VMware Inc (VMW) 2015 Q4 法說會逐字稿

Good day, and welcome to the VMware Q4 and full-year 2015 earnings call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Paul Ziots, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon everyone and welcome to VMware's fourth-quarter 2015 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 the 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 a reconciliation of GAAP to non-GAAP data for constant currency growth in revenues plus sequential change in unearned revenues for Q4 2015 and Q4 2014.

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. We assume no obligation to and do not currently intend to update any such forward-looking statements.

In addition, during today's call we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for or isolation from, GAAP measures. Our non-GAAP measures exclude the effect of our GAAP results of stock-based compensation, 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. You can find additional disclosures regarding these non-GAAP measures, including reconciliations of comparable GAAP measures, in the press release and on our investor relations website.

A 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 2016 quiet period begins at the close of business March 15, 2016. Unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2014. With that, I will turn it over to Pat.

Thank you, Paul, and good afternoon everyone. We thank you as always for your interest in VMware. We have quite a bit to cover on today's call, specifically we will be addressing our results for the quarter and our outlook going forward. In addition, we'll discuss the steps we are taking to best align VMware for the future, especially in the area of cloud computing and a management change.

Let me start with an overview of our results. Q4 was a solid finish to 2015. For the full year we grew total non-GAAP revenue 13% in constant currency to over $6.6 billion and we increased non-GAAP earnings to $4.06 per share. We were especially pleased with the growth across our portfolio of emerging products and businesses, including NSX and User Computing and Virtual SAN. All of these businesses demonstrated strong growth in both Q4 and for the full year, underscoring the momentum behind our new focus areas. We believe they will also contribute to our bookings growth rate exceeding our revenue growth rate for 2016.

Here are some highlights. Our End-User Computing business crossed $1 billion of total bookings, joining both compute and management as billion-dollar businesses for VMware. AirWatch ranked as a leader in the Forrester Wave enterprise mobile management in Q4 2015, and was the only company to receive the highest score for customer confidence in vision as well as for enterprise app store extensibility.

In networking we had a stellar year, growing NSX over 100% year on year, and bringing in our total annual bookings run rate to well over $600 million. We believe our emerging networking business will be as transformative to the entire networking and security industries as vSphere has been to the compute and server industries. Our VSAN products are now well over $100 million in annual bookings run rate, and we just released major updates to our management suite, vRealize 7. As one of the largest software companies in the world, these results demonstrate the strong demand we're seeing for VMware's core and emerging products in an evolving marketplace for IT solutions. Carl and Jonathan will provide some specific commentary on these and other products in a few minutes.

Today we want to provide further clarity around our cloud strategy. While the cloud is fast becoming mainstream, we are only just starting to see the significant implications for IT. Multi-cloud environments are becoming the norm. Customers are increasingly looking for solutions that work across clouds and across devices. Most companies now have meaningful portions of infrastructure which they do not operate or own. We believe that VMware is uniquely positioned to help our customers manage these highly complex multi-cloud and multi-device environments using the unmatched power of our software-defined approach.

There are three components of VMware's expanded cloud strategy. The first part of our cloud strategy is focused on extending our leadership in the private cloud, the foundation of our business. With our SDDC technologies we have helped our customers transform their data centers. During 2015 we saw a significant increase in customers deploying the entire VMware SDDC stack of compute, networking, storage and management. These SDDC technologies are the basis for the powerful hybrid cloud capabilities our customers use to extend their private cloud workloads to and from the public cloud, and to help them run, manage, secure and connect all their applications across all clouds and all devices.

The second part of our strategy is our focus on helping customers extend their private cloud workloads into the public cloud. Our vCloud Air service and our vCloud Air network partners are both examples of this. I would like to take a moment to clarify our strategy for vCloud Air. The service will have a narrower focus, providing specialized cloud software and services unique to VMware and distinct from other public cloud providers. We will aggressively provide these innovations to our vCloud Air network partners, helping them accelerate their growth. VMware is creating cloud software and cloud services for cloud providers. It's important to note that given it's narrower focus, we believe that capital expenses we have already invested in vCloud Air will be adequate for our needs, and that we expect our vCloud Air service to be accretive by the end of 2017.

The third part of our strategy builds on last year's technical preview of NSX connecting and securing endpoints across a range of public clouds, including Amazon Web Services. Later this year we will be introducing a new NSX offering which will enable customers to create secure encrypted overlay networks across public clouds, including AWS and Azure in on-premises data centers. This new service will provide unparalleled connectivity, security, and visibility across multi-cloud IT resources, regardless of whether the underlying infrastructure is VMware-based or not. I'm pleased to announce that we are already offering the first set of limited trials of this service operating on top of Amazon Web Services.

We will be investing in similar ways across our portfolio of products to extend their functionality to work with native public cloud applications. As an example of this, we will extend the capabilities of vRealize automation to manage applications built on Azure in addition to AWS and on other cloud services. At the center of our business mobility portfolio, AirWatch secures and manages the delivery of cloud applications to users across a world of heterogeneous devices.

