VMware Inc (VMW) 2016 Q4 法說會逐字稿

Good day and welcome to the VMware fourth-quarter and full-year FY16 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Paul Ziots, Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to VMware's fourth-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 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, acquisition and other related items and gain on share repurchase and include non-GAAP tax rate 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 first-quarter FY18 quiet period begins at the close of business, Thursday, April 20, 2017. 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. We are very pleased with our strong Q4 and 2016 results. Q4 was one of the most balanced quarters for VMware in years in terms of product performance, geographical performance, vertical segments, and across routes to market. Revenue grew 9% year over year to over $2 billion, with non-GAAP earnings of $1.43 per share. In terms of regional bookings, Asia-Pacific was particular standout, followed by EMEA and the Americas.

NSX, AirWatch, VMware Cloud Foundation, vCloud Air Network and our hyper-converged software offerings, including VSAN and VxRail, all grew robustly. NSX is clearly becoming a mainstream part of all of our solutions, included as an essential element of Cloud Foundation Cross-Cloud services and VMware Cloud on AWS.

We closed our largest ever NSX-only deal, well surpassing $10 million in Q4. Annualizing our Q4 total bookings for NSX, it is now on a $1 billion run rate. Similarly, our hyper-converged software, including VSAN and VxRail, is now in a $300 million run rate. We continue to believe we are the market leader for hyper-conversion infrastructure software.

Turning to end-user computing, license bookings returned to double-digit growth in Q4. We had a strong quarter for our mobility products and saw increasing adoption for our complete workspace solution, Workspace ONE. Customers continue to strengthen their strategic commitment to VMware. One of the areas that this evident is with compute bookings, which once again exceeded our expectations.

We are very pleased with customer enthusiasm for our cloud strategy. We believe we have the world's most complete and capable hybrid cloud architecture, uniquely offering customers freedom and control in their infrastructure decisions. Our Cross-Cloud services, with availability midyear, will extend our hybrid cloud strategy with new public and private cloud capabilities that enable our customers to run, manage, secure, and connect all their applications across all clouds and all devices, regardless of whether the underlying infrastructure is VMware-based.

VMware Cloud Foundation, announced in August and available from VMware as of Q4, is at the core of our hybrid strategy. It's a unified, software-defined data center platform that provides the virtualized infrastructure, including vSphere, vSAN, and NSX, to build both private and public clouds. VMware Cloud Foundation makes the private cloud easy and enables customers to extend their private cloud into the public cloud using a proven and familiar set of software and tools.

In Q4, we saw accelerating strength in the overall vCloud Air Network. IBM was the first vCloud Air Network partner to bring a VMware Cloud Foundation-based service to market earlier this year. IBM cloud for VMware solutions helps customers quickly and easily move enterprise workloads to the cloud. We have more than 1,000 joint customers in an expanding pipeline.

VMware Cloud Foundation is also a key component of our strategic alliance with Amazon Web Services and the VMware Cloud on AWS service that will be delivered, sold and supported by VMware. VMware Cloud on AWS represents the best of both the private and public clouds that will make it easier for our customers to run any application using a standard set of familiar software and tools in a consistent hybrid cloud environment. Customers interest to date has been overwhelmingly positive and we plan to deliver this service midyear.

This Q4 cloud momentum across customers and partners is an indicator that our cloud strategy is increasingly contributing to our success. We closed out 2016 with a busy Q4, where we completed major product line refreshes of most of our product portfolio.

We hosted more than 75,000 customers, partners, and influencers at VMworld, VMworld Europe, and across APJ vForums. We also continued to receive broad recognition from industry analysts for the strength of our products. As expected, we are seeing growth from our OEM and Dell relationships. Dell synergies exceeded our plan for Q4, establishing momentum toward our long-term synergy goal.

In concluding, we believe that with the digital transformation taking place across every industry, technology has never been more important. The significance of mobile and cloud in this transformation puts VMware at this critical intersection. We are seeing momentum in emerging growth businesses and our core business and are increasingly positioned to capture major adjacencies in areas such as network functions virtualization and IoT, which will extend the use of our technologies into every area of business for the future.

I want to thank all of the VMware customers, partners, and, of course, team VMware employees for a terrific quarter. I'll now turn it over to Zane to talk more about our business performance.

