VMware Inc (VMW) 2016 Q1 法說會逐字稿

Good day, and welcome to the VMware Q1 2016 earnings call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Paul Ziots, Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to VMware's first-quarter 2016 earnings conference call.

On the call we have Pat Gelsinger, Chief Executive Officer, and Zane Rowe, Executive Vice President and Chief Financial 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 in conjunction with live remarks, and can also be downloaded at the conclusion of the webcast from ir.vmware.com.

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 in isolation from, GAAP measures.

Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, certain litigation and other related items, and acquisition-related items, and apply non-GAAP tax rate and constant-currency adjustments. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in the press release and on our Investor Relations website.

The webcast replay of this call will be available for the next 60 days on our Company website under the Investor Relations link. Our second-quarter 2016 quiet period begins at the close of business June 15, 2016. Unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2015.

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

Thank you, Paul, and good afternoon, everyone.

This afternoon, I will summarize our business performance in Q1, in addition to key announcements we made during the quarter, including important updates to our expanded cloud strategy. After I discuss the quarter, Zane Rowe, our CFO, will provide you with additional detail regarding our business and financial performance in the period.

Q1 was a good start to 2016, both for results and against our strategic goal of building momentum for our newer growth businesses and in the cloud. Our results were in line with our expectations for the period, and support our outlook for the full year that we articulated on our call with you in January.

We grew total revenue 6% year over year in constant currency to $1.6 billion, with non-GAAP earnings of $0.86 per share. VMware's value proposition around the hybrid cloud, software-defined data center, and end-user computing continue to resonate with our customers around the world. In terms of regional bookings performance, Asia-Pacific performed best, followed by EMEA and the Americas, although particular emerging markets such as Russia, Brazil and China continue to experience weakness.

This quarter we made important headway with respect to our expanded cloud strategy, which we discussed together during our last earnings call in January. Our cloud strategy includes three components. First, extending our leadership in the private cloud, the foundation of our Business.

Second, helping customers extend their private cloud into the public cloud; our vCloud Air service, and our vCloud Air network partners are both examples of this. And third, connecting, managing and securing endpoints across a range of public clouds, including Amazon Web Services and Microsoft Azure.

In February, as part of our strategy to help customers extend their private cloud into the public cloud, we announced an expansion of our partnership with IBM, one of our leading vCloud Air network partners. Customers will be able to take advantage of VMware's software-defined data center architecture, using IBM's growing footprint of 45 cloud data centers worldwide, enabling them to scale globally, and manage their data locally and securely. Multi-cloud environments are becoming the norm, and we believe that VMware's software-defined approach offers unparalleled capabilities to help customers manage these highly complex, multi-cloud and multi-device environments.

Q1 2016 proved to be a strong quarter for new products, use cases, and updates across our software-defined data center and business mobility portfolios. I am particularly delighted to let you know that during this quarter we crossed a threshold of 1,000 issued US patents, and that we have been recognized as number two in the software category of IEEE patent quality rankings across this portfolio.

On the end user computing front, we unveiled a new platform for delivering secure digital workspaces for flexible work styles and bring your own devices. Using the principles of consumer simple and enterprise secure, VMware Workspace ONE delivers a digital workspace that integrates mobile management, desktop virtualization, application delivery, and identity management technologies, thereby addressing both end-user and IT business mobility needs.

We also announced new advancements in VMware Horizon 7, and a new hybrid mode capability that will be available in VMware Horizon Air to simplify application and desktop delivery. With these advancements, VMware Horizon will offer the industry's most comprehensive application and desktop virtualization portfolio, with options for on-premises, off-premises or hybrid deployments. VMware AirWatch continues to enjoy strong customer adoption, and is rated an enterprise mobility management leader by the leading analyst firms.

We also made some announcements on the SDDC side of the Business. During my keynote at this year's RSA Conference, we demonstrated a technical preview of distributed network encryption powered by NSX. This is a unique new technology which enables the encryption of data and applications across clouds. Overall, NSX has enjoyed another strong quarter, with bookings growing over 100% year on year.

We've released VMware vRealize Suite 7, which provides customers the ability to provision and manage at scale, compute, storage, network and application services across hybrid cloud environments. And we also announced the release of VMware Virtual SAN 6.2, the fourth generation of VMware simple enterprise-grade native storage for vSphere. Virtual SAN serves as a key component of our Hyper-Converged software offering.