VMware's new multi-cloud and multi-device strategy will transcend the limitations of individual cloud services by providing customers with the ability to run, manage, secure, and connect all their applications across all clouds and all devices. VMware will also continue to support EMC's Virtustream service, which is focused on supporting mission critical workloads in the cloud. And Virtustream will continue to be an important vCloud Air network partner.

I would like to turn now to our announcement regarding our CFO succession. I regret to announce that Jonathan Chadwick has decided to leave VMware and expand his advisory roles working with a number of companies as a nonexecutive board member. I have greatly appreciated Jonathan as a partner and leader at VMware for the past three years. We will miss him, and we all wish him continued personal and professional success.

I am very pleased to let you know that Zane Rowe will be joining as our new CFO, replacing Jonathan. Zane brings a wealth of executive experience from prior leadership roles at Apple, United Airlines, Continental Airlines, and of course most recently as CFO of EMC. Jonathan and Zane have been collaborating ever since Zane joined EMC, and they are committed to ensuring a seamless hand-off through Q1, with Zane assuming full responsibility as of March 1.

Before Jonathan gets into the details, I want to make a few high-level comments on guidance. As I talked about earlier, we are seeing strong growth across our full portfolio of emerging products. We recognize that our blockbuster compute products are reaching maturity and will represent a decreasing portion of our business going forward, even as they continue to be a powerful springboard for building our new businesses. As you well know, we continue to grow our newer product areas. 2016 will be a key transition year as we expect the effect of our new products to outweigh the decline in our compute products.

With this is a backdrop, in 2016 we expect both total and license bookings to exceed revenue growth by 3 to 5 percentage points as we build our deferred revenue for accelerated growth in 2017 and beyond. We are also keenly focused on our overall business model and managing our investments between existing product lines and new initiatives. Today we also announced an internal restructuring and reduction in workforce, which will help us align our resources with our most important priorities. Jonathan will provide more details about these adjustments and their financial impact.

VMware has been on a journey of transformation from relying on the singular and almost unprecedented success of vSphere to becoming a multibillion-dollar software company with a full suite of SDDC, EUC and cloud offerings. I appreciate that 2015 was a challenging time for VMware investors. I know many of you have sought additional clarity about the implications of Dell's planned merger with VMC. We believe our expanded relationship with Dell will be very positive for our customers and for our shareholders. Michael Dell has reached out to our major partners to assure them that VMware will continue to invest in its strong independent partner ecosystem. Over time we see significant revenue upside from upselling our full portfolio of products and services to Dell's new equipment sales and from accessing their incredibly strong SMB go-to-market engine.

During 2016 we expect our bookings growth to outpace revenue growth as we build our momentum for accelerated growth in 2017 and beyond. We are confident about the outstanding value we can uniquely offer customers in their multi-cloud and multi-device environments. I will now turn it over to Carl to talk more about our business performance in Q4.

Thank you, Pat. We delivered results either in line or above our guidance. I am proud of how our teams around the world executed in Q4, particularly their ability to close large deals. We remain pleased with the increasing breadth and year-over-year growth of our newer offerings. We were able to deliver solid bookings results in the quarter in the face of continued shifts we all have been experiencing as an industry for quite some time.

VMware's value proposition around the private cloud, software-defined data center and business mobility continue to resonate with our customers around the world last quarter. We did see what I would describe as a modest budget flush at the end of December which allowed us to drive a strong enterprise agreement quarter. We did continue to see weakness in China, Russia, and Brazil. These three countries alone posed 2-point headwind to our overall bookings growth in the quarter.

Taking a look at our Q4 regional bookings performance on a constant currency basis in relative terms, EMEA performed best, followed by Americas and Asia Pacific. Note, all growth metrics that I will reference on this call are in constant currency terms. In EMEA we were pleased with our overall business across Europe, with the strongest bookings coming from central Europe, particularly Germany, which were powered by some larger deals. We also experienced strength in the UK. As I indicated earlier, Russia continued to be challenging due to the economic environment. In the Americas, stronger performance in the US was partially offset by weakness in Latin America, particularly Brazil. The US enterprise and healthcare markets performed well in the quarter. In APJ, we saw good bookings result out of India, Japan, and Southeast Asia offset by continued weakness in China, as experienced by many of our peers. Total bookings in China were down nearly 40% year-over-year.

We saw strong execution in our large deals in Q4. Enterprise agreements were approximately 42% of total fourth-quarter bookings. This was our highest EA quarter in VMware's history, and up from approximately 39% last Q4. This strong performance demonstrates commitment by our customers to invest in VMware's expanded solution offerings. We closed six deals at or over $10 million in the quarter, and had a healthy mix of new EAs as well as EA renewals. Our in-quarter renewal rates for EAs were equal to our record high, and our large deals once again included a strong mix of our newer technologies. For example, all of the top 10 deals contained EUC. 9 of the top 10 deals contained NSX, and 6 of our top 10 deals contained VSAN. This reflects the increasing strategic value our customers rely on from VMware.

