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VMware (NYSE:VMW)

Q3 2011 Earnings Call

October 17, 2011 5:00 pm ET

Executives

Paul A. Maritz - Chief Executive Officer, Director and Member of Mergers & Acquisitions Committee

Mark S. Peek - Chief Financial Officer and Co-President of Business Operations

Michael Haase - IR

Analysts

Adam H. Holt - Morgan Stanley, Research Division

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Brent Thill - UBS Investment Bank, Research Division

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Walter H. Pritchard - Citigroup Inc, Research Division

Mark L. Moerdler - Sanford C. Bernstein & Co., LLC., Research Division

Operator

Welcome to the VMware Third Quarter 2011 Earnings Call, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Mr. Mike Haase, Vice President of Investor Relations.

Michael Haase

Welcome to VMware's Third Quarter 2011 Earnings Conference Call. On the call, we have Paul Maritz, our CEO and Mark Peek, our CFO. 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.

Statements made on this call include forward-looking statements such as those with the words will, believes, expects, continues and similar phrases that denote future expectation or intent regarding our financial outlook, product offerings, customer demand and other matters.

These statements are based on the environment, as we currently see it, and are subject to risks and uncertainties. Please refer to the press release and the risk factors and documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-Q and Form 10-K for information on risks and uncertainties that may cause actual results to differ materially, from those set forth in such 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 an 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 the press release 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 fourth quarter quiet period begins at the close of business, December 16, 2011.

Finally, unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2010. With that, let me hand it over to Mark.

Mark S. Peek

Thanks, Mike, and good afternoon, everyone. The financial and business results for our third quarter were once again very strong. We achieved record revenue and free cash flows driven by strength across our product offerings. We successfully launched vSphere 5, as well as 11 new additional products and services. We hosted over 19,000 registered attendees at VMworld Las Vegas. And beginning this week, we will host more than 20,000 customers and partners internationally at VMworld Europe and our Asia Pacific and Japan vForum events.

Now for the financial highlights. Total third quarter revenues increased 32% year-over-year and license revenues increased 29%. Our non-GAAP operating margin was 30.3%. Trailing 12 month free cash flows were $1.8 billion, an increase of 72% from a year ago. Our balance sheet remains strong with cash and investments of $4 billion and unearned revenues of $2.2 billion.

Our results speak to the value of our products. vSphere is the most trusted, widely deployed virtualization platform in the world. During the third quarter, we launched vSphere 5 and a comprehensive suite of cloud infrastructure technologies to not only help customers virtualize their application portfolio, but also help them build and operate modern data centers with cloud architectures.

With nearly 200 new and enhanced capabilities, vSphere 5 continues to raise the bar and set the standard in virtualization, delivering better application performance and availability for business-critical applications, while automating the management of an increasingly broad pool of data center resources.

We also expanded our end user computing strategy to help IT organizations empower more agile, productive, and connected enterprise. View 5 delivers new levels of innovation and simplicity with protocol enhancements, advanced 3D graphics, scalable unified communications and integrated persona management.

During the quarter, we closed the acquisitions of Digital Fuel and PacketMotion and welcomed over 100 new employees from those companies to VMware. We are very pleased with our results for the third quarter of 2011, and want to thank all of the people of VMware, our partners, and our customers.

Now I'll walk you through the financial details. Total revenue for the third quarter was $942 million, an increase of 32% from a year ago, or 30% on a constant currency basis. The quarter was characterized by strong demand in our Asia Pacific markets and seasonal strength with the U.S. Federal Government.

License revenues were $444 million, up 29% from last year, driven largely by strong global demand for vSphere and our management tool solutions. License growth, on a constant currency basis was 25%.

Enterprise License Agreements were 22% of total third quarter bookings and included two transactions in excess of $10 million. We were pleased to see a healthy mix in the quarter from renewals, as well as new ELAs. In addition, we continue to see stronger demand for our end user computing and management products, as customers renew their ELAs.

