VMware Inc (VMW) 2014 Q4 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

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

And I will turn the meeting over to Mr. Paul Ziots, Vice President, Investor Relations. Thank you. You may begin.

Thank you. Good afternoon, everyone, and welcome to VMware's fourth-quarter and full-year 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 Chief Operating Officer. 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 with conjunction with live remarks and can also be downloaded at the conclusion of the webcast from www.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 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 or in isolation from GAAP measures.

Our non-GAAP measures exclude the effect on our GAAP results of stock-based composition, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, the net effect of amortization and capitalization of software, certain litigation and other related items, 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 2015 quiet period begins at the close of business, March 13, 2015. 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, and good afternoon, everyone.

We're very pleased with our team's performance during 2014. Our total revenue for the full 2014 fiscal year was a record $6.035 billion, up 16% year over year and surpassing the $6 billion mark for the first time. This was near the high end of the guidance we provided at the beginning of the year.

Our non-GAAP operating margin for 2014 was 31.1%, just exceeding the guidance we provided at this time last year. We are particularly pleased with our sustained strong growth in the context of the industry disruption affecting businesses around the world. Customers continue to partner with us because we offer a new model for IT designed to rapidly and automatically deliver any app anywhere without sacrificing their vital needs for security, availability, and compliance.

Over the course of 2014, we delivered the revenue and operating margin performance we said we would, while also introducing an unparalleled portfolio of new products and services that will drive our growth in the future. Key milestones during the year include closing the AirWatch acquisition; the continued expansion of vCloud Air across the US, EMEA, and APJ; introduction of Virtual SAN; and the launch of EVO:RAIL, our hyper-converged infrastructure appliance.

Adoption of our newer products and services including NSX, AirWatch, cloud management, Virtual SAN, and vCloud Air is growing rapidly and enjoying significant customer momentum. We are also seeing more customer interest in the value offered by the complete Federation solutions.

Our customers are operating in a business environment where disruption has become the norm and old rigid business models are melting away. They are increasingly looking to software defined infrastructure and new applications as the basis for business innovation that outsmarts their competitors. This requires a new model for IT that customers see VMware as uniquely being able to deliver.

Our software defined platform enables customers to instantly deploy and manage their applications, operate their workloads and data seamlessly between their private and public clouds, rapidly architect cloud native apps with our support for containers, and support our range of management options with VMware Integrated OpenStack along with VMware's best-of-breed custom APIs. Customer momentum and adoption continues to build across all areas of our software defined data center portfolio.

2014 has been a particularly impressive year for our network virtualization solution, VMware NSX. We have seen a rapid increase in its production use with more than 400 paying customers, up 60% quarter over quarter. In the first half of 2014, we appeared in Gartner's Data Center Networking Magic Quadrant, furthest on the Completeness of Vision axis in this space, the first time a software vendor has ever been included in this Magic Quadrant.

We continue to see momentum with partners like Palo Alto Networks, which is working with VMware to enable customers to apply the same rich security policies across their entire infrastructure consistently for all applications, whether virtual, physical, on premises, or off premises. Additional strategic relationships announced include those with a risk to networks, F5, Dell, and HP. We are pleased to say that NSX bookings more than doubled in the second half of 2014 compared to the first half, as customers look to take advantage of the unique benefits possible only through virtual networking.

At VMworld 2014, we announced EVO:RAIL, a hyper-converged appliance which provides customers with an extraordinarily fast and efficient way to build and deploy a software-defined data center. We are seeing strong interest in this new category and in Q4 we announced three additional qualified EVO:RAIL partners, NetApp, HP, and Hitachi Data Systems, bringing our total partners to nine.

We also announced availability of powerful new vRealize cloud management solutions which simplify and automate how IT is managed and help customers deliver IT as a service. In addition, vRealize Air Automation and vRealize Air Compliance extend these solutions to an as-a-service model via vCloud Air.

Speaking of vCloud Air, VMware continues to rapidly expand the global footprint of the vCloud Air hybrid cloud platform, most recently to Australia and Germany with these new service locations opening in the first half of 2015, These new locations follow the introduction of vCloud Air to Asia last year through our partnerships with soft bank group in Japan and China Telecom Corporation in China.

This global expansion is complemented by a rich set of new service offerings, including three new services we announced last week. The second generation of our very well received vCloud Disaster Recovery. New advanced networking services allowing secure and seamless extension of the private data center to vCloud Air. And the general availability of vCloud Air virtual private cloud on demand, providing customers simple credit card provisioning and extreme flexibility to consume and pay for only those resources they use.

As we approach the one-year anniversary of AirWatch joining the VMware family, it's great to see our growth and momentum go from strength to strength. We recently surpassed a record 15,000 customers globally, nearly double our closest competitor. Our leadership position is recognized by key industry analysts with Gartner positioning us for the second year in a row furthest on the Ability To Execute Access In the Enterprise Mobility Management Quadrant.