VMware is a leader in Hyper-Converged Infrastructure software, having sold to more than 3,500 customers in 21 months since the initial release of Virtual SAN. We are optimistic about the long-term growth potential for this important new HCI category. VMware's Hyper-Converged software includes VMware vSphere, Virtual SAN, and vCenter Server, transforming x86 servers and direct-attached storage into simple and robust HCI systems. Customers benefit from reduced costs and management complexity with breakthrough performance.

This quarter, EMC and Dell both announced new distribution options for our Hyper-Converged software offering. In February, EMC launched the new Hyper-Converged VCE VxRail appliance family, which features VMware Hyper-Converged software. Early in April, Dell announced that it will be reselling the VxRail appliance family, in addition to Virtual SAN-ready nodes based on Dell PowerEdge servers.

Let me turn to some leadership updates we made in the quarter. First, we are delighted to welcome Rajiv Ramaswami to our executive team. Rajiv joined earlier this month as GM and EVP of our Networking and Security Business, and brings with him a deep understanding of the networking industry after most recently serving as Executive Vice President and General Manager of the infrastructure and networking group of Broadcom Corporation.

With Carl Eschenbach's move into a strategic advisor role for the Company, we also took the opportunity to announce expanded roles for other members of the VMware executive team. Maurizio Carli and Ray O'Farrell have both been promoted to Executive Vice President. Maurizio now runs our Worldwide Sales Organization, and Ray has expanded his role as Chief Technology and Development Officer to include responsibility for VMware's global services and customer advocacy. In addition, Sanjay Poonen, Executive Vice President and General Manager End-User Computing, has expanded his role to include leadership of VMware's marketing and communications functions.

I am also pleased to mention that for the second year in a row, VMware has ranked on Fortune Magazine's list of 100 best companies to work for in the US, competing among hundreds of companies for the honor. Overall, we are confident in our strategy and optimistic about the momentum we're seeing behind our growth businesses.

We are also optimistic about the long-term value to VMware of the proposed merger between Dell and EMC, and the opportunities for a deeper partnership with Dell. During Q1, we saw strong momentum from our existing relationship with Dell through initiatives such as Dell's new VMware-based channel offerings and Dell's use of assessment tools to provide their customers with an IT health check and help them move to broader software-defined data center solutions. We see significant opportunities for ongoing revenue synergies, both from our existing relationship and subsequent to the merger being finalized.

In closing, our Board has recently approved a plan to buy back $1.2 billion worth of stock in aggregate during 2016. This provides a good opportunity for us to return cash to shareholders, given the confidence we see in the Business.

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

Thank you, Pat.

I'd like to thank the entire VMware team for all their effort driving results this quarter. As this is my first earnings call as VMware's CFO, I want to start out by saying how pleased I am to have the opportunity to join VMware.

As CFO at EMC, I was able to view VMware's great prospects at a consolidated level. I decided to join this team because VMware is at a unique point in its history, with significant future potential. In addition, it has the trust of a loyal group of customers and partners who rely on VMware for their most important software infrastructure deployments.

As Pat indicated, Q1 was off to a good start to the year, putting us on track to achieve our plan for 2016. I'll start with a summary of P&L and balance sheet items, followed by product bookings and guidance.

For Q1, total revenue grew 5% year over year as reported, or 6% in constant currency. License revenue declined 1% year over year as reported, and grew 1% in constant currency.

Hybrid Cloud and SaaS rose to over 7% of total revenue. vCloud Air network, vCloud Air, as well as AirWatch as a service, made up the bulk of this group, which grew revenue over 20% year over year.

Non-GAAP operating margin was 28.1% and diluted non-GAAP EPS was $0.86 per share on 424 million shares. We continue to build upon the strength of our balance sheet, with cash and short-term investments at quarter end totaling $8.2 billion, up from $7.5 billion in Q4 2015. Domestic cash was $1.9 billion at quarter end.

Total unearned revenue was $5 billion, down 2% from Q4 2015. $1.8 billion of this amount is long term.

Moving to bookings, the growth rate for total revenue plus the change in unearned revenue was 5% year over year, or 6% when adjusted for currency, in line with the revenue growth rate for the quarter. The growth rate for license revenue plus the change in unearned license revenue was 1% year over year, or 2% when adjusted for currency, slightly ahead of the license revenue growth rate for the quarter.