Our End User Computing business continued its market momentum with a strong performance in Q4. End User Computing including AirWatch grew license bookings over 20% year over year in Q4. For 2015 EUC total bookings grow over 30% year over year, and we are now over a $1.2 billion annual run rate. We believe we continue to gain share against the competition in both desktop and mobile, and in 2016 our EUC license bookings could surpass that of our nearest competitor. I'm pleased to say that we now have over 62,000 End User Computing customers across our desktop, mobile, identity, and content collaboration solutions.

Breaking down our Q4 EUC business a bit further, the desktop business once again grew license bookings double digits year over year. AirWatch grew license and subscription bookings nearly 50% year over year in Q4. For 2015 our AirWatch total bookings were over $370 million, which we believe makes us the clear number one in the enterprise mobile management space. Looking back at 2015, our End User Computing business made significant contributions to our overall business. I would like to thank the team for their hard work and commitment to making VMware a powerful force to be dealt with in End User Computing and enterprise mobility.

I will now switch for a moment to our Software Defined Data Center, or SDDC products. Our total compute bookings were roughly flat year over year in Q4. This includes our support and subscription business, and reflects the extraordinary participation and renewal rates that we enjoy with our customers. Compute license bookings declined in the low double digits year over year, and management license bookings grew in the low teens year over year in Q4. Our newer, high-growth SDDC products, which includes NSX and VSAN, grew license bookings robustly. We expect license bookings growth in 2016 from our faster growing, newer SDDC products in aggregate to more than offset the decline of compute. Our cloud management penetration is now over 17% of our install base, up from 14% in Q4 2014, still leaving plenty of headroom for growth.

We saw continued momentum in Q4 for our network virtualization solution, VMware NSX. We are pleased to say that total NSX bookings more than doubled in the second half of 2015 as compared to the first half. We are now well over a $600 million annual total bookings run rate versus over $200 million last year at this time. Based on these results in both Q4 and 2015, it is obvious that our investment in a specialized network and security sales force is paying off. We will accelerate our investment in this specialized sales force throughout 2016.

In Q4, the number of paying customers increased to over 1200, over one-third of which are repeat customers with multiple NSX purchases. As I indicated earlier, 9 of our top 10 enterprise agreements included NSX. We are seeing many of the largest companies in the world recognize VMware's NSX as the clear industry leader for network virtualization. We had a number of big NSX deals in the quarter, the biggest being with a large automobile manufacturer.

Another example of our momentum behind NSX is with Sabre, the leading technology provider to the global travel industry. Sabre is using NSX in production with customers of its intelligence exchange platform. They chose NSX for its improved network security, streamlined networking policies, and significantly increased speed to market for their customers. They expect their NSX environment to grow extensively as more of their airline customers adopt their new intelligence exchange platform.

We continue to see increasing production use of NSX. These deployments are across a wide variety of use cases in the three broad categories of IT automation, security, including our microsegmentation capabilities, and application continuity. We remain confident regarding our future opportunities in the networking space and see an extraordinary strong pipeline heading into 2016.

Summarizing a few other product areas, our hyper-converged offerings based on VMware Virtual SAN experienced significant traction. Specifically our Virtual SAN business saw successes across a wide variety of industries, market segments, and geos. In Q4, total VSAN bookings grew nearly 200% year over year, and customer count has increased to over 3000 versus over 1000 a year ago. We are now well over $100 million annual run rate for total bookings. With our next release of VSAN in Q1, we expect our momentum to build given the powerful new enterprise capabilities the product brings to market. Taking into account the hardware associated with running the Virtual SAN software and our current bookings run rate, we believe we are the industry leader in hyper-converged offerings measured both by software and as an appliance.

Last quarter we expanded our partnership with Kroger, one of the world's largest grocery retailers. Kroger will leverage VMware's Virtual SAN software-defined storage technology to help further reduce their operating costs and IT footprint in their stores. Kroger expects to realize a compelling ROI from VSAN, and VSAN is a key component of their Thin At The Edge Initiative.

Turning to hybrid cloud. Total bookings for vCloud Air network grew in the low teens year over year. We continue to see significant interest from cloud and service providers around the world who want to take advantage of our hybrid cloud technologies. Jonathan will provide more color on vCloud Air in a moment.

As we look into 2016, we are excited about the future of VMware. The performance of our new products in Q4 gives us confidence and momentum as we head into the new year. Before turning it over to Jonathan, I would like to thank him for his business partnership over the last three years. I wish him all the best as he embarks upon his next journey. I would also like to welcome Zane to the VMware team. Having known and worked with Zane for quite some time, it is clear to me he is certainly a welcome addition to our team. With that, let me turn it over to Jonathan.

Thank you, Carl. Our Q4 and 2015 results met or exceeded our revenue and operating margin guidance for the quarter and the year. Before I go into detail on Q4 and guidance for 2016, I want to summarize how we performed in 2015. The 2015 non-GAAP total revenues grew 13% year over year in constant currency, or 10% as reported. License revenues grew 9% year over year in constant currency in 2015, or 5% as reported. Our non-GAAP operating margin for the year was 31.8%. And our non-GAAP EPS for 2015 was $4.06 per share.