In their latest vendor rating of VMware published this month, Gartner upgraded our overall end user computing efforts to their highest rating; strong positive. We believe this is based on the strength of our upgraded EUC management team, strong vision in the market, and superior innovation, both organic and inorganic.

Next week, we will be hosting over 20,000 customers at our biggest launch event for the year when we unveil some exciting new products and services and cover updates to our hybrid cloud strategy. We hope you will be able to join us online. You can sign up by going to VMware.com/now and you'll also find the link highlighted in the slides accompanying today's presentation.

In summary, our business is growing. We are confident in our strategy and our portfolio of groundbreaking new technologies is helping customers realize the dramatic benefits of a new software defined model for IT.

I'll now turn it over to Carl to talk more about our business performance in Q4. Carl?

Thank you, Pat.

I am very proud of our performance in Q4 and 2014. In each quarter, we delivered consistently against our revenue and operating margin guidance as we have done in every quarter since mid 2009. Our level of execution over a sustained period of time is a true testament to the tremendous value of our offerings and the commitment and dedication of our employees and our extensive partner ecosystem.

Taking a look at our regional bookings performance, in Q4 we had the most balanced performance across all geographies of the year. Once again, overall license bookings performance in EMEA was aided by strong execution in the southern region. Also, as expected, we experienced better bookings performance in Germany with our new sales leadership team now solidly in place.

In APJ, we saw particularly strong performance out of greater China and Australia in Q4. We closed the second largest APJ deal ever in Australia, which was driven primarily by vCloud Suite and management products.

In relative terms, Japan remains soft but was much improved as compared with the last two quarters and believe is on track for a solid 2015. The Americas had a solid quarter powered by strong execution. We saw strength in our enterprise segment and continued improvement in our transactional business led by vSphere with operations management.

Q4 was our strongest quarter of the year for ELAs. As we expected, the mix of ELA bookings was seasonally high and approximately the same level as in Q4 of 2013. For the quarter, 39% of our bookings were from ELAs and we closed seven deals over $10 million.

We did see some enterprise customers use end-of-year funds in Q4, which allowed us to accelerate a few larger deals. Our large deals are increasingly including more components of the software defined data center as we continue to increase the strategic value our customers rely on from VMware.

One of the largest transactions in Q4 was the Federation-wide software-defined data center win with a major financial services company. This solution included the VMware software-defined data center stack, the CEB box, EMC Viper software-defined storage, Pivotal, and our joint professional services offerings.

Cloud management saw solid license bookings growth in Q4 helped by strong double-digit year-over-year growth from vSphere with operations management. In addition, our latest release of vRealize Operation has been well received by our customers since it became generally available in Q4.

Our cloud management penetration is now 14% of our installed base, up from over 12% last quarter leaving plenty of headroom for growth. End-user computing, including AirWatch, grew license bookings over 60% year over year in Q4 with several key workspace suite wins.

As it relates to our desktop business, we believe that we continue to gain market share against the competition, and our recent acquisition, App Volumes, which contributed to several key wins, creates even further differentiation in our desktop portfolio. Specific to AirWatch, our customer count increased to over 15,000 in Q4, and bookings were over $200 million in 2014, which we believe makes us the clear number one in the enterprise mobile management space.

When we acquired AirWatch last year, we expected the integration into VMware to accelerate its growth through three key areas of leverage; Reach from VMware's global presence, leverage from our robust channel, and access to enterprise accounts via our sales force. In Q4, we clearly saw all three of these leverage points start to kick in.

As Pat mentioned, 2014 was a particularly impressive year for our network virtualization solution, VMware NSX. We have seen a rapid increase in its production use with more than 400 paying customers, up 60% quarter over quarter.

We are pleased to say that NSX bookings more than doubled in the second half of 2014 as compared to the first half. And we are now at well over a $200 million annual bookings run rate.

In addition, nine of VMware's top 10 Q4 deals contained NSX. I want to particularly highlight our first $10 million all NSX deal with a large global investment bank.

This globally recognized bank is transforming its operations and expects NSX to drive far more utilization out of their data centers. The firm will use NSX to improve application provisioning times, dramatically increase hardware efficiency, and improve its security with microsegmentation.

We also closed a large NSX deal with one of the largest system integrator and outsourcers in the world, which is building network virtualization offerings based on VMware's NSX technology. We are extremely pleased with our NSX performance this year driven by the simplicity of deploying a software only networking solution. We continue to see increasing production use of NSX, and as we finish 2014, it's clear that network virtualization has moved past the early adoption phase and we are seeing broad industry momentum.

Turning to vSan, during the first three quarters of vSan sales, we saw rapid uptake of more than 1,000 paying customers already utilizing the platform. We are seeing adoption across a wide variety of industries, market segments, and geos.

We were pleased with the broad channel participation in the business. We saw strong Q4 transaction growth quarter over quarter, and we closed a sizable deal with a large grocery chain that is deploying vSan into all of their stores.

