VMware, Inc. Q1 2010 Earnings Call Transcript

Apr.20.10 | About: VMware, Inc. (VMW)

VMware, Inc. (NYSE:VMW)

Q1 2010 Earnings Call Transcript

April 20, 2010 5:00 pm ET

Executives

Michael Haase – VP, IR & Treasury

Mark Peek – CFO

Tod Nielsen – COO

Paul Maritz – President & CEO

Analysts

Israel Hernandez – Barclays Capital

Brent Thill – UBS

Phil Winslow – Credit Suisse

John DiFucci –JPMorgan

Derek Bingham – Goldman Sachs

Adam Holt – Morgan Stanley

Heather Bellini – ISI

Walter Pritchard – Citigroup

Jonathan Doros – Raymond James

Tim Klasell – Thomas Weisel Partners

Shaul Eyal – Oppenheimer & Co.

Brent Williams – The Benchmark Company

Operator

Good afternoon. Welcome to VMware’s first quarter 2010 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. At this time I’d like to turn the call over to Mr. Mike Haase, Vice President of Investor Relations. Mr. Haase, you may begin your conference.

Mr. Haase, we are unable to hear you at this time. Please check the mute function on your phone.

Michael Haase

– limited to statements regarding our financial outlook, future product offerings, and future demand. These statements are based on current expectations as of the date of this call and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities & Exchange Commission, including our Annual Report on Form 10-K for the period ending December 31st, 2009 that may cause actual results to differ materially from those set forth in our 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 intangible assets, employer payroll tax and employee stock transactions, the net effect of amortization and capitalization of software, and acquisition related items.

You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in our earnings release for the period ended March 31st, 2010 and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 30 days on our Company website under the Investor Relations link.

Our second quarter quiet period begins at the close of business June 16th, 2010. Also, unless otherwise stated all financial comparisons in this call will be in reference to our results for the comparable period of 2009.

With that, let me hand it over to Mark.

Mark Peek

Thanks, Mike, and good afternoon everyone. VMware had a great first quarter with record free cash flows, revenue, and operating profits. Our business was particularly strong in Europe, China, and Japan. The demand we witnessed in the December quarter somewhat unexpectedly carried over into the March quarter. We are not yet ready to assume that the world’s economy is robust and believe that w4e continue to benefit from pent up customer demand on the heels of a long dry period.

Our field execution was outstanding across the board and we are seeing the benefit of our international investments particularly in Japan and China. In Europe, we closed an eight-figure ELA that included over $8 million of license bookings. This is our largest ELS since Q1 2009.

We maintained strong discipline on product discounting and even though our mix shifted from Enterprise Plus towards the SMB focused vSphere packages, we were able to maintain our blended ASPs at similar levels to those in 2009. Customers continue to adopt the vSphere platform as a strategic investment that delivers substantial cost savings, improved efficiency, and flexibility for their business.

Our message is clear and is resonating with our customers. Cloud computing is not a destination, it is an architecture. The foundation of that architecture is vSphere, which enables customers to leverage their existing IT investment and greatly simplify their data centers while providing the flexibility to take advantage of the offerings from vCloud service providers.

During the March quarter we closed the acquisitions of RTO Software and Zimbra. In early April, we acquired certain of the management products, technology, and people from EMC’s Ionix group. Combined, we welcome the nearly 500 new people that these acquisitions bring to VMware and look forward to delivering new products to our customers.

These acquisitions compliment our virtualization solutions. We continue to invest in our core virtualization platform to maintain and extend our multi-generational lead over commodity virtualization offerings. We plan to release updates of both View and vSphere during the year.

We ended the quarter with nearly $2.8 billion of cash and $1.4 billion of deferred revenue. Strong revenue performance, improved operating leverage, and capital efficiency led the trailing 12 months free cash flows just short of a billion dollars growth year-over-year of 40%. We are pleased with the quarter and want to thank all of the people at VMware, our partners, and our customers.

Now, I will walk you through the details. Total revenue for the first quarter was $634 million, up 35% from a year ago. Total license revenue was $312 million, an increase of 21% from the first quarter of a year ago. Clearly, revenues surpassed our expectations as IT spending was stronger than expected, driven by a carryover of the pent up demand we witnessed in the December quarter.

We also benefited from strong sales across our global regions and all customer segments. In particular, Europe was stronger than expected and the team closed an eight-figure ELA with a larger customer that netted over $8 million of license bookings.

In addition, our OEM partners had a very strong December finishes for the U.S. resulting in better-than-anticipated revenue. Finally, we saw enthusiastic demand for Essentials and Essentials Plus primarily in the SMB markets.

Despite the unit mix shift to lower priced packaging, discipline around our discounting allowed us to maintain our blended ASPs flat to Q4.

