VMware Inc (VMW) 2018 Q1 法說會逐字稿

Good day, and welcome to the VMware First Quarter Fiscal Year 2018 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Paul Ziots, VP of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to VMware's First Quarter Fiscal 2018 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 and employee stock transactions, acquisition, divestitures 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.

A 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 fiscal 2018 quiet period begins at the close of business, Thursday, July 20, 2017.

VMware revised its fiscal calendar effective January 1, 2017. VMware's first fiscal year under its revised fiscal calendar began on February 4, 2017, and will end February 2, 2018. The period from January 1, 2017 through February 3, 2017, has been recorded as a transition period and will be reported as a separate period in VMware's Form 10-Q filing for the first quarter of fiscal 2018.

Year-over-year comparisons of quarterly financial results included on this call compare results for VMware's fiscal 2018 first quarter, February 4 through May 5, 2017, to VMware's fiscal 2016 first quarter, January 1 through March 31, 2016. Sequential changes in total unearned revenue and unearned license revenue for the first quarter of fiscal 2018 compare VMware's total unearned revenue and unearned license revenue balances as of February 3, 2017, the last date of the transition period to the respective balances as of May 5, 2017, the last day of VMware's fiscal 2018 first quarter.

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

Thank you, Paul, and good afternoon, everyone. We are very pleased with our strong Q1 results. Revenue grew 9% year-over-year with non-GAAP earnings of $0.99 per share. In terms of regional bookings, we have strong, balanced results across geographies, and we're particularly pleased with performance in the Americas this quarter. We are confident about our outlook and growth opportunities. Our strategy is resonating and our execution remains strong. Looking back on Q1, I'm particularly pleased with the volume of expanding strategic partnerships we announced in addition to positive momentum across our portfolio. In early May, the OVH Group, a global hyper-scale cloud provider and a VMware vCloud Air Network partner, acquired VMware's vCloud Air. This included data center and customer operations, customers and an enterprise-ready support team. We will continue to support customers and provide technology differentiation to the OVH team as part of VMware's thriving and global vCloud Air Network program, which we retained.

We also announced 3 end-user computing partnerships, helping to expand the AirWatch footprint as well as Workspace ONE. Google and VMware are working together to accelerate the adoption of Chromebooks, while Oracle and VMware are collaborating to enable advanced security features and streamline management of Oracle mobile enterprise applications. Most recently, we announced the collaboration with Microsoft to deliver Horizon Cloud on Azure, bringing VMware virtual desktops and applications to Azure users. We also announced new integrations with Dell EMC to accelerate workplace transformation. These partnerships will accelerate the momentum we are seeing in our EUC products as will our acquisition of Apteligent, an innovator in mobile application performance and engagement insights. Overall, the EUC business saw a strong growth this quarter, and some of our largest deals were led by EUC.

Additionally, at Dell EMC World, we announced an integration of VMware software-defined data center and Pivotal Cloud Foundry designed to deliver developer-ready infrastructure. Developer-ready infrastructure represents a significant joint engineering effort between VMware and Pivotal at the intersection of developers and IT. Developers are able to drive agility with a modern cloud native application platform from Pivotal, while IT has peace of mind knowing that it runs on a secure software-defined data center pioneered by VMware. The first example of this integration is with NSX.

All of these partnerships provide more choices and innovation to our customers across clouds, devices and applications. On the product side, NSX continues to see great momentum with large NSX wins across multiple verticals including health care, telecom, state, local and federal governments. 9 of our top 10 deals included NSX this quarter, and it continues to be an integral piece of all of our offerings. Security continues to be the lead use case across our NSX customers. We were excited to announce the availability of vSAN 6.6 in April featuring industry-first hyper-converged capabilities, lower total cost of ownership, industry-first native encryption and significantly higher all-flash performance. These combined benefits help customers accelerate their data center modernization efforts. We are experiencing good customer, partner and influencer response to this next version of vSAN as we continue to see momentum for vSAN as well as its hyper-converged infrastructure solutions.