It is also important to remember vSan is a key component driving our hyper-convergent infrastructure solution, EVO:RAIL, a first of its kind in the industry built on the VMware software stack and delivering the software defined data center promise in an efficient, predictable, and cost effective way.

Turning to Hybrid Cloud, I am pleased to note we continue to see significant momentum in our vCloud Air and our vCloud Air network offerings. In 2014, we established a very strong position in the hybrid cloud, a new segment within the public cloud market. With thousands of customers and a growing set of service offerings, we are clearly building significant momentum in this new market.

In Q4, we closed a large vCloud Air deal with one of the world's largest pharmaceutical companies, looking to shift their current on premise infrastructure to a hybrid model that allows them to dramatically improve time to market at a fraction of the cost of their current environment. vCloud Air enabled this agility and these cost savings while helping the customer address the security concerns of both HIPPA and high-tech compliance. In addition, vCloud Air allowed them to take their test and development environment to the public cloud and bring it back to their private cloud as they needed it and when they needed it.

In summary, we are very pleased with the strength of our results in Q4 and throughout 2014. VMware is well placed at the center of the transformation taking place in the IT industry, and we could not be more excited about our portfolio of new disruptive technologies that will liberate our customers from the constraints of old hardware-based traditional models of IT.

I would like to thank our customers, partners, and employees for their passion and engagement throughout 2014. As we begin 2015, we are looking forward to providing our customers with extraordinary unparalleled value through the strongest portfolio of VMware products, services, and solutions in our history.

With that, let me turn it over to Jonathan.

Thank you, Carl.

We're very pleased with our Q4 and 2014 results, meeting or exceeding our revenue and operating margin expectations for the quarter and the year. Before going into detail on Q4 and guidance for 2015, I want to summarize how we performed in 2014.

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 revenue and operating margin plan we laid out. I am proud of how the VMware team executed in 2014.

Over the course of the last two years, we have significantly increased the diversification of our business. License bookings beyond standalone vSphere are now greater than 55% of total license bookings, up from greater than 30% just two years ago. License bookings beyond standalone vSphere grew nearly 40% year over year in Q4. This progress clearly demonstrates that VMware is successfully transitioning to a wide range of products. We're enabling the entire software defined enterprise.

For 2014, non-GAAP operating margin just exceeded our annual guidance of 31% and reflected a seasonably strong Q4 operating margin of 33.3% as we continue to invest aggressively for future growth. Our Hybrid Cloud and SaaS offerings represented just under 5% of our Q4 total revenues with a growth rate of over 100% year over year in Q4. Hybrid Cloud and SaaS revenues are now expected to grow faster than we had originally anticipated, and I'll talk about how this impacts guidance in a few minutes.

Turning to our performance this quarter, Q4 license revenues were $777 million, up 13% year over year. Q4 license revenue growth was adversely impacted by approximately 3 percentage points year over year due to currency.

Q4 total revenues were $1.7 billion, up 15% year over year and were also adversely impacted by currency by approximately 1 percentage point year over year. I'll talk more about the expected impact of currency in 2015 when discussing guidance shortly. Diluted non-GAAP EPS for Q4 was $1.08 per share on approximately 433 million shares, and as planned, continue to reflect the dilutive effect of the acquisition of AirWatch early in 2014.

During the quarter, we repurchased approximately 2.95 million shares of stock for a total of $250 million at an average price of around $85 per share. For the full year, we repurchased approximately 7.6 million shares for a total cash outlay of approximately $700 million at an average price of approximately $92 per share.

Our balance sheet remains strong with cash and short-term investments at quarter end $7.1 billion, up 15% from Q4 2013. Total unearned revenues ended the quarter at $4.8 billion, up 18% from Q4 2013 and of which $1.9 million is long term, up 21% year over year.

Turning to guidance, I'll first point out that we expect a couple of unusual items to impact our revenue growth rate for 2015. As most of you know, currency is not normally a sizable impact to VMware. However in Q4, approximately 70% of our billings were in US dollars, and with the dollar reaching a multi-year high with respect to most currencies in 2014, we are not immune from the impact of the dollar appreciation. With this in mind, for the full year 2015, we anticipate currency to have an approximately 2 percentage point negative impact to total revenue growth and an approximately 3 percentage point negative impact to license revenue growth.

We are likely to see an even greater impact on quarterly bookings in future periods as well, especially in the first half of 2015, even assuming no additional strengthening of the US dollar. For the purposes of guidance, we are applying an average US dollar to euro rate of 1.18. In addition, as I mentioned earlier, an increasing percentage of our revenue is being driven by Hybrid Cloud and SaaS revenues which are growing at a high rate.

While this is a positive development for VMware, it also has the impact of recognizing less revenue up front than otherwise would be recognized as part of a multi-year license deal. We estimate that this will have a negative impact on total 2015 revenue growth of up to 1 percentage point and on license revenue growth of at least 2 percentage points.