Thank you, Pat, and thanks to all of you for joining us today. Q4 was a strong quarter and we were particularly pleased with the year-over-year performance in compute, NSX, vSAN, AirWatch, and our vCloud Air Network partner business. Our results are a reflection of the continued support and commitment from our customers and partners, as well as all the efforts from the entire VMware team. VMware's strategy is resonating and driving increased customer interest across our private, hybrid, and public cloud solutions.

I'll begin with a brief overview of the P&L and balance sheet, followed by product bookings and guidance for Q1 and the full year. Total revenue grew 9% and license revenue increased 8% year over year in Q4. Hybrid cloud and SaaS revenue increased in the strong double digits year over year in Q4 and represented approximately 8% of total revenue. vCloud Air Network revenue, the largest component within hybrid cloud and SaaS, grew over 35% year over year. This growth is a result of a number of factors, including increased diversity of product sales beyond compute, growth in hosted private cloud services offered by our partners, and customer interest in subscription offerings.

Non-GAAP operating margin for Q4 was 36.8% and non-GAAP EPS was $1.43 per share, up 13% year over year. Share count for the quarter was 417 million diluted shares. Cash and short-term investments totaled $8 billion. $1.1 billion of this was domestic cash. Unearned revenue at the end of Q4 was $5.6 billion, with $2.1 billion of this amount long term. Cash flow from operations for full year was $2.4 billion. Free cash flow for the full year was $2.2 billion.

In Q4, the year-over-year growth rate was 13% for total revenue plus a sequential change in unearned total revenue and 14% for license revenue plus the sequential change in unearned license revenue. The majority of license bookings continue to originate from products other than compute, such as management, NSX, vSAN, and end-user computing.

Support and services, or S&S, bookings growth was also strong in Q4 due to the large year-over-year increase in customer renewal opportunities as well as continued strong renewal rates. We believe this growth reflects our customers' confidence in our strategy, which includes compelling uses of our products and solutions across multiple cloud alternatives. We had a record number of large deals in Q4, with 13 deals over $10 million, including an NSX-only deal of greater than $10 million.

Turning to our products, NSX customer growth continued in Q4, with an increase to over 2,400 customers, which is almost double the count of last year. NSX license bookings grew over 50% year over year in Q4, as we executed well in the market with significant wins across multiple verticals. Our vSAN license bookings, including our vSAN software and VxRail, increased over 150% in Q4. Customer count rose to over 7,000 across all segments, more than doubling from a year ago. The top five vSAN deals in Q4 were repeat customers that are now expanding deployments and adding workloads.

Our end-user computing license bookings rebounded this quarter, up mid-teens year over year. We were especially pleased by growth in mobile license bookings, which was up over 30% from Q4 last year. Total management bookings for Q4 were up in the high-single digits year over year, which reflected strong S&S renewal activity. Management license bookings declined in the low-single digits year over year, as there was less management tied to the specific large deals in Q4. For the full year, management license bookings grew in the mid-single digits.

Total compute bookings for Q4 were up in the high-single digits year over year, driven by strong license bookings and S&S renewal activity. Compute license bookings were up 11% year over year in Q4. Factors contributing to this growth includes strength in our vCloud Air Network, EA renewals, as well as strong customer interest in our vSphere platform as part of their cloud strategy.

Turning to capital allocation, in Q4 we completed our $1.2 billion stock repurchase authorization for 2016. In addition, we also repurchased approximately 4.8 million shares for $375 million related to the incremental $500 million authorization announced in December, which we expect to complete in February.

Today, we're pleased to announce an incremental $1.2 billion repurchase authorization to be completed FY18. This level of repurchase activity reflects our confidence in the business and strength of our balance sheet. It's a balanced capital allocation plan, which preserves flexibility for strategic M&A while delivering on our desire to return capital to shareholders.

Turning to guidance, as you'll recall, our FY18 begins on February 4, 2017, and ends on February 2, 2018. January 1 through February 3, 2017, will constitute a stub period. We expect our FY18 total revenue to be approximately $7.57 billion, up nearly 7% year over year. We expect license revenue for FY18 to grow year over year by approximately 6% to $2.97 billion. We expect non-GAAP operating margin of approximately 32.3% for the full year.

