VMware (VMW) Patrick P. Gelsinger on Q1 2016 Results - Earnings Call Transcript

| About: VMware, Inc. (VMW)

VMware, Inc. (NYSE:VMW)

Q1 2016 Earnings Call

April 19, 2016 5:00 pm ET

Executives

Paul Ziots - Vice President-Investor Relations

Patrick P. Gelsinger - Chief Executive Officer & Director

Zane C. Rowe - Chief Financial Officer & Executive Vice President

Analysts

John DiFucci - Jefferies LLC

Philip Winslow - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Heather Bellini - Goldman Sachs & Co.

Mark L. Moerdler - Sanford C. Bernstein & Co. LLC

Keith Eric Weiss - Morgan Stanley & Co. LLC

Gregg Moskowitz - Cowen & Co. LLC

Mark R. Murphy - JPMorgan Securities LLC

Michael Turits - Raymond James & Associates, Inc.

Nikolay Beliov - Bank of America Merrill Lynch

Ittai Kidron - Oppenheimer & Co., Inc. (Broker)

Nehal Sushil Chokshi - Maxim Group LLC

Abhey R. Lamba - Mizuho Securities USA, Inc.

Rajesh Ghai - Macquarie Capital (USA), Inc.

Jayson A. Noland - Robert W. Baird & Co., Inc. (Broker)

Operator

Good day, and welcome to the VMware Q1 2016 Earnings Call.

Today's conference is being recorded.

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

Paul Ziots - Vice President-Investor Relations

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

On the call we have Pat Gelsinger, Chief Executive Officer; and Zane Rowe, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions.

Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. Slides which accompany this webcast can be viewed in conjunction with live remarks, 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-K's, 10-Q's and 8-K's VMware files with the SEC. We assume no obligation to and do not currently intend to update any such forward-looking statements.

In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for, or in isolation from, GAAP measures.

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

The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link.

Our second quarter 2016 quiet period begins at the close of business, June 15, 2016. Unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2015.

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

Patrick P. Gelsinger - Chief Executive Officer & Director

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

Q1 was a good start to 2016, both for results and against our strategic goal of building momentum for our newer growth businesses and in the cloud. Our results were in line with our expectations for the period and support our outlook for the full year that we articulated on our call with you in January. We grew total revenue 6% year-over-year in constant currency to $1.6 billion with a non-GAAP earnings of $0.86 per share. VMware's value proposition around the Hybrid Cloud, Software-Defined Data Center and End-User Computing continued to resonate with our customers around the world.

In terms of regional bookings performance, Asia-Pacific performed best, followed by EMEA and the Americas. Although particular emerging markets such as Russia, Brazil and China continue to experience weakness.

This quarter, we made important headway with respect to our expanded cloud strategy, which we discussed together during our last earnings call in January. Our cloud strategy includes three components: First, extending our leadership in the private cloud, the foundation of our business. Second, helping customers extend their private cloud into the public cloud; our vCloud Air service and our vCloud Air Network partners are both examples of this. And third, connecting, managing and securing end points across a range of public clouds, including Amazon Web Services and Microsoft Azure.

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

Q1 2016 proved to be a strong quarter for new products, use cases and updates across our Software-Defined Data Center and Business Mobility portfolios. I am particularly delighted to let you know that during this quarter, we crossed a threshold of 1,000 issued U.S. patents, and that we have been recognized as number two in the software category of IEEE patent quality rankings across this portfolio.

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

We also announced new advancements in VMware Horizon 7 and a new hybrid mode capability that will be available in VMware Horizon Air to simplify application and desktop delivery. With these advancements VMware Horizon will offer the industry's most comprehensive application and desktop virtualization portfolio with options for on-premises, off-premises, or hybrid deployments.

VMware AirWatch continues to enjoy strong customer adoption and is rated an enterprise mobility management leader by the leading analyst firms. We also made some announcements on the SDDC side of the business. During my keynote at this year's RSA Conference, we demonstrated a technical preview of Distributed Network Encryption powered by NSX. This is a unique new technology which enables the encryption of data and applications across clouds. Overall, NSX has enjoyed another strong quarter with bookings growing over 100% year-on-year.