We saw strong momentum across our growth businesses, including NSX, VSAN, End-User Computing, and vCloud Air network. Stand-alone vSphere license bookings were less than 35% of total license bookings, down significantly from more than half of our bookings just two years ago. This is a strong indicator of our ability to diversify VMware's product portfolio, as customers continue to see value and an expanded set of product offerings from us, and as we become a more strategic partner with them. We were also pleased with our renewals in Q1, and expect to see continued growth throughout the year, supported by a strong pipeline of renewal opportunities.

Turning to SDDC, our Software-Defined Data Center products performed well, powered by the strength of NSX and VSAN. Total compute bookings for the quarter met our expectations, down 1% year over year. Compute license bookings declined 10% year over year, in line with expectations, and in line with results we've seen for the last few quarters. Management license bookings grew in the mid-single digits year over year, also in line with expectations.

Turning to NSX, we saw strong momentum continue in Q1, with NSX license bookings growing over 100% year over year. NSX customers now total over 1,400, with nearly 350 of these in production deployment. These deployments are across a wide variety of use cases in the three broad categories of IT automation, application continuity, and security, which includes our micro-segmentation capabilities. NSX is proving to be the premier network overlay solution across any hardware infrastructure.

Our Hyper-Converged software offerings, based on VMware Virtual SAN, continue to gain significant traction. Although it's still early in the product cycle, VSAN license bookings grew over 200% year over year. We are pleased to close our largest ever VSAN deal with a global investment bank.

Turning to hybrid cloud, total bookings for vCloud Air network grew over 25% year over year. We see significant interest from cloud and service providers around the world wanting to utilize our hybrid cloud technologies. For example, as Pat mentioned earlier, IBM will be delivering a complete SDDC offering based on VMware's technologies across their expanded footprint of cloud data centers worldwide. vCloud Air also performed well in Q1, with large enterprise customer adoption.

End-user computing license bookings grew in the mid-teens year over year, and total customer account increased to over 63,000, including over 1,300 of the global 2,000. We began further integrating and aligning the AirWatch mobile and Horizon desktop sales forces during the quarter. This integration enhances the strength of the combined teams, although it did have an impact on AirWatch-specific sales in certain geographies as the teams ramped up.

Our Horizon desktop business had strong year-over-year license bookings growth in the quarter, due to increasing customer adoption of our integrated functionality within the Horizon suite. Demand for EUC is healthy, with 9 of our top 10 deals this quarter containing some component of these products.

Now I'd like to spend a moment on our stock repurchase announcement. Our Board has authorized the repurchase program of up to an aggregate $1.2 billion for 2016. We plan on using all of this amount to repurchase class A shares in the open market during 2016.

For regulatory reasons, we expect to begin repurchasing after the EMC shareholder vote. We believe a share buyback is a prudent use of our cash at this time.

For full-year 2016, we expect stock repurchases will increase non-GAAP EPS by $0.02 per share. As a result, we are increasing our guidance for 2016 non-GAAP EPS to between $4.09 and $4.18 per share on a total share count of 421 million diluted shares.

We are reaffirming all other guidance for 2016 provided on our last earnings call in January. In January, you'll recall we guided total revenue for 2016 between $6.785 billion and $6.935 billion; license revenue between $2.66 billion and $2.76 billion; and a non-GAAP operating margin of approximately 31.5%. Cash flow from operations is expected to be $2.225 billion for 2016, up 18.5% versus the prior year, and free cash flow is expected to be $1.98 billion, up 26.5% versus the prior year.

For Q2 2016, we expect total revenue between $1.66 billion and $1.71 billion, or up 4% to 7% year over year. License revenues for Q2 are expected to be between $623 million and $653 million. At the mid-point, this is flat year over year. For Q2, we expect non-GAAP operating margin to be approximately 29.8%, and non-GAAP EPS to be between $0.94 and $0.97 per share.

In summary, as we look to the rest of the year, our growth businesses are performing well, and offering unparalleled value to our customers. Our balance sheet is strong. This year we plan to return $1.2 billion to our shareholders in the form of a stock buyback, and we will leverage our broad ecosystem to build upon our position as one of the world's top software companies.

I'm looking forward to engaging with all of you. Our relationship with you is important, and we value your ongoing interest in VMware.

With that, I'll turn the call back to Paul.

Thanks, Zane.

(Caller Instructions)

Operator, let's get started.

Thank you.

(Operator Instructions)

Brent Thill, UBS.

Hello. This is actually Michael on for Brent. Thanks for taking my questions.