We plan to increase investments in growth products and newer initiatives such as Cross-Cloud services, VMware Cloud Foundation, and VMware Cloud on AWS. For FY18 we expect non-GAAP EPS to be approximately $4.87 per share and expect to generate cash flow from operations of approximately $2.65 billion. Capital expenditures for FY18 will be approximately $260 million, and we expect free cash flow of approximately $2.39 billion.

For our fiscal Q1 2018, total revenue is expected to be between $1.675 billion and $1.725 billion, or up approximately 7% year over year at the midpoint, which is compared to our calendar Q1 quarter in 2016. License revenue for fiscal Q1 2018 is expected to range from $590 million to $620 million, or up over 5% year over year at the midpoint as compared with our calendar Q1 quarter in 2016. We expect non-GAAP operating margin to be approximately 28.2% and non-GAAP EPS to range from $0.93 to $0.96 per share. Additional details on guidance are provided in the slide deck accompanying this call.

In summary, Q4 was a strong finish to a very good year and we expect this momentum to extend through FY18. Our expanded product portfolio, as well as our private hybrid and public cloud strategy, are resonating well with our customers. We will continue to innovate and invest in growth while we return capital to shareholders. With that, I'll turn the call back to Paul.

Thanks, Zane. Before we begin the Q&A, I'll ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible. Operator, let's get started.

(Operator Instructions)

Keith Weiss, Morgan Stanley.

This is Sanjit Singh in for Keith Weiss. Nice set of results. Sounded like you saw a lot of momentum. Could you give us a sense of two areas, both on NSX side, a really strong rebound from Q3. Can you just give us more details there on what drove that momentum in Q4?

With respect to your management bookings versus license bookings, management bookings up in the high-single digits versus license bookings down a little bit. Can you explain what's causing that delta, that discrepancy between those two sets of growth rates?

Hi, this is Paul. I just need to be a little firm here. We have one question per caller, please. We want to try to get through as many questions as we can. Could you pick which of the two you'd prefer?

Sure. Why don't you start with the NSX.

Great. Thanks. NSX, it really was a very good quarter and we finished a very good year, 2,400 customers, doubling year over year. If you recall, we were at 1,200 or so at the end of 2015. That takes us over a $1 billion run rate for the products that we're quite excited about, just the overall momentum.

I would also point out a few other things about NSX. We have now integrated into all of our solution selling. It's part of VMware Cloud Foundation. It's part of VMware Cloud on AWS. It's part of our VxRack solution. It is being sold through our vCAN offerings. It is critical to our Cross-Cloud.

I will say clearly we're seeing land and expand, customers are doing more with it. We're seeing it integrated to more and more of our selling motion. Some of the big wins this quarter, a top-five financial institute, a top-five insurance company, our first greater-than-$10 million deal, all of these have really shown, along with the continued progression of deployments, not just selling but the number of customers in production. We're seeing our use cases around automation, security, application, mobility.

Maybe one more point to add is we had announced the Arkin acquisition for network visibility, automation, physical, and virtual network introspection, and that has gone extremely well in Q4 to be another accelerant to the business. Overall, NSX, critical, powerful, and just a great quarter to a great year in this critical product.

Thank you, Sanjit. Next question, please.

Mark Murphy, JPMorgan.

This is Matthew Coss on for Mark Murphy. Thank you so much for taking my question and congrats on a great quarter. Could you comment a little deeper on the sustainability of the compute revenue side? It rebounded in Q3 and also did well in Q4, but just help us understand how we should think about compute going forward.

Yes. Let me start and I'll ask Zane to give a few other comments. Overall, we really are pleased with the performance of the compute business and it continues to exceed our expectations. Zane will comment a little bit more on our guidance going forward there.

As we think about compute, the more that we build that installed base of compute, the larger the opportunities for the attach of the other products. That clearly is one of the beneficiaries, right, in NSX, in vSAN, vCAN, UC Management, the more of that foundation, the strength of the foundation, it just really is a springboard for the rest of the product line. Zane, a few more comments with regard to our view going forward?

Sure. Matthew, I would just add, as we pointed out in the fourth quarter, clearly our strong renewals had an impact of compute as well as the strength that we have seen with our vCAN business. A large part of that is compute driven. As we look ahead for the remainder of the year, we have talked about the expected decline in license bookings. We are actually moderating our view somewhat and now expect a decline in compute license bookings to be in the mid-single digits for the rest of FY18.