Blended vSphere ASPs increased slightly during the quarter, driven primarily by good discounting discipline in the field and a higher mix of enterprise SKUs.

View 5 was released during the third quarter and initial customer feedback has been positive. We were pleased with a number of competitive wins and with a follow-on business across geographies and vertical markets.

We're also seeing continued traction for our management products including Site Recovery Manager, vCloud Director, and vCenter Operations. Much of the increased interest for our management tools is being driven by the build out of private clouds within our customers' data centers.

U.S. revenues increased 22% year-over-year to $443 million. We saw solid performance from our U.S. federal team as the government continues on its virtualization journey in an effort to contain and manage capital and operating costs, while preserving high confidence in security and reliability.

International revenues were $499 million, an increase of 42% compared to the third quarter of 2010, or 37% in constant currency. Demand in our Asia Pacific region was particularly strong, led by solid year-over-year bookings growth in Australia, Japan, India and China. Our growth in Europe was led by strong demand in Germany.

We're very pleased with our progress in growing our global market presence. The investments we have made and will continue to make in our international market expansion are clearly paying off.

Software maintenance and support revenue was $427 million, up 36% compared to last year. Customers continue to buy, on average, more than 24 months of support and maintenance with each new license purchased, illustrating their strong commitment to VMware as a core element of their data center architecture and hybrid cloud strategy.

Professional services revenue was $71 million, up 26% from last year. Total unearned revenues ended the quarter at $2.2 billion, up 8% sequentially and 48% from a year ago. The complexity of our unearned revenue has increased over time, as a result of acquisitions, an expanded product portfolio and a broader range of pricing and packaging alternatives.

Over 80% of our unearned revenues represent software maintenance that will be recognized ratably. Approximately 12% of unearned revenue is software license revenue, which will be recognized either ratably, upon product delivery or upon product release. In addition, approximately 7% of unearned revenue is the result of prepaid professional services, including training, which is recognized as the services are delivered.

We are very pleased with our third quarter financial results and operational execution, and anticipate a seasonally strong fourth quarter. We currently expect fourth quarter revenues to be within a range of $1,030,000,000 and $1,060,000,000 or year-over-year growth of between 23% and 27%. Licensed revenues for the fourth quarter are anticipated to increase approximately 20% from last year.

From a booking's perspective, in 2010, we saw a significant sequential increase in bookings between Q3 and Q4. The timing of bookings can be lumpy, and so you should not anticipate similar sequential growth in Q4 of 2011.

To help you in your modeling, if we normalize the quarterly fluctuations, we anticipate aggregate bookings for the second half of 2011 to grow at close to 30% year-over-year or approximately the same growth experienced in the second half of 2010 over 2009.

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

Our Q3 operating profit, measured on a non-GAAP basis, was $285 million or 30.3% of revenue compared with 31.6% in the second quarter of 2011, and 28.6% in the third quarter of 2010.

We ended the quarter with 10,900 employees, up 1,900 from the beginning of the year. During the third quarter, we added over 500 employees and expect to continue to hire in Q4 and throughout 2012.

Diluted non-GAAP EPS was $0.53 a share on 432 million diluted shares. Our non-GAAP tax rate was 20%. The GAAP tax rate was 3.1%, lower than recent quarters due largely to a year-to-date benefit for a favorable shift in pretax income from higher to lower tax jurisdictions and an increase in our estimated U.S. federal R&D credit. We continue to expect the non-GAAP tax rate to be at 20% for 2011. The GAAP tax rate is expected to be 7 to 9 percentage points lower than the non-GAAP tax rate for the year.

Taking into account our adjustments to GAAP operating income that might disclose at the start of the call, we expect our operating margin in Q4 to increase sequentially to between 30.5% and 31.5%. The GAAP operating margins for the fourth quarter are expected to be approximately 10 to 13 percentage points lower than the non-GAAP operating margins.