For the full year 2015, our hybrid cloud and SaaS offerings represented just over 6% of non-GAAP total revenues, with a growth rate of nearly 80% year over year versus 2014. License bookings beyond standalone vSphere ended the year at greater than 65% of total license bookings, which is up from greater than 30% three years ago when we began to aggressively expand into new product areas. As we expected, standalone vSphere continues to decline in year-over-year terms as well as a percentage of our business.

Before we get into Q4 results, I'll highlight Carl's statement that in 2016 we expect dollar growth in newer product SDDC license bookings, including from NSX and VSAN will be greater than the dollar decline in compute. I will come back to this point again when I provide guidance in a few minutes.

Turning to Q4. License revenues were $825 million, up 11% year over year on a constant currency basis, or up 6% as reported. Q4 total revenues were $1.9 billion, up 12% year over year on a constant currency basis, or up 10% as reported. Diluted non-GAAP EPS for Q4 was $1.26 per share on approximately 423 million shares.

In Q4, as we committed two years ago, AirWatch became neutral to non-GAAP EPS. In fact, AirWatch was slightly profitable in the quarter. We're proud of the performance of the entire AirWatch team, as they achieved this important milestone along with the significant bookings growth mentioned by Carl.

Our balance sheet remained strong with cash and short-term investments at quarter end of $7.5 billion, up 6% from Q4 2014. Total unearned revenues were $5.1 billion, up 5% from Q4 2014, and $1.8 billion of this is long-term.

For 2016 guidance, I will first point out that we currently estimate currency will have up to an approximate 0.5 percentage point negative impact to both total and license revenue. For the purposes of guidance we're applying an average US dollar to euro rate of $1.10. Obviously if this changes, our assumptions around currency FX could change and we will update you accordingly.

With that is background, we expect total revenues for 2016 to be between $6.785 billion and $6.935 billion, or up 2% to 4% year over year. Without the effect of currency, total non-GAAP revenues for 2016 would otherwise be expected to grow 2% to 5% year over year. License revenues for the full year are expected to be between $2.660 billion and $2.760 billion. For both reported and constant currency this is approximately flat year over year at the midpoint of our guidance range. You will have calculated that our total revenue growth exceeded our total bookings growth for each of the past six quarters, and that license revenue growth equaled or exceeded license bookings growth in five of the past six quarters.

While we had a good finish to the year, we were not able to build deferred license revenues for 2015. This reflects the revenue recognized in 2015 on previously deferred revenue combined with our bookings performance throughout the year. As I've covered earlier, we're expecting to see a key transition in 2016 with license bookings growth in 2016 from our faster growing, newer SDDC products in aggregate to more than offset the decline of compute.

As Pat stated at the beginning of this call, for the full year 2016 we're expecting total and license bookings growth to exceed total revenue growth by approximately 3 to 5 percentage points. This is being driven by growth in newer SDDC products, including NSX and VSAN, as well as our End User Computing and vCloud Air network businesses. As a result we expect to resume building deferred license revenues in the second half of 2016.

For the full year 2016 we expect non-GAAP operating margin to be approximately 31.5%. Excluding vCloud Air, our non-GAAP operating margin is expected to be approximately 33.5% for the full year 2016. You will note that we are separately disclosing the effect of vCloud Air is expected to have on various financial metrics in 2016 on the slide in the deck accompanying this call.

In addition as Pat stated, we recently initiated a resource realignment and restructuring plan. We are restructuring approximately 800 jobs over the course of the first half of 2016 and are reinvesting the associated savings in field, technical, and support resources associated with our growth products. We expect to take a GAAP charge of between $55 million and $65 million in the first half of 2016 associated with this action.

Regarding taxes for 2016. We expect our non-GAAP tax rate to be approximately 20%. This reflects a greater mix of revenue and profits in the US which puts an upward bias on our tax rate, which is somewhat offset by the permanent reinstatement of the R&D tax credit in late 2015.

Moving to cash flow. We're expecting that cash flow from operations will be approximately $2.25 billion, or a growth rate of approximately 18.5% year over year. We now expect capital expenditures to be down slightly from 2015 at approximately $270 million. As a result, free cash flow will be approximately $1.98 billion for 2016, or up 26.5%.

Now I want to discuss share repurchase for a moment. In Q4 we repurchased just under 1 million shares of stock for approximately $75 million, which brought total repurchases for 2015 to 13.5 million shares totaling $1.13 billion. This was slightly less than the $1.2 billion in repurchases we had planned for in 2015, as the proposed Dell EMC merger reduced the number of days we could be in the market during Q4. We've had a lot of comments from shareholders requesting that we engage in a substantial share repurchase program. We hear you. Right now we are subject to a number of legal and regulatory constraints. Our Board and Management are actively working the issues and we will get back to us soon as we can.

For modeling purposes only, we have included the impact of a share repurchase program equivalent to our average annual repurchases over the last three years, or approximately $800 million, weighted towards the back half of the year. This results in a share count of approximately 423 million shares for the year and a non-GAAP EPS range of between $4.07 and $4.16 per share.