One item I wanted to revisit in Q4, you talked about 2016 bookings growth potentially coming in 3% to 5% ahead of where revenue growth is. If we look at Q1, the dynamic is a little bit tilted from that. I was wondering if you had any additional color or care to update there as well.

Hey, Michael. This is Zane.

Yes, as you recall, we did mention that bookings we expect to come in 3 points to 5 points higher than our forecast for the year. As you heard in my prepared remarks, we are on target with our forecast for the year, so we would expect that bookings growth rate to be the same as we mentioned to all of you last quarter, so we were reconfirming our guidance for both revenue, as well as for the bookings rate.

Overall, that acceleration in the second half is driven by the growth of the new product areas, which as you saw, we began with strength in all of those in Q1. And as those get larger as the year goes on, we are comfortable the guidance that we gave.

Thank you, Michael.

Thanks, Paul.

John DiFucci, Jefferies.

Thank you.

Pat, given all the potential disruption that could have occurred at VMware recently due to the leadership changes, it really seems the core could've been a lot worse than it was, and you came in line and maybe showed some modest license billings growth, which is pretty impressive. My question is, what does this mean?

I assume you did have some disruption. No offense to the team that is here now, but Carl had been there for a long, long time. Jonathan had been there a while, Zane is doing a great job. Martin, the leader of one of your premier, if not your premier growth area. I was just surprised to see, and actually a little surprised to see you maintaining the guidance here, Zane.

I guess, is anything changed out there? Or is it just that everybody else has just stepped up and it's just business as usual?

Well, we think on the executive side it really is the combination of being able to attract new players. I mentioned Rajiv, we brought in a leader for China, Bernard, we've been able to continue to attract talent. We've also had a commented on our very strong bench, like Maurizio, we had brought him over from Europe a year plus ago to prepare for this eventuality, and so we had been grooming and preparing for these transitions.

So, I think it's a combination of the strength of our bench, the strength of our employee base that we have today and the momentum of the business, our attractiveness of people bringing onto the team. But I just say overall we've managed through these transitions highly effectively, and I'm quite proud of my leadership team in getting that done.

John, this is Zane.

I would just add to that being one of the newer members of that team. It's an impressive bench that's here and across the organization we're doing some great things. So as you see, even on the graphic results and you see with the guidance for the year, we feel very confident in where we are and where were heading for the year.

Thank you, John.

Next question please.

Phillip Winslow, Credit Suisse.

Hello. Thanks for taking my question.

Pat, thanks for the incremental color on the go live on NSX in addition to the customer count. My question is on NSX. When you think about where you stand after Q1 now, in the context of where you see this business, it going over the course of 2016, I just wonder if you would provide some color there?

Thanks.

Generally, Q1 for us, 100% growth rate in the business, we're continuing to increase the customer count. Customers going into production. You know, some of the customers, as well, that we saw, while we didn't have as many big deals in Q1, we see a very powerful pipeline for the year. Also, across geos, across verticals, large and midsize customers.

We also just say overall NSX, we're really excited about the potential and the transformative capabilities. A few specifics: a big US life sciences customer, combining it with VDI to deliver the virtual desktop environment in a secure way. TriZetto, a huge healthcare IT company, there's real strength in healthcare.

Microsegmentation overall was killer. You might've seen, I commented, or I demonstrated new areas like distributive network encryption at the RSA conference. Some very profound new capabilities. Overall, this is now being unquestionably seen as the premier overlay technology, the clear market leader and underlay environments, including Cisco, are increasingly seeing this as a complementary technology.

We had a couple customer announced specifically how they are using NSX and ACI environments, like Sugar Creek and Shutter Fly. Overall, this is a hot product area and one that we see tremendous strategic potential for in the long-term.

Thank you, Phil. Next question, please.

Heather Bellini, Goldman Sachs.

Great. Thank you. I was just wondering if you could give a little bit more color on the EUC business. Maybe I missed it, but AirWatch in particular. I know that was lumpy last year. 60% constant currency growth in the second quarter, then it went to 20% in Q3 2015 and went back up in the fourth quarter. Can you give us a sense of what you saw for that business, a similar metric for that business for the first quarter and what the bookings run rate might be now?

Yes, so over all we had all in business was strong for EUC. Desktop we had a strong Q1 and we believe we continue to gain market share AirWatch in Q1, while it grew, it had a healthy growth rate, it was not as strong as we would've hoped for. We did in Q1, Heather, merge the sales teams. Particularly with our Workspace One announcement, we are increasingly selling the combined solution of AirWatch identity and desktop as a complete solution, so we did undertake the step of merging the sales teams in Q1, which did create some disruption in the AirWatch business, particularly in EMEA.