Software maintenance and support revenue was $267 million, an increase of 52% from last year. Our maintenance recovery program has now been in place for a full year, and although down sequentially from Q4 back maintenance revenue almost doubled from Q1 a year ago. As the program will see its anniversary in Q2, we expect back maintenance for the balance of 2010 to be lower compared to the same period of 2009. In total, renewal bookings grew approximately 56% compared to the first quarter of 2009.

Professional services revenue was $54 million, an increase of 44% from last year, and stronger than our expectations. Customers consumed professional service credits primarily for training and to assist in planning and implementation of vSphere deployments. Our deferred revenue related to professional services declined sequentially by $7 million.

U.S. revenues increased 30% from a year ago to $317 million, representing half of total revenue. International revenue grew 40% to $317 million driven by strong demand across geographies, particularly Europe, China, and Japan.

Enterprise license agreements were in the mid-teens as a percentage of total bookings and transactions with order values less than $50,000 represented approximately half of total orders.

As a remainder, late in Q2 2009 we started to bill and collect and collect in euro, pound sterling, yen, and the Aussie dollar. Until we have a full quarter of prior year comparable, we won't be able to provide you with a constant currency revenue impact.

I’ll now provide some details on our operating expenses. Unless otherwise noted all references to our expenses and operating results are on a non-GAAP basis, which are reconciled in the press releases tables and posted on our Investor Relations website.

Total operating expenses, including cost of services and cost of license, increased 2% sequentially to $459 million driven largely by increased headcount, the seasonal impact of payroll taxes, and robust set of internal IT initiatives to deliver productivity tools to our field and support organizations aimed at significantly improving customer and partner experience. As a percentage of first quarter revenue, cost of revenues were 12.2% consistent with our 2009 run rate.

First quarter R&D expenses increased sequentially to $124 million, or 19.5% of revenue, as compared with 18.7% in the fourth quarter of 2009. Most of the increase was headcount related. Sales and marketing expenses were $200 million, or 31.6% of revenues compared with 35.1% in the fourth quarter. The decline is largely the result of Q4 variable sales compensation.

G&A expenses were $58 million, or 9.1% of revenue compared to 8.45% of revenue in Q4. The sequential increase was significantly influenced by contractor costs associated with IT projects in progress and our global leadership meetings and 2010 kick-off events.

Our operating profit measured on a non-GAAP basis increased 11% sequentially to $175 million or 27.6% of revenue. This beat our forecast range due primarily to operating leverage from our revenue performance. The quarter benefited by approximately 60 basis points from FX rates as compared to Q4, but was negatively impacted by approximately 130 basis points from our Zimbra and SpringSource acquisitions.

The non-GAAP diluted EPS was $0.32 a share on 417 million diluted shares. Our share repurchase program did not have an impact on EPS during the first quarter.

Now onto our balance sheet and cash flow statements. Our balance sheet remains strong with cash at quarter-end of nearly $2.8 billion, a sequential increase of $270 million driven primarily by the seasonal collection of accounts receivable from the December quarter billings. During the March quarter, we used nearly $200 million for capital spending, M&A activity, and our share repurchase program.

During the quarter we announced authorization to repurchase up to $400 million of our Class A common stock through 2011. The objective of the VMware program is to partially offset the dilution from employee stock issuance.

Total deferred revenues were $1.4 billion, up 48% from the same period last year and a 2% sequential increase. As a reminder, over 90% of our deferred revenue is recognized with the passage of time or the delivery of professional services. The remainder is solely tied to product release events.

At the end of the quarter we had approximately 7400 people, an increase of 300 from the beginning of the year. Approximately a third of these were from the acquisitions of Zimbra and RTO. However, the M&A activity of early April related Ionix increases our Q2 beginning-of-quarter headcount to approximately 7700 people, a 9% increase from the beginning of the year.

Non-GAAP operating cash flows, which exclude adjustments for capitalization of software development costs and excess tax benefits from stock compensation were $357 million for the quarter, and nearly $1.1 billion for the trailing 12 months ended March 31st.

Free cash flows for the quarter were $326 million and $972 million for the trailing 12 months. Free cash flow per share was $0.78 cents for the quarter. Free cash flow per share for the trailing 12 months was $2.39. Free cash flow per share can be volatile in the short term, so we believe looking at it over a trailing 12-months is a better indicator of progress. We are paying increasing attention to the metric as a financial progress in our business as it balances operating results, cash management, capital efficiency, and share dilution.

The fully diluted share count increased to 417 million for the first quarter driven by the impact of a higher share price on the calculation of dilutive securities. We expect our Q2 diluted weighted average share count will by approximately 425 million and approximately 430 million shares for the full year.