Taken together, the impact of a stronger dollar and the growth of Hybrid Cloud and SaaS are expected to reduce our 2015 total revenues by approximately 3 percentage points of growth and are expected to reduce our 2015 license revenues by approximately 5 percentage points of growth from what we would otherwise report. With that as background, we currently expect total revenues for 2015 to be between $6.64 billion and $6.76 billion or up 10% to 12% year over year. To be clear, without the effect of currency and the impact of our growing Hybrid Cloud and SaaS businesses, total revenues for 2015 would otherwise be expected to grow 13% to 15% year over year.

License revenues for the full year are expected to be between $2.735 billion and $2.815 billion, or up 6% to 9% year over year. Without the effect of currency and the impact of our growing Hybrid Cloud and SaaS businesses, license revenues for 2015 would otherwise be expected to grow 11% to 14% year over year.

For 2015, we expect full-year non-GAAP operating margin to be approximately 31.5%, which balances some margin expansion against continued investment in our growth businesses. As a reminder, we are planning for AirWatch to be EPS neutral exiting the fourth quarter of 2015.

However, this plan continues to imply a dilutive effect from AirWatch on overall margins throughout 2015. We continue to see the opportunity to invest in our various new product areas and we intend to manage spending accordingly. We also are expecting that cash flow from operations will be approximately $2 billion.

There are three key factors to take into account when thinking about cash flows in 2015. Firstly, we're expecting cash taxes to be approximately $350 million, incrementally higher by approximately $135 million in 2015. Secondly, we are currently forecasting AirWatch acquisition related payments of approximately $185 million, an increase of approximately $100 million.

And finally, currency impacts will negatively impact our cash flows by approximately [$80] million. Taken together, these three items represent a headwind to 2015 operating cash flows of approximately $315 million or 14 percentage points of growth year over year. To be very clear, with the possible exception of foreign exchange, these items will not present the same headwind to cash flow growth rates beyond 2015.

Finally with respect to the full-year view, as we mentioned, we are seeing significant momentum in our newer product areas. We believe it's an opportune time to expand our buyback program and are increasing our share buyback goal compared to recent years. As a result, we expect to repurchase at least $1 billion of stock in 2015 compared with the approximately $700 million repurchased in 2014.

While it's difficult to predict exactly what the effect of this will be in 2015, we are currently modeling a share count of between 429 million and 433 million shares for the year, and a non-GAAP EPS range of between $3.96 and $4.04 per share. For Q1 2015, the negative impact of foreign exchange is currently expected to be around 1 percentage point on total revenue growth and approximately 3 percentage points on license revenue growth. For Q1 2015, we expect total revenue to be between $1.49 billion and $1.51 billion, or up 10% to 11% year over year.

Adjusting for currency, total revenues for Q1 2015 are expected to increase 11% to 12% year over year. License revenues for Q1 are expected to be between $570 million to $580 million or up to 2% to 3% year over year. Adjusting for currency, license revenues for Q1 2015 are expected to increase 5% to 6% year over year.

For Q1, we expect non-GAAP operating margin to be approximately 29.5% and non-GAAP EPS between $0.83 and $0.85.

To assist you with your models, I'll make a couple of comments regarding revenue and non-GAAP operating margins seasonality in 2015. Given the significant currency market movements over the past few months and the product transitions that we've been highlighting for a number of quarters, we see the first half of 2015 growing at a lower rate than the second half. This means we expect a slightly lower revenue growth rate in the first half 2015, and expect growth to be higher in the second half of 2015.

Further as with 2014, we expect our operating margin performance to reach a seasonably strong high in the fourth quarter and to be seasonally lowest in Q1. We encourage you to model the year accordingly as you take into account our full-year and first-quarter guidance. Remaining guidance for Q1 in 2015 is included in the slide deck posted on our Investor Relations website.

In summary, we did what we said we were going to do for revenue growth and operating margin performance in 2014. Although 2015 revenue growth is expected to be negatively impacted by 3 percentage points due to currency and the growth of Hybrid Cloud and SaaS, we are encouraged by the breadth of our product portfolio and the opportunities ahead for our newer product areas.

And 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.

(Operator Instructions)

Kash Rangan, Merrill Lynch.

Hi, can you hear me okay?

Yes.

Thanks for taking my question. Happy new year to you.

Microsoft on a conference call yesterday talked about weakness getting worse in Japan and China, but your comments suggest otherwise to a certain degree. Can you just give us your state of the union take on what's happening with some of the emerging markets, because the US certainly seems to be doing quite well? And if you will, if you have the time, quick update on the government deal that you are targeting to close sometime this year.

Thank you.

Thanks, Kash, and happy new year.

Just before we dive into the bulk of the Q&As, I just want to again express my appreciation to the tremendous results of the VMware team and crossing $6 billion, 16% growth. The entire team had a really tremendous performance in this past year. And with that, Carl, maybe you can comment on the GO differences that Kash was asking about.

Sure. Thanks, Kash. Let me start off answering your first question as it relates to China and Japan specifically.

