. We do see that this TAM opportunity that we laid out, which is really the broad thesis that we described at our analyst event last year, $50 billion plus TAM, the 20% plus opportunities that we see in the portion of that really guided the thesis against our accelerated growth rate over time, particularly as we go into these new areas. We tried to give you a model, that I'll let Jonathan talk about, of how we see those accelerating over time as they become a larger portion of our business. That guides both where we've invested, the excitement that we're seeing around the new products and the long-term growth potential that we've laid out. Jonathan?

Yes, Shawn, I'm going to let you deal with the transaction clarification that Kash asked. Kash, what we did as you recall at the Analyst Day, and nothing's really changed with respect to it, we broke out the opportunity between SDDC, software-defined data center, the hybrid cloud opportunity and end-user computing. We talked about each of those with a potential growth opportunity. I'm not going to stack rank the size of each of the individual components of the growth opportunity. Obviously, you expect us to manage that as a portfolio, and that's what we will do. Clearly, we're excited about the four or five key growth drivers that are both executing today and that we execute in the future. Today, we see contributions from vDI. We see contributions from our Management Suites and the management products that we have. Then, going into 2015 and 2016 we expect to see more meaningful contributions from NSX, or the network and security products that we have. Then, the fact we have G8, our Virtual SAN product, gives you -- just in the last month alone, gives you a sense of the stage of development we're at with that and the stage of excitement we're at.

So, we've got four or five key growth drivers kicking in over the course of the next 12 to 18 months. That's what gave us the original confidence to talk about, and continued confidence, just to be clear, about the opportunity for that 16% to 20% growth rate that we've talked about, end-user computing, management contributing today, network, mobile, and storage contributing increasing in the future.

Kash, let me talk a little bit about the transactional business and the performance in the quarter. Our transactional performance performed as we expected in the quarter and our entire vision of no more naked vSpheres is becoming a reality. As Jonathan indicated, greater than 45% of our bookings now in the quarter came from non-vSphere related business. We continue to grow our business around more of a holistic solution and we continue to see our channel become more skilled at selling solutions like vSOM, which is vSphere with Operations Management, really embracing this whole notion of no more naked vSphere. So, we're pleased with the transactional business. Our partners are really getting up to speed with selling more of the broader portfolio of products and offerings we have. Pat, anything to add?

Yes, just to add a little bit to that. One of the things having just come off of our Partner Exchange conference, we hadn't given our partners, our channel, a lot of new products that were high velocity, transactable products and vSOM is really the only one. Now with vSAN, with vSAN plus VDP as well as bringing AirWatch into our channel, we see that we're bringing an awful lot more product that they can be selling. Just coming off of multiple partner exchanges that I personally was at and participated in, the enthusiasm of the transactional channel for these broader products is extremely high.

Thank you, Kash. Next question, please.

Phil Winslow, Credit Suisse.

Thanks, guys, on all the details this quarter as far as the acquisition and the ELAs. Just want to focus back on NSX. I know it's obviously early in its life cycle. Wonder if you'd provide us just an update on what you're seeing as far as traction goes? Where we stand in terms of just winning some proof of concept and call it architectural wins out there? How you expect to see this progress over the course of 2014? Thanks.

Thanks, Phil. Let me start and then I'll ask Pat to add some color here. First of all, we continue to be pleased with our customers' interest in NSX, our network virtualization platform. It's really starting to resonate with our customers. We now have a number of customers moving this platform from test and depth straight into production. We saw a significant increase in Q1 in large enterprises and service providers actually doing real, meaningful proof of concepts around this platform. They couldn't be more excited about it.

We also are starting to see something emerge, pretty quickly here, that it's not just about network virtualization. It's about network virtualization and network security. We're starting to see our customers really value this platform to deliver layer two through seven services, but really start to double click on that value it brings from a network security perspective. Lastly, this vision of leveraging the power of virtualization like network virtualization and the notion of distraction pooling and automating is resonating with our customers. They clearly are starting to say, we see the value of network virtualization and we don't have to rip and replace our hardware infrastructure at the network layer to get all the benefits that VMware can bring us. Pat, any color to add?

Overall, the software-defined data center vision resonates with customers. They get it very, very quickly. Networking and NSX as the delivery vehicle for that next leg of the software-defined data center is very powerful. As Carl was mentioning, our security aspect of this was highlighted at the Interop speech that I gave as we laid out with customers like Nexon and WestJet, a very powerful vision of how they are embodying this in their solutions today. Overall, it's not just network virtualization, the agility, efficiency and cost savings, but an entirely new model of how they can execute the overall data center with a powerful new security model to go with that, is really bringing excitement to a broad set of our customers.