As you think about that, we have moderated our view on the license side. We still expect declines further over time. When we look at total compute, which includes both license and service components, we still expect that to be roughly flat as we look through FY18 and beyond.

Thank you, Matt. Next question, please.

Matt Hedberg, RBC Capital Markets.

Hey, guys. Thanks for taking my questions and I will offer my congrats, too, on a strong quarter and end of year. Guys, I wanted to dig a little deeper on the synergies with Dell. Clearly, you are having some success with VxRail, but I'm wondering, can you give us a little bit more granularity on other areas? How can we think about segmenting that sort of that $1 billion in proposed synergies, maybe a little bit on a more granular level?

Yes. Thanks, Matt. Overall, we are pleased with the progress that we're making with Dell. I would say that Dell had a good quarter, but we also grew the overall OEM business as well. Overall, that portion of our business did well in Q4.

As we look forward, we have talked about the business cases that we have built that include compute, end-user computing, storage. We have also said that we have built those business cases in the geos as well as different vertical segments. Those are now interlocked with Dell and as they begin their fiscal year, we expect that those will start to accelerate. We're building the teams to go execute across that. In FY18, we expect approximately $200 million in synergy benefits this year as we work toward that $1 billion of business acceleration for VMware over several years.

Thank you, Matt. Next question, please.

Walter Pritchard, Citi.

Hi, thanks. Pat, so it feels like a big part of your roadmap is providing a common management and control air as customers use public cloud like AWS and things like your Cross-Cloud services. The product results were pretty strong here across the board, but arguably your management performance was the weak spot in Q4 and has been sort of mixed most of this year. I'm wondering, what gives you the comfort you can insert yourself into this, like Cross-Cloud management role and be adopted as a management plane in the cloud when you're having mixed success selling management into your platform?

Yes. Let me give two different perspectives on that a little bit. One is just talking a little bit talking about the management bookings. We do expect that there will be quarter-to-quarter variations in which products have a strength. Overall, Walter, that is a portion of our strategy really to be a portfolio and be able to say we're going to have strong products and some not as strong on any individual quarterly basis.

Clearly Q4 NSX, vSAN were very strong and if you think back to Q3, we had a very good Q3 in terms of license growth back in Q3. Management is driven largely by large deals and we had less of the large deals had management tied to it in Q4. Overall, it was mid-single digit management license across 2016, as we believe that we have really gotten the product line well-integrated now and overall more momentum. No real change in market dynamics or competitive dynamics.

Another aspect of this as we think more toward the Cross-Cloud strategy, sort of the second half of your question, is in Cross-Cloud. It isn't just management. It is management; it's NSX; it's storage capabilities; it really is that collection of services that will differentiate VMware because nobody else brings all of those to the table.

Our Cross-Cloud strategy, it is one of the legs but not the only leg, and we do believe that much of that will be tied to NSX sales, for which we are highly differentiated in the marketplace. It really is a broader set of capabilities that VMware is uniquely able to deliver as part of our overall Cross-Cloud strategy.

Thank you, Walter. Next question, please.

John DiFucci, Jefferies.

Thank you. I have seven questions. Just kidding, Paul (laughter). My question's for Pat. It's on end-user computing, which actually looked like it was a pretty good quarter this quarter, as just about everything was, and especially in strong with in mobility.

Now, Sanjay has talked in the past about some issues with restructuring the sales force that had some rough spots along the first half of this year. Just wanted -- just give us an update on that. Has that progressed and is that fully behind you at this point, do you think and -- or is that there is still work to be done there?

Yes. Simply put, we believe we've turned the corner on those challenges in Q4, John, and with the good overall performance in the quarter, you see licensing overall up in the mid-teens. Clearly, we saw the mobile strength growing over 30%. We also for desktop and end-user computing overall have a very robust pipeline as we enter this year. Customer accounts now at 67,000.

We are most excited, though, about the forward vision of Workspace ONE, where it is not about desktop or mobility or identity. It is that complete solution and that is highly differentiated strategy from anybody else in the industry. We really started to see the uptake of that in Q4 and those are bigger, more strategic deals.

Overall, that is the key piece of what really gives us excitement for the long term, not any piece. We have got the engine running on EUC and that forward strategy is what we think will be the thing that drives this business for the long-term in a highly differentiated way.

Thank you, John. Next question, please.

Brent Thill, UBS.