Overall, it was still very strong performance in Q1. Big, big customers are coming our way: huge deal in Japan for both desktop and mobile, several large takeouts of competitive offerings, both on the desktop and on the mobile side. Particular strength in healthcare. Overall, VMware had a real barn burner quarter in healthcare, and a lot of that was led by EUC. Overall growth rates, strong double-digit growth rates overall for the business in each of the parts.

Heather, I would just add to that. You should expect to hear us talk about the combination because of that on the financial side, as well, for the rest of the year. It's still, obviously, a large contributor in aggregate and a big part of our growth business.

Overall, the run rate and the guide that we set overall, we are comfortable with that for the year.

Thank you.

Thank you, Heather. Next question please.

Mark Moerdler, Bernstein Research.

Thank you very much. Given how hybrid cloud and SaaS revenue grew nicely this quarter, can you give us a more color? How should we think about vCloud Air, specifically how you monetize it by the partners, what the opportunity is as you see it?

Yes, so let me -- I'll start and ask Zane to add just on the overall financial metric. We are monetizing vCloud Air and vCloud Air network. And as we commented in our formal comments, vCloud Air had very good performance in Q1. It's on our expectation for the plan for the year.

I was really pleased, you know, despite some of the disruptions in that business area right as we went through, is it out or is it in the late last year. The team really stepped up, and I was quite happy with their operational performance in Q1.

The second way that we monetize that technology is through the vCloud Air network, and this is really -- we developed a core intellectual property, and then we amplify it through our service provider partners, which we continue to sign up more partners, and because it's a very healthy area of our Business. We have 4,200 partners now in over 100 countries. That business, the vCloud Air network business grew over 25% year on year in Q1, so very healthy growth there.

We also saw that -- and for us as they continue to grow, they use more vSphere, but we are increasingly gaining penetration of other technologies in that. For instance, Telstra with NSX, Virtustream with NSX, NaviSite, a big DaaS opportunity that they are taking advantage of. So they're using more of our portfolio in their offering.

And of course the big thing that we did in Q1 was the IBM partnership announcement. We believe that, you know, IBM has already closed a number of deals based on that, and the tremendous pipeline of opportunity, which is the biggest incremental amplification opportunity that we've ever talked about in the vCloud Air network area.

Mark, I would just add to that as you think about the forecast for the year. In each of these categories, we've mentioned that vCloud Air is slightly above our expectations. These categories are still growth categories for us. vCAN and AirWatch SaaS being the primary contributors of the growth for the year.

Thank you, Mark. Next question, please.

Keith Weiss, Morgan Stanley.

Thank you for taking my question.

I was wondering if you could give us a little more color on the larger, more strategic ELA deals, something as you said breakout. Given the changes going on in the Company, are you continuing to be able to sign the same level of those strategic deals as you were historically, or is there any higher impact on those types of deals?

Overall, and personally, I've been in all three geos in Q1 visiting big customers, spending time with our sales teams overall. Generally, I'd say we remain quite comfortable with our ability to close ELAs, and with Carl's transition, he remains a rainmaker for us in his consultancy role, so we continue to gain that benefit even as Maurizio and our sales leaders around the world step up.

We do have a very large ELA renewal opportunity this year, not as much in Q1 but in Q2 in the second half, it's a very large opportunity. We do see that we are well-positioned to continue to have strong renewals and our new products going into those ELA renewals as demonstrated by the good performance in those areas in Q1.

Overall, we feel comfortable, our ability to do that and our strategic relationship with our customers continues to grow. You know, they're seeing the share of wallet opportunities in today's data center is increasing the value we deliver as well as our vision in the multicloud, multidevice future binding us to strategically the problems they need to solve for tomorrow. Overall, we feel quite comfortable.

Keith, I would just add that, obviously, as you saw in the slides we provided, ELAs were 29% of our total bookings, which is in line with where we were last year. As Pat touched on with breadth of the portfolio, nine of the top 10 deals included EUC, eight of the top 10 include NSX, and three of the top 10 include VSAN. And of course we had great transactional performance on VSAN, as well. We feel quite good about where we are positioned here.

Thank you, Keith. Next question, please.

Gregg Moskowitz, Cowen and Company.