Now on to our balance sheet and cash flows statement. Our balance sheet remains strong with cash and short-term investments at quarter end of $4 billion. During the quarter, we used $365 million in aggregate for M&A, capital spending and our share repurchase program and we benefited from $100 million tax refund from EMC.

Non-GAAP operating cash flows, which exclude adjustments for capitalization of software development costs and excess tax benefits from stock compensation, were $549 million during the third quarter, and more than $2 billion for the trailing 12 months.

We adjust our operating and free cash flows for excess tax benefits because it converts to cash or reduces our tax liability. Free cash flows for the quarter were $494 million. For the trailing 12 months, free cash flows were $1.8 billion. Free cash flow per diluted share was $1.14 for the quarter, and $4.23 for the trailing 12 months. As we have mentioned, free cash flow per share can be volatile in the short term, so we believe looking at it over a trailing 12-month period is a better indicator of progress.

The fully diluted share count increased to 432 million shares for the third quarter. We expect our Q4 share count will be approximately 435 million shares. And for the full year, we expect a diluted share count to be within a range of 430 million and 435 million shares.

Before I hand it off to Paul, I want to share with you how we are looking at the business for next year. Given the strength of our 2011 results, 2012 will be a difficult comparable. There's growing uncertainty in the global macro conditions and an expectation of lower growth rates for both IT spending and server shipments relative to 2011.

For the first quarter of 2012, we are currently planning for total revenues to decline sequentially from Q4 and be in a range of $1 billion to $1,030,000,000, an increase of approximately 18% to 22% compared to the first quarter of 2011. As a reminder, during the first quarter of 2011, we closed five transactions, in excess of $10 million, and we do not anticipate this benefit in the first quarter of 2012.

The first quarter operating margin is anticipated to be below 30% and the GAAP margin approximately 9 to 14 percentage points lower than the non-GAAP operating margin.

We will talk more about 2012 in January. However, as we go through our planning cycle, it will be a year of challenging revenue comparables from 2011 and considerable investments.

The theme of our recent Analyst Day was big investments and bold bets in order to capitalize on the opportunity in front of us to help our customers to bridge to the future. Customers are already modernizing infrastructures and operations to carry existing and future applications. Customers will be investing in new and renewed applications and customers are faced with bridging from existing to new modes of end-user access.

Given all that we need to do to help our customers meet this challenge, we are not planning on growth in our operating margins for 2012. We plan to provide more information in January after we report our Q4 results, and have completed our 2012 go-to-market plans.

To summarize, we are very pleased with our execution and solid third quarter performance. We continue to manage our resources prudently while making the key investments necessary to maximize our long-term growth and free cash flow per share. Paul will now make a few remarks before we take questions.

Paul A. Maritz

As Bob noted, we had a very successful VMworld 2011 vanity event in Las Vegas in late August, and this week, we hold our corresponding VMworld Europe event in Copenhagen.

At the Las Vegas event, we reiterated and updated our three-layered strategy. The first layer builds off our strong foundation in virtualization. Our opportunity is now to help our customers realize significant operational savings as virtualization becomes the accepted way of doing computing in the data center. To do this, we're building out a comprehensive cloud infrastructure suite for the private and public cloud, incorporating new approaches for management and security. At VMworld, we announced new releases of all key components of this suite. In the management dimension, we are particularly pleased by the traction our vCenter Operations product is gaining. Tomorrow at Copenhagen, we will have further announcements in the management space.

The second layer of our strategy is to build out a new application platform for a multi-cloud world. This encompasses our vFabric and Cloud Foundry work and is in large part based upon an open source approach. We believe that these assets give our customers the flexibility and choice that they will need in the cloud era, and provide an alternative to highly closed vertical stacks and avoid the Hotel California problem.

The third layer of our strategy is to enable end users to work productively and securely in a multi-device world. This builds off our now very solid View desktop virtualization solution, a new version of which we also announced at VMworld. And at Copenhagen tomorrow, we will be making some interesting announcements with partners in the space of mobile virtualization.