For Q1 2016 we expect total revenue to be between $1.550 billion and $1.600 billion, or up 3% to 6% year over year on both a reported basis and in constant currency. License revenues for Q1 are expected to be between $555 million to $585 million. At the midpoint this implies a decline of approximately 1% year over year, or approximately flat year over year on a constant currency basis. For Q1 we expect non-GAAP operating margin to be approximately 28% and non-GAAP EPS of between $0.83 and $0.85.

As in prior years, we expect our operating margin performance to reach a seasonally strong high in the fourth quarter and to be seasonally lowest in Q1. We're investing in our growth areas such as NSX in the first part of 2016 and expect to see the full benefit of the restructuring I mentioned in the back half of the year. We encourage you to model the year accordingly as you take into account our full-year and first-quarter guidance. As always, remaining guidance for Q1 and 2016 is included in the slide deck posted on our investor relations website.

In summary, I want to thank the entire VMware team for a good finish to a very busy 2015. It has been my great pleasure to have been part of the team for the past part of 3-plus years. And I want to wish Zane the very best of luck in the role going forward. We have worked closely together since he joined EMC, and I know he will do very well. And with that, I will turn it back to Paul.

Thanks, Jonathan.

(Caller Instructions)

Operator, let's get started.

Thank you.

(Operator Instructions)

Brent Thill, UBS.

Thanks. Good afternoon. Jonathan, just on the guidance. Can you just talk through a little bit about how you're taking the macro into account versus some of the internal operational metrics you look at on the guidance? Tim Cook had mentioned on the Apple call about unprecedented conditions everywhere they look. Are you seeing the similar thing that Tim is talking about, and how have you factored that into the guidance? Thank you.

Brent, thank you for the question. First, as we start the Q&A, it's good to be back talking to the analyst community and the investor community. And thank you for the time and interest today. It's a great pleasure to be able to lay out a clear view of our going-forward strategy in the multi-cloud, multi-device world. And also how we see this 2016 as being a critical transition year, and setting up for the long-term growth of the Company. With that, the guidance question is very appropriate, Brent, and Jonathan, if you could fill in the specifics.

Sure. And I'll ask Carl to add on the specifics around the macro. As we said on the Q3 call, we'd expect to see higher bookings growth overall in the second half. While we did see growth, we didn't see it meet our internal expectations. And that obviously had an impact. Specifically on the macro, what we talked about was in Q4 alone the BRIC countries, or the Brazil, Russia and China in particular, caused a 2-point headwind in and of themselves. That is something we are continuing to track. And that is definitely a core factor as we think about the guidance overall that we've given. I can go into more detail, but I think that addresses your macro question overall.

Thank you, Brent. Next question please.

John DiFucci, Jefferies.

Thank you. My question is for Carl. Carl, I think you scared a lot of people on the last call when you talked about a massive secular shift on the last earnings call, because as you know, the stock trades -- stocks usually trade on fundamentals but there is a lot happening with VMware, right? We all know that. And fundamentals aren't always what seems to be driving the stock. But when you talk about a massive secular shift and put in those kinds of words, I think it scared a lot of people, and for good reason. And in this time, in this call you did talk about a secular shift we've all been dealing with for a while. And it sounded like you sort of softened that.

I just want a little clarification on that. And listen, we know it's challenging out there. We know people are moving to sort of public cloud workloads and all of that. But can you talk to us a little bit more, give us a little more color of how you're positioned VMware for that? And your customer base is typically enterprise, for instance, although you do have some mid-market, and maybe the mid-market goes first. What are you seeing in regards to this secular shift? And is it something that we should be -- it's certainly something we should be thinking about, but is it something that is going to have a very significant impact on your business over the next year?

Yes. Thanks, John. First of all, I didn't mean to scare you or anyone on the last call. Let me give you some additional color as to how we're thinking about some of these transitions we're seeing in the industry. First, I just say everyone, not just VMware, is experiencing significant transitions in our industry today. And in fact we at VMware, we've been speaking about this secular shift, one, from client-server to mobile cloud for quite some time. And that is no longer a prediction, but is now seen clearly by all in the market. I think it's something everyone is seeing.

As we think about our business, John, we believe we are firmly planted on both sides of that shift. We're helping our customers transform their existing environments, and as we do that we believe it gives us a tremendous potential for upside growth in areas like network, storage, and management. Some of them I highlighted in my prepared remarks. We also believe we are firmly established on the other side of that shift in mobility and cloud, especially with some of the additional strategies that Pat laid out today. For example, the NSX strategy we laid out is a clear opportunity for us across a multi-cloud world that we live in going forward.

And over the last few months, John, I will tell you, as you would expect we've been out in front of our customers on a global basis. And our customers are clearly and increasingly looking to us as a strategic advisor to help them navigate the transition I think were all experiencing in the industry. And we've been watching and tracking quite closely a number of both industry analyst reports and financial reports that talks about IT spending trends, and even CIO surveys in 2016. And in just about every one, VMware is viewed as one of the top strategic IT vendors for our customers. We think we're in a very good position. And based on this strategy we laid out today, and I will ask Pat to give a little bit more color, and the momentum, John, we're seeing in our newer products, we really believe our position will only be strengthened both in 2016 and beyond. And Pat, maybe you can give a little more color on some of the announcements you made today around our cloud strategy.