Thank you very much.

Last quarter, Pat, you mentioned that weakness China, Russia, and Brazil caused a two-point headwind to bookings in the aggregate. I was wondering what the impact was this quarter. Also for Zane, any changes quarter on average duration for either your EAs or for your maintenance contracts?

Thanks.

Sure, I can actually touch on both and maybe talk color -- .

-- on the geos.

On the headwind, as you mentioned, last quarter we mentioned two points of headwinds for Brazil, Russia, and China specifically. While we still saw additional headwind, it's actually moderated now, so it's less than half a point of headwind. And, aAs you would expect, the teams are working on each of those regions and working and improving the performance, but not as significant this quarter and year-over-year as we experienced last quarter.

Overall, you know, were taking steps in each of our geos to address the new realities of those markets respectively. Having just been in China, just got back from China on Friday, feel very good about our new leadership, the strategy that's forming with them. We just announced a new joint venture with Sugon. We had communicated the intent to do that. We just launched that last week.

So I feel like we're getting our legs back under us and that, the world's second-largest IT market. We are taking steps to address it, but it remains a headwind and it's factored into our overall business outlook.

Greg, I'll add one more point. I know you had asked around the average length of EAs, and those have not changed. We remain at just over three years for average duration.

Next question, please.

Mark Murphy, JPMorgan.

Thank you.

My question was actually just asked by the prior person, so I will return to the queue. Thank you.

All right, Mark. Next question.

Michael Turits, Raymond James.

Hello. Let's talk about public cloud a little bit. A couple quarters ago Carl had mentioned there was some hesitancy in buying as people try to evaluate public versus private cloud options. My question, has that changed any? Do you feel like people are ready to move forward?

And a related question, since you've changed your strategy somewhat, or modified it to be more oriented towards vCloud Air network versus vCloud Air itself and Virtustream, how has the customer reaction been there?

Yes.

So on the side, you know, clearly, our strategy that we've laid out, our multi-cloud strategy is three parts. Continue to help customers build private clouds, extend that into the public cloud, that SDDC stack into the public cloud, and third is provide a unique control plane to manage, run, secure, and connect across any cloud on any device.

And that comprehensive strategy as we've described it engaged with customers around it. I'll say every customer engagement you have a discussion of cloud because they're trying to figure that strategy out as well and how they need to evolve their IT infrastructure and application plans in that regard.

And as we've describe that and engage with customers, are growing comfort that we are a technology partner that both helps them transform today, but also helps them build a bridge to tomorrow. So we feel quite good that the strategic evolution that we've gone through is now resonating quite well with our customers. Clearly, good performance in Q1 reinforces that.

You know, the announcements that we made around, for instance, our management being realized, being able to manage workloads in AWS, and we'll roll that out for Azure shortly. NSX on multiple clouds has been well received by the marketplace, the RSA announcement of our distributor network encryption has resonated extremely well. I already mentioned the IBM SDDC partnership that we announced has also gotten good response.

Overall, we really feel it we made a lot of progress in this regard. At the highest level, customers are going on a journey. They're going on the journey to the multicloud future. They're picking strategic partners for that journey.

From a financial perspective, we clearly have a share of wallet opportunity in today's infrastructure on premise, but we are laying out a clear path for customers being able to monetize and benefit from the new value and taking advantage of clouds for tomorrow.

Thank you, Michael. Next question, please.

Kash Rangan, Bank of America.

Hello, this is Nikolai Beliav on behalf of Kash. Can you please give us an update on your traction with your product based on containers and open stack?

Thank you.

Yes. Let's separate the answers. Let's talk about open stack first and then I'll address containers.

You know, on the open stack side, what we've seen is that there's been a decided shift around open stack, and we're seeing now a repeated pattern where customers have attempted to take advantage of other open stack distributions or other open-source alternatives for open stack.

And after investing significantly in those attempts, tens of engineers over many quarters, they've been unable to get a scalable reliable solution working, and those customers are coming back to VMware and we're able to come in with our VMware integrated open stack offering and literally in hours or days have an environment that's up, running, built on the robust VMware ingredients.

We've seen this repeated pattern in addition to the tens of customers that we've already talked about, major athletic retailer in the US. This quarter we added key wins with the wireless provider in EMEA, a big telco in the Middle East. A big high tech in Silicon Valley is moving away from their open stack and back to VMware. So this pattern of the immaturity of open stack coming to the VMware ingredients is now well seen in our sales and we see a good pipeline of those opportunities for the year.