So we have our path laid out. We continue to execute. And as Mark noted, we will continue to manage the business prudently given the uncertain macro environment. But we are also committed to make the necessary efforts and investments to realize the opportunities and stay ahead of our competition.

Michael Haase

Operator, lets open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from John DiFucci of JPMorgan.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Mark, you put up strong revenue but even stronger billings in cash flow. Does this have anything to do with more large deals? In this quarter you mentioned you had, I think two deals over $1 million -- over $10 million. Because I'm just wondering, you've been really early in noting what's happening in the macro economy. And I'm just curious if you see, for instance, large deals being a little more sticky as they come to the end of their sales cycle versus mid size or smaller deals?

Mark S. Peek

John, the overall bookings and cash flow performance is really driven by a combination of factors. And first we have large receivables entering the quarter was 26% of our billings in Q2 being from ELAs. And although we didn't have any $10 million plus deals in Q2, we did have a good collections behavior during the quarter. And we also had really strong early quarter transactional business, particularly in Europe, which contributed to the cash flows for this quarter. The overall ELA, the size has not increased significantly. In fact, we have seen some behavior as customers become cautious about the macro environment of decreasing the length of the maintenance on uncertain deals. This hasn't become a full trend yet, but it was some of the caution that we were seeing towards the end of the quarter.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Okay, and you mentioned Europe and you did say that growth in Europe was led by Germany. If -- did Europe actually grow on a constant currency basis?

Mark S. Peek

Yes.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Can you tell us what that was?

Mark S. Peek

We just do -- just as an overall segment international completely and it was 37% growth on a constant currency basis. And we did have growth so in the eurozone and in most of the countries in Europe.

Operator

Our next question will come from Heather Bellini of Goldman Sachs.

Heather Bellini - Goldman Sachs Group Inc., Research Division

I had, I guess, two questions. One was just drilling down a little bit more on John's comment. Mark, I was wondering if you're starting to -- you've seen a trend where you're recognizing a smaller percentage of ELAs, at least I think you guys have been talking about that in the past, recognizing a lesser proportion upfront. I was wondering if you could talk about the dynamics there? And if that means that deferred gets a little bit more of a cushion say in calendar '12 whereas license revenue has a little bit of a sequential headwind as that trend unfolds? And I guess the other question would be for Paul. Just to kind of where you think we are in the inflection of the management tools and kind of how do you see that playing out over 2012, in terms of helping to drive bookings growth?

Mark S. Peek

Heather, with respect to deferred license revenue over the 2 last quarters...

Heather Bellini - Goldman Sachs Group Inc., Research Division

Well, not just deferred license, just the ELAs in general. If you could talk about the percentage that you've been recognizing as license revenue and the percentage that's been going to the balance sheet that might be going to maintenance revenue?

Mark S. Peek

Okay. Well, let me start with the deferred license revenue component. We've had about 12% of total deferred our license revenue. So that's growth of $15 million to $20 million sequentially from the second quarter that's on the balance sheet. We've seen a trend of changing some of the entitlements and enterprise agreements so that a portion of that license revenue will be recognized ratably, as opposed to when the particular product is shipped. Overall, the -- as we've done ELA renewals, there is a tendency to have license revenue come from both vSphere but also management and desktop products. But customers are renewal -- renewing the full vSphere maintenance typically at 3 years. And so we are seeing a little bit of a percentage and more going on the balance sheet will be recognized as maintenance revenue overtime. But at this point, it's not a significant trend.

Heather Bellini - Goldman Sachs Group Inc., Research Division

Okay, and then just on the management tools for Paul, please?