Once again, we saw strong performance in our China business, and we've seen that continuously over the last couple of years. We have a great team there and they are executing well. And this is despite what everyone else is saying and seeing in the region. We will continue to watch the macro of China going forward and make adjustments as needed, but we couldn't be more pleased with the execution of the team in our China business.

As it relates to Japan, we still didn't necessarily see the growth that we would've liked to have seen but we did see much better improvement in our overall execution. And as we head into 2015, we believe that our Japan business will get back on track and we have a great leadership team there to lead us into the new year.

And as a relates to the federal deal, at this time, the deal did not close in Q1. I'm sorry, did not close in Q4. But we remain very pleased with our ongoing opportunity with the US federal government. I'd also say given the pending RFP release of this opportunity, we really are not in a position to discuss the opportunity at this point.

Having said that, we expect it will leverage the large install base that we have across the federal government and we'll take their technologies that they currently have installed to the latest and greatest available, and we'll help them actually meet their aggressive virtualization needs that is set forth in the government policy.

Thank you, Kash. Next question, please.

Brent Thill, UBS.

Thanks, Jonathan. I know you love to talk about the ELA so I will ask you a question as it relates to the 10% to 12% guidance. With the FX headwind, your assumption on ELAs for the years and the makeup for that particular segment.

Enterprise license in particular, Brent?

Yes.

We're not specifically guiding on mix, but as you will have noticed, we were up to I think 39% of our total bookings in Q4 2014 being from ELAs. I think Carl can add, but as I think about the mix moving forward, we still see the ELAs being a valuable buying motion for customers. The ELA renewal opportunity, which I know is perhaps on top of people's minds, does go up again in dollar terms in 2015. I just want to remind everybody that the majority of the ELAs we do, though, are actually new.

So more than 50% of our ELAs are on new business; less than 50% are renewals. But the dollar value of renewals does go up, a bit more weighted towards the back half, but you'll see that is factored into our guide as we think about not just the full year, but also the profile of the year.

All right. Thank you, Brent. Next question, please.

Walter Pritchard, Citi.

Hi, thanks. Carl, maybe you could talk a bit about the cloud and SaaS business that you expect to impact the forecast that Jonathan gave. Specifically, we are all familiar with vCloud Air. What else is in the mix there? Is it AirWatch or other things that see an impact from? And do you see this transition going on for multiple years, or do you feel like 2015 is a year where you take a little bit of an impact on revenue and then start to catch back up?

Yes, okay. Thanks, Walt.

Let me just clarify what's in our Hybrid Cloud and SaaS business and how we classify it. Obviously, it's vCloud Air which is our hybrid cloud platform that we've built out that we own and operate. It's our vCloud Air network, which is the greater than 4000 partners around the world that are leveraging our platform to deliver public cloud services.

It is a portion of the AirWatch revenue that is recognized as a service. As you know we sell AirWatch both on premise and in perpetual license manner, as well as we sell it in our public cloud on top of vCloud Air as a service. And we're also starting to see a pickup in other as a service offerings, specifically like desktop as a service, which is VDI hosted in the public cloud.

And our vRealize Suite as a service, which is our management products that have historically been sold as a perpetual license on premise, we now deliver through the public cloud, so they're all the components of hybrid/SaaS revenue model going forward. As we think about the mix, we continue to see these as being growth opportunities for us.

It's reflected in the guidance we're providing, which is why Jonathan talked about the shift to more ratable revenue and subscription-based revenue coming from these public cloud offerings. So we are encouraged by it and we'll continue to update it -- update you as we go throughout 2015 on the progress we're making.

Pat, maybe want to add a little color as well.

And I'd also like to add, Walter, that just last week we had a major project announcement from our Hybrid Cloud business where we announced our on-demand service, the second generation of our DR service, additional feature and functions coming onto the platform that we expect to continue to accelerate the adoption specifically, some hybrid networking capabilities that we announced. All of those are continuing to build momentum.

And when we announced those services, they're not only useful for us in the vCloud Air, but we also are rapidly making those technologies available to the vCloud Air network of partners which continues to expand our global footprint through those, as Carl said, over 4,000 partners. And as the platform becomes more robust, more of these services such as desktop as a service and others that Carl mentioned, they become more and more attractive, as well. So we really see this as a reinforcing spiral, and that's resulting in Jonathan's guidance as this accelerating piece of our overall business profile.

Thank you, Walter. Next question, please.

Heather Bellini, Goldman Sachs.

Hi, great. Thank you very much.

I just wanted to follow up a little bit on the NSX deal and the comment you made about the run rate of that business. I am just wondering, the run rate I think you gave us two quarters ago was $100 million. Now it's over $200 million.

What is it that's kind of causing that business to inflect and how material do you think we could -- if you had to bet between that and EUC this year, which one do you think is going to have the biggest incremental contribution to your billings?

This is Carl.

Let me start with answering the question first and then Pat can add any color, as well. We were extremely pleased by our performance of NSX in the quarter. As you could tell, we highlighted it a number of times in our prepared remarks. And we said our revenue had actually doubled. Our bookings, I should say, have doubled from the first half of the year into the second half of the year, and it's now well over $200 million.

