VMware's (VMW) CEO Patrick Gelsinger on Q2 2016 Results - Earnings Call Transcript

Jul. 18, 2016 10:55 PM ETVMware, Inc. (VMW)
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VMware, Inc. (NYSE:VMW)

Q2 2016 Results Earnings Conference Call

July 18, 2016, 05:00 PM ET


Paul Ziots - Vice President-Investor Relations

Patrick Gelsinger - Chief Executive Officer & Director

Zane Rowe - Chief Financial Officer & Executive Vice President


John DiFucci - Jefferies

Brent Thill - UBS

Heather Bellini - Goldman Sachs

Keith Weiss - Morgan Stanley

Mark Murphy - JPMorgan

Nikolay Beliov - Bank of America

Michael Turits - Raymond James

Karl Keirstead - Deutsche Bank

Gregg Moskowitz - Cowen and Company

Nehal Chokshi - Maxim Group

Abhey Lamba - Mizuho Securities

Jayson Noland - Baird

Jason Ader - William Blair

John Rizzuto - SunTrust



Good day and welcome to the VMware Second Quarter Fiscal Year 2016 Earnings Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Paul Ziots, VP of Investor Relations. Please go ahead, sir.

Paul Ziots

Thank you. Good afternoon, everyone, and welcome to VMware's second 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 the close of market and is posted on our website, where this call is being simultaneously webcast. Slides which accompany this webcast can be viewed in conjunction with live remarks and can also be downloaded at the conclusion of the webcast from ir.vmware.com.

On this call today we will make forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially as a result of various risk factors, including those described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC. We assume no obligation to and do not currently intend to update any such forward-looking statements.

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

Our non-GAAP measures exclude the effect of our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, certain litigation and other contingencies and acquisition and other related items, apply non-GAAP tax rate adjustments, and exclude the impact of our GSA settlement on Q2 2015 GAAP revenues. 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 third quarter 2016 quiet period begins at the close of business September 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 Gelsinger

Thank you, Paul, and good afternoon, everyone. Q2 has been a good quarter, with good overall results, good momentum for our newer growth businesses and in the cloud, and building on a positive start in Q1.We grew total non-GAAP revenue 6% year-over-year to $1.7 billion, with non-GAAP earnings of $0.97 per share.

In terms of regional bookings performance, Asia-Pacific performed particularly well, followed by EMEA and the Americas. We are confident about our continued growth as we move into the second half of the year and Zane will address this more specifically when he provides updated guidance.

We were especially pleased with our results across our portfolio of newer growth businesses. In Networking, we had another great quarter with NSX license bookings more than doubling and the number of customers now exceeding 1700.

We are seeing broad adoption across all customer segments for NSX capabilities, including micro segmentation, IT automation, and application continuity. We continue to extend our leadership in hyper-converged infrastructure software, with approximately 5,000 customers now using Virtual SAN since its launch just over two years ago and up from about 3500 just a quarter ago.

Our hyper-converged license bookings, including VSAN and VxRail software, grew over 200% year-over-year. The new VxRail appliance we jointly developed with EMC was launched earlier this year and has enjoyed an impressive start, benefiting also from Dell's decision to resell VxRail.

We continuously complement our R&D engine with the infusion of acquired technologies and talent. To that end, in Q2 we completed our acquisition of Arkin Net, a leader in software-defined data center security. Arkin was described in a recent article as offering a GPS or Google maps for networking traffic.

Its management platform is purpose built for NSX and, combined with vRealize, will provide customers with a security and operations management plane for the SDDC. We are confident that Arkin will further expand vRealize suite's position as the industry's clear leader in cloud management.

Our leadership in cloud management was acknowledged by leading analyst firm IDC during Q2. They named VMware as the market share leader in both the worldwide cloud systems management and the data center automation software markets based on 2015 revenues. This is the third consecutive year that VMware has topped both categories.

We're also seeing strong interest for VMware Photon platform and VMware vSphere integrated containers, both of which enable our customers to run cloud native applications while addressing their enterprise requirements.