And are we ready --

Next question.

Okay. Heather Bellini, Goldman Sachs.

Pat, I was wondering if you could share with us just with AirWatch now embedded in the VMware family, can you talk to us about how you're going to change the go-to-market strategy with the channel now for AirWatch? Also, how do you see having this asset is helping your End-User Computing positioning going forward?

Sure. Thank you, Heather. I'll start and ask Carl to help me here. Clearly, the first quarter is an early quarter. Despite all the opportunities of distraction for your first quarter of acquisition, AirWatch is off to a strong start and in a couple of months it's been part of the family. We've seen the teams come together well, integration. We have started to see the pipe emerge that VMware is enhancing and expanding the business opportunity with it, the number one asset, number one Company in the space, the large increase in customers that we saw in Q1.

When we combine that with the EUC Suite and particularly coming off of a very strong Horizon 6 announcement, the combination of those two is really turning heads in the industry, turning heads in the partner community as they're viewing our presence in the EUC space as now the clear vision. We are executing with great excitement into partners and customers with respect to that vision. We do see that there is broad ability for us to accelerate and leverage the broader platform for VMware in the go to market. Maybe, Carl, you can speak specifically to some of those.

Thanks, Pat. Hello, Heather. Let me talk about three key areas that we expect to help accelerate AirWatch's growth going forward. The first is our enterprise segment, meaning that we have pretty deep penetration into the enterprise today. We have deep, meaningful relationships with them. We've already saw early signs where VMware's relationship with customers can have a material impact in the outcome of AirWatch's business going forward. Secondly, as we go towards a second half of this year, we're going to leverage the vast channel that VMware has around the world to extend the reach of AirWatch as we bring their products and solutions onto VMware's price list that will then be available through our distributors and channels around the globe. Lastly, one of the areas we recognized, even during our due diligence, is that we could really expand our presence in Europe and in APJ where VMware has a large footprint and AirWatch doesn't, although they have a larger footprint in Europe than APJ. We're working very closely to leverage the core VMware sales force in our channel in those international markets, driving broad adoption and expansion of AirWatch going forward.

Thank you, Heather. Next question, please.

Walter Pritchard, Citigroup.

I'm just trying to figure out how to interpret your bookings commentary, because you're reiterating guidance for the year. You're basically reiterating the Q2 guidance. I think in Q4 you talked about having licensed bookings in the very high single digits, and here you're talking about having licensed bookings below 10%. Should we think about this as you're eating through some backlog to get to the type of growth numbers? Because you're putting up license revenue numbers that are well above the licensed bookings numbers, it sounds like. Yet we're not changing any numbers here. I think myself and others are a bit confused as to you how to actually interpret that commentary around bookings.

This is Jonathan. I think the way to think about this is, first of all, we're not anticipating deferred -- let me just remove from the question that you brought up, we're not anticipating in this revenue guide a deferred revenue reduction over the course of the year. We're actually from here expecting a deferred revenue build as you would expect. We don't guide on that number, but I just want to make sure that is clear. The only reason we share this bookings information is just to give some insight as to some of the internal metrics that we track when we manage our teams to. I think of it as being color. We've used it consistently throughout 2013 to give you a sense about what's going well, what's maybe some challenges. As Carl's talked about, the slightly lower percentage of ELAs as a mix of our overall business in Q1 gave rise to a lower internal metric.

Now, clearly that external metric is a little bit higher and there's always been some differences between the revenue plus change in deferred calculation that you do and then what our own internal metrics are. We're trig trying to give you a sense about some of those things. The external metric's always a great proxy, but there are always some differences, and we talked about examples of those in the past.

The key thing, Walter, as we think about this going forward, is the robustness of the pipeline that we've examined and we've looked at as we think about the opportunity ahead. There's nothing changed. In fact, I would say the opportunity continues to be enhanced every day. We see customers talk about SDN and we see the broad industry adoption around network virtualization starting to really gather a pace. The key thing is the opportunity and the revenue guide is entirely supported by the pipeline we see for overall bookings, but for ELAs in particular, going into Q2 and the back half of the year supported by the overall forecast.

Jonathan, just on that, so you guided the year obviously a license revenue in the 13%, 17% excluding Pivotal. It sounds like we need to see license bookings accelerate from the high single digits to be able to get to 13% to 17%. Is that a fair way to correlate the two?