We've released VMware vRealize Suite 7 which provides customers the ability to provision and manage at scale, compute storage network and application services across hybrid cloud environments. And we also announced the release of VMware Virtual SAN 6.2. The fourth generation of VMware's simple enterprise grade native storage for vSphere. Virtual SAN serves as a key component of our hyper-converged software offering. VMware is a leader in hyper-converged infrastructure software having sold to more than 3,500 customers in 21 months since the initial release of Virtual SAN.

We are optimistic about the long-term growth potential for this important new HCI category. VMware's hyper-converged software includes VMware vSphere, Virtual SAN and vCenter Server, transforming x86 servers and direct attach storage into simple and robust HCI systems. Customers benefit from reduced costs and management complexity with breakthrough performance.

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

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

With Carl Eschenbach's move into a strategic advisor role for the company, we also took the opportunity to announce expanded roles for other members of the VMware executive team. Maurizio Carli and Ray O'Farrell have both been promoted to Executive Vice President. Maurizio now runs our worldwide sales organization and Ray has expanded his role as Chief Technology and Development Officer to include responsibility for VMware's Global Services and Customer Advocacy. In addition, Sanjay Poonen, Executive Vice President and General Manager End User Computing has expanded his role to include leadership of VMware's marketing and communications functions.

I am also pleased to mention that for the second year in a row, VMware has ranked on Fortune Magazine's list of 100 Best Companies to Work for in the U.S., competing among hundreds of companies for the honor.

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

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

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

Zane C. Rowe - Chief Financial Officer & Executive Vice President

Thank you, Pat. I'd like to thank the entire VMware team for all their effort driving results this quarter. As this is my first earnings call as VMware's CFO, I want to start out by saying how pleased I am to have the opportunity to join VMware. As CFO at EMC, I was able to view VMware's great prospects at a consolidated level. I decided to join this team because VMware is at a unique point in its history with significant future potential. In addition, it has the trust of a loyal group of customers and partners, who rely on VMware for their most important software infrastructure deployments.

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

For Q1, total revenue grew 5% year-over-year as reported, or 6% in constant currency. License revenue declined 1% year-over-year as reported, and grew 1% in constant currency. Hybrid cloud and SaaS rose to over 7% of total revenue. vCloud Air Network, vCloud Air, as well as AirWatch-as-a-service made up the bulk of this group, which grew revenue over 20% year-over-year. Non-GAAP operating margin was 28.1%, and diluted non-GAAP EPS was $0.86 per share, on 424 million shares.

We continue to build upon the strength of our balance sheet, with cash and short-term investments at quarter-end totaling $8.2 billion, up from $7.5 billion in Q4 2015. Domestic cash was $1.9 billion at quarter-end. Total unearned revenue was $5 billion, down 2% from Q4 2015. $1.8 billion of this amount is long-term.

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

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

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

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

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

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

End user computing license bookings grew in the mid-teens year-over-year and total customer account increased to over 63,000, including over 1,300 of the Global 2000. We began further integrating and aligning the AirWatch Mobile and Horizon desktop sales forces during the quarter. This integration enhances the strength of the combined teams, although it did have an impact on AirWatch specific sales in certain geographies as the teams ramped up.

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

Now, I'd like to spend a moment on our stock repurchase announcement. Our board has authorized repurchase program of up to an aggregate $1.2 billion for 2016. We plan on using all of this amount to repurchase Class A shares in the open market during 2016. For regulatory reasons, we expect to begin repurchasing after the EMC shareholder vote. We believe a share buyback is a prudent use of our cash at this time.

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

We are reaffirming all other guidance for 2016 provided on our last earnings call in January. In January, you will recall we guided total revenue for 2016 between $6.785 billion and $6.935 billion; license revenue between $2.660 billion and $2.760 billion; and a non-GAAP operating margin of approximately 31.5%.

Cash flow from operations is expected to be $2.225 billion for 2016, up 18.5% versus the prior year. And free cash flow is expected to be $1.980 billion, up 26.5% versus the prior year.

For Q2 2016, we expect total revenue between $1.660 billion and $1.710 billion or up 4% to 7% year-over-year. License revenues for Q2 are expected to be between $623 million and $653 million. At the midpoint, this is flat year-over-year. For Q2, we expect non-GAAP operating margin to be approximately 29.8% and non-GAAP EPS to be between $0.94 and $0.97 per share.