In April, VMware and Pivotal introduced a new cloud native stack featuring Pivotal cloud foundry and VMware Photon platform, designed to provide customers with worry-free management of their infrastructure while speeding application deployment and development.

Our open stack distribution, VMware Integrated OpenStack is also being increasingly adopted as the only enterprise class implementation of OpenStack. As part of our expanding commitment to open source, Dirk Hohndel, a longtime leader in the open source community recently joined as our Chief Open Source Officer.

In this new role, Dirk leads the company's free and open source strategy with a goal of increasing our engagement with the open source community and further accelerating innovation through open source software.

SDDC technologies are the basis for VMware's cloud strategy and future offerings. We are providing customers with powerful capabilities to extend their private cloud workloads into the public cloud and to help them run, manage, secure and connect all their applications across all clouds and all devices.

We are looking forward to unveiling many of these new capabilities at VMworld, which kicks off at the end of August. These new services will provide customers with unparalleled connectivity, security, and visibility across multi-cloud IT resources, regardless of whether the underlying infrastructure is VMware based.

VMware's vCAN partners are a key part of this strategy and represent an increasingly important part of VMware's growth and revenue. IBM is one of VMware's long standing vCAN partners; and in Q2 they secured a number of new customer agreements.

These included a global mass media and financial services information company which is re-architecting its application service delivery with the VMware-powered VDI, one of the first wins from the expanded go-to-market partnership we announced with IBM in Q1.

In addition, one of North America's top financial institutions is moving 40% of its existing workload to IBM's new SoftLayer service powered by VMware's SDDC. In addition, IBM and VMware announced an extension to our partnership which enables VMware Horizon Air customers to take advantage of cloud hosted desktop and application services via the IBM cloud globally.

There have been some other exciting announcements for our end-user computing business. In partnership with Tanium, a leading endpoint security company, we announced VMware TrustPoint, a new integrated solution for endpoint security and management. And we also announced enhancements to Workspace ONE to deliver a new identity defined managed workspace.

VMware AirWatch continues to get industry recognition from top analyst firms. This quarter it was named the leader in the Gartner Magic Quadrant for enterprise mobility management, EMM, for the sixth consecutive year. It was also noted as the highest in ability to execute for the fourth year in a row and the furthest in completeness of vision this year.

This is the first time in the history of the Gartner Magic Quadrant for EMM that a single vendor placed highest on both axes. For the second consecutive year, leading analyst firm IDC ranked VMware AirWatch as the largest EMM vendor in terms of market share for 2015.

Before I hand over to Zane, I want to talk briefly about the proposed merger between Dell and EMC, which EMC indicates is expected to close within the originally announced timeframe. We believe our expanded relationship with Dell will be very positive for our customers, partners and shareholders.

One of the core tenets of this relationship is the commitment from Michael Dell that VMware will retain and continue to invest in its strong independent partner ecosystem. Overall, we were very pleased with the business through our OEM partners in Q2 and we expect our relationship with Dell to build upon the strong partnership we've built with EMC over many years.

In closing, I hope to see many of you at VMworld which kicks off on August 29, when we will welcome over 23,000 attendees to our annual industry conference which takes place in Las Vegas this year. Overall, we are confident in our strategy and optimistic about the momentum we are seeing behind our growth businesses.

I'll now turn it over to Zane to talk more about our business performance in Q2.

Zane Rowe

Thank you, Pat. And thanks to all of you for joining us today. Q2 was another good quarter for VMware, thanks to all of the team's efforts and the continued support and commitment from our customers.

I'll start with a brief overview of the P&L and balance sheet results, followed by product bookings, and then conclude with updated guidance for the year.

For Q2, non-GAAP total revenue grew 6% year-over-year and licensed revenue increased 1%. Our Hybrid Cloud and SaaS offerings, driven by vCloud Air Network, vCloud Air and AirWatch as a Service, grew in the strong double digits year-over-year and reached approximately 8% of total revenue in Q2.

Non-GAAP operating margin was 30% and non-GAAP EPS was $0.97 per share. Share count for the quarter was 427 million diluted shares. We continue to build upon the strength of our balance sheet, with cash and short-term investments totaling $8.7 billion. $2.1 billion of this is domestic cash.