Paul A. Maritz

Sure. So the management as we noted is a focus of ours because we think that, that's where a lot of our opportunity lies in the future. We've been assembling the pieces over the last several years and have now starting to get into the shape that we wanted to be. With introduction earlier this year of our vCenter Operations suite it really gives us the fighting product that we want in that space. But it's still early days, we continue to slot elements into place and will continue to do so this year and into next year. So on the one hand, we feel good about the position we're building there that obviously we're building off a small base. But it is a focus of ours going forward. So the short answer is as far as we, VMware, are concerned, we're in the early stages of that journey.

Operator

Our next question will come from Brent Thill of UBS.

Brent Thill - UBS Investment Bank, Research Division

Paul, can you just talk through some of the pricing changes, and what customers are seeing? I know you've given somewhat of a concession off the change and most of the pricing discussions died down, in terms of the change? And for Mark. Just, at the end of September early October, has there been any change in the customer behavior, in terms of what you've seen in sales cycles or deal size that you saw that may have changed or is it -- was it similar in terms of linearity that you've seen in past quarters?

Paul A. Maritz

This is Paul. Quickly to jump in on your first question, yes, we have seen the discussion over pricing largely down -- died down. As you know, we did make an adjustment based upon feedback. And since we have done that, it has gone off as the front burner as an issue.

Mark S. Peek

And Brent, just on the linearity of the quarter and the behavior we saw to be towards the end of the quarter and early in Q4. We continue to be fairly back-end loaded, particularly on the larger transactions. This quarter, we had 22% ELAs which was a bit more in line, as you recall from the comments last quarter, 26% we thought was relatively high and that some of the transactions from -- in Q2 were really brought in that may have closed in Q3. We have seen a bit more scrutiny in higher levels of approval required, as we landed more towards the end of the quarter, particularly with larger deals where they would go for CFO and CEO approval where in the past we may not have seen those approvals to be necessary.

Operator

Our next question will come from Mark Moerdler of Sanford Bernstein.

Mark L. Moerdler - Sanford C. Bernstein & Co., LLC., Research Division

Two quick questions. First, Mark, how much of the strength that you're seeing do you feel is coming from clients spending earlier in the budget cycle to get those projects locked down before they're canceled? In addition, as it relates to the maintenance, you're seeing there that the same thing is happening that they're extending the maintenance periods out in order to be sure that they're not going to be canceled ahead of changes in the economy et cetera? And then a quick one for Paul, do you have any more information on how we're doing, how you're doing on Cloud Foundry?

Mark S. Peek

Mark, this is Mark. We haven't seen a lot of behavior that would suggest that customers are rushing to make purchasing decisions ahead of some fear that budgets might be shutting down. In fact, what we've seen is a bit more caution and just required higher levels of approval. And with respect to terms on maintenance, overall the averages have remained relatively constant. From -- we have -- we did have several transactions this quarter, which actually shortened the maintenance terms from say 2 years -- from 3 years to 2 years just to have less of a cash impact on a specific business. But we haven't seen a big sort of rush to close transactions.

Paul A. Maritz

This is Paul. I want to say on Cloud Foundry. We continue to be pleased with the progress there, the developers continue to sign up and test the service. We are still in trial phase, beta test of that service as we work on bringing that technology, both to the private cloud and the public cloud in 2012. This week at Copenhagen, we'll actually see the first partnership announcements around Cloud Foundry as other software vendors are starting to cooperate with us in that space, which is an early but positive indication.

Operator

Our next question will come from Philip Winslow of Crédit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

Just wondering if you could talk about the verticals a little bit. Paul, I think you mentioned the government vertical being pretty good for you guys. Any other standout from a strength or weakness perspective? And then, also just one follow-up on deferred revenue, obviously you guys had a very big deferred quarter. I wonder if you could just take that out a little bit more, and I know you discussed it previously, but sort of what drove that outperformance this quarter? And then was there any sort of shifting of the deferred out of Q4 like the commentary of a tough comp year-over-year into Q2 -- Q3 or is that pretty apples-to-apples?