Pat, on the big deals, you doubled year over year. Great quarter for deals over $10 million. I'm curious if there was a common thread that you saw that would result in that type of uptake?

Overall, Brent, I'll just say, this quarter, we just executed well. It wasn't just the big deals. I would also point out, none of those big deals was a monster deal, right? They were all -- deals are getting bigger. They're getting more strategic. We also saw good performance of plus-million-dollar deals. We also had very balanced performance in transactional business as well, which was almost exactly equal to the growth of our EA business. It was a very balanced quarter.

At the highest level, I'd just say customers are viewing us with a higher strategic urgency. We're solving some of their most important problems. They are betting on us in bigger ways and as a result, we're going to the front of the food line of their IT budgets. They are seeing us as a strategic opportunity for the future. It really is a good time to be part of the sales machine for VMware and our guys are quite excited about it. Zane, anything to add?

Yes, Brent, I would just add, as you look across -- Pat mentioned it earlier, this being a balanced quarter, as you look across the geos with particular strong performance in APJ, but we also saw double-digit growth in 6 of our top-10 countries. Not only were the large deals there, but we saw a tremendous uptick, if you will, across the globe, which we're quite pleased with.

Thank you, Brent. Next question, please.

Kash Rangan, Bank of America Merrill Lynch.

Hi. Thank you for taking my question. Congratulations on finishing up the fiscal year. Where are going to dropping off for the Microsoft call in a minute, but thanks for taking me in. Your view on how much of revenue growth in FY18 is going to be driven by Cross-Cloud and your expected revenue contribution from Erebus, please. Thank you very much, and congrats again.

Thanks, Kash, and thanks for your honesty on how long you plan on staying on the call. It's the same view we mentioned last quarter. We don't expect a material amount. We are very excited about the progress we're making, but for FY18 don't expect a material amount of revenue. Pat, if you want to talk a little bit about the progress?

Yes. Two more comments to add, Kash. One is the development of Cross-Cloud and the VMware Cloud on AWS. Both of those are proceeding as we would expect. We're soon putting the first what we call lighthouse customers onto the AWS service. It will go to beta and then be GA in the middle of the year, similarly for the Cross-Cloud services. The development there is going well. As we indicated in our formal comments, the customer response to that has been overwhelmingly positive to both aspects, both Cross-Cloud and the VMware Cloud offerings.

Even more importantly, even though it is not going to be directly a material contributor in our FY18 revenue expectations, strategically, it is immediately impacted our business, because customers are now saying, oh, I get it. These guys are uniquely positioned to allow me to take care, take advantage of the cloud in new and differentiated ways that make it more secure, more managed, more available and I get to keep my app compatibility. This a very powerful capability and we believe part of the Q4 strength was a direct result of their confidence in our strategy going forward and both of those offerings are critical components of that strategic commitment.

Great. Thank you, Pat.

Thank you, Kash. Next question, please.

Raimo Lenschow, Barclays.

Thanks for taking my question. As we are hopping on conference calls, just maybe a quick one from the Intel call that just kind of is going on at the same time, how do you think -- they just talked about private cloud or the private data center market not being very strong.

What do you see in terms of customer thinking about public cloud versus private cloud and how does that play out for you? Obviously, you are on both camps with AWS, with the AWS partnership and obviously you have a big stake in the private cloud build outs as well. How do you see that market evolving? Thank you.

Yes. Thanks, Raimo, and a few general comments would be, I think that clearly if we unwind two years ago, many big enterprise customers were saying, public cloud, I am not sure if it is safe, secure. That has change entirely, where public cloud offerings like Amazon are clearly part of their strategy.

Also, as they started to take advantage of public cloud and they look at what does it take to move a workload to the public cloud or some of the other challenges, performance, cost, governance, those aspects, they started saying, wow, this is not going to happen overnight to move to the public cloud. I need a private cloud on-premise set of capabilities for years, if not decades, to come.

That really has led to, I think, a broad resonance in the industry. Hybrid cloud is the answer. I need to have comprehensive ways to take advantage of both of these. I'm going to build new apps in the public cloud. I'm going to continue to run certain apps on my private cloud and increasingly, I want to stitch the two together.

Again, that aspect of our strategy as we materialize that in the second half of the year, clearly was a very strong element of our strategy in the good resonance that we have seen from our customers as we finish the year.

Thank you, Raimo. Next question, please.