Before I hand it off to Tod, I want to share with you how we were looking at the business to give you some assistance in developing your estimates. During the first quarter we were the beneficiary of pent up customer demands that carried over from the fourth quarter. We did not forecast the eight-figure ELA and we don’t have anything of this size in our current second quarter pipeline. Make no mistake, Q1 was a great quarter and we are encouraged by the uptick in SMB demand and the strong preference of our customers when faced with competitive options.

Given this, we are planning for the future assuming the economic recovery and IT spending will be gradual. We are increasing our revenue and operating margin guidance as a result of our increased near term visibility and the expected incremental revenue from our M&A activities. We expect second quarter revenues of between $635 million and $665 million, flat to up 5% sequentially, and a sequential decline in license revenue. Revenue from our recent M&A activity represents low-single digit percentage of our guidance.

As a remainder, the second quarter comparable to last year is relatively easy and over the last two years license revenue has declined in Q2 relative to Q1, primarily as a result of our reporting of OEM revenue. We expect the acquisitions we have made to be further dilutive to our non-GAAP operating margins.

Our 2010 merit [ph] increases take effect in Q2 and will cost 120 basis points to margin. Taking into our account our adjustments to GAAP operating income that Mike disclosed at the start of the call, we expect second quarter non-GAAP operating margins to be between 25% and 27%. We expect our GAAP operating margin to be approximately 13 to 14 percentage points lower than our non-GAAP operating margin.

We have established a high bar given our performance over the past two quarters relative to expectations. The second half of 2010 is a much more difficult comparable than the first half particularly in the first quarter, which in 2009 included the impact of our promotion to upgrade customers to Enterprise Plus. We continue to set six month quarter plans and operate our business in a half yearly rhythm, but expect Q3 license revenue to be flat to slightly down from Q2 reflecting seasonality. We also expect a currency headwind on revenue in the second half as we have the anniversary of our local currency billing and collection.

We are currently planning on 2010 revenue of between $2.625 billion and $2.725 billion, or growth of 30% to 35% for the year. From a margin perspective we will continue to invest both organically and through acquisitions. Our current expectation for the full year non-GAAP operating margin is a range of 25% to 27%, but this could be disrupted by M&A activity. We expect our 2010 GAAP operating margin to be approximately 14 to 15 percentage points lower than our non-GAAP operating margin.

To summarize, Q1 was a great quarter and we were pleased with our execution and solid performance. We are planning for the future assuming the economic recovery will be gradual. We continue to manage our resources prudently while making the key investments necessary to maximize our long term growth in free cash flow per share. Tod?

Tod Nielsen

Thanks, Mark. Good afternoon. As you just heard from Mark, it appears the technology industry is broadly benefiting from pent up customer demand. And VMware is no exception. But as we look at our first quarter performance, VMware also benefited from strong field execution around the world and solid product line performance across all customer segments. Further, we are experiencing not just revenue growth but an overall strengthening of our existing enterprise relationships, and are making progress expanding our footprint within the government sector as well as the small and medium business market.

vSphere continues to gain in relevance as customers are increasingly utilizing the advanced features of our core virtualization platform as they progress to the next phase of their virtualization journey. Our most recent customer survey showed strong adoption of what we considered the more unique and innovative vSphere functionality most directly associated with the business production phase of the virtualization journey.

For example, within the last year we saw the usage of a feature, which enables the automated load balancing of VM’s increase from being used by 35% of customers to 56% of customers surveyed. Similarly, the usage of Storage VMotion nearly doubled and increased from 25% to 49%.

We also saw a very fast uptake of the new features we brought to market with the release of vSphere 4 in Q2 of last year. Of the customers who upgraded to vSphere 4 by the end of 2009, 34% were already using fault tolerance in production and 29% were using vStorage thin provisioning in production.

These statistics illustrate adoption points along the virtualization journey. Further, as we learn more about our customer’s real world experiences and deployments, we tailor our solutions, professional services, and go-to-market strategies to help them accelerate their adoption and progress on the journey.

We are also beginning to see the SMB market increasingly value our most innovative technologies. In general, the SMB market once it begins the virtualization journey is progressing along at a much faster pace than enterprises partly because they have fewer servers, but also they have fewer people, processes, cultural implications to deal with as they transform their IT departments. We certainly expect competitive pressures to grow in the SMB market, but as of today we continue to see good growth in this market segment and have maintained our blended ASPs over the past several quarters.

We are investing on all fronts to take advantage of our momentum. We are seeing the rewards of this investment especially in Japan, China, Russia, and across Europe where we are now fully executing an aggressive expansion effort. As an example, in Japan in Q1 we saw year-over-year revenue growth of 100%.