And the other thing that we were very proud of, we have always talked about our ELAs becoming much more strategic to our customers and we saw 9 of our 10 largest ELAs in the quarter actually include NSX. Which driving this is the fact that NSX, in network virtualization, is moving from an early adopter phase into production.

Our customers are seeing the significant business value of NSX, whether it's time to market in deployment of applications, whether it's the powerful microsegmentation solution that we are bringing to market that is unmatched right now, or it's just overall people looking to modernize their existing network infrastructures leveraging the software-defined network approach.

All of those are really leading us to a very successful Q4 and a lot of momentum as we go into 2015. As it relates to the one deal I highlighted, we did do a $10 million all NSX deal with a large global financial services company who is looking to rearchitect how they deliver networking services. We were really excited and pleased to finalize this agreement and contract with them, and we hope to really change how they deploy, run, and operate their network on a go forward basis.

Overall, just a strong momentum and great customer adoption, not just in proof of concepts any longer, but really moving from tests and dev straight into production.

And just to add a point or two, and as Carl said, we just couldn't be happier with the momentum that we are seeing in the market. And customers have moved past the early adoption into now the production phase in this broader phase of adoption. It is also such a powerful lynch pin of our overall SDDC strategy, where it really gives us that opportunity to transform, not just compute, not just management, but the network, as well.

And as we have already mentioned, Heather, this ability to tie together our often on premise offerings with our hybrid capability is truly a fundamental differentiator versus any other person on premise or any other cloud operator, as well. So this ties together so many of our strategies, and we couldn't be more thrilled with the momentum we saw coming out of the end of Q4.

Thank you, Heather. Next question, please.

Phillip Winslow, Credit Suisse.

Hi. Thanks, for taking my question and congratulations on the quarter. Just have a question on just your outlook you gave for the full-year. Obviously, you talked about growth higher in the second half versus the first half. I'm wondering if you could give us some more details on what is driving that.

Is it what you were just talking about the ramp that you were expecting in NFX and vSan? Those becoming a -- continuing to grow, becoming a bigger percentage of revenues so therefore lifts it up. Or is it something on the core side or the management tools. Help us sort of back into the first half or the second half from a product perspective.

Yes, this is Jonathan. I'll take that. Clearly, Phil, one of the things that's having an impact, and we're assuming at this point no further degradation in the -- or strengthening in the dollar. One simple growth driver on a reported basis or an adjusted basis will be foreign exchange as we get to the second half.

So I just bring that up because we're not expecting a modeling further decline and given the fact that Q4 2014 saw the most significant shift with a little bit also into this quarter. You've got a year-over-year effect when you get to the back half of the year. But you're right, we also are seeing product strength as we continue to see even more meaningful contributions plan from our newer product areas.

And as you have picked up from the license guide and product guide for Q1, we did see some impact of some transactions with longer revenue recognition periods having an impact on our Q1 2015 guide. You'll see that in our long-term deferred revenue being up 21%. So there's a little bit of timing in here in terms of when rev rec is going to get recognized, but fundamentally it's a combination of foreign exchange and strength in product bookings as we see greater contributions from our newer areas.

Thank you, Phil. Next question, please.

John DiFucci, Jefferies.

Thank you. Follow-up to Phil's question, Jonathan, because I think even if you exclude those FX, the foreign exchange, and foreign-exchange, I think, is understandable and pretty much expected. Maybe the hybrid cloud and SaaS, I think that is understandable too but maybe not expected. Q1, even if you exclude those FX, the license revenue, the growth slows and then reaccelerates for the year.

So even excluding those FX, why is it going to slow? One thing, Carl said something. I want to make sure you understand it. He said something about seven deals over $10 million this quarter, and it accelerated a few deals.

Were there some deals that were pulled into this quarter that might have gone into the next quarter and that's why you expect sort of a little bit of a lull in the first quarter, but you expect it to accelerate thereafter. Or is it something else going on here?

John, I'll take it and then Carl, feel free to add as I talk about the deals in particular. John, there's a few points I want to make here. Obviously, and you picked up on this, currency is having an impact on Q1. Again, just to put a line underneath it, license in particular is going to be negatively impacted, we estimate by about 3 percentage points year over year.

The second factor was what I just alluded to, which was we saw a larger mix of deals in particular as we finished Q4 with longer revenue recognition periods than is typically the case. We do structure deals in respect to how customers want to do business with us. In this particular case, we saw a number of deals actually were structured in such a way that revenue will be recognized over a longer period of time than is usual.

There's are deals that we have already taken. They're on the books. The deferred revenue, though, will get recognized over a period of time and that's having something of an impact in Q1 and first half timeframe.

You'll note that our long-term deferred revenue actually went up by 21%. Fundamentally, that's just a timing question, and again, it's not future deals. These are deals that we've already taken.