Phil Winslow, Wells Fargo.

Thanks, guys, for taking my question. I'm still with you all despite the fact that Microsoft started (laughter).

What's that little company up north, anyway?

Yes. Exactly. My first question is actually (inaudible) next quarter. Seriously, if you looked at the revenue for you guys, it looked like you had a particular strong quarter internationally, just actually very strong second half. I wonder if you could just double-click on the geos as far as sort of what you saw second half and how your think about those going forward?

Yes. I will start and then let Pat finish off. Again, we were, I think, particularly pleased with the strength we saw in APJ and the team in APJ is really executing very well. EMEA was followed quite well, as well. As we think about some of the challenges that the economies there have seen, we're actually quite pleased with our performance. Quite frankly, we have been, throughout the year, even markets like the UK that I know some have pointed out as being more challenging, we were actually very pleased with our performance in the UK despite a little bit of the FX headwinds that we have seen it the UK in particular.

Overall, it gets back to Pat's point on this being a balanced quarter. As we've thought about the second half of the year, we continue to see strength, both internationally as well as the, in the domestic marketplace here. As we look at our FY18 forecast, we have factored in within our guidance roughly 1 point of headwind into our total revenue guidance, so as we think about the currency impact that we're seeing, it is approximately 1 point on total revenue and just over 1 point on license revenue as you factor in our guidance heading through the FY18. Again, we see strength around the globe. Pat, want to add to that?

Yes. I'll just say, I am so happy with our teams across the world because we really, as we said, just saw a great performance. The Japan team was just a barn-burner quarter for them, which really lead the way in APJ. The strength in Europe, despite some of the things that could be seen as challenges or headwinds for them, they have continued to outpace even the Americas growth. Across our regions, across our verticals, across our product lines, across the routes to market, a very, very balanced quarter, best in many, many years, so we're very proud of the team VMware.

Thank you, Phil. Next question, please.

Brian White, Drexel.

Pat, I'm wondering if you would talk a little bit about this deeper push that VMware has in the communication service provider and telco market? I know you made some announcement in November about this. What does it mean in terms of your different product portfolio and what is the opportunity there? Thank you.

Yes. Thank you. I am way excited about this. In the telco space, largely they run unvirtualized infrastructure and the size of the telco network market is nominally equivalent to the size of the data center market, so you have a very large adjacent market that is almost virgin territory, because almost all of it runs unvirtualized. The telco industry largely has agreed upon a virtualized architecture. It is called network functions virtualization. They have their own acronym. We call it SDDC; they call it NFV.

Largely it is a greenfield opportunity for us to go pursue, and against that, we have built a specific vertical focus there. We have a team and we're building some unique product capabilities, but largely it is taking NSX, vSphere, vSAN, management, and applying them to this new market segment. We're quite excited about it. We have now lined up, we have about 50 different wins in that. Some are just early pilots wins. A number of those, like Vodafone, are now in large-scale production. We see this as a multi-year transition of great opportunity for us.

One additional point would be that as those telcos look toward their 5G build outs, we believe the standard architecture as they build 5G infrastructure will be NFV architecture. Over the next several years, they'll be doing it for certain applications, certain new services. By the end of the decade, I think everyone will be building this at scale and become a very large adjacent market for us to pursue.

Thank you, Brian. Next question, please.

Kevin Buttigieg, MKM Partners.

(Technical difficulty) better than I guess I would have expected double digits off of a tough comparison last fiscal year. Could you give us a sense of what the puts and takes are there and whether or not that reflects expectations of bookings growth exceeding revenue growth again next year?

Kevin, would you might just starting the first part of your question again? I think I got the tail end but we didn't get the first part.

Yes. It's with regards to the cash flow guidance for next fiscal year. Obviously, it looks for double-digit growth off of a tough comparison. It is a little bit better than I guess I would've expected under those circumstances and just wondering if you could through the puts and takes, including how that might relate to billings growth next year.

Sure. I think you are exactly right. It is coming off -- we obviously had -- and we have highlighted the compares of versus 2015, so you can see those but we're quite pleased with cash flow growth we saw in 2016 as well as the guide for 2018.

One point I would make is as we compare our fiscal quarters going forward to our calendar quarters of last year, we see on the P&L that they are quite comparable, but when you cash flow, obviously, January is a strong cash flow month, so we will be trading out that part of -- as you look for cash flow by quarter, we will be trading out the quarter, the strong Q1 that you typically have for Q4 in FY18. We do not believe it will have a material impact as you look at that year.