Unearned revenue was $5.1 billion, with $1.8 billion of this amount long-term. The year-over-year growth rate for non-GAAP total revenue, plus the change in unearned revenue was 10%, and the growth rate for license revenue, plus change in unearned license revenue was 5%.

We had continued strong bookings growth with NSX and vCloud Air Network, along with our hyper-converged software solutions, which include VSAN and VxRail. We were also pleased with our support and service bookings growth, supported by a strong pipeline of renewal opportunities.

This is a recurring business which provides an opportunity for us to up-sell and cross-sell our newer products when agreements come up for renewal. In Q2, standalone vSphere represented less than 30% of license bookings and as we expand our growth businesses, we expect this figure to continue to decline.

We also want to provide a little more insight into our product mix this quarter, with an additional comment on compute license bookings. As you'll recall, compute license and total compute bookings include the combination of standalone vSphere, in addition to vSphere sold with suites and to our vCloud Air Network partners.

Compute license bookings were less than half of our license bookings for Q2, with the majority of license bookings coming from other products, which include management, NSX, VSAN and end-user computing.

Compute license bookings declined less than expected in the low single digits year-over-year, while management license bookings grew in the mid single digits. Total compute bookings grew in the low single digits year-over-year and total management bookings grew in the low double-digits in Q2.

Our network virtualization and hyper-converged products had particularly strong growth this quarter and are becoming a larger driver of our overall business. NSX license bookings increased over 100% year-over-year and the combined growth for our hyper-converged products was over 200% year-over-year in Q2, with a significant increase in customers for both products.

Turning to hybrid cloud. Total bookings for vCloud Air Network, which includes multiple product offerings, grew over 25% year-over-year. A wide variety of cloud and service providers from around the world utilize VMware software defined data center products to deliver cloud services to their customers. These include OVH, a European cloud provider, and IBM, who both offer the full SDDC stack in the cloud.

Wrapping up on the product front, end-user computing license bookings increased in the low single digits this quarter, excluding the AirWatch Wandering Wi-Fi business, which was divested in Q1. AirWatch continued to see double digit license bookings growth, with the EMEA recovery plan underway, while the desktop business had challenges in Americas and EMEA, as we converged the desktop and mobile sales teams into a unified selling motion.

We continue to see solid customer interest in our EUC digital work space solutions, and now that the EUC sales team convergence is largely complete, we believe EUC will be a growth driver for VMware in the back half of the year.

I'll spend a moment on our stock repurchase plan. As we mentioned on our last call, our Board authorized a repurchase of up to $1.2 billion for 2016, which we plan on using to repurchase class A shares in the open market before the end of the year. We expect to begin repurchasing our stock after the EMC shareholder votes.

Now turning to guidance. We are increasing our full year guidance for revenue, non-GAAP operating margin, non-GAAP EPS and operating cash flow, due to stronger-than-expected performance in both Q1 and Q2, as well as a slightly higher outlook for the second half of 2016.

We are increasing the midpoint of our total revenue guidance range for 2016 to $7 billion and the midpoint of our license revenue range to $2.734 billion. We are increasing our non-GAAP operating margin guidance to approximately 32% and increasing the midpoint of our non-GAAP EPS range to $4.30 per share.

We are increasing our operating cash flow expectation to $2.3 billion and decreasing our CapEx forecast to $170 million, which results in an increase of our free cash flow expectation to approximately $2.13 billion.

For Q3 2016 guidance, the midpoint of our total revenue range is $1.763 billion and the midpoint of our license revenue range is $682 million. We expect non-GAAP operating margin to be approximately 32.6% and the midpoint of our non-GAAP EPS to be $1.10 per share. Additional details on guidance are provided in the slide deck accompanying this call.

In summary, we're increasing the guidance for 2016 as a result of a good first half and a slightly higher outlook for the remainder of the year. Our balance sheet is strong and we plan to return $1.2 billion to our shareholders in the form of a stock buyback by the end of the year. And finally, our products and services continue to provide unparalleled value for our customers.

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

Paul Ziots

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 Instructions] At this time, we'll take a question from John DiFucci with Jefferies.