Turning to our momentum with our cloud offerings. We believe we offer the world's most complete and capable hybrid cloud architecture, providing customers freedom and control in their infrastructure decisions. We are continuing to see great customer momentum for our VMware Cloud on AWS service, which remains on track for delivery midyear. The VMware Cloud on AWS lighthouse customers are now accessing the service, and we are significantly oversubscribed for our available data service slots. Our Cross-Cloud Services will extend our hybrid cloud strategy to 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. We are on track to deliver initial set of Cross-Cloud Services. VMware recently completed the acquisition of Wavefront, an ultrahigh performance metrics monitoring service for cloud and modern application environments. The deal will allow VMware to accelerate delivery of its Cross-Cloud management services. We also saw a customer and industry interest in network functions virtualization and Internet of Things as customers seek out our expertise and solutions. At Mobile World Congress in March, we unveiled VMware vCloud NFV 2.0, which is designed to modernize and transform network architectures and operations for global communications service providers. We now have over 80 production deployments for NFV. We announced our first IoT offering, VMware Pulse IoT Center, which is a secure, enterprise-grade, Internet of Things infrastructure management solution that will help our customers more efficiently manage, operate, scale and protect their IoT projects from the edge to the cloud. We also announced IoT partnership with HARMAN, Fujitsu and Samsung.

We were honored to be recognized for the third year in a row as one of the 2017 Fortune 100 Best Companies to Work For according to global research and consulting firm Great Place to Work in Fortune. I am grateful to the VMware team for delivering another consecutive strong quarter. As a team, we are all excited and committed to helping our customers succeed in their digital transformation journeys, our software and services help them build exactly what they need, the way they need it. It's a privilege to serve our customers and our partners.

Now I will turn it over to Zane.

Thank you, Pat, and thanks to all of you for joining us today. We're pleased with our strong Q1 results which reflect the benefits of our broad portfolio and the performance of our growth products. Our software-defined data center, end-user computing and hybrid cloud strategy is resonating well and driving increased customer interest across our product offerings. Customers are also excited about our upcoming vSphere-based cloud service on AWS. VMware Cloud on AWS service will be powered by VMware Cloud Foundation, which includes vSphere, vSAN and NSX.

Total revenue for Q1 grew 9%, and license revenue increased 7% year-over-year. Hybrid cloud and SaaS represented greater than 9% of total revenue and grew over 30% year-over-year. Within hybrid cloud and SaaS, our vCloud Air Network revenue grew nearly 40% year-over-year, with several partners up over 100% year-over-year. Non-GAAP operating margin for Q1 was 28.5%, and non-GAAP EPS was $0.99 per share, up 15% year-over-year.

Share count for the quarter was 414 million diluted shares. Cash and short-term investments totaled $8.6 billion. Approximately $900 million of this was domestic cash. Unearned revenue at quarter-end was $5.2 billion, with $1.9 billion of this amount long term. To calculate revenue plus sequential change in unearned revenue with the change in our fiscal year, we have provided the unearned revenue balance as of the beginning of the quarter in our financial statement and in the slide deck on our website.

With the sale of vCloud Air to OVH, unearned revenue for vCloud Air has been removed from our Q1 quarter-end unearned revenue balances. The impact of this removal is also reflected in our financial statements and in the slide deck on our website.

Using beginning of quarter unearned revenue balances and excluding the impact on unearned revenue from the sale of vCloud Air to OVH, the year-over-year growth rate for total revenue plus the sequential change in total unearned revenue was 12%, and the growth rate for license revenue plus sequential change in unearned license revenue was 10% year-over-year. We saw a good pipeline demand build during the January stub period which had some benefit for the bookings growth we experienced in Q1 for both license and total bookings.

Support and services, or S&S, bookings growth was also strong in Q1 primarily due to the continued high renewals. We continue to be pleased with customer commitments to our growing product portfolio. We had 6 large deals equal to or greater than $10 million in the quarter versus one large deal in Q1 last year.

Looking at our product performance. Both NSX and vSAN continued their strong growth trajectory in Q1. NSX license bookings grew over 50% year-over-year and customer count increased to over 2,600 total customers. Our micro-segmentation security use case continued to be a large driver of customer demand for NSX. vSAN license bookings once again grew over 150% year-over-year with continued momentum in customer growth to a total of over 8,000 customers. We believe we have the broadest offering in the hyper-converged market and that vSAN grew faster than the competition.