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

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

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

Paul Ziots - Vice President-Investor Relations

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

Question-and-Answer Session

Operator

Thank you. And we'll take our first question from Brent Thill with UBS.

Unknown Speaker

Hey, guys. This is actually Michael (20:44) on for Brent. Thanks for taking my questions. One item I wanted to revisit, in Q4, you talked about 2016 bookings growth potentially coming in 3% to 5% ahead of where revenue growth is. If we look at Q1, the dynamic is a little bit tilted from that, and I was just wondering if you've had any additional color, or care to update there as well?

Zane C. Rowe - Chief Financial Officer & Executive Vice President

Hey Michael (21:04), this is Zane. Yes, as you'd recall, we did mention that bookings we expect to come in three to five points higher than our forecast for the year, and as you heard in my prepared remarks, we are on target with our forecast for the year. So we would expect that bookings growth rate to be the same as we mentioned to all of you last quarter. So we were reconfirming our guidance for both revenue as well as for the bookings rate.

Unknown Speaker

Perfect.

Patrick P. Gelsinger - Chief Executive Officer & Director

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

Paul Ziots - Vice President-Investor Relations

Thank you, Michael (21:47).

Unknown Speaker

Thanks, Paul.

Paul Ziots - Vice President-Investor Relations

Next question, please.

Operator

We will now go to John DiFucci with Jefferies.

John DiFucci - Jefferies LLC

Thank you. Pat, given all the potential disruption that could have occurred at VMware recently, due to the leadership changes, it really seems the quarter could have been a lot worse than it was, and you guys came in line with – and maybe you showed some modest license billings growth, which is pretty impressive. So I guess my question is, what is all this – what does this mean? I assume you did have some disruption, no offense to the team that's here now, but Carl had been there for a long, long time. Jonathan has been there for a while. Zane is doing a great job, but – and I guess Martin, sort of the leader of your – one of your premiere, if not your premiere growth area. I was just surprised to see, and actually a little surprised to see you maintaining the guidance here, Zane. So I guess is there – is anything changed out there? Or is it just that everybody else has just stepped up and it's just business as usual?

Patrick P. Gelsinger - Chief Executive Officer & Director

Well, we think on the executive side, it really is the combination of being able to attract new players than – I mentioned Rajiv, we brought in a leader for China, Bernard; we've been able to continue to attract talent. We've also had commented on our very strong bench, and – like Maurizio, we had brought him over from Europe a year plus ago to prepare for this eventuality, and so we had been grooming and preparing for these transitions. So I think it's a combination of the strength of our bench, the strength of our employee base that we have today and the momentum of the business, our attractiveness of people bringing onto the team. I want to just say overall, we've managed through these transitions highly effectively, and I'm quite proud of my leadership team in getting that done.

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

John DiFucci - Jefferies LLC

Thanks a lot, guys.

Paul Ziots - Vice President-Investor Relations

Thank you John. Next question, please.

Operator

We will now go to Phil Winslow with Credit Suisse.

Philip Winslow - Credit Suisse Securities (USA) LLC (Broker)

Hi guys. Thanks for taking my question. Pat thanks for the incremental color on just the go-liveson NSX in addition to the customer count. My question is on NSX. And when you think about just sort of where you stand after Q1 now, sort of in the context of where you see this business going over the course of 2016, just wondering if you can provide for some color there. Thanks.

Patrick P. Gelsinger - Chief Executive Officer & Director

Generally, I mean Q1 for us, 100% growth rate in the business. We're continuing to increase the customer count, customers going into production. Some of the customers as well that we saw – and while we didn't have as many big deals in Q1, we see a very powerful pipeline for the year, also across geos, across verticals, large and mid-size customers. So I'll just say overall, NSX, we are really excited about the potential and the transformative capabilities.