John DiFucci

Thank you. My question is going to be around Brexit. You guys put up good numbers again, actually even better than you have been putting up, raising guidance here. It doesn't appear that you saw any slowness due to that vote, which happened with still a week to go in the quarter.

I guess, Zane and Pat, what gives you the confidence to actually raise guidance here for the rest of the year, what are you hearing from the European region?

Zane Rowe

Hey, John, this is Zane. I'll start and then let Pat finish off the answer. You know, as we looked at our second quarter results, we didn't see an immediate impact, as you might expect, in the UK or Europe tied to Brexit.

But as you would expect, we're monitoring it closely. If you look at the currency side of things, it had a negligible impact on our second quarter results as well.

Giving you a sense of size, our pound exposure is in the mid single digits. So related to the UK, we don't necessarily have significant exposure. If you were to look at our EMEA pipeline, it's actually strong for the second half, and as I mentioned, while we're studying it closely, we haven't seen any impact just yet. Pat, I'll let you touch on…

Patrick Gelsinger

Yes, and as you've seen, John, we've had great performance out of our EMEA team. As we've gone through the year, they've performed well so far. We just completed detailed reviews of our second half pipeline, as Zane indicates, and it's strong.

And based on that and the overall strength of the products and business, we feel very comfortable with our overall guidance and the raise that Zane communicated.

Paul Ziots

Thank you, John. Next question, please.


At this time, we'll move on to Brent Thill with UBS.

Brent Thill

Thanks. It's been six quarters since you've seen double-digit billing growth. I'm just curious what you think is changing. You obviously had a very easy comp last Q2. But could you give us a little more color in terms of what you're seeing in terms of the customer adoption and the pipeline?

Zane Rowe

Hey, Brent, this is Zane. As you see in the bookings, the total bookings trend, we're seeing great adoption across all of the products, the newer products in particular. We had a good renewals growth this quarter, as well, which clearly contributed to the growth that we've seen, both in the first quarter and the second quarter, and as you would expect, this is incorporated in our guidance.

Patrick Gelsinger

And overall, we've clearly communicated that we really see the strength of the new product areas allowing us to see our business accelerate. And that's coming to fruition, the strength in vSAN and NSX and you see and are seeing the size and the growth rates to become more meaningful impacts on our overall business as we move forward.

So overall, this - the strong execution of the team, and I'll just say great resonance for the VMware strategy in our customers and where the challenges that they are facing, we feel very good.

Paul Ziots

Thank you, Brent. Next question, please.


We'll move on to Heather Bellini with Goldman Sachs.

Heather Bellini

Great. Thank you very much. I was wondering if you could share with us, Pat, kind of which of the businesses are you most optimistic on that given your results a little bit better than expected, you're slightly raising estimates for the back half of the year.

Which one is outperforming versus your expectations, or is it that the core vSphere business is just declining at a slower rate and if maybe you stabilizes at a - even though it's going down, but it's going down at a slower clip than you might think? So trying to get your view as you look out over the course of the next 12 to 18 months kind of how you see things playing out?

Patrick Gelsinger

Yes. Very good, Heather. Thank you. And generally, the rock stars of Q2 were NSX and vSAN and they were just fabulous. Them combined with the AirWatch and our vCAN business have been the strong growth drivers, all of those exceeding our plans for the first half of the year. So we feel very confident in that.

Also, compute, we had been modeling approximately a 10% decline in compute license bookings. We were less than that in Q2 or we performed better than that in Q1 and Q2. So overall the compute business was a bit more stable in Q2.

So not only did we have the benefits of that, but these rocket ship products on top of that. And we see nothing changing in the second half that we're not going to continue to see that kind of growth in the new product areas.

So great momentum in the new products, a little bit less decline in compute than forecast, and great resonance for our strategy as we go into the second half of the year, which I'd also say with the EA renewals, a typical second half acceleration that we've been forecasting, we just feel good as we go into the second half.

Heather Bellini

Great. Thank you very much.

Paul Ziots

Thanks, Heather. Next question, please.


We'll move on now to Keith Weiss with Morgan Stanley.