EUC license bookings for the quarter were up over 20% year-over-year, driven by healthy growth in both our mobile and desktop businesses. Total compute bookings as well as license compute bookings were each up mid-single digits year-over-year. Our vCloud Air Network business, along with our strong renewals business, both contributed to this quarter's growth in compute. Total cloud management bookings were up in the mid-single digits year-over-year and cloud management license bookings were down in the low teens year-over-year, a result of less management tied to specific large deals this quarter versus Q1 last year.

Turning to capital allocation. In Q1, we completed the remaining $125 million in stock repurchases from our December authorization of $500 million. In addition, we repurchased $300 million of stock in the quarter from Dell Technologies, taking delivery of 2.7 million shares in Q1 and the remaining 0.7 million shares early in Q2. We currently have $900 million remaining in our $1.2 billion repurchase authorization, which extends through the end of fiscal 2018.

Turning to guidance. Considering our strong Q1 performance, we're updating our full year fiscal 2018 guidance. We're increasing our total revenue forecast for 2018 to approximately $7,610,000,000, and increasing license revenue guidance to approximately $2,975,000,000.

We're expecting fiscal '18 non-GAAP operating margin to be approximately 32.5%, non-GAAP earnings per share of approximately $4.91 per share and diluted share count of 411 million shares. Cash flow from operations is expected to be approximately $2.7 billion. Although it's still early in Q2, we're seeing strong sales in the quarter benefiting from the momentum we saw in Q1. We expect Q2 total revenue of between $1,840,000,000 and $1,890,000,000. License revenue is expected to be between $695 million and $725 million.

We expect non-GAAP operating margin of approximately 30.5%, with non-GAAP earnings per share between $1.11 and $1.14 per share on a diluted share count of 412 million shares.

In summary, Q1 was a great start to the year, and we're continuing to see good momentum across the business in Q2. We're pleased with our strong quarterly results driven by customer demand for our broad product and solution portfolio. We're committed to providing increased value to our customers through our SDDC, EUC and hybrid cloud offerings. With that, I'll turn the call back to Paul.

Thanks, Zane. Before we begin the Q&A, (Operator Instructions). Operator, let's get started.

(Operator Instructions) And we'll take our first question from Keith Weiss with Morgan Stanley.

I was wondering if you could give us kind of an update. Now that you guys are fully integrated with Dell per se, and Dell has more VMware product in their sales toolkit, if you will, in their distribution channels, how that's been impacting results. Have you guys seen any initial impacts from the tighter collaboration between the 2 companies?

Yes. Thank you, Keith, and great to take your question. Overall, we made great progress with Dell this quarter. And Dell grew well and performed a bit better than our expectations for Q1, and we expect that momentum that we saw in Q4, Q1 to continue into fiscal '18. And the Dell EMC World event that we had was a really phenomenal event, lots of joint announcements, VDI complete, AirWatch on Win 10, VxRack and VxRail momentum, strong alignment around 14G. As I've said before, Keith, key areas for that momentum include compute, vSAN, VxRail, EUC, certain geos where they're just better penetrated. And as we've indicated, we expect approximately 1/4 of the $1 billion of synergies to be materialized this year so while still getting started, we've got lots of work to do yet. Dell has definitely been a very positive benefit, and we're excited to see that continue through the year.

No change in confidence in that $1 billion?

No. We're running a bit ahead, as I said.

We'll now take our next question from John DiFucci with Jefferies.

I guess the question is probably for Zane, and it has to do -- when I look at your results and all the adjustments, I think there's some confusion right now. So -- and the guidance is -- looks really strong. And the results look strong. But just to be clear here, the license dealings, excluding the vCloud Air sale and also adjusting for the 1 month thing that I think is where most of the confusion is, grew 10%. Is that correct? That's what you said, right, Zane?

Yes, John, this is Zane. Yes, let me go over what we mentioned. As you highlight, we've made the adjustment to the unearned revenue as a result of the disposition of vCA and the sale to OVH. So you're exactly right, the change versus the prior period is 10% for license and 12% for total bookings. So overall, we were incredibly pleased with the bookings that we saw in the first quarter. We're also very pleased with the momentum coming out of the first quarter which is why I think you see that in our guidance and you see us obviously moving our guidance quite nicely for the second quarter as well as the full year. So we feel confident with the business, where it is in the first quarter, and early results of the second quarter are solid as well.