The desktop virtualization continues to show promise with an increasing portion of our field organization engaging with customers on desktop evaluations and running proof of concepts. Further, we are seeing our early adopter customers broaden their desktop deployments, some into several thousand and even to then thousand plus desktops.

A specific example, in Q1 2010, one of the largest banks in the world made the decision to expand their virtual desktop deployment to 30,000 seats, up from their initial 3000 seat deployment. Key drivers for them were centralized management, locked-down security while delivering the best user experience thru VMware View’s protocol PC-over-IP. While we have a number of success stories, this market opportunity has not yet tipped and our challenge remains in moving the broader market from evaluation to purchase.

We expect to learn more about how this market will unfold over the coming quarters. I remain excited by and focused on the desktop opportunity. Overall, I am pleased with our performance and results in Q1. From an operations perspective, our goal is to consistently strike the right balance of executing on our quarterly plans while building the foundation of our business that will allow us to scale and grow over the coming years.

With that, I will hand the call over to Paul. Paul?

Paul Maritz

Thanks, Tod. As Mark and Tod have noted, we saw very positive results during Q1 as our customers responded to the fundamental value proposition of virtualization as being not only the way to increase efficiency in the short term but also being the strategic evolutionary path to a better way of providing IT services in the future.

We see increasing numbers of customers not only wishing to push for deeper virtualization but to now reach for a true private cloud, which will enable them to operate like internal service providers, a concept we refer to as IT as a service. As we have outlined before, our goal is to be able to offer the software to not only build these private clouds but to manage them, to develop for them, to offer core services that will sit on top of them, and to be able to enable hybrid clouds, which span both the private and the public cloud.

During the course of 20100 then we will significant releases and updates of all of our major products to enable these goals. We will update our core vSphere product line, which offers the foundation for both increased usage of virtualization and the private cloud. As Tod noted, we are pleased with the way our customers are adopting and exploiting the new functionality that we introduced in vSphere 4.0 last year. We will build on these capabilities as we seek to further increase scalability and deepen the level of automation we can offer in the data center.

We will also extend our vCenter management product line. In addition to the internal development we have already underway, we announced during the quarter that we have acquired certain assets from EMC that pertain to configuration control, compliance management, application discovery and service management. These assets will be integrated with our current management offerings to offer a more complete solution for managing both private and hybrid clouds.

We will also significantly update our View desktop product, our View desktop virtualization product line. As Tod noted, we continue to see strong customer interest and activity here with some customers pushing ahead with very large deployments.

We will see both updated and new products coming from our recent acquisitions. In particular, we are pleased with the progress that SpringSource group is making maintaining their lead in the Java and open source development space. As shown by the recent acquisition of their RabbitMQ messaging team and technology, we intend to build on this lead and expand our range of offerings that are useful in the context of both the private and the public cloud.

The Zimbra team is now being part of VMware for a quarter. We expect to build on their position as the leading open source mail and collaboration product. Zimbra will provide an important scalable solution that can be hosted on the private and the public cloud by businesses and service providers.

In summary, we remain convinced that the industry is at the beginnings of a major and a far-reaching transition from the PC client server era to the cloud era and that virtualization offers the bridge between the two. This is a huge opportunity for VMware and we remain committed to making the investments in our organization, in organic development, in technology acquisitions, in sales and marketing capabilities, and the partnerships necessary to realize it.

Our sales performance over the final months of 2009 and in the past quarter is certainly very good news and a testament to great products and good execution by our sales teams. Things look positive as we look forward, but as Mark commented, I am not sure if we have sufficient data points to accurately predict the slope of the curve coming out of the recession and to banish the uncertainty that persists in the macroeconomic picture.

We are more than holding our own versus our competitors, but we also know that they are determined and have deep pockets. So while we remain fundamentally positive we know that we cannot relax and we need to resist the temptations of exuberance.

So, with that we will open it up for questions now. Operator, let's start the polling process please.

Question-and-Answer Session

Operator

(Operator instructions) And we’ll go first to Israel Hernandez with Barclays Capital.

Israel Hernandez – Barclays Capital

Good afternoon everyone. A question on your comments around your focus on the SMB. Obviously you have pretty Greenfield opportunities for VMware. You recently introduced some price promotions during March. So, want to comment in terms of how that promotion is going and how do you see the opportunity unfolding over the course of the next – over the next several quarters.

Tod Nielsen

I will take the first, this is Tod. Our SMB promotion we put into place at the beginning of March and are seeing great uptick of our vSphere Essentials product. As Mark mentioned on – in his scripts, we actually moved, saw an increased net volume and so there is shift from the Enterprise and Enterprise Plus products to Essentials and Essentials Plus. And so we are seeing good adoption, good strength in that market channels working well with us and we are very encouraged. We are also encouraged that even with this price promotion that we were able to manage our discounting such that overall our blended ASPs were able stay the same as they were in 2009.