Mark S. Peek

Sure, Phil. First, let me just address on the verticals. There's really nothing too unusual. This of course is the quarter for the U.S. Federal business. And overall, we had good growth from the U.S. Federal business. We had anticipated that the growth rates would not be what they where in 2010, and that's what we saw the growth overall in federal was about what we experienced overall in the U.S. but less than the overall business combined. But other than that, the other verticals, nothing in particular stood out with respect to the verticals. On overall deferred revenue, unearned revenue, we had, really, strength again based on what we felt was a fairly easy comp compared to Q3 of last year. As you might recall from a year ago, there were a lot of questions around whether we, the business, performed across the lines. And although we made our bookings numbers a year ago, there wasn't a lot of strength that put a lot of unearned revenue on the balance sheet. And that's why when you look at the overall bookings for the back half of the year. You are looking at a growth rate of about 30%, which is comparable to the growth rate we had in the second half of 2010.

Operator

Our next question is from Rick Sherlund of Nomura Securities.

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

A couple of things. First, just on pricing, any more feedback you're getting from customers on a change in pricing. And then just to put a finer point on the question on deferrals, were there any -- was there any evidence of actual order deferrals that you experienced, end of quarter deals that normally you would think that you would get, but you've seen evidence of the deals getting pushed out? And then lastly just on the management products if, I understand they're small in nature. Any sense of traction, momentum, and I don't think you going to quantify for me, but anything more you can say in terms of the magnitude and sort of the momentum you're experiencing in that part of the business?

Paul A. Maritz

So this is Paul. I think, starting in reverse order there, the management products, we definitely expect to see our management product revenue grow at a much higher rate than our core vSphere business. And as I said, we think we're finally getting the completeness and functionality that we need in order for that to do going into 2012. Now even with an accelerated growth rate just given the sheer magnitude of our vSphere business is going to take some time for that to really start to add significant mass to our overall performance. On the pricing front, as I said earlier, while any price above zero always has to be earned and justified, by and large, our field tells us that the pricing is not -- is no longer a critical issue that it was earlier. And by and large, that has died down.

Mark S. Peek

And Rick, with respect to deals being pushed out at the end of the quarter, really the behavior wasn't atypical from other quarters. There always seems to be one big deal that's a potential, but doesn't land, and we had that again this quarter. And so we continue to chase things into the pipeline in Q4.

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Mark, I don't want to read too much into this because I know your guidance is usually on the conservative side. But in terms of what you're being told from IT departments and their spending plans for next year, is it your sense that they've made plans to be more conservative next year, or is it a little too early to read?

Mark S. Peek

I think it's a little bit early to read. I think everybody seems to be cautious. And so it's not -- we are sort of waiting to see what happens in particularly in Europe whether or not the macro economic conditions or sovereign debt concerns in Europe will cause some larger contagion. But at this point, most organizations are going through their budgeting cycles for 2012. And we do expect that there'll be the typical Q4 seasonality, but it's a bit early for us to read too much into 2012.

Operator

Our next question will come from Adam Holt of Morgan Stanley.

Adam H. Holt - Morgan Stanley, Research Division

Just a follow up, I guess, on Rick's question about next year. Is there any reason to believe, understanding its early, you have commented on, in this quarter and previous years. Is there any reason to believe at a high level that seasonality in next year is any different than say we've say seen in the last couple of years?

Mark S. Peek

Adam, it's really difficult to tell. I think the uncertainty that exists, again particularly in Europe, but the impact that, that might have on the rest of the world economy is one of the reasons that we've held back on giving high-level guidance for 2012, and we just think that we'll have a lot more visibility in the next 3 to 4 months.

Adam H. Holt - Morgan Stanley, Research Division

If I can ask a follow-up on the ELA business. You had another very good quarter of ELAs. They've been strong now for several quarters. Do you feel like you're selling model has structurally changed, or helped by the broader product portfolio around driving ELAs as a percentage of your billings? Or do you expect that level to maybe shift as you to get into the first part of next year? And maybe talk about how you think about new versus renewal billings also as an influence there.