On the container side, containers remain a fairly immature technology with huge interest in the industry. And against that interest there's an increasing amount of how do I develop and take advantage of this, and I'll say there's a growing consensus that as the key part of how people develop their applications in the future and the eco system is building in that direction.

And while immature, VMware has clearly embraced and we are aggressively delivering a set of solutions to enable customers to have an infrastructure that is container-ready. And we're doing that in two ways. One is our VMware integrated container offering, which allows efficient use of containers on today's vSphere based environments today. It allows IT to just say yes to their developers and containers without changing networking, policy, security, or management, a very efficient way to get started.

And then the second of our strategy is Photon, and for that is really building a grounds-up environment that's optimized for that container future. And we'll be having some key announcements around that in the near future of our Photon offerings in the marketplace. And both of those, again, we're engaging with customers and getting a lot of interest, so while early, a lot of hype around it, we see this as a very important trend for the industry and VMware will be there with the infrastructure that our customers require to take advantage of it.

Thank you, Nikolai. Next question please.

Ittai Kidron, Oppenheimer.

Thanks, a couple questions for me. One on vSphere.

Just one question, please.

Okay, we'll correlate it. So on vSphere, can get us a sense on when and how you think the decline in license bookings in vSphere? Where do we bottom on this? And related to that, again what is the timeline by which you think license growth could return?

License growth?

Overall license growth for the Company. Clearly vSphere is declining and weighing and the new products growing on the mix. When can we get the whole boat altogether moving in the right direction?

Ittai, I'll start that. Obviously on the vSphere side we've mentioned that at least for this year we see constant and predictable decline as we've laid out in the first quarter for the remainder of the year, and that's how view the remainder of this year. We'll be updating 2017 a little bit later on in this year. As you think about aggregate license growth, as we've touched on, and as you can see with our performance, with our growing parts of our portfolio we're encouraged by the booking trend and the aggregate booking trend that we see through the course of the year.

But we'll update you for 2017 and beyond a little bit later on in the year.

And I'd just add, that's exactly why in our last call. Ittai, we referred to this as the transition year. It's when the new product booking areas more than offset the compute license decline. Overall as we've said, it's about 10% in Q1, consistent with our modeling and expectations.

Overall, compute was approximately flat and the new areas are growing very well, and we gave quite specific guidance on those areas and updates in Q1. So we remain quite committed to the acceleration of bookings as we go through the year and we think it sets the Company up for growth in the year and 2017 and beyond.

Thank you, Ittai. Next question please.

Nehal Chokshi, Maxim Group.

Yes, thanks for taking my question.

Could you talk about the sales and marketing investment in the quarter? That was up 4% year-over-year, whereas your OpEx was up a little bit more. So it seems like you're deciding to invest in R&D a little bit more, gross wins sales and marketing. Can you comment on why you're choosing to divvy up the OpEx investments that way, in terms of the year-over-year growth?

Sure, I would encourage you not to look at any one line item as we look at the quarter. We went through a realignment in the quarter as we realigned a number of our resources towards our growth products and growth opportunities. We have been investing in R&D heavily, and as you would expect we're encouraged by what we're seeing there. So we're pleased with trend. I wouldn't look too much into any one particular quarter. We have maintained our guidance for the year on our operating margins, so we feel good about where we'll end up for the year.

Thank you, Nehal. Next question please.

Abhey Lamba, Mizuho Securities.

Thank you.

Pat, I think you mentioned on the ELA opportunity exulvating in the second half of the year. What are your assumptions for customers' willingness to sign longer term commitments? I understand you're not seeing an impact on duration. Duration was consistent this quarter. But it would be helpful to see what your planning assumptions are for the upcoming renewals. And if there's any behavioural difference amongst large customers versus SMBs when it comes to ELAs.

Thank you.

I'd tell you a few things and then I'd ask Zane to add perspective, as well. Overall, Q2 second half, the ELA renewal opportunity is a very large opportunity for us, given the performance that we've continued to see that we're able to have renewal value, equal or greater. We're also able to maintain duration, high renewal rates. Overall, every aspect of our business relationship with our customers seems healthy in that respect, and we've not seen any fundamental signs that we're unable to continue that trend forward.