Yes, Walter, I think that's a very clear assumption. As we talked about, we planned the year anticipating some greater seasonality coming into Q1. We certainly saw that, frankly, a little bit more than we were anticipating, which is why we've been talking as we have. As Carl anticipated and as we see our own internal forecast, we do see that acceleration occurring as we get into Q2.

Thanks.

Thank you, Walter. Next question, please.

Rick Sherlund, Nomura.

I'm wondering about the seasonality that may be emerging in ELAs? You mentioned 40% total bookings in Q4. I'm looking back, I think Q1 last year was at 29% of total bookings, ELAs? I'm wondering, with such a strong Q4, is there anything you're seeing in terms of seasonality of ELAs that might account for some of the slower bookings growth you saw in Q1?

Yes. Hi, Rick, this is Carl. Let me take that. We indicated on our last two calls, that we expected to see greater seasonality in Q1 over Q4 and it did play out that way, exactly as we had anticipated. If you look back over time, the strongest quarters for VMware from an ELA perspective, as a total percentage of our bookings, is Q2 and Q4, which is why we're confident we'll see a reacceleration as we head into Q2. And as we always see in Q4, with budget flushes and people having end-of-year money, we always see a big uptick in our ELA. Nothing materially has changed. We did see greater seasonality maybe than we anticipated in Q1, but we expect a strong bounce back in Q2. We do plan on having, again, a strong seasonal quarter for ELAs as we get into the later half of the year, specifically Q4.

Thank you, Rick. Next question, please.

Ross McMillan, Jefferies.

I just wanted clarification on one thing on the ELAs with regard to -- was the weakness both in new ELA signings as well as renewals or was it weighted one way or the other? Then my second question, Jonathan, for you is as the product portfolio expands, should that be a driver of more ELAs within the mix, naturally over time, as customers consume more from the VMware product portfolio? Thanks.

Ross, I hate to play this role, but which question would you prefer to have answered, the first one or the second.

Let's go for the first. Thanks.

Thank you. Ross, I knew you'd say that. This is Carl, so let me take a stab at it. As I indicated, in my prepared remarks and I think I said in some of the Q&A here, we actually had a record in-quarter renewal of ELAs, so our ELAs expired in the quarter. We did a very good job in partnering with our customers to close in the given quarter. The majority of what we've seen in the seasonality of our ELAs was in net new ELAs. That's what I was trying to articulate. When you're doing a net new ELA there's a little bit more selling time that we have to have and we didn't have that capacity in Q1, which is why a handful of deals went into Q2. Some of those ELAs we did already close here in this quarter.

Thank you, Ross. Next question, please.

Matt Hedberg, RBC Capital Markets.

vSAN has only been out a short while here. Can you talk about what you guys are focused on internally and with partners to drive further adoption there, and as it relates to, also, the relationship between vSAN and EMC Viper? That would be helpful. Thank you.

Let me start and Carl can add some color to it. This is Pat. Overall, vSAN has just gotten a lot of enthusiasm. The value proposition, extremely easy to use, for a V admin it's extremely easy to use. It's a selling motion, essentially the same as vSphere, so it works so nicely to our channels who are very well versed. The value propositions of great performance, low cost, easy to use is going extremely well. Early, so it's hard to say, but as you saw in Carl's script we have already closed a meaningful ELA with it already, so not only to transaction but also to some larger opportunities. With respect to Viper, we've laid out, clearly, a positioning where Viper is a heterogeneous control plane for all of storage and vSAN is a new storage tier for the VMware user. Enough that they're actually quite far apart from each of other in the overall storage landscape. We have built very complementary use cases, and you'll be seeing more from us in that area at EMC World this year, a very specific examples of how the two products work together and complement each other. Carl, anything to add?

I think you said it well. I think the channel is quite excited about vSAN. It's a similar selling motion to Pat's point, when they adopted the selling motion of vSphere. There's a lot of excitement, not from our partners only but also our customers alike. As I indicated in my prepared remarks, we've already closed a sizable vSAN ELA with a large retailer who's looking to deploy it to get the operational benefit and the cost savings in their stores and distribution center. So, we're off to a solid start with vSAN.

Thank you, Matt. Next question, please.

Keith Weiss, Morgan Stanley.

Just a quick question for Jonathan. Given the full-year revenue guide and the operating profitability remains the same, can you help us understand the slight down tick in operating cash flow? Is that a result of slightly weaker bookings expectations in the beginning of the year? Or, help us understand why that comes down a little bit?