Israel Hernandez – Barclays Capital

And was the focus – if I could followup –was the focus there really to go after the Greenfield as opposed to any competitive pressures that you may be starting to see in the SMB channel?

Tod Nielsen

Correct. The focus was the Greenfield opportunity. There is a lot of – around the world lot of SMB out there and it’s a great opportunity for us to get our product in their hands.

Israel Hernandez – Barclays Capital

Great. Just that [ph]. Thanks a lot.

Operator

And we’ll go next to Brent Thill with UBS.

Brent Thill – UBS

Good afternoon. Mark, I was wondering if you can address the conservative Q2 license guide at least from our perspective and also if you look at the maintenance catch-up program, can you just bring us up to speed? It sounds like you expect that to tail off, but it certainly seems like you are having a lot of new licenses, so I would expect that that carryforward on maintenance would also – would help you out going forward. Can you just address both? Thanks.

Mark Peek

Sure, Brent. First on the sequential license decline, a number of factors. First, the large ELA that we booked during Q1 was about $8 million and that wasn’t in our original forecast. If you look back to Q1 of last year we had a similar phenomenon with some large government deals that we booked and then Q2 declined sequentially.

Secondly, our OEM license revenue is seasonal and so we benefited from the December shipments of the (inaudible) system vendors in our Q1 and just even though server shipments are strong, they are down sequentially in Q1.

Finally, we have a bit of license revenue uptick from the acquisitions, but it’s not enough, not enough offset the other two. So, this is really consistent with the past two years of license revenue declining in Q2 sequentially from Q1.

With respect to maintenance recoveries, the way that that program works is it was focused on companies that had not renewed upon their renewal period. We got very disciplined operationally beginning in Q2 of last year to make sure that we were reaching out to customers that hadn’t renewed automatically. And so the recovery revenue that we expect, in other words, going back and capturing maintenance that isn’t within the period upon the renewal, we just expect that maintenance to decline over time as we capture new licenses as they are booked on an annual basis.

Brent Thill – UBS

And just to be clear, you had two government transactions in Q1 of last year worth $20 million and this Q1 you had an $8 million transaction, so there were no other large transaction. It’s a $20 million versus the $8 million contrast?

Mark Peek

Yes, and that’s a license, that’s license revenue. And so a year ago we had just short about $20 million of license revenue. This quarter one large one, but a little bit – a bit of a robust business on ELA.

Brent Thill – UBS

Right. Thank you.

Operator

And we’ll go next to Phil Winslow with Credit Suisse.

Phil Winslow – Credit Suisse

Hi guys, good quarter. I just have a couple of questions, first, just on the desktop side. I wondered if you can just talk about trends in desktop virtualization you are seeing and then when you start to think that that’s going to actually see an inflection point occur, is it this year, is it next year? And what do you actually think you need to see in the market?

And also just from a spending perspective, clearly you are raising your operating margin guidance for the full—where do you expect most of that leverage to come from? Thanks.

Tod Nielsen

This is Tod, I will take the desktop point and I will let Mark address the margin. With respect to the desktop, we are seeing a lot of interest from customers. Most every customer we are engaged with wants to hear about our desktop virtualization strategy. Many are running proof of concepts. We’ve got our field organization and our partner organization really ramped up to drive and provide the information our customers need to evaluate. I think another driving factor is going to be the current desktop fleet out there is aging and with the pending Windows 4 upgrade many customers are saying if they are going to virtualize, if they are going to upgrade to Windows 7, they want to virtualize at the same time. Exactly when this market is going to tip though we don’t know. We were saying – engaged and focused on it, but I couldn’t tell you if its going to be at the end of the year or next year or exactly when that’s going to be but our eyes are certainly on the ball and we are going to make sure that when it does tip, we are there to take advantage of it.

Mark Peek

And Phil, this is Mark. Our guide in January for the full year was to continue to target around the 25% range in operating margin, which is at the low end of the guidance that we’ve provided today of 25% to 27%. That said, expectation on operating leverage are going to come from the recognition of deferred revenue as the maintenance amortizes off as we have building that balance over most of the quarters as well as our professional services revenue, which has lower general margin isn’t growing as quickly as the rest of the business.

Operator

And we’ll go next to John DiFucci with JPMorgan.