Mark S. Peek

Yes, overall the Enterprise License Agreement sales motion has been something we've been -- we're now in our fourth year of doing and so the field has gotten relatively good as engaging with the customers. And particularly as we move into a renewal cycle, it gives us an opportunity to -- to engage on management products and on desktops. Over the years, we've seen a trend to have smaller size organizations enter into ELAs. These used to be reserved just for the very largest corporations, but now we'll do ELAs that are in the $500,000 range and not just in the million-dollar plus range. The renewal business continues to be good and really just somewhat of a cycle as to when renewals expire. We don't see customers engaging too early in having a renewal done prior to its expiration date, and we continue to engage with customers on renewals that go past expiration as well.

Operator

Our next question will come from Kash Rangan of Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

I was just curious to dig a little bit more into the management commentary. I think, Paul, you mentioned that you think that management functionality is now complete, and if that's the case, how should we think about the sales cycle? You have the management products relative to the core business. How easy or tough will it be going forward? I think you've talked about the deals or conferences having a base of 20 million virtual machines and the ASP or the management functionality at least at that point in time seem to be $1,300. So we're all doing the time analysis. Looks to be $25 million, $26 million of addressable market at least. But how should we think about the rate at which the management market moves ahead relative to where you stand with your core business?

Paul A. Maritz

First of all, what I've said is not that we're complete, I said we've now got a fighting product. So we've got the critical mass to go out there and really start engaging and generating business. We're going to be at this for essentially forever, adding functionalities as we go forward. The -- it's hard to go beyond what I said earlier, which is that we certainly have expectations that the rate of growth from management revenue will be higher than our core vSphere business. And we have a fair degree of -- fair confidence that, that will happen. But the proof of the pudding is always is in the eating, and -- but it will be a big focus of ours in 2012.

Kash G. Rangan - BofA Merrill Lynch, Research Division

And one for you Mark if I could, to what degree are you baking in a material revenue contribution from management products into your 2012 forecast?

Mark S. Peek

Kash, at this point again it continues to be early. We have concrete plans that certainly expect the management business to grow more quickly than the vSphere business just from the perspective of overall size. But as we look at the first quarter of 2012, we expect continued growth in the management business.

Operator

Our next question will come from Walter Pritchard of Citigroup.

Walter H. Pritchard - Citigroup Inc, Research Division

Mark, a couple questions. I guess one for Paul first on desktop. I'm wondering what you're hearing from customers there as you get a little bit more scrutiny on deals. Does that tend to get held up more than server? I'm curious first on that topic.

Paul A. Maritz

I don't think there's a dynamic cause by uncertainty around cost consciousness or whatever. I think they're relatively equal in that regard. The desktop deals tend to have a longest sales cycle associated with them because the cost benefit analysis isn't as compelling and as easy to make as a service ideal. And typically the customers are doing it for the first time, so they really want to experiment and get comfortable et cetera versus virtualization, which is on the server-side, which is a fairly mature and well-accepted technique at this point in time. So the desktop deals tend to have a longer sales cycle with him. And I guess you could theorize that for that reason, they could be more susceptible to economic uncertainty. But at this point, as Mark noted, particularly with View 5, we think we plugged any remaining significant holes versus our competition, and are pleased with the progress we are seeing there, and are making and getting good traction.

Walter H. Pritchard - Citigroup Inc, Research Division

Mark, just a question for you on ELAs. There's been a few questions here. But I'm just curious how you're thinking about the percentage of billings from ELAs in a tougher macro environment. Does that come down because it requires customers to write bigger checks, or does it go up because it gives them more certainty in terms of spend? How should we think about how that may play out over time if we start to see sort of a more systematic scrutiny on spending?