A few specifics. A big U.S. life sciences customer combining it with VDI to deliver the virtual desktop environment in a secure way. TriZetto, a huge healthcare IT company, is a real strength in healthcare. Micro segmentation overall was killer, right? You might have seen – I commented – or I demonstrated new areas like Distributed Network Encryption at the RSA Conference. We have some very profound new capabilities, and overall, this is now being unquestionably seen as the premiere overlay technology, the clear market leader and underlay environments, including Cisco, are increasingly seeing this as a complementary technology. We had a couple of customer announcements specifically how they're using NSX and ACI environments like SugarCreek and Shutterfly. So overall, this is a hot product area and one that we see tremendous strategic potential for in the long-term.

Paul Ziots - Vice President-Investor Relations

Thank you, Phil. Next question, please.

Operator

We will now go to Heather Bellini with Goldman Sachs.

Heather Bellini - Goldman Sachs & Co.

Yes. Great. Thank you. I was just wondering if you could give a little bit more color on the EUC business. And maybe, I missed it, but AirWatch in particular, I mean, I know that was lumpy last year at 60% constant currency growth in the second quarter then it went to 20% in 3Q15, and went back up in the fourth quarter. Can you give us a sense of what you saw for that business on a – the similar metrics for that business for the first quarter and what the bookings run rate might be now?

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah. So overall, we had – all-in business was strong for EUC. Desktop, we had a strong Q1 and we believe we continued to gain market share. AirWatch in Q1, while it grew, had a healthy growth rate. It was not as strong as we would have hoped for. We did in Q1, Heather, merge the sales teams. Particularly with our Workspace ONE announcement, we're increasingly selling the combined solution of AirWatch Identity and desktop as a complete solution. So we did undertake the step of merging the sales teams in Q1 which did create some disruption in the AirWatch business, particularly in EMEA.

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

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah.

Heather Bellini - Goldman Sachs & Co.

Okay. Thank you.

Patrick P. Gelsinger - Chief Executive Officer & Director

And overall the run rate in the guide that we set overall, we're comfortable for that for the year.

Zane C. Rowe - Chief Financial Officer & Executive Vice President

Yeah.

Heather Bellini - Goldman Sachs & Co.

Thank you.

Paul Ziots - Vice President-Investor Relations

Thank you, Heather. Next question, please.

Operator

We will now go to Mark Moerdler with Bernstein Research.

Mark L. Moerdler - Sanford C. Bernstein & Co. LLC

Thank you very much. So given how hybrid cloud and SaaS revenue grew nicely this quarter, how should – can you give us some more color, how should we think about vCloud Air specifically how you monetize it by the partners, what's the opportunity as you see it?

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah. So let me – I'll start and ask Zane to add just in the overall financial metrics. We're monetizing vCloud Air and vCloud Air Network. And as we commented in our formal comments, vCloud Air had very good performance in Q1, right, it's on our expectation for the plan for the year, right? And I was really pleased despite some of the disruptions in that business area, right, as we went through our – is it out or is it in late last year, the team really stepped up and I was quite happy with their operational performance in Q1.

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

We also saw that – and for us it's just as they continue to grow, they use more vSphere, but we're increasingly gaining penetration of other technologies in that. For instance, Telstra with NSX, Virtustream with NSX, NaviSite a big DaaS opportunity that they're taking advantage of, so they're using more of our portfolio in their offering. And, of course, the big thing that we did in Q1 was the IBM partnership announcement and we believe that IBM has already closed a number of deals based on that. And a tremendous pipeline of opportunity, which is, you know, the biggest incremental amplification opportunity that we've ever talked about in the vCloud Air Network area.

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

Mark L. Moerdler - Sanford C. Bernstein & Co. LLC

Thank you.

Paul Ziots - Vice President-Investor Relations

Thank you, Mark. Next question, please.

Operator

We will now go to Keith Weiss with Morgan Stanley.

Keith Eric Weiss - Morgan Stanley & Co. LLC

Excellent. Thank you, guys, for taking my question. I was wondering if (31:07) you guys could give us a little bit color on the larger more strategic ELA deals. Something as you said sort of a breakout and given a sort of the changes going on in the company, are you continuing to be able to sign the same level of those strategic deals as you were historically, or is there any higher impact on those types of deals?