John DiFucci –JPMorgan

Thank you. Mark, I want to just circle back to the guidance and you’ve obviously put up some good numbers, so looking sequentially it’s I guess not that surprising to see – to expect something to come down, the license to come down. But last year truly was an anomaly with the economy deteriorating, continuing to deteriorate from the March to the June quarter. And then if you look at 2008, if I look back at my notes anyway, it was a very disappointing quarter for you. When I look back the last couple of years before that you actually had an increase and that’s normally what we expect for It spending from the first to the second quarter. So – and then I guess you also are saying you expect to be flattish to perhaps down in the third quarter. And not to take anything away from what you have done the last couple of quarters, but when I look at it and there is a not a lot of history for you guys right, but it looks like you’ve been putting up as far as license goes sort of normal seasonality. And to just – excluding last year – to sort of depart from that it just sort of begs the question and I would understand if you are trying to be a little more conservative, but given the kind of results you put out the last couple of quarters I just wonder if you could just talk a little more qualitatively about that.

Paul Maritz

Sure, John. You know the fact is that we believe we benefited in Q1 from pent up demand that we saw in the fourth quarter and that there were significant surges in buying in the first quarter. On top of that we – it’s been a year since we have had an eight-figure enterprise license agreement as you saw our ELA percentage as a total of bookings was in the mid teens this quarter in a times that’s crossed the 20% or 25% range that accelerates the recognition of license revenue. We are also just in the throws of planning the back half of 2010 and as we look ahead although we are optimistic, we are still cautious with respect to what the economy has in store for us as well as the fact that we do have competitors who are willing to throw money at the market and so we are just approaching 2010 with caution and assuming that both the economy and IT spending will improve gradually.

John DiFucci –JPMorgan

Okay, thanks.

Tod Nielsen

Sorry John, Paul, I just wanted to add a – color comment there. I think it's still too soon to say that we are back in normal waters. I think we are still kind of (inaudible) some ways coming out of the recession last year and we are just uncomfortable saying that that’s all behind us, we are back to normal patterns, et cetera.

John DiFucci –JPMorgan

Okay, that’s fair. Thank you.

Operator

And we’ll go next to Derek Bingham with Goldman Sachs.

Derek Bingham – Goldman Sachs

Hey everybody. Congratulations. Mark, just on Q1 license again, in the last quarter or two has there been any meaningful amount of license revenue that comes off the balance sheet, also that makes the sequential compare harder?

Mark Peek

No.

Derek Bingham – Goldman Sachs

Okay. Also I wanted to ask about cash flow. It’s – you know your cash flow generation is extraordinary I think relative to your net income and relative to peers. As that gets more and more focused, going forward this year, could you give us any thoughts on how you would expect cash flow to grow relative to net income? I mean in ’09 cash flow grew I think over 20% even though non-GAAP net income was down a little. Can it outpace again this year or what are the dynamics that will affect its relative growth of cash from ops?

Mark Peek

Yes, Derek, it’s a metric that internally we are more and more focused on because it encompasses all of the elements of running our business, certainly first and foremost is bookings. And we have been very successful perhaps much more so than our peers in being able to get multi-years of maintenance when we sell a new license. And so that’s the primary driver on the input side. We’ve also had discipline in our cost execution. We have good receivables management. We have kept accounts receivable days and our DSO under 50 days for some time. And so it's really just across the board focus on cash flow as a measurement and as a metric for the business. That said, the M&A activity does put pressure on cash flows. That’s something that we are willing to live with because we see as much as you’d see capital investment is that we are investing for the future and building out products that will help us in this marketplace.

Derek Bingham – Goldman Sachs

Okay, just one more followup on that. Could you talk a little bit about the ELA renewal wave that everybody has been talking about on the way? How much of that have you already started to see and is that something where you’ve got ELA renewals coming on top of now your run rate new ELAs just kind of one more thing it keeps cash flow generation strong this year, even accelerate it further?

Tod Nielsen

Yes, this is Tod, I will take that. As you know, we’ve started kind of in earnest our ELA program in 2007 and the majority of them were three-year terms and so many of them will be coming – will be expiring in the back half of this year and will be up for renewal. In Q1 we renewed the majority of the ones that were coming due and as well we are adding new ones to the list as well. We expect over the course of the year to renew these as they come forward. One of the things we have been asked that we are doing aggressively is pulling things about [ph] forward. I mean we are pulling some forward as the customers engaged us, but we are working at the customer’s pace and tracking carefully the deployments and where are they with respect to their license consumption and making sure that we can not only renew the deal with respect to maintenance, but also up-sell them some of our management products and our desktop products as well.

Derek Bingham – Goldman Sachs

Got it. Thank you.

Paul Maritz

This is Paul. I just add a comment on that is we’ve been very gratified by the response we are seeing from customers in terms of renewing those ELAs. Almost without an exception the ELAs that have come due have renewed and those that are coming due we are seeing very encouraging signs from the customers that they intend to renew.

Derek Bingham – Goldman Sachs

Thanks, Paul.

Operator

And we’ll go next to Adam Holt with Morgan Stanley.