As you point out, we were pleased with our bookings growth back in 2016 and as we look to 2018, we expect bookings growth once again to exceed revenue growth for FY18. Along with that cash flows to mirror the business. We're pleased with the business. We are pleased with our expectations on cash flow for FY18 as well. I would have you pay attention quarters because I think there will be some subtle quarterly adjustments as you map out the year.

Thank you, Kevin. By the way, we know it is pronounce Buttigieg, so we have it correct here. We'll get that right. Next question please.

Michael Turits, Raymond James.

Hey, guys. I don't think we've talked about storage yet. vSAN this year seems to have really taken off with the VxRail strategy and it seems to me, my impression is with a lot of what you are doing a partnership side. Can you walk through that, because that has been a big uptick this year.

Yes. You are right. We really did have a fabulous acceleration in that area of the business in 2016. Just to touch on a few points, customer count, we are now over 7,000 customers for vSAN and VxRail and the software component of VxRail.

Our hyper-converged software license bookings continue to exceed our plan as we have gone through the year, up 150% year over year. We're at $300 million run rate now for that business, so significant acceleration from the $100 million year ago. We are very confident that we are the market leader for hyper-conversion infrastructure software. We're also seeing our strategy of the land and expand become an increasing element where people will put it into a couple of clusters in small ways, a certain branch, and now those deals are growing very rapidly, so our top five vSAN deals were all repeat customers this quarter.

We introduced new capabilities like All Flash and great adoption for that. This is a particular area for synergy from our OEMs, and Dell in particular. In many respects, this has just been a rocket ship, and we expect this to continue into FY18 as we end this year with tremendous momentum.

Thank you, Michael. Next question, please.

Jason Ader, William Blair.

Thank you. One of the fears people have had on the VMware partnership with AWS and your Cross-Cloud services is that it will be cannibalistic to your on-prem business. How can you help us think through the impact of the shift to the cloud and the software-defined data center on your on-premises business, on your total business, I guess?

Yes, several different aspects to answering that. Clearly, as you think about a customer consuming the AWS service, they are taking the full VMware software stack when they are using the AWS service. They are getting NSX and vSAN and vSphere and management, so it is a full stack. The large majority of our customers are vSphere-only customers who will now be taking advantage of a full SDDC stack for us and so in many cases we see that as the fastest way to the SDDC and it will also be a very positive revenue element for us, because they are taking advantage of that full set of capabilities.

I also believe in many cases customers will have their first SDDC experience in that environment and will actually drive them to say, wow, I can start using that network virtualization service. It is that easy, it's that beneficial. Wow, I'm going to start pulling that back on premise and that is a core element of our hybrid cloud strategy.

Here we have laid out that there will be credit mechanisms for people to bring their license benefits to those cloud offerings, but what we have seen so far is this is an accelerant to our business in the near term. I think what I've laid out is it drives a richer set of VMware products as we bring that to the marketplace, and overall the differentiation of a hybrid cloud service of VMware and your on-premise VMware now in the largest public clouds on the planet, we think this is a huge win for our business for the long term.

Thank you, Jason. Next question, please.

Ittai Kidron, Oppenheimer.

Thanks, and congrats again on a great quarter and guide. I want to talk about, Pat, you talked about the growing excitement that customers have for your upcoming AWS release. I am just trying to understand whether there's a way to tie this into your regional commentary in that the Americas were the weakest region of all three.

Is there somewhat of a slowing of demand right now in anticipation of greater pick up once AWS kicks in? Is there a backlog building there that's associated with that? I am trying to kind of understand if there is a connection between the two.

Yes. No. I would say very simply the answer is no, I don't believe there's a connection there. In fact, all of the regions showed acceleration of growth in Q4, Americas included. Americas was a double-digit growth in Q4, which actually it's been a number of quarters since we've seen that level of growth in Americas. Overall, our business accelerated, including the Americas business.

We have seen the AWS to be an accelerant around the world, right, as people have talked about that. In some cases as we made clear to our customers, they won't see the service until calendar 2018, but they still see it as a benefit to the strategic commitment they are placing on VMware because they see that roadmap to the future. Overall, it has been a positive to our business, it increases our strategic relevance and we have seen acceleration across all geos for the VMware business. Thank you, Ittai. Next question, please.