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah. Overall, and personally, I've been in all three geos in Q1 visiting big customers, spending time with our sales teams overall. And generally, I'd say, we're – we remain quite comfortable with our ability to close ELAs. And with Carl's transition, he remains a rainmaker for us in his consultancy role. So we continue to gain that benefit even as Maurizio, one of our sales leaders around the world step up. We do have a very large ELA renewal opportunity this year. Not as much in Q1 but in Q2, in the second half it's very large opportunity. And we do see that – we're well positioned to continue to have strong renewals and our new products going into those ELA renewals as demonstrated by the good performance in those areas in Q1.

So overall, we feel comfortable our ability to do that. And our strategic relationship with our customers continues to grow. They're seeing the share of wallet opportunities in today's data center, whereas increasing the value that we deliver, as well as our vision in the multi-cloud multi-device future binding us to strategically the problems they need to solve for tomorrow. So overall, we feel quite comfortable.

Zane C. Rowe - Chief Financial Officer & Executive Vice President

And, Keith, I will just add that obviously as you saw on the slides we provided, EAs (32:49) were 29% of our total bookings, which was in line with where we were last year. And as Pat touched on with the breadth of the portfolio, nine of the top 10 deals included EUC, Eight of the top 10 included NSX, and three of the top 10 included VSAN. Of course, we had great transactional performance on VSAN as well. So again, we feel quite good about where we're positioned here.

Paul Ziots - Vice President-Investor Relations

Thank you, Keith. Next question, please.

Operator

We will now go to Gregg Moskowitz with Cowen & Company.

Gregg Moskowitz - Cowen & Co. LLC

Thank you very much. Last quarter, Pat, you had mentioned that weakness in China, Russia and Brazil cause a 2-point headwind to bookings in the aggregate. I was wondering what the impact was this quarter. And then also just for Zane, any changes quarter on average duration for either your ELAs or for your maintenance contracts? Thanks.

Zane C. Rowe - Chief Financial Officer & Executive Vice President

Sure. I can actually touch on both and let – Pat maybe talk...

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah. (33:40) color on the geos.

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah. And overall, we're taking a steps in each of our geos to address the new realities of those markets respectively. We do – having just been in China, just got back from China on Friday, feel very good about our new leadership strategy that's forming with them. We just announced the new joint venture with Sugon, which we had communicated the intent to do that. We just launched that last week. So I feel like we're getting our legs back under us in that the world's second largest IT market. So we're taking steps to address it but it remains a headwind and it's factored into our overall business outlook.

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

Gregg Moskowitz - Cowen & Co. LLC

Terrific.

Paul Ziots - Vice President-Investor Relations

Thank you, Gregg. Next question, please.

Operator

We will now go to Mark Murphy with JPMorgan.

Mark R. Murphy - JPMorgan Securities LLC

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

Paul Ziots - Vice President-Investor Relations

All right, Mark. Next question.

Operator

We will now go to Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates, Inc.

Hi, guys. Good afternoon. I want to talk about public cloud a little bit. Couple quarters ago, Carl had mentioned that there was some hesitancy in buying as people try to evaluate public versus private cloud options. So my question is, has that changed? And then do you feel like people are more ready to move forward? And a related question, since you've changed your strategy, somewhat re-modified it to be more oriented towards vCloud Air Network versus vCloud Air itself and Virtustream, how has the customer reaction been there?

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah. So on the cloud side, clearly our strategy that we've laid out, where our multi-cloud strategy is three parts: Continue to help customers build private clouds, extend that into the public cloud that SDDC stack into the public cloud, and third is provide a unique control plane to manage, run, secure and connect across any cloud on any device. And that comprehensive strategy, as we've described it, engage with customers around it, I'd say every customer engagement, you have a discussion on cloud, because they're trying to figure that strategy out as well, and how they need to evolve their IT infrastructure and application plans in that regard. And as we describe that engage with customers are growing comfort that we are a technology partner that both helps them transform today, but also helps them build the bridge to tomorrow. So we feel quite good that the strategic evolution that we've gone through is now resonating quite well with our customers.

Clearly good performance in Q1 reinforces that. The announcements that we made around, for instance, our management be realized, being able to manage workloads in AWS and we'll roll that out for Azure shortly. NSX on multiple clouds has been well received by the marketplace. The RSA announcement of our Distributed Network Encryption has resonated extremely well. As I've already mentioned, the IBM SDDC partnership that we announced has also gotten good response. So overall, we really feel like we've made a lot of progress in this regard.