Yes, and thanks for the question, John. Clearly as we described in my formal comments, we see VMware, the multi-cloud, multi-device strategy that we lay out, transcends the limitations of any individual cloud service. We provide customers the ability to run, manage, secure, connect applications across clouds, across devices. And we do that through what we're doing with private cloud, where we have clear momentum in our SDDC technologies. And Carl's description today on the call of the very powerful momentum we're seeing in these is very strong evidence of the momentum we have in private cloud. Extending the SDDC with our cloud offerings, with the rich partnerships with our vCAN network, as well as the vCloud Air strategy we described today. Finally, and maybe most significantly on today's call, is this ability to connect, secure, and manage across all clouds with NSX, vRealize and AirWatch across clouds and devices and our ability to do NSX, vRealize on AWS, Azure and other public clouds is clear evidence of the strength of our cloud strategy going forward.

Thank you, John. Next question please.

Walter Pritchard, Citi.

Hi. Carl, I guess probably a question for you. I'm wondering, you made some comments on the call last quarter talking about customers having some architectural uncertainty and that impacting spending. And I'm wondering, it's been three months. You've been through a Q4, which is a big quarter. Have you at all changed your view on that dynamic that you described last quarter?

Yes. As I just mentioned, and kind of follow-on question to the one I just got from John, Walter, clearly the industry as we've all seen, this isn't a VMware phenomenon, is going through a transition. But in Q4, I must say I was very pleased with our ability to execute and close larger deals as customers thought about what does their new architecture for the future look like. And they see VMware, as I tried to describe, sitting on both sides of the shift that's taking place. We're helping them transform their data center and they're also looking to us for guidance on how to leverage public and hybrid cloud solutions going forward. In Q4 based on our execution, I think we did quite well.

Our enterprise agreements were up to a record 42% of total bookings in the quarter. And I'm not going to say that we didn't see customers take an extra look at every capital expenditure they were making, or before they move into a large enterprise agreement with someone like VMware. They clearly have done that. But overall I think our customers are seeing VMware's strategy and vision come together, and we're executing on a lot of our newer products as you heard in our prepared remarks, which are in a number of the new ELAs and renewal ELAs. So I think our sentiment coming out of Q4 and the strength of our EAs gives us confidence in our ability to continue to be relevant for our customers in the future.

Thank you, Walter. Next question please.

Philip Winslow, Credit Suisse.

Thanks guys for taking my question. Walter just asked about the trends in the core businesses and some of the things you mentioned of various kind of moving parts influencing that. But if I look at some of your newer areas that you called out, NSX and then VSAN, how would you compare and contrast where we are in terms of those taking off and the feedback from customers in terms of just adoption rates there? And how you think about it through 2016 and beyond relative to some of these, call it, feeling out headwinds that people are making right now between public cloud, private, hybrid? There's two kind of curves. How should we think about those and how do you guys think about those?

Maybe set a little bit broader context to the answer to start with, Phil. Overall, we just had tremendous momentum in the newer products in Q4. And as Carl touched on in his formal remarks, NSX, VSAN, AirWatch, very strong quarters. As we said -- clearly, as we said, 2016 is this transition year where we see the effects of those emerging markets and the strength of those offsetting the shifts in the core business that we've been working through. This is a powerful trend for us as it sets up the long-term growth in 2017 and beyond.

As we're making that shift, we see that the strategy that we laid out for private cloud, extending that into the public cloud and the multi-cloud strategy is extremely well-positioned for what customers are looking for on both sides of that trend, as Carl has described. Carl, maybe a few more specifics on the emerging products?

Yes, sure. Phil, as you know for a number of years we've been expanding our product portfolio outside of compute. And it's been a big strategy of ours to sell no more naked vSpheres. We got into these new products, and we've talked about a transition that would happen. It wasn't a matter of if. It was really about when we'd start to see our newer products offset some of the decline we saw in our compute business. And coming out of Q4 we saw a significant strength, as Pat indicated, in things like VSAN, NSX, AirWatch. Our vCloud Air network once again saw strength.

All of these newer products are starting to resonate with our customers. And we believe their growth in FY16 will outpace the decline that we expect to see in standalone compute. We are pretty excited about these newer opportunities. And we think that transition is well underway, based on our results coming out of Q4.

Thank you, Phil. Next question please.

Heather Bellini, Goldman Sachs.

Great. Thank you. I was just wondering, Pat, if you could give us a sense of how big of a drag you see the core compute business impacting your license and total revenue guidance for 2016? Can you give us an idea of the magnitude of the decline that you're expecting in that for those line items? Thank you.

Sure. Thank you, Heather, and great to be talking to you again. In the compute space, on-premise compute is a maturing market. And inside of that maturing we have very high market share, but also high penetration. The total compute bookings were approximately flat in 2015. But it continues to be a huge cash flow generator and a strong driver of recurring bookings and [by] driving extraordinary renewal rates. The new compute licenses did decline year on year, which we expect that trend to continue as we go forward. And they were largely offset by the new product areas. And we do see that transitioning in 2016, as we've described. And it sets us up well for the long-term growth. Jonathan, anything else you would want to add to that?

