VMware, Inc. (VMW) CEO Pat Gelsinger on Q1 2019 Results - Earnings Call Transcript

VMware, Inc. (NYSE:VMW) Q1 2019 Earnings Conference Call May 31, 2018 5:00 PM ET

Executives

Paul Ziots - VP, Investor Relations

Pat Gelsinger - Chief Executive Officer

Zane Rowe - EVP and Chief Financial Officer

Analysts

Kash Rangan - Bank of America/Merrill Lynch

Mark Murphy - JPMorgan

Karl Keirstead - Deutsche Bank

Raimo Lenschow - Barclays

Matt Hedberg - RBC Capital Markets

Walter Pritchard - Citi

Heather Bellini - Goldman Sachs

Phil Winslow - Wells Fargo

Jason Ader - William Blair

Mark Moerdler - Bernstein Research

Michael Turits - Raymond James

Sanjit Singh - Morgan Stanley

Gregg Moskowitz - Cowen & Company

Brad Zelnick - Credit Suisse

Adam Holt - MoffettNathanson

Operator

Good day and welcome to the VMware First Quarter Fiscal Year 2019 Earnings Conference Call. Today’s