Yes, well, Keith, thank you for the question. You're correct, we brought down the midpoint of the operating cash flow guide just a hair from what we'd said 90 days ago. That midpoint is now around $2.65 billion. We did see good collections in Q1, as we expected. This is really a direct relationship to the softer ELAs in Q1 that Carl talked about. Softer ELAs or lower than expected ELAs in Q1, just gives us less time to collect those as we go into Q2. So at this point, the bookings performance more directly correlates to the cash flow just as a net effect, in particular in Q2. Overall, though, cash flow at $2.65 billion I still think is pretty healthy, and I would actually note that's actually largely where I understand consensus is as well at this point.

Nice one. Thank you.

Thank you, Keith. Next question, please.

Shaul Eyal, Oppenheimer.

Totally get the fact that little slippage you've seen on the ELA was not driven by competition. Any general thinking about the competitive landscape, as a whole, you can share with us?

I'll start on that, Shaul. Overall, the competitive landscape has not changed significantly at all. SDDC, unquestionably the broadest vision for the industry, about how to transform the data center. Our Hybrid Cloud story is resonating very well and EUC is resonating well. If we look at each one of those, SDDC we continue to compete with Microsoft as normal, but that success rate remains extremely high, particularly with our enterprise customers. We just don't see any place that we're not winning with it. In the Hybrid Cloud, obviously that's a much more nascent space and we're highly differentiated with our focus on enterprise, hybrid, and our partner ecosystem. While early, getting good resonance from it even though we'll say the enterprise cloud space is very early and immature overall. Then, the end-user space, competitively, we are the aggressor and we're winning share. We are now driving the industry forward with a bold vision. The combination of AirWatch and Horizon 6 is clearly putting the entire industry on notice of our aggressive, intents in this area and customers and partners are responding quite favorably to it.

Thank you.

Thank you, Shaul. Next question, please.

Michael Turits, Raymond James.

Just want to ask you a question about the factor you cited regarding broader deals having perhaps been a contribution to the push out. Is that a change where -- and obviously selling a lot broader range of product than you were a year ago, six months ago. Is that resulting in longer decision cycles? If so, how does it -- where's the confidence that it clears up in the near term?

Michael, this is Carl. Let me take it. Let me start by saying on average our sales cycles are unchanged. We haven't seen a big expansion or elongation of our sales cycles. What I did state, and you were accurate in saying, is that we are seeing the size and scope of our ELAs continue to grow as customers look to incorporate all of our products and even some of our new products as seeding into their ELAs. As that occurs, we're just in much deeper conversations with our customers and some of the ELAs close on time, as we've always said in a given quarter, some close early and some actually go out a quarter or two. In general, we haven't seen a real change in the business model or how we're engaging with our customers. We're quite encouraged by the ELA pipeline that we have going forward.

Okay. Thank you.

Thank you, Michael. Next question, please.

Gregg Moskowitz, Cowen & Company.

Most of my questions have been asked, but just wondering on the EUC side with the deadline for Windows XP support having recently passed, what impact, in your view, does this have on the VDI market going forward?

Thank you, Gregg. Overall, there's a broad interest on the part of customers to move past managing that Break 6 patch of desktops. As a result of that, the overall EUC Suite, whether it's a VDI discussion or a Mirage discussion, those discussions are expanding and accelerating for us. The Windows XP end of support has just accelerated that set of conversations with customers overall. We do think that is one of the accelerants to the EUC business for us. We expect that to become more of a discussion as we go through the year.

One thing to add there, Pat, is we were really excited with the launch of our desktop as a service that came out in Q1. As people look to migrate off of their current desktop environment, a lot of them are thinking about do we still want to do this in house? And, it's a very capital intensive deployment. Or, do we want to go to an OpEx model and get desktop as a service from a cloud provider like VMware? Our desktop as a service runs on top of our vCloud Hybrid Service. We were the first in the market with this solution, and we are seeing quite a bit of excitement and demand for desktop as a service as it relates to people migrating off their existing desktop operating systems.

Thank you, Gregg. Before we wrap up the call, Pat will make a final comment.

Thank you very much for the good questions that we've had. In summary, we are seeing strong momentum across all three of our strategic priorities. I'd like to thank our customers, partners and employees for their passion, support and engagement as we build on this momentum into 2014. Thank you very much.

This concludes today's conference. Thank you for your participation. You may now disconnect.