I think I would just add that we did see good strong growth in some of our combined products. If you remember, our strategy overall has been to sell no more naked vSphere. And while the ongoing deceleration in standalone vSphere was a little bit more pronounced in Q4, which drove the decline that Pat just talked about in overall compute, we saw growth in vCloud Suite and in vSOM, which both of which include vSphere. I think that is a strong indication that our overall combined product and packaging strategies are working as we think about the newer drivers of our growth going forward, Heather.

Thank you, Heather. Next question, please.

Kash Rangan, Bank of America.

Hey, guys. Thanks for taking the time to walk through the model transition. If I understand right, the decline's going to be outpaced by the growth, and to be followed by re-acceleration in calendar 2017. How confident do you feel about your assumptions that this increase in the new business can continue to outpace the decline in the core vSphere, Or is there a risk that vSphere could decline even more, that you could be in for a couple of years of this transition as opposed to one year of the transition? Thank you very much.

Kash, obviously there's unknowns in the marketplace. But given the strength we ended Q4 of the year with, the new product growth is really on a strong trajectory at this point. And as they continue to grow, we're confident. And as Carl mentioned in his formal remarks, we have an extraordinary pipeline for NSX, as one example, as we begin the year, momentum in all of the growth product areas. And we are now, as Jonathan just described, on vCloud Suite, vSOM, we're pretty well-versed in how the compute trajectory looks for the forward. See, we feel very comfortable with the trajectory, the transition year in 2016 and the acceleration of long-term growth. Carl?

I think you covered it. Based on that Q4 momentum you just spoke about, Pat, we believe particularly things like EUC, VSAN, and NSX have reached a size and growth rate to become meaningful to our overall bookings in 2016. So I'm -- as Pat said, we can always think about some different dynamics in the market, but based on what we are seeing coming out of Q4, we think the growth in these newer products will absolutely offset the decline in compute that we saw exiting 2015.

Thank you, Kash. Next question please.

Mark Murphy, JPMorgan.

Thank you very much. Pat, regarding your public cloud strategy with vCloud Air, I wanted to ask you to the extent that that has not generated the same level of visibility or excitement with your partners and customers just relative to what you've seen out of NSX and VSAN, I'm wondering to what factors you would attribute that difference? And why did you decide to shift that to a narrower focus rather than perhaps doubling down on your vCloud Air investments?

We looked carefully. And after the considerations and after we had the Virtustream joint venture considerations, we decided that a focused strategy was the best use of our capital investments, of our unique focus on services that are highly differentiated for VMware customers. And as we described the hybrid services around data center extension, hybrid networking, disaster recovery, these are unique services. And we also have a great deal of interest from our vCloud network partners in those services. So our go-forward strategy is one of focus on those services, our best, highest, most important customers directly, but indirectly, extraordinary amplification through the broad vCloud Air network. And this, I will also point out, vCloud Air network is a significant expanding, profitable and growing business area for VMware. And thus we have increasing confidence that we can amplify our unique investments through that broad vCloud Air network.

Thank you, Mark. Next question, please.

Keith Weiss, Morgan Stanley.

Thank you for taking my question. VMware, and more broadly EMC, is going through a lot of changes right now. And that always runs the risk of execution challenges and challenges in keeping people's focus. Anything that we should be aware of in terms of increased attrition within employees or increased disruption that you guys have been experiencing in Q4 as you work towards the Dell EMC deal? Or anything we should be aware of on a going-forward basis in terms of extraordinary execution risk, given the business disruption that is taking place in your business?

Thank you. I think there are always questions around talent, and we're so focused on our talent and our people. Talent wants to be part, and people want to be part of a company that they are passionate about the vision, they like who they are working with, the problems that they are working on. And VMware is that place. And we continuously focus on making it the kind of place that people have the problems and the opportunities that they want. What we've seen is that as we were laying out the strategy for the future, people are excited about that.

We also see that our product strategy, and we're coming up on a major cycle of product announcements as well, has our product teams enthused for the year as well. We're about to go into our leadership and sales kickoff as well, for firing up for our 2016 vision that you've us describe today. And we're -- believe that we are now well-positioned to execute on this year and set up for long-term growth in the future. And we have the people, resources and the passion to accomplish that.

Thank you, Keith. Next question, please.

Michael Turits, Raymond James.

Hey, guys. Michael Turits. One of the solid pieces of the guidance I think was free cash flow at $1.98 billion. I know you are guiding to lower CapEx probably than we had originally thought of prior to the original Virtustream announcement. But either way it looks like very solid guidance. And yet we've had free cash flow disappointments in the past. So given the fact that the income statement is being guided lower, what gives you the confidence that you can do this free cash flow number?