That's helpful. I know that was a simple question, but your stock was down here and there's probably a lot more people out there smarter than me, I just wanted to make sure I didn't miss anything, it doesn't looked like I did.

No, you have it exactly right, John. I don't shy with -- I would have added that last part for you, but you're right. Why don't I give you a little more color on the stub period because I think, as you highlight, there may be some questions around the stub period, which we'll be detailing in our 10-Q. So as a reminder, the stub period ran from Jan 1 through Feb 3 of this year, and we recognized for that period $496 million in total revenue during the period. For some additional context, if you were to compare that to total revenue for the month of January last year in 2016, it was $482 million. On the spend side, it was sort of business as usual. Our operating expenses went up due to increase in headcount and headcount-related costs as well as a sales kickoff event which occurred during the stub period of this year. On the operating cash flow, as you recall, January is a strong operating cash flow month, operating cash flow was $361 million. So it's historically been a strong month for us and was the same this year. So hopefully, for those of you listening, this provides additional context for the stub period. But we couldn't be more pleased with where the business is right now.

Yes. And I would just add, for the stub period, we would call it business as usual for us in that 1 month and we operated as a very normal month. And clearly, Q1 was a very strong quarter of momentum. But for us, January was a generally softer month overall as normal, and we operated as normal in that month.

We'll now take our next question from Walter Pritchard with Citi.

I'm wondering, Pat, if you could give us an update from an AWS partnership perspective, any color you have out of customer betas or sort of the go-to-market planning on that and sort of when should we expect to hear -- I'm assuming VMworld, but any sort of road map in terms of further updates coming there?

Yes, thanks, Walter, always good to hear from you. Overall, the market interest in the VMware cloud and AWS continues to be very strong and significantly oversubscribed for the beta slots that we have available, positive feedback from early customers as we've indicated. And I'd say the beta, the development processes are going smoothly. As you said, we'll have availability of the service in the middle of the year, so we're on track for that. Overall, we're seeing that the excitement of the private cloud leader with a public cloud leader coming together remains firmly in place. And we'll, certainly, by VMworld, have a lot more to say about its availability and customers using it. And so far, on track, a lot of excitement.

And Zane, anything to add just on the financial impact or sort of how pricing will work with, for example, the installed base who's mostly paid you perpetual licenses? Or is it too early to talk about that?

Yes. Well, generally, we're not going to be announcing pricing until the availability, Walter. A couple of general comments about it. One is we have begun those pricing discussions with the beta customers. They feel very good with the pricing and the modeling that we've done around that. So we do feel confident that we're landing well in the marketplace overall with a very compelling service. We do believe that as we bring the service into the marketplace, it's unique in the sense that it gives us hybrid ability for customers which really allow them to seamlessly move without changing operations, management, et cetera, into a cloud experience. And that combination we think is very compelling from their operational benefits they get, in addition, the price of the service itself. With respect to impact on financials for the year, we expect it to be minimal this year, as we've said before, and we'll be giving more details on that certainly in our next quarter call.

We'll now take our next question from Mark Murphy with JPMorgan.

This is Matthew Coss on for Mark Murphy. You continue to have very impressive growth in NSX and vSAN in addition to great customer growth there. What are some of these I guess, customer pushbacks that are really sort of evaporating at this point? And do you see sort of any opportunity for just continued adoption at this pace throughout the rest of the year?

Overall, both products, NSX and vSAN, that you call out, both of them had very strong quarters. Our customer counts on NSX is at 2,600 customers. Deployments are continuing to grow rapidly. Year-on-year, that's 85% customer growth on NSX. As I've said before, we've really now integrated NSX into really everything that VMware does, our cloud offerings, our VMware Cloud Foundation products. We saw a very good strength in North America, commercial, EMEA, so it really now is well penetrated across the market. VSAN, again, a great quarter for vSAN, 150% growth rate, customer counts are over 8,000 now. And nothing in those would indicate any change in that kind of market acceptance that we're seeing. And in fact, we just came out of our Partner Leadership Summit last week with the top couple of hundred partners of VMware, and they're now seeing that market. And when the partners start to really ante into it, that really gives us a broadening of our ability to reach the market overall. So both products, very hot, both of them continuing to see great momentum.