Keith Weiss

Excellent. Thank you for taking the question and also a very nice quarter. Maybe carrying on sort of the theme that you left on, Pat, in terms of the enterprise agreements. Can you talk a little bit about what percentage of overall bookings that are EAs, are the ELA bookings making up in the current quarter?

And on the renewals, and you talked about - and our analysis shows a building or a faster renewal dates in 2016 versus 2015. How are you guys doing in terms of converting those renewals and up-selling additional licenses into those deals, and what are the people buying? Is it still expansion deals, or are there new products that are coming in versus what you've seen in prior cycles?

Patrick Gelsinger

Good. Well, let me give some context to that overall, and then I'll ask Zane to add some thoughts, as well. Overall, our EA business, enterprise agreements in Q2 was very solid. We saw big deals coming over the line effectively.

We also saw the composition of those EAs to be very healthy, with strong contributions, 8 of 10, of our 10 largest deals with NSX and with vSAN management. EUC, I think, was 10 of 10.

So overall, we're very effectively doing what we described, in terms of bringing our new products into those renewed agreements. So that, to me, really is a critical determinant for our business, that our strategic relationships with our largest and most important customers is expanding to all of our new product areas. Zane, maybe a few specifics on the renewals.

Zane Rowe

Sure. Keith, as you point out, this is a good renewal year for us and our opportunity is larger this year than it has been in recent history, at least. And our conversion rates have stayed the same. We have exceptionally high conversion rates and we've maintained that, as Pat mentioned, with tight coordination of the sales teams, as well as the customer efforts that we have. So we're very pleased with the renewal front.

Paul Ziots

Yes. Thank you, Keith. I'll also point out, for those that may not know, there is an appendix slide that has some of the detail on EAs, and that's where we intend to have that information moving forward. Next question, please?


We'll move on to Mark Murphy with JPMorgan.

Mark Murphy

Thank you very much. I will add my congrats on the results. So Pat, I wanted to ask you, when you consider the acceleration in billings growth back up to double-digits, which Brent had mentioned earlier, to what extent do you attribute it to a few different factors?

First of all, any macro snapback in Russia, Brazil, China? Secondly, I guess, the concept of reaching a crossover point in the mix shift toward NSX and vSAN? Thirdly, was there any indirect early benefit from the Dell relationship?

And then finally, perhaps public cloud deployments being pulled back in-house, which we hear about from time to time, so to move from public cloud to run on prem or hybridized? Thank you.

Patrick Gelsinger

Wow, there's a lot in that single question. Maybe broadly, overall, there wasn't any particular macro effect that we're considering positive or negative. In that respect, we already touched on the Brexit topic. The BRIC countries for us were a bit better, still a bit of a headwind overall, with the exception of India and we are really proud of our India team performance.

The mix, as I think I've already covered that reasonably well, that the growth products really are contributing more and more to the overall growth and billings of the company. We did have a good quarter with Dell, but we also had a good quarter overall with the OEMs.

So to us, that's important indicator of the health of our overall channel and OEM business broadly. And clearly, Dell was very positive in this quarter, which is a good indicator of things to come.

You touched on the cloud topic, as well. I'm sure we'll cover that a little bit more as we go forward here. But I did mention the hybrid business for us, or I think Zane did in his comments, was a good one in second quarter, as well.

The vCAN business and the strategy that we're laying out with a multi-cloud strategy is clearly getting good momentum with customers overall.

Mark Murphy

Thank you.

Paul Ziots

Thank you, Mark. Next question, please.


Now we'll hear from Kash Rangan with Bank of America.

Nikolay Beliov

Hi. This is Nikolay Beliov sitting in for Kash. Can you guys please comment on the transactional business? I think it grew 5%, 10% in Q1. What was the performance in Q2 and what's driving the business?

Patrick Gelsinger

Yes. Overall, the transactional business was almost exactly identical to the EA business in Q2. To me is a real indicator of a balance to our business overall and I'm really quite proud of it. We had been making adjustments to our transactional.

We brought in a new leader for that area last year. He's really getting his hands around that, making changes, improvements into the programs and the operational disciplines that we have there.