And then Carl did mention as we were going through our prepared remarks, we were able to accelerate a couple of large deals into Q4 that we had anticipated closing in 2015. I view that as actually being a good thing. First of all, it reflects the strong value proposition given the fact that we saw a higher attach rate of NFX as an example in our top 10 deals. And also we did see something of a budget release from a handful of customers in the Q4 timeframe.

We do also have a little bit of a tougher compare, I would say, in Q4 2014 from a license revenue perspective. It's one of our stronger quarters for license revenue growth. So, if I step back from all of that, we're set up for an accelerating license growth story going into the second half, but not actually that dissimilar from what we talked about for 2013 and 2014.

So those are the key drivers.

Thank you, John. Next question, please.

Rick Sherlund, Nomura.

Thanks.

On the FX side, why are you assuming 1.18 when the rates are a bit different right now? And also, I wasn't real clear on you said newer products in the second half of next year. What were you referring to there? Are there unannounced things?

No, no, let me just clarify. The FX is a fairly a straightforward one, Rick. Rick, for the quarter where we plan our quarters essentially on an average rate and we started this year at 1.22 if you just take a look at the euro to dollar rate. Now I think today the spot rates are up to 1.14. For modeling purposes and for planning out the quarter, we are assuming a 1.18 FX rate on average.

And then now all I was just referring to with respect to the newer products was these are obviously starting out. We believe that decade plus long opportunity, we're at the early innings so the dollar contribution from those products as they grow nicely should have a greater dollar impact and greater growth impact as the mix of them becomes bigger in the back half. We're not signaling any other new products than what we have ready have talked about at this point.

Thank you, Rick. Next question, please.

Matthew Hedberg, RBC Capital Markets.

Great, thanks for taking my questions. I am wondering, how should we think about the growth and headcount in 2015 versus your revenue assumption? And can you comment on your sales capacity and productivity assumptions as we enter 2015?

Matt, I will take the first one just quickly and then I'll hand to Carl on sales capacity. Headcount, there a few things we don't guide on and headcount is one of them. But I think about roughly growing in line with the rest of the business and OpEx that's inherent in the guide we've given here.

On sales capacity, I think we've done all of our productivity math, as you could expect, as we looked at our 2015 guide for both Q1 and the full year. And we believe that we have a well thought out plan on how we will hire to ensure that we have the capacity we need to deliver the results that we're guiding to.

It's also important to note that we continue to invest, not just in our core sales force but in our specialist sales force and engineering team around areas like NSX, which is receiving great momentum, around management, around vCloud Air, as well as we have quite a large sales force that we got through the acquisition of AirWatch.

So the specialty organizations continue to be important but we also have absolutely taken a look at the capacity needed from a pure sales force to deliver on the guidance we're provided.

Thank you, Matt. Next question, please.

Keith Weiss, Morgan Stanley.

Excellent, thank you for taking my question and nice quarter. I have a question for Jonathan. I just wanted to dig into the cash flow guidance and make sure I'm thinking about this right. When I look at the income statement guidance, sort of total revenue and operating margins, I get to low teens, about 12% operating income growth.

I understand there are some one-time items that take away about 13% of growth. But if we are going to do around $2 billion in operating cash flow, that's going to be down low teens. I'm just trying to understand the variance between operating income growth, those items that you gave, and what operating cash flow is expected to come out. Is there any sort of additional drag on operating cash flow that we should be aware of?

You know, Keith, there are a number of things overall. I've identified the three major drivers, but obviously forecasting cash flow is inherently lumpy. I'm giving you my best view of the cash flow outlook at the start of the year. I want to just take the opportunity to highlight and perhaps help you as you think about your models here little bit.

First of all, number one item is we expect to pay approximately $350 million in cash taxes compared to $215 million in 2014, so it's an increase of over 50%, five zero percent. Secondly, we are expecting to make installment payments to the AirWatch founders as part of the transaction that we struck with them when we acquired AirWatch. That's up around $100 million in 2015, compared to 2014. Again, that's a pretty big increase percentage wise.

I do think there's going to be ongoing FX impact which we assumed around $80 million, eight zero million dollars. So those various factors are actually about a 14% headwind to OCF growth. Again, I think you've clearly picked this up, but just to make sure that everybody has, we expect to see the headwinds from at least two of those items, cash taxes and the AirWatch founder payments, basically be removed after this year.

In other words, in 2016, we will have a very, very small amount of AirWatch founder payments in the first quarter, a fraction of the amount we are going to be seeing in 2015. And I'm expecting our cash tax rate on GAAP income to normalize it about that mid 20s rate, much as it is in the 2015 timeframe.

When you start to then see normalized cash flow levels trend back to us for 2016 taking out those one-time items, I think that should help you as you think about not just 2015, but 2016 as well.

Thank you, Keith. Next question, please.

Mark Murphy, JPMorgan.

Thank you. I had a similar question I wanted to try to ask in a different way. Jonathan, for 2015 it looks like operating cash flow will dip below operating income, and you been very clear about the one-time impacts. I think it's well understood.