Adam Holt – Morgan Stanley

Great. Thank you. If I can just ask a question or two about the M&A commentary, first of all could you remind us what percentage of you $2.8 billion in cash is in the U.S.? And then secondly, as we think about M&A on a going forward basis obviously a couple of deals year-to-date. Should we expect you to be more aggressive, should we expect deals to get larger, and generally without obviously naming names, what should we be thinking about strategically that you would like to add into the portfolio?

Mark Peek

Adam, just on the cash comment, a majority of – more than 50% of our cash is U.S. based and available for purposes in the U.S.

Paul Maritz

I think – yes, this is Paul – in terms of our direction, obviously we are not going to go into any detail of that and drive prices up. But the general rule is we are seeking to invest for future capability so we are seeking to look at things that can strategically add to our technology repertoire rather than bulking up on revenue.

Adam Holt – Morgan Stanley

And if I can just ask a followup then about the product mix, Enterprise Plus it sounds like you saw a little bit of a shift towards into the lower end SKUs. Do you think that’s primarily driven by the incentive programs in the quarter or is that more of where you are in the product cycle and how should we be thinking about mix going forward as we get through the promotions in the back half of the year? Thanks.

Tod Nielsen

Yes, with respect to the shift, I think it’s partly because the SMB market is just so large as far the opportunity, the number of customers are to touch and with our promotion we certainly help to accelerate some of the focus on that space by us and our channel partners. So, I don’t think it’s indicative that we are going to see things shift like enterprises or using lower end SKUs but more just as that market opportunity grows and matures and SMB will expect to see continued growth in the SKUs that are targeted on that market.

Adam Holt – Morgan Stanley

Great. Thank you.

Operator

And we’ll go next to Heather Bellini with ISI.

Heather Bellini – ISI

Hi, I had a followup question on the ELA renewal comments and then I had another question about ASPs. On the ELAs, I was just wondering, Paul or Mark, if you could share with us the renewals on average, the ones that you are seeing from 2007, are they coming in at a higher amount than the original ELA, just to get people a sense of the book to bill math, and then I have a followup?

Mark Peek

Yes, Heather, this is Mark. Yes, in general ELAs are coming in at amounts larger than the original amounts that we booked.

Heather Bellini – ISI

Okay. Thank you. And then the followup would be can you talk about your expectations on ASPs going forward and also I think you mentioned that you are going to have an update to the product portfolios in the second half of the year. Could you talk to us a little bit about the potential pricing changes we might see or the SKU changes we might see when you release your new enterprise products later in the year?

Mark Peek

Yes, just expectations on ASPs, we have programs in place to make sure that we are doing a good job of managing discounts against the list and we were very successful this quarter and we expect the success to continue by the field organization. Certainly as it's largely depended upon how the SMB market does and if we continue to grow the SMB there will be continue to be downward pressure on overall ASPs. With respect to packaging and pricing, we are just not ready to talk about anything until we announce it first to our channel and to our field. And we are always exploring how we might best optimize pricing.

Heather Bellini – ISI

Great. Thank you.

Operator

And we’ll go next to Walter Pritchard with Citigroup.

Walter Pritchard – Citigroup

Hi, thanks. Just a kind of one follow-up on the ELA question. I guess just want to clarify, I guess as I understand it the ELAs, the customer comes in and renews the maintenance and you mentioned that you have seen an uptick in terms of the ELA size in terms [ph] of renewal. Is that relative to the actual dollar paid or you are talking about just the footprint of the deployment?

Mark Peek

It’s really both. It’s – the total size of the enterprise agreements are growing and we are seeing new license sales into those organizations.

Walter Pritchard – Citigroup

Got it. And then just to help us sort of understand the Q2 dynamic, but I think it would be helpful if we could get a sense of the kind of order of magnitude contribution from the OEMs as those partners have an impact, a delayed impact on rev rec just to help us understand the Q2 sequential decline possibility?

Mark Peek

Sure. It’s like the large ELA we booked this quarter; it’s single digit million.

Walter Pritchard – Citigroup

Single – hold on – single digit millions. I guess what I was trying to get at is percentage of the business that’s coming through OEMs.

Mark Peek

Yes. We don’t – we haven’t split out by channel what percentage is coming out, but if you look at the sequential move between Q1 and Q2 we expect it to be a single digit million.

Walter Pritchard – Citigroup

Okay. Thank you very much.

Operator

And we’ll take our next question from Jonathan Doros from Raymond James.

Jonathan Doros – Raymond James

Hi guys. You mentioned that you’ve seen a detraction with View. Can you just may be provide roughly how much you did during the quarter and maybe how much View is baked into 2010 guidance?

Mark Peek

We are breaking out by product category our revenues or bookings. View certainly has an aggressive business plan inside. And that’s appropriately baked into the guidance as well as into the pipeline.