We'll now move on to Matt Hedberg with RBC Capital Markets.

I have a question on IBM and, I guess, the expanded relationship there. Can you give us a little more detail on that partnership? When might we see some synergies there? And is there a way to think about that opportunity versus other partnerships like Dell or IBM -- excuse me, like Dell or AWS?

Yes. The IBM partnership, we really consider that one of our cloud network partners, and we really believe that IBM is really one of the mega-cloud leaders in the industry. I think everybody puts the range of mega-cloud players and puts IBM in that list. And what they're seeing is that the VMware offering on the IBM SoftLayer, now they call it the IBM Cloud, is just having great success in the marketplace. Many of the enterprise customers for IBM are very strong, right, many of those customers have large VMware footprint, so the combined momentum of us coming together is very strong. And our partnership, the pipeline of customers, the realization of that and revenue for IBM this quarter has been strong. Overall, that's seen in our numbers as part of the vCAN strength that we've had, which had another very strong quarter for us, and IBM's really one of the strong members of the growth that we're seeing in our overall vCloud Air Network. We do expect that we'll continue to see enhancements to the IBM offerings in the marketplace, and we're partnering with them to accelerate their offerings and their unique ability to benefit from the VMware Technologies in the IBM Cloud offering. So we really couldn't be happier than we are seeing with how IBM is partnering with us. I'd also point out that IBM Global Technology Services as a system integrator has been a great partner with VMware for a number of years, long before the cloud relationship. And that combination of GTS as well as IBM cloud for VMware customers gives them a very unique position in the market.

We'll now take our next question from Raimo Lenschow with Barclays.

Can I ask a question on EUC? I think I heard you correctly that you're over 20% license bookings growth. That's kind of like the strongest we've seen for a while. Can you just kind of talk a little bit about what you saw as the drivers there? And is that kind of a sustainable run rate?

Yes, Raimo. And I think if -- after the challenges that we had in this area last year, the EUC license growth greater than 20%, a really strong quarter, couldn't be happier with my team, in particular, AirWatch and Workspace ONE saw strong momentum, it's even better than that in many ways because some of the largest deals that VMware did this quarter were led by EUC. So in addition to the EUC component, many of these were large strategic deals, a major financial institution just anted into a full set of VMware because of EUC. Again, we continue to believe we're gaining market share in virtual desktops as well as mobile and identity, emerging market growth was doing very well and across the entire suite with some of the announcements we made with the partnerships as well, the Microsoft Azure partnership, the Oracle partnership, the Apteligent acquisition, the Google partnership along with Dell, all of those really give us enhancing strategic position in the marketplace. So combined together, we feel quite good about the growth in that business, and we believe it's a sustainable growth, above the growth rate of VMware overall.

Last point, 9 of our top 10 deals had EUC in them, so just a tremendous quarter for EUC team.

We'll hear now from Heather Bellini with Goldman Sachs.

This is actually Ted Lin on for Heather. Pat, I wanted to get your thoughts on overall IT spending. How is the environment overall? And are you seeing an uptick versus last year?

Yes, it's a great question. And I'll just say, from the macro sense, we feel good. We're feeling like that -- this idea of technology, breaking out of technology where now every business is becoming a tech business, every element of every business is becoming a tech business. This idea of digital transformation is, we believe, ushering in a broadening of the role of technology. So I believe that this is, overall, a period of accelerating growth for technology companies broadly. And I think companies that are well positioned for that are going to benefit by a good tailwind of tech growth in a broader sense. We believe that VMware, with our cloud offerings, our software-driven offerings, is uniquely positioned to benefit from many of those trends. And if you look at some of the, I'll say, related areas like IoT and NFV, they show even broadening of market opportunity for us. So we're feeling quite good about the overall tech spending environment in the broadest sense. And our ability to harvest it, we think, is pretty unique.

We'll hear now from Michael Turits with Raymond James.