And we've also made progress with respect to the products in the transactional business, with vSOM or vCloud Air Network, vSAN, AirWatch all having very effective businesses through the transactional channel.

So overall, having such a balanced performance between EAs and transactional business, to me is one of the real highlights that I'm proud of to the overall execution of my team in Q2.

Paul Ziots

Thank you, Nikolai. Next question, please?


We will move to Michael Turits with Raymond James.

Michael Turits

Hey, guys. I'd like to talk about the decline in compute bookings and licensing. It was more moderate than it was. What were really the drivers for that and are they sustainable?

Zane Rowe

Michael, I'm happy to start out with that. I think Pat touched on that earlier. We do experience some quarter-to-quarter volatility in that. While we're pleased with the performance that we saw this quarter, and obviously, I mentioned renewals was a part of that, by no means has that changed our longer term view and I think Pat touched on that a little earlier. Our longer term view for compute remains the same.

Patrick Gelsinger

Yes. And a few other comments in that overall, with strong renewals, that's an indicator of the strength of the compute business, good EA cycle that we've touched on, that's also a strength. Also, some of the areas that people have expressed concerns in the past, such as cloud or OpenStack or other areas.

We've continue to see very good momentum for the VMware solutions there. And many of our customers have explored other technologies and found that the only way to run an enterprise grade solution is with VMware technology.

So in some cases, we've just seen customers experiment with other choices in their labs and after an experimentation of a few quarters or even a couple of years, we've seen them come to an all VMware technology as the best one.

In fact, we had a very good win in a major financial services this quarter, after a couple of years of having a parallel technology stack basically said, the only way to run my enterprise grade solutions is all VMware, and have made a major move back to VMware.

So I think those are some of the indicators that would say that our modeling has been maybe a touch conservative here. But I think that's exactly where you'd want us to be as we really understand the compute business. And as we've said before, at 80% penetrative and 80% market share, it is just a very powerful springboard for all of the new product areas that we're moving into.

Paul Ziots

Thank you, Michael. Next question, please?


We'll move now to Karl Keirstead with Deutsche Bank.

Karl Keirstead

Question on the change in the CapEx guide, if I heard you correctly, $170 million for the year. That's at the midpoint. That's about half of what it's been the last couple of years. I'm wondering if you could elaborate on the driver of that change and what we should infer about perhaps your investments in vCloud Air? Thank you.

Zane Rowe

Hello, Karl. This is Zane. I'll take that one. This has been more or less just timing, as you think of the big drivers in CapEx. Our facility spend, we've found ways to optimize our facility spend and are spreading that out further into future years. We had some internal IT projects that are getting extended into upcoming years, as well.

So I wouldn't look too deeply into that. I mean, I think we still want to maintain a healthy CapEx spend and we're not looking to change any of the dynamics that we've talked around historically.

So again, this isn't a big change, I would say it's just a little bit of movement for this year, bringing our guidance down from 270 down to roughly 170 for the year.

Patrick Gelsinger

And you referenced the vCloud Air business specifically in the question, and as we indicated when we brought that business back into VMware that in fact, it was going to be a very targeted use of our CapEx in that area around specific use cases.

And since we did that, Q1 and Q2 performance has been very solid for that business, and I'm quite happy with how they are being able to leverage the installed capital that we have against the use cases and really deliver a very unique service to some of our largest customers.

Karl Keirstead

Got it. Thank you.

Paul Ziots

Thank you, Karl. Next question, please.


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

Gregg Moskowitz

Okay. Thanks very much. I'll add my congratulations, as well. Pat, I know it's still quite early, but a couple of months ago you introduced new NSX SKUs more tailored to the mid market.

What has the initial response been like, and more importantly, what are your thoughts going forward as it relates to mass market applicability of the technology? Thanks.

Patrick Gelsinger

Yes, while it's, I think, early to really declare success for them, the early indications are very positive for the new SKUs that we've introduced. And if I just dimensionalize that a little bit, NSX has been a high end product, they've sold at the high end. And is still a new product with very powerful capabilities, but not necessarily the complete maturity of a mid market or high-volume product.