Mark S. Peek

Well, Walter, part of it becomes an individual customer-by-customer value proposition and how far along they are overall on the virtualization journey. It's -- on the one hand, if budgets are constrained, customers may decide to forego future discount or possibly just forego out years of maintenance and buy smaller overall dollar amounts. On the other hand, they may take advantage of uncertainty because they have a little bit better visibility into their own businesses and decide to take advantage to enter into an ELA. So what we've done is just to apply essentially the averages that we've seen and we do a bottoms-up build from the field. And we're going through those 2012 planning cycles right now.

Operator

Our next question will come from Jason Maynard of Wells Fargo.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

A quick question on cash flow. You had a huge quarter here, and I'm curious just how you think the better collections and strong bookings will influence Q4? And then just sort of a broader look into fiscal '12, I mean the cash flow growth from '10 to '11 has been ginormous. So how should we kind of caveat and think about cash flow growth into '12?

Mark S. Peek

Jason, I think as you look at the fourth quarter until the fiscal '11 cash flows and compare them to the trailing 12 in September, you likely won't see as much sequential growth. One is that we received $100 million tax refund during this quarter, which impacted cash flows. And although we have some built into the Q4 forecast, it's not nearly that size. And then also, we'll build a fair amount of receivables in Q4, as we go through the fourth quarter flush. Our -- which gives us of course a head start on the first quarter cash flows, which tends to be one of our stronger quarters from a cash flows perspective. As we look at 2012, it's -- we're largely dependent on the cash flow cycle on the link of maintenance agreements on ELAs and on transactions that we sell through that business. And we've been, over time, just very resilient in staying in that 24-plus month cycle and continue to have a focus on that from the field. And so largely our cash flow fortunes are based on the years of maintenance associated with licenses.

Operator

Our next question comes from Robert Breza of RBC Capital Markets.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Just quickly looking at you talked about the mobile announcement for the next day I guess. When you look at mobile, how should we think about mobile's impact in the overall desktop solution and management tools?

Paul A. Maritz

Hi, this is Paul. From a revenue point of view, we don't think it's going to have a material impact on the near term. But we think strategically it is very important. Our customers tell us that this is one of their highest priorities, as their -- more and more of their workforce essentially go mobile. The challenge with the mobile, there isn't a set of single bullet that you can fire at it to solve all problems. So we're actively investing in there. And as I said, tomorrow, we'll have announcements with partners, carriers specifically, as to some trials that we're going to be doing together in that space.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

And then maybe, just, I think, Mark, you kind of talked a little bit about this as you look at 2012, maybe to be clear, is there anything from a deferred revenue perspective that you see today that would influence the seasonality for next year?

Mark S. Peek

Not in particular. We continued to have a combination. It's 80% maintenance, which is recognized ratably, and so it makes it relatively straightforward to predict. And of the 12% that is tied to license revenue, a greater percentage of that revenue is ratable as well, and so a portion of it is now long term. But at this point, there aren't any real significant trend differences that would affect models.

Operator

Our final question for today will come from Rob Owens of Pacific Crest Securities.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Any color on the desktop business beyond what you've already talked about, View 5 shipping in the quarter just in terms of improved win rates or where customers at right now?

Paul A. Maritz

No, I think we said that we're generally happy in that space. Happy from both the perspective of where we are with the functionality of the product and with our win rates and our customer acceptance. As I said before, those desktop cycles tend to have a longer decision cycles than the server-side of things. And we're starting to see some of the fruits of having been in those decision cycles for some time now.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

You've talked in the past about it being about 10% of, I think, domestic bookings. Are you still around that range?

Mark S. Peek

It's still in that neighborhood.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

And then lastly, how do we think about Romley potentially providing an upgrade cycle in '12?

Paul A. Maritz

Can you repeat the question, please?

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Around Romley and its potential impact to 2012?

Paul A. Maritz

We can't get that word. What's going to impact 2012?

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

The Romley chip out of Intel.

Paul A. Maritz

Okay. You're off our radar screen there. We're not sure.

Michael Haase

Okay, everyone. Thanks a lot. That concludes the call.

Operator

Thank you for your participation on the conference. You may disconnect at this time.

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