You made some comments about the impact of January. You said it was a solid January. It did grow but not a bit as fast as the full quarters. So can you just clarify, was there any benefit from January sales flowing into this quarter at all?

Sure, Mike, I'll start then I'll let Pat give you a little more color on the quarter. I mean, obviously, when you have -- a January period which, as Pat alluded to earlier, is a soft month, it gives you an opportunity to take a look and inspect the deals a little more closely. We've been very pleased with the momentum we saw even coming out of the fourth quarter last year. So of course, January benefited from that as well as the first quarter as we head into the second quarter. So I think it's hard to parse out what any particular month did and its impact on the upcoming quarter, but we thought it was a fairly clean period, a stub period anyway, and we feel good about the first quarter, and we think it stands on its own merits.

Yes. Great Q4, solid performance in January. Clearly, January gave us a strong start to the year as well as -- everything was sort of in the starting blocks, ready to go for Q1. I'd also point out that it was a normal January for us, and Dell consolidates that. So they're motivated that we just execute business as usual through the January month. And we believe that Q1 stands on its own merits, and we delivered a great Q1.

We'll hear now from Gregg Moskowitz with Cowen and Company.

Per your 10-K, you had, I believe, a fairly significant increase in backlog exiting 2016. And Zane, just wondering, did a lot of that happen to get recognized in Q1? Or did most of that remain in backlog?

Yes, Gregg, let me give you a little color. Obviously, coming out of the K, we saw a mix of backlog which includes, as you know, license, SaaS and committed S&S. And generally speaking, it's recognized over multiple periods, including our stub period in January as well as Q1 and beyond. So I pointed out in my prepared remarks, we obviously saw good momentum even coming out of Q1 into Q2, and we've seen some good early sales in Q2. So we don't disclose backlog on a quarterly basis, but hopefully that gives you a little bit more color in what we saw at the end of the year.

We'll now move on to Jayson Noland with Robert W. Baird.

I wanted to ask a follow-up question on VMware Cloud and AWS and the dedicated hardware. Is -- given the demand, Pat, is that -- I guess, why, what's the purpose of dedicated hardware? And would that slow the ramp of the relationship going forward?

I'm not sure I understand the question. Could you -- what do you mean dedicated hardware?

Well, part of the relationship, as I understand it, is that the AWS facilities would include dedicated hardware for VMware.

Oh, okay, I understand what you're saying now. So the way the service is built, basically, it's a new hardware footprint that Dell is making available -- I mean, that Amazon is making available to us to run the full VMware cloud service on. So it's a new hardware footprint. Everything else about it is the normal AWS, and they're making it available to us that way. And part of this is, is that we're able to now run the full VMware stack. There's not a hypervisor underneath the VMware stack. We are the full stack all the way to the hardware level, and that gives us compatibility, that gives us performance, this absolute ability to have the complete VMware experience. And that's what's so compelling to customers, is that they're not giving anything up, right, from their VMware experience. If they can run vCenter, I think the most widely deployed management tool in the history of computing, right? Everybody can run it, they're using it all the time. They can now take advantage of this service in a seamless way. Early beta response, early customer response for the beta has been quite strong, a lot of enthusiasm to it. So we think we're well aligned on what customer needs are with the way the services stand up. It is elastic capacity because the customer is managing a vCenter environment, we're managing the infrastructure, we're doing the back ending with Amazon and making that seamless from the customers' experience as well. So in that sense, they're getting a cluster of vSphere, they're not managing the hardware underneath it, but it is dynamic and scalable as the AWS service, the ability to have elastic capacity on demand. And again, that is part of the compellingness of the services we're seeing from customers. Clearly, as we roll out and make it generally available, we'll go through a lot more details, right, of the experience itself. But so far, I'd say, we're on the money.

We'll hear now from Nehal Chokshi with Maxim Group.

The license guidance for Q2 is, I think, [$30 million] above where consensus is, yet your fiscal year '18 guidance for license, I believe, is only a $5 million raise. I think that then implies that you're expecting in the back half of fiscal year '18 a deceleration in license revenue growth. A, is that correct? And b, what's the rationale behind that?