And particularly, given the breadth and strength of the new product areas, we're bringing a lot more to the table as we have those ELA renewal discussions, solving many of their multi-cloud, multi-device opportunities for the future and presenting transformational technologies to solve some of their problems. So we are seeing those to be robust discussions with customers and nothing that we've seen so far would indicate that we're unable to continue to maintain those kind of metrics that we've been giving you now for quite a number of quarters.

And I would add, obviously, that's included in our guidance. We see the volume of renewal opportunities increase, and obviously expect the rate to maintain at its high level already. As I mentioned earlier, we do also expect the average duration to stay around the same, which was three years. As we think about that guidance. Now this also with some of the SNS involved in those renewals, this is part of why we're encouraged by that bookings ramp that will exceed the revenue ramp for the year.

Thank you, Abhey. Next question please.

Rajesh Ghai, Macquarie.

Thanks.

My question on lease end. I think it was [Vasey] shared about the product, 3,500 customers, 200% growth. In comparison with the installed base of over 500,000 customers you have, and also the strong secular trend that we've seen hydroconverged infrastructure. My question is what would you do, if anything, to change your strategy to address and that opportunity better, or be more effective in penetrating that opportunity?

Well I'd say we're pretty thrilled with the momentum we saw in Q1. Part of it is I'll say, and having been three years at EMC as a storage company, part of it is it just takes a lot to get a storage product mature. Right? And that -- we have crossed the two year cycle on VSAN now, the 6.2 release as I would say, checks all the boxes with regard to key features, capabilities and so on, and we are I'll say, right on schedule. We're seeing the inflection point on that business. And the 6.2 release really hit the mark in the market place very well.

You know, and we'd say we're clearly now seen as number one in the hyper-converged infrastructure space, and that software category we think is going to continue to really emerge as a powerful trend in the industry. We also are very happy to see quite a number of deals. I think Zane mentioned a large financial services company, we had a large EMEA retailer, a large consumers goods manufacturer, a large equipment engines company. And each one of these is really demonstrating the power of the technology. We also had transactional bookings as well, so it wasn't just in big deals, but also transactional performance was good, so the channel participation is increasing here.

So we really left Q1 feeling really good about this area, and I am quite bullish about its growth potential through the year and 2017 and beyond.

Thank you, Rajesh. I think our next question is the last question in que, so we'll do one more question.

Jason Noland, Robert Baird.

Okay, thank you. Pat, as much as you can talk about it, I'd like to ask about an update on Dell as it relates to timing. And then maybe any recent customer feedback you've heard. I know you've called out SMB as a revenue synergy opportunity.

So maybe on timing, Zane, you'll do that and I'll comment on customers and synergy?

Sure, on the timing side things are going according to plan. I think you'll probably hear more tomorrow on the EMC call, because they're closer to that element of it, but everything is going according to plan best we can tell.

And on the synergy side of it, we've indicated the synergy opportunity is very significant here. We've spent a good amount of time working with our Dell counterparts, really grinding through the details of that. And we see some of those areas are starting to materialize in terms of the operational characteristics and the VxRail announcement by Dell is a good example of that this quarter.

We also are beginning to develop a clear view of many of the opportunities that we can action post-close, as well. So we do feel good about the synergy opportunity. With regard to customers and partners around Dell, what we would say is that there was -- in Q4 there was just astonishment. This is the biggest deal in history. People immediately, what does this to affect me? And fairly quickly in Q4, people got back to business and it was like after Thanksgiving, we got to business; we delivered a solid Q4. That clarity and momentum has continued into Q1. Clearly it's a discussion topic with customers, but now it's very much, it's a quick topic, right? It isn't the topic to cover with them.

We also just completed our partner leadership summit, with essentially is the top partners that we pulled together to really talk about VMware strategy for the future, and we have all of our channel partners as well as OEM partners there. And we invited Michael Dell to participate in that to really answer the clarity of his intent and strategy with respect to VMware, and it was a robust conversation as he was addressing the questions of our key OEM partners first hand.

I tell you, we left that partner leadership conference very encouraged by the ongoing health and opportunity that we have overall for the VMware ecosystem, and really quite optimistic that they are seeing the momentum of our new product areas. And that is clearly seen in the Q1 results and looking forward to the long term.

Thank you, Jason.

Before we conclude the call, I think Pat had a few final comments.

Yes, thank you. It's a very good start to the year. We're increasingly confident in our strategy and optimistic about the momentum we're seeing. Given this confidence we're also pleased with our plan to repurchase $1.2 billion of stock in 2016. As always, we thank you all for your time and interest in VMware.

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