Shannon Cross, Cross Research.

Thank you very much for taking my question. I was just curious, you talked about increased investment and the guide was a little lower for operating margin than we'd anticipated, even with higher revenues. I'm just curious as to where you're going to be placing your dollars, where you think the most opportunity comes. Is this more sales focused or product focused? Thank you.

Shannon, this is Zane. I will start and then let Pat chime in afterwards. Shannon, there are two areas primarily. We have seen tremendous success in areas like NSX, AirWatch, and vSAN. I would say it's across the board from the R&D side all the way through the sales motion related to those products. In addition to that, we will be placing a fair amount of investment into the VMware Cloud on AWS and the Cross-Cloud services that we have been talking about as we ramp up to those platforms through the course of the year. Pat, I don't know if you want to add --

Clearly, we exceeded in the operating margin performance in 2016 over our guide. We're trying to be very thoughtful about those investments because we do have tremendous opportunities. As we have indicated, the Cross-Cloud services, AWS, minimal revenue generation, meaningful investment areas this year. They'll start contributing in a more positive way in calendar 2018.

Thank you, Shannon. Next question, please.

Abhey Lamba, Mizuho Securities.

Thank you. Pat, I just want to revisit NSX commentary. Can you talk about how penetrated your install base is with NSX and how high can it go? Can we expect it to be a $2 billion business over the next three to five years?

Yes. While I am not going to answer that very specifically, the -- NSX is literally an opportunity for us that, as I have described, I believe the market opportunity for us in NSX is larger than the ESX vSphere opportunity over time, because the market for networking is larger. In a multi-cloud world, it plays a critical function in terms of tying clouds together across environments. It has app and container relevance to it.

It's applicable into markets such as the NSV discussion that we had earlier in the call. I really see this as a market has greater potential strategic significance over the next decade than the franchise product of all time, vSphere, has over the last decade. We're quite excited about that long-term opportunity. Won't give specifics on this year or next year, but boy, over the long term, this is a hugely strategic opportunity for us and the results of Q4 has just showed it has really taken off.

Thank you, Abhey. Next question, please.

Pat Walravens, JMP Securities.

Great. Thank you very much. Pat, I would love to hear your thoughts on HP's acquisition of SimpliVity and what that might tell us about what is going on in the hyper-conversion infrastructure market. In particular, I think the price was quite a bit lower than what most people would have expected.

Yes. We have been, and I have been, talking about that this is what would happen for a while, that we expect there would be a consolidation, that the OEMs will become the primary route to market and the primary providers of hyper-converged solution into the marketplace. Hey, we're committed to our HPE partnership and we don't expect any major changes to that, as we indicated in our earlier comments that we did have -- we grew our HPE businesses this quarter.

We have been successfully competing against SimpliVity and against HPE's other HCI offerings based on their store virtual appliance. We have an impressive win rate versus SimpliVity due to the flexibility of hardware, lower TCO, integration with the VMware offerings. We don't see that changing because of the acquisition. As we have indicated before, hey, we have great momentum for our offerings, and we're very confident in our leadership market position in the space.

Thank you, Pat. The last question, please.

Gregg Moskowitz, Cowen and Company.

Yes, hi. It's actually Mike Romanelli on for Gregg. Just looking to get your latest thoughts on M&A. Thanks.

Sure. On M&A, really no change in our expectation. We believe that VMware has been a very good acquirer and we have had a great track record and we also think there are good targets around us. Along with buybacks, that's the primary use of cash will continue to be buybacks and M&A. We're always looking for good targets to augment and accelerate our strategy.

The Arkin acquisition that we talked about before has executed very well for us, fitting into both our networking and our management strategies. The PLUMgrid asset acquisition that we did late in the year has gone very well. No other specific comments on M&A, but it does continue to play an important piece of our strategy to continue to accelerate VMware's position in the market place.

Thank you, Mike. Before we conclude, Pat, I think you had a final comment you wanted to make.

Yes. Thank you all so much. Q4 was a strong finish to a very good year. We are seeing momentum in our business and we expect this momentum to extend through FY18 and look forward to continue updating you on our progress during our Q1 conference call and throughout the coming year. Thank you very much.

That does conclude today's conference call. We thank you for your participation. You may now disconnect.