Sure, I'll start with that and then let Pat add some color. If you take a look at license revenue, on a year-over-year basis, obviously, we feel very good about the momentum we're seeing in the first quarter and leading into the second quarter. If you take a look at the compares in license revenue, so we have easier compares on a year-over-year basis in the first half versus the first half of what we saw last year. So it's easier compare. We feel very good about the momentum. We're building in-license revenue. I think if you take a look at total revenue, and you look at first half versus second half seasonality on a normal year, we'll see -- you'll notice that our seasonality expectation is very similar to what we've seen historically. 2016 was a little bit of -- the anomaly because we saw such strength coming into the back half of 2016, but we feel very good about the momentum we're currently seeing as well as our guidance for the full year.

And just to add to it, the strategic resonance with customers is just increasing. The cloud strategy momentum, the comments on EUC earlier in the call, the NSX, vSAN product momentum, vCAN momentum, all of these pieces really give us confidence of the ability to execute, as we've said. And I think the Q1 performance, the Q2 and year raise are all indicative of that confidence.

We will now take our next question from Abhey Lamba with Mizuho Securities.

Pat, good to hear about the strong traction of NSX in large deals. Can you talk about the types of use cases and the customers and where you're seeing the adoption? And is it primarily a large company player? Or are you seeing it in the mid-markets as well?

Yes. And the question was on NSX?

Yes, please.

Yes. So definitely it's a larger play, a larger company play. It's a more enterprise play, not really in the mid-market yet. It is a more, I'll say, higher-end product today in that sense where you're solving unique and complex enterprise use cases. The use cases have continued to be, first and foremost, is the security benefits. Second has been the, right, application automation, deployment of applications in a more automated fashion. Third use case has been around the multi-data center, right, an ability to have transportability and connectivity across data centers. New use cases are starting to emerge. We, for instance, announced the developer-ready infrastructure, the partnership with Pivotal, so integrating it more fully into the container space. It also is part of the VMC, the VMware Cloud on AWS, the IBM offering, all of those are now including NSX. It will also be part of our Cross-Cloud Services, so we're rapidly expanding the use cases for NSX. We do believe as well that we are making progress to make the product, I'll say, simpler, more broadly deployed, introduce new price points and start bringing it down the stack. A lot of enthusiasm from our Partner Leadership Summit that we had last week. And when the partner starts showing up, that's when we can really start reaching the high end of commercial and the broader commercial marketplace as well. We've also seen Dell starting to resell it as well, and their ability to add momentum to it as well is starting to show up. So overall, we're feeling very good about that broader market momentum, and the use cases are expanding concurrent with that.

We'll now hear from Srini Nandury with Summit Redstone Partners.

Pat, can you comment on the competitive environment in the vSAN space? And what are some of the use cases your vSAN solution is being deployed?

Sure. Overall, vSAN, the great momentum, as we already commented on, clearly, the use cases have been any place that vSphere runs. As I tell my team, how many places does vSphere run? How many places does vSphere use storage, right? And the answer is 100%. So our target marketplace is every place there's vSphere, we have an opportunity to deliver vSAN, so we see it as a very broad market potential. Clearly, a lot of the new features and capabilities, new performance, stretch clusters, native encryption, something I'm personally very excited about, and the security benefit just gives us more and more breadth of use cases emerge as a result. Competitively, we'd say that it is a good market for us. And seeing the growth rates that we've posted, clearly, it's a market share gainer. It has been critical in the hyper-converged infrastructure category. That's where our vSAN Ready Nodes as well as the VxRail with Dell has been very strong. There are a range of competitive offerings, clearly, Nutanix, SimpliVity, Springpath, a variety of those in the marketplace, but vSAN has unquestionably had the fastest growth rate, the most customers, the category-defining product, and we're really feeling like we're racing ahead of all the alternatives.

Before we wrap up, I think that Pat had a couple of final comments.

Yes. Thank you so much for joining our call today. We're very pleased with our strong Q1 results, and I want to thank all the VMware customers, partners and especially my employees for a terrific quarter. We're committed to help our customers succeed in their digital transformation journeys and look forward to updating you again on our progress next quarter. Thanks so much.

That does conclude today's conference. Thank you for your participation and you may now disconnect.