Jonathan Doros – Raymond James

Can you guys talk about it may be seats deployed out there?

Tod Nielsen

At the end of Q4 was that of the roughly 1.5 million virtualized desktops that were out there we had over a million of them and so we felt strong in the VDI space, but that’s the last data we talked probably about.

Jonathan Doros – Raymond James

Thanks.

Operator

And we’ll take our next question from Tim Klasell with Thomas Weisel Partners.

Tim Klasell – Thomas Weisel Partners

Yes, good afternoon everybody. Wanted to jump over to the international portion of this which did quite well. Can you give us some color on how far along your international customers are in virtualization, what products are doing better, so should this trend continue what changes to the business are revenues flow should we be thinking about?

Tod Nielsen

What we are seeing in Japan and China and Eastern Europe and some of the expansion markets are customers are looking at the early phases of virtualization and so in the first part of journey it’s typically around CapEx reduction and the value proposition is incredible where you could buy 10 servers or you can buy one and so it’s still early stages, much like VMware was four or five years ago. So we are not seeing as much of in general the advanced products around management or site recovery manager and more folks are looking at View and core vSphere as they are building their base virtualization strategy to get through phase I. But as I mentioned, we are seeing a strong uptick and seeing good results from these investments and expect that as they get through this phase of the journey they will catch up and look at some of the more advanced features to building a private cloud like Paul talked about.

Tim Klasell – Thomas Weisel Partners

Okay. Thank you.

Operator

And we’ll go next to Brian Marshall with Broadpoint AmTech. Mr. Marshall, your line is open, please check your mute function, we are unable to hear your at this time. Once again, Mr. Marshall, we are unable to hear you at this time, please check your mute function.

Operator

And we’ll take our next question from Shaul Eyal with Oppenheimer & Co.

Shaul Eyal – Oppenheimer & Co.

Thank you. Hi, good afternoon guys. Good quarter, congrats. Two quick questions on my end. The eight digit contract, the European customer, is that an existing – an extension of an existing contract or a new customer?

Tod Nielsen

It’s an existing customer.

Shaul Eyal – Oppenheimer & Co.

Got it. And generally speaking, in terms of not necessarily ASPs but more status cycle are days lengthening or kind shortened right now, what’s the view on that point?

Tod Nielsen

I am sorry; I lost a part of that question. Can you repeat the last part of the question again–?

Shaul Eyal – Oppenheimer & Co.

Absolutely. I was asking about the status cycles, are they lengthening or are they shortened right now?

Tod Nielsen

So, for this year the sales cycles are about where we’ve seen them. On the desktop side they are consistent with other desktop sales cycles, but they are certainly a longer sales cycle than we see with the vSphere. So, within the product line we are seeing consistency across the sales cycle durations, but there is definitely a difference between selling a View deployment versus vSphere.

Shaul Eyal – Oppenheimer & Co.

Got it. Thank you.

Michael Haase

Operator, we are going to take one more question please.

Operator

Great. We’ll go next to Brent Williams with The Benchmark Company

Brent Williams – The Benchmark Company

Hi, thanks for letting me slide in under the wire. Wanted to talk about some products in the cloud division. You hired a guy in March that’s the leader of the Redis open source memory cache. And that’s one of those technologies that go under the no sequel tag, so it’s the – that movement to all the cool kids are getting caught up in. And I am an old database guy, so I know that relational database is really unsuitable for storing stuff in the cloud and there is a lot of small players in there. So, by taking this on, are you really tipping your hand regarding entering the sort of the emerging or alternative database market, not trying to compete with Oracle, but by saying, hey, that stuff doesn’t work, here is the solution.

And can you give us any sort of larger thoughts about the storage architectures for the cloud that you are thinking about. Not talking storage management and integrating that with vSphere, the classical kind of thing, I am talking about more advanced technologies like that.

Paul Maritz

This is Paul. I would be happy if you had to come around and have a cup of coffee with me and we could discuss that for several hours. The very, very short answer to your question is that we are not trying to get into the database business per se. We are trying to be into the business of enabling applications for the cloud, both private and public. And as I said building off of our SpringSource acquisition we are adding to the repertoire of underlying middleware and technologies that we think are going to be needed to generate – to develop a new generation of applications. So, in that sense our hiring of the gentleman in question is a further indication as was the RabbitMQ acquisition of our intent to build a very compelling suite to enable you to build cloud based applications.

If you want us to get into the whole database and date storage discussion, as I said, swing by and we can have a long and interesting debate about that.

Brent Williams – The Benchmark Company

I’d love to take you up on that. Thanks for taking the question.

Michael Haase

Great. Thanks a lot. That concludes the call.

Operator

This does conclude today’s conference. Thank you for your participation and have a great day.

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