But I'm curious, moving beyond 2015, should we model operating cash flow either generally materially above operating income, or do you think we have generally reached a point of essentially longer-term conversions between those two numbers where there wouldn't be a very material spread between the two numbers?

I don't want to get dragged too much into forecasting 2016. I understand the thrust and the reason why you are asking the question. Cash flow fundamentally is going to be a combination of bookings less expenses because we bill upfront on our bookings. As we think about the opportunity to grow the top line revenue, beyond 2015, beyond the guide I've given you, that's the way I would think about it as then reinforced by bookings growth.

But I do think they're going to generally converge, recognizing that billings often don't translate immediately into revenue. But we'll talk more about 2016 in approximately 365 days time, if that's okay.

Thank you, Mark. Next question please.

Michael Turits, Raymond James.

I was just wondering if you could talk again about the long-term deferred that were so strong in this quarter. I know you said that there's some [love lack] and some of that will flow into, I would assume the back half of 2015. But what was the multi-year long-term in terms of beyond one year.

I'll start and then Carl by all means add. In particular, what I was highlighting was that we saw a number of transactions at the back half of 2014. And end up having deal terms that we struck with the customer that allows the customer to consume product. And these aren't SaaS deals. These are just regular license deals that allow the consumer to consumer our product and require us to revenue recognize the transaction over an extended period of time.

In some cases, this can be over more than one year. Again, I don't necessarily view that as being a bad thing. Essentially, we have the cash up front. We entered into the transaction with the customer. It's really just a question of how revenue is then recognized off the balance sheet, Michael. And that's what we saw based on responsiveness and how we dealt with the customer.

Carl, do you want to add anything?

Yes, I don't think anything has changed, Jonathan, in our business model. I think you articulated it the right way. I would just add that we remain open and flexible to meet our customers' desires and wishes on how they want to procure our software.

And depending on the deal terms and deal structures, it can create a different timing of how we recognize revenue, whether it's all up front or if it's over time. In Q4, as Jonathan said, we did see more ratable revenue recognition in some of our larger deals, which is what's driven some of our long-term deferred revenue up 21% on a year-over-year basis.

Thank you, Michael. Next question, please.

Karl Keirstead, Deutsche Bank.

Hello, Karl. Can you hear us? Let's go on to the next question, please.

Gregg Moskowitz, Cowen and Company.

Thank you very much. I just had a follow-up to Keith's question. Jonathan, you had pointed out the three headwinds to cash flow from ops, which in total is greater than investors had expected. The question is, even if we exclude that, I'm getting to cash flow from operations growth of only about 7% in 2015. And in light of low double-digit growth expected in revenue with some margin expansion, I just would've expected a little more than that. So I'm just wondering if there are any working capital assumptions or other items that we should be aware of.

You know, Gregg, I would just summarize it and say, look, in any one particular quarter and even for a year, cash flows can be somewhat lumpy. You saw that in Q4 in particular. We saw tax payments coming in. We have taken all of that into account as we think about the outlook for the year, 2015. We'll obviously update you on how we do against the goal I've laid out.

But at the start of the year, I think that guidance level of around $2 billion obviously reflects those one-time items but also a multitude of other factors as we've looked at the timing of working capital, cash flow receipts, and payments, et cetera. So it's my best view, at this point.

Thank you, Gregg. Next question, please.

Abhey Lamba, Mizuho Securities.

Hello. Thanks for taking the question. This is Jim Shaughnessy stepping in for Abhey. Just wanted to ask a quick question regarding the OpenStack distribution and specifically how it fits in to your overall cloud strategy how we should think of it as part of your hybrid cloud SaaS offerings. Thanks.

Sure. This is Pat. OpenStack generally, as we talked about it, has been a good business for us. We've seen OpenStack customers growing faster than our overall business. And what we indicated at VMworld last year was that we would begin offering a VMware OpenStack distribution directly to our customers. You'll be hearing more about that this quarter, so we are quite excited about that.

And as we discuss our OpenStack offering with customers, it becomes a very compelling offering because our customers have very large VMware footprints using our networking, compute, et cetera, as part of that. And this becomes a very easy way for them to extend their offerings to their internal developer teams or other application developers to also offer OpenStack APIs as a way to consume that infrastructure without in any way altering their underlying networking, compute, management, security requirements, and all of those are common and broadly deployed.

So we are quite excited about bringing that to market and we believe that based on our early beta customer feedback, that it's going to be an extraordinarily well received offering on the part of our customers.

All right. Thank you. I think that with only minute or so left, I think it's time to probably conclude the call. Pat will have a couple of final comments.

Again, thank you all for joining us on the call today. In summary, our business is growing and we're confident in our strategy, looking forward. I'd like to thank again our customers, partners, and employees for their passion, support, and engagement as we began 2015 with the strongest portfolio of products and services in the history of VMware. And as I mentioned in my formal comments, we hope you all will be able to join us online for our launch next week at VMware.com/now. Thank you. I look forward to hearing from you then.

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