And that's really what these new SKUs were designed to allow us to do is start reaching into a higher volume of customers more in the mid market. Early indications are positive. Overall NSX customer count continues to accelerate.

We're also trying to reach a bit more of the channel opportunities with those SKUs, which we've started to see some channel momentum, still a long way to go in building the broader channel. But overall, good indicator and I believe this will just further accentuate the strong momentum that NSX has to truly transform networking for the long term.

Paul Ziots

Thank you, Gregg. Next question, please.


And now we'll hear from Nehal Chokshi with Maxim Group.

Nehal Chokshi

Yes, thank you for taking my question. Could you visit - you were giving, I believe, a metric around the percent of installed base that penetrated with cloud management on automation tools. Could you give that metric and elaborate a little bit further on where you guys stand as far as where you think you will ultimately be?

Patrick Gelsinger

Yes, the metric that we've traditionally given is attach rate of the management into our installed base, and that continued to increase. So this quarter we're up to 18%. I think that's up 1 point from the last time we gave you that metric, nominally. So we continue to see attach rate.

Overall, this is a great business for VMware. It's very strategic. It's very sticky. It's over $1 billion for us, and we grew in the low double digits in Q2. I'm not entirely satisfied with that growth rate. We are in a product transition. The results of our vRealize 7 suite have been very positive from customers, with great customer satisfaction scores showing the affinity of it.

We're also seeing the integration of the full SDVC suite with management, particularly NSX and vRealize automation use cases gaining a lot of momentum with customers. And we do see this as something that we're going to put increasing sales focus to make management a standard part of our sales going forward, because we really do see an opportunity to get to a much higher attach rate over time with the management products.

Paul Ziots

Thank you, Nehal. Next question, please?


Next question will be from Abhey Lamba with Mizuho Securities.

Abhey Lamba

Thank you. Pat, I think you mentioned you had a good quarter with Dell. Can you clarify, is that Dell buying your product or is Dell reselling? And how should we kind of think of revenue synergies from Dell owning EMC?

VXL [ph] was something you mentioned benefited from it this quarter. What are the other products that can benefit from this close relationship?

Patrick Gelsinger

Yes. Yes, and generally, we spoke broadly when the deal was announced that we could see $1 billion of revenue acceleration for VMware over time. And that's largely accomplished as Dell selling through their very large channel the VMware product portfolio. And we've dimensionalized that across the VMware products in compute, in end user computing, in storage, being able to leverage us in mobility, storage attached to core compute sales.

And those early business cases have now been developed in detail. We're also optimistic that we can, as soon as the deal closes, that we can get those underway very quickly and see the benefits that we saw in Q2 accelerate as we go into '17.

Overall, those market synergies are not Dell buying our products, it's Dell selling our products, and really seeing them as a reseller and bundling those into their OEM, as well as resale of sales motions overall.

And there's just a lot of enthusiasm for that opportunity on the VMware side, as well as on the Dell side. I would also point out ago that Michael is not just a champion of that, but he'd like to see our growth rates with the other OEMs increase even more rapidly, and in Q2, we did see good momentum overall for our OEM business beyond Dell.

Paul Ziots

Thank you, Abhey. Next question, please?


We'll move on to Jayson Noland with Baird.

Jayson Noland

Okay. Great. I wanted to ask on vSAN, it seemed to hit an inflection point in the quarter. Is that Dell synergy, in part, Pat, or HCI broadly, or what happened there?

Patrick Gelsinger

Yes, clearly the VxRail and the momentum that it is seeing was a piece of that. But a lot of the customer count was non-VxRail. So this product has now hit a point of inflection, as you suggest, that really was thrilling. And if I would call out one product in Q2 that just blew their numbers away, vSAN is it, and it was the rockstar of Q2 above all others.

And what we're seeing is that the product maturity, the channel momentum, I commented on the transactional channel before, and that really is well fit to vSAN. But also some of the enterprise use cases have clearly seen momentum, as well. And then we add to that the incremental benefits of VxRail that we jointly developed with EMC and Dell now reselling that VxRail product.