At the highest level, customers are going on a journey. They're going on journey to the multi-cloud future. They're picking strategic partners for that journey. And from a financial perspective, we clearly have a share-of-wallet opportunity in today's infrastructure on-premise, but we're laying out a clear path for customers being able to monetize and benefit from the new value, and taking advantage of clouds for tomorrow.

Paul Ziots - Vice President-Investor Relations

Thank you, Michael. Next question, please.

Operator

We'll now go to Kash Rangan with Bank of America.

Nikolay Beliov - Bank of America Merrill Lynch

Hi. This is Nikolay Beliov on behalf of Kash. Can you guys please give us an update on your traction with your products based on Containers and OpenStack? Thank you.

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah, and let's separate the answers. Let's talk about OpenStack first, and then I'll address Containers. On the OpenStack side, what we've seen is that there has been a decided shift around OpenStack, and we're seeing now repeated pattern where customers have attempted to take advantage of other OpenStack distributions or other open source alternatives for OpenStack, and after investing significantly in those attempts, tens of engineers over many quarters, they've been unable to get a scalable, reliable solution working, and those customers are now coming back to VMware, and we're able to come in with our VMware Integrated OpenStack offering, and literally in hours or days have an environment that's up, running, built on the robust VMware ingredients, and now we're seeing this repeated pattern in addition to tens of customers that we've already talked about major, athletic retailer in the U.S.

With this quarter, we added key wins with a wireless provider in EMEA, a big telco in the Middle East. A big high-tech company in Silicon Valley is moving away from their OpenStack and back to VMware. So this pattern of the immaturity of OpenStack coming to the VMware ingredients is now well seen in our sales, and we see a good pipeline of those opportunities for the year.

On the Container side, Containers remain a fairly immature technology with huge interest in the industry, and against that interest, there is an increasing amount of how do I develop and take advantage of this. I'll say those are growing consensus that is the key part of how people develop their applications in the future and the ecosystem is building in that direction. And while immature, VMware has clearly embraced and we are aggressively delivering a set of solutions to enable customers to have an infrastructure that is container ready, and we're doing that in two ways.

One is our VMware Integrated Container offering, which allows efficient use of Containers on today's vSphere-based environments today. It allows IT to just say yes to their developers and containers without changing networking policy, security or management, a very efficient way to get started. And then the second piece of our strategy is Photon. Before that is really building a grounds-up environment that's optimized for that Container future, and we'll be having some key announcements around that in the near future of our Photon offerings in the marketplace. And both of those again, we're engaging with customers and getting a lot of interests. So while early, a lot of hype around it, we see this as a very important trend for the industry, and VMware will be there with the infrastructure that our customers require to take advantage of it.

Nikolay Beliov - Bank of America Merrill Lynch

Thank you.

Paul Ziots - Vice President-Investor Relations

Thank you, Nikolay. Next question, please.

Operator

We'll now go to Ittai Kidron with Oppenheimer.

Ittai Kidron - Oppenheimer & Co., Inc. (Broker)

Thanks. A couple of questions for me. One on vSphere.

Paul Ziots - Vice President-Investor Relations

(41:04), please. One question.

Ittai Kidron - Oppenheimer & Co., Inc. (Broker)

Yes.

Paul Ziots - Vice President-Investor Relations

(41:07) just one, please.

Ittai Kidron - Oppenheimer & Co., Inc. (Broker)

Well, they're correlated (41:09).So on vSphere can you get us a sense on when – and when and how would you think the decline in license bookings in vSphere? Where do we bottom on this? And related to that, again, what is the timeline by which you think license growth could return?

Patrick P. Gelsinger - Chief Executive Officer & Director

License growth on vSphere?

Ittai Kidron - Oppenheimer & Co., Inc. (Broker)

Overall license – no, no, overall license growth for the company. Clearly, vSphere is declining and weighing, and your new products growing on the mix. When can we get the whole boat all together moving the right direction?