I was going to bring this up if you didn't ask me, Michael. So the way I would think about this is, don't forget that in 2015 we had a pretty soft cash flow guide, mainly driven by a number of one-time items. Just very quickly, the foreign exchange conversion of overseas receivables during a pretty tumultuous year in the foreign exchange markets, the AirWatch operating cash flow impact associated with earn-outs on the transaction, and the GSA settlement that we talked about in, I think, Q2. These were all items that had a particularly large impact in 2015. And to a large extent, they are reversing, or they're going away in 2016.

As you appreciate also, cash flow is function of billings less expenses. It doesn't get more simple than that. Bookings and therefore billings were a little bit lower than we planned in 2015. That had an impact. And while we managed costs carefully during the year, that affected operating cash flow. When we think about that going next year, we're taking actions, as you've picked up, to manage our cost base so you'll see a healthy return to positive cash flow in 2016.

We see the bookings transition that Carl and Pat have talked about. And then as we think about the free cash flow, there's a number of things to think through here. One is we're taking a far more targeted approach with respect to vCloud Air. The reality is we deployed a fair amount of asset base over the course of the last couple of years. And while it has never been a significant CapEx investment, we're very confident for the next year plus we're going to be positioned to leverage the existing build-out over the next couple of years.

The other thing is on the CapEx side, our larger facility costs are behind us. In particular around the world our Palo Alto buildings and Bangalore buildings are complete. And then you'll have picked up that the big delta between the last time we talked to you and this time is obviously we're not participating in the Virtustream joint venture, and that is a significant elimination in our CapEx forecast. The key thing, though, is that the outlook for 2016 for both OCF and FCF show a significant improvement in both measures. I want to point out we are actually above our cash flow guide for this year. And so as we think about 2016, that 26%, or just over 26% free cash flow growth, I feel very confident about.

Thank you, Michael. Next question, please.

Karl Keirstead, Deutsche Bank.

Thank you. Pat or Jonathan, just generally on the growth margin trade-off, despite the material deceleration in revenue growth that you're guiding to in 2016, you're actually guiding the operating margins roughly comparable to 2015 and not that far off your prior guidance. Coupled with the headcount actions you're taking and slimming down vCloud Air, it seems to me that you're making operating margins a bigger priority than trying to accelerate the top-line growth in 2016. Is that the right way to summarize a lot of the data you've given us here? Thank you.

I think it's a balance, right, but we're certainly focused on both top and bottom line. You're right, I guided to 31.5% non-GAAP operating guide for 2016. And obviously last quarter, just to recap, we talked about 28% reflecting the CSB, or the cloud services business with Virtustream. We're at 31.5% for the year. We've spent a lot of time as a team planning our investment strategy to reflect where we want to invest for the long term.

We are specifically reinvesting the resources that are associated with the headcount reduction into the areas of growth for us, NSX, VSAN, our storage business and also into AirWatch. These growth businesses, as we talked about, are approaching a key inflection point. We are encouraged by the momentum. So we are managing top and bottom line. I would say it is a consistent balance. And I think we are doing as reasonable job as we can.

You're right given the revenue outlook. But I think the top line is something we're investing for as we think about that balance. I feel good about how we are guiding for the profit for the year. Pat?

Just to add to that a little bit. We do expect that as a software company, and as we continue to scale and grow the Company, that we can expand our operating margin profile over time.

Thank you, Karl. I think we have time for one more question. So let's make this the last question, please.

Keith Bachman, BMO.

(Technical difficulty) M&A, in the context of the question is twofold. Number one, if I think about the last couple of years, the long-term revenue outlook I think has come down a bit, particularly as we reflect on the guidance that you just gave. The second is, you now have, or presumably going to have a different parent company out there with Dell and EMC. So how do you think about M&A as you look out over the next 12 months with that as a backdrop? Is M&A -- is one of the ways you think about to try to re-accelerate growth more specifically? Thank you.

Our M&A strategy -- the M&A outlook that we have is unchanged in the sense that we continue to look for M&A to complement our organic growth and R&D as an opportunity to expand the Company. As Dell has clearly communicated, the VMware cash flows will be used by VMware. And we think that M&A, use of those cash assets is an important aspect of our capital allocation strategy. And against the strategy that we've laid out, we fully believe that we'll be taking advantage of M&A to fill in and expand our strategic opportunity going forward.

I would also point out that the M&A track record we have had over the last several years is extremely strong. And the two areas that -- two of the areas we highlighted of our accelerating growth this year, both NSX from Nicira and AirWatch, are a direct result of inorganic moves that we made. And now they are paying off handsomely going forward. Our strategy is unchanged. The strategy will be to continue to do M&A to fill in and to drive accelerated growth over time. And we are excited about those opportunities, and always on the prowl for what they might be.

Thank you, Keith. Before we conclude, Pat has a few final comments he'd like to make.

Thank you very much. And again, we appreciate you joining the call today. Q4 was a solid finish to 2015. We are pleased with the growth and the momentum behind the newer products, as we were able to describe today. We also look forward to providing customers additional value through this extension of our strategy in the multi-cloud and multi-device way as we outlined on the call today. Thank you again, and great to be talking to you.

Ladies and gentlemen, this does concludes today's conference. We thank you for your participation.