It was also geographically balanced, as well. We saw vSAN growing across all of the geos, large customers, major wins, in healthcare, also mid market wins across different geos. So really, really excited about the VxRail, as well as the overall hyper-converged category for us and vSAN, the rockstar of Q2.

Jayson Noland

Thank you.

Paul Ziots

Thank you, Jayson. Next question, please.


We'll move to Jason Ader with William Blair.

Jason Ader

Thanks. My question is, is it true that you guys are no longer compensating sales people on ESX renewals, and if so, how do you think that's going to impact the business going forward?

Zane Rowe

No, I don't believe there's been any change in how we compensate. I mean, obviously, as you would expect, we have multipliers on certain products at certain times. But there's been no change in how we compensate our sales teams.

Patrick Gelsinger

Generally, we bias our sales teams to the new product areas, but it's a bias. And clearly, the growth in new products are the ones that we give them the highest multipliers, as Zane inferred, whereas mature products, like vSphere, they get paid for those, they retire quota for those, but clearly not at the same level that they would for the new product areas.

Paul Ziots

Thank you, Jason. Next, and I believe this is the last question. So please go ahead.


This will be from John Rizzuto with SunTrust.

John Rizzuto

Hi. Thank you. Pat, it's been, I guess, four years since you came out and you said to the world, let's focus on something different, it's not about the virtualized server. And you brought forth the software defined data center, you brought forth the concept. It's a much bigger problem that we're solving. And since that time, you talk about transitioning to these new products and you keep still referring to them as new products.

I'm asking, at four years into this, it's kind of like these products are becoming or the strategy is becoming more of that adolescent phase, if you will or toddler phase, maybe let's say. Is the market - and everybody was jumping on the bandwagon at the time, has the market started to bifurcate where leaders in this space have started to separate themselves from others and actually selling new customers and new sales, but now standardization, incremental sales in a certain group in the market, and where do you fall out the way the landscape is shaping up?

Patrick Gelsinger

Yes, a couple of general comments. As we think about these newer product areas, as you say, and some of these we've been talking about for a while, so you'd say, hey, is this still new? And when we laid out the SDBC vision, and Rajaram, I think, was the first one that did that, it was really indicative of where the market was going.

And then we started to fill in that vision with the products, NSX about three years ago, vSAN about two years ago, the management products have really gone through major re-architecting to accomplish that, some of the more advanced hybrid cloud use cases really just in the last year.

And there's also adoption cycle for enterprise customers. As I describe it, a storage product, right, you ship it, and about two years later the market says yes to it. They test it. They try it. You can't afford data loss. So there really is a gestation cycle in the market for these products.

And they also have to become really integrated to the business processes of customers, as well. And as such, it is an enterprise customer base and these infrastructures that we're largely running on, they can't fail. So adoption for kicking the tires and test and dev is one thing, turning them into production scale deployments is entirely different.

And if I could, in Jeffrey Moore sort of terms, we feel like now we've crossed that initial chasm and we really are seeing the tornado of adoption, which really indicates to us that the SDBC for private cloud has an awful lot of legs and we're now really starting to feel that momentum in our customer base.

But we also have to put that against the backdrop of a much bigger shift to a multi-cloud environment. And that's where the strategy has evolved in that period of time and being able to run that SDBC stack on public cloud resources, like we've announced with IBM and recently with OVH, the strength in our vCAN business, as well as taking those products and stretching them onto public clouds, like NSX and vRealize, with Amazon and Azure, these are powerful extensions of that core strategy that we laid out four years.

So yes, I think we're definitely past the bleeding edge adoption into the early market adoption. And as Jeffrey Moore, a longtime friend says, the tornado phase, I think, is now upon us.

Paul Ziots

Thank you, John. Before we conclude, Pat has a couple of final comments.

Patrick Gelsinger

Yes. And thank you all for joining us. In closing, Q2 was a good quarter which concludes a good first half of '16 for VMware. We're confident in our strategy and execution plans and we're very optimistic about the momentum we're seeing behind our growth businesses. We hope to see many of you at VMworld. We'll be unveiling new capabilities that will enable our customers to run, manage, secure and connect applications across all clouds and all devices. Thank you again.


Again, this does conclude today's conference call. Thank you all for your participation.

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