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah. And I'd just add, I mean, that's exactly why on our last call, Ittai, we referred to this as the transition year, right? It's when the new product booking areas more than offset the compute license decline. Overall, as we said, it's about 10% in Q1, consistent with our modeling and expectations. Overall, compute was approximately flat. And the new areas are growing very well and we gave a quite specific guidance on those areas and updates in Q1. So we remain quite committed to the acceleration of bookings as we go through the year and we think it sets the company up for growth in the year and 2017 and beyond.

Paul Ziots - Vice President-Investor Relations

Thank you, Ittai. Next question, please.

Operator

We'll now go to Nehal Chokshi with Maxim Group.

Nehal Sushil Chokshi - Maxim Group LLC

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

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

Paul Ziots - Vice President-Investor Relations

Thank you, Nehal.

Nehal Sushil Chokshi - Maxim Group LLC

Thank you.

Paul Ziots - Vice President-Investor Relations

Next question, please.

Operator

We'll now go to Abhey Lamba with Mizuho Securities.

Abhey R. Lamba - Mizuho Securities USA, Inc.

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

Patrick P. Gelsinger - Chief Executive Officer & Director

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

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

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

Paul Ziots - Vice President-Investor Relations

Thank you, Abhey. Next question, please.

Operator

We'll now go to Rajesh Ghai with Macquarie.

Rajesh Ghai - Macquarie Capital (USA), Inc.

Yes. Thanks. I had a question on VSAN. I think (46:36) shared about the product, 3,500 customers, 200% growth. (46:41) comparison with the install base of over 500,000 customers you have, and also the strong secular trend that we've seen in hyper-converged infrastructure. My question is what would you do, if anything, to change your strategy to address that opportunity better, or be more effective in penetrating that opportunity?

Patrick P. Gelsinger - Chief Executive Officer & Director

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

I'd say we're clearly now seen as number one in a hyper-converged infrastructure space, and that software category we think is going to continue to really emerge as a powerful trend in the industry. We also are very happy to see quite a number of deals. I think Zane mentioned a large financial services company. We had a large EMEA retailer, a large consumer goods manufacturer, a large equipment engines company, and each one of these is really demonstrating the power of the technology. We also had good transactional bookings as well, so it wasn't just in big deals but also transactional performance was good. So the channel participation is increasing here. So we really left Q1 feeling really good about this area, and I'm quite bullish about its growth potential through the year and 2017 and beyond.

Rajesh Ghai - Macquarie Capital (USA), Inc.

Thank you.

Paul Ziots - Vice President-Investor Relations

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

Operator

We'll now go to Jayson Noland with Robert Baird.

Jayson A. Noland - Robert W. Baird & Co., Inc. (Broker)

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

Patrick P. Gelsinger - Chief Executive Officer & Director

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

Zane C. Rowe - Chief Financial Officer & Executive Vice President

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

Patrick P. Gelsinger - Chief Executive Officer & Director

Yeah. And on the synergy side of it, we've indicated the synergy opportunity is very significant here. We've spent a good amount of time working with our Dell counterparts really grinding through the details of that, and we see some of those areas are starting to materialize, in terms of the operational characteristics. And the VxRail announcement by Dell was a good example of that this quarter. We also are beginning to develop, right, a clear view of many of the other opportunities that we can action post close as well. So we do feel good about the synergy opportunity.

With regard to customers and partners around Dell, what we would say is, is that there was – in Q4, there was just astonishment. This is the biggest deal in history. People immediately, what does this do to affect me, and fairly quickly in Q4, people got back to business, and it was like after Thanksgiving, we got back to business, we delivered a solid Q4. That clarity and momentum has continued into Q1.

Clearly, it's a discussion topic with customers, but now it's very much – it's a quick topic. It isn't the topic to cover with them. We also just completed our partner leadership summit, which essentially is the top partners that we pulled together to really talk about VMware strategy for the future, and we had all of our channel partners as well as OEM partners there, and we invited Michael Dell to participate in that to really answer the clarity of his intent and strategy with respect to VMware. And it was a robust conversation as he was addressing the questions of our key OEM partners firsthand.

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

Paul Ziots - Vice President-Investor Relations

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

Patrick P. Gelsinger - Chief Executive Officer & Director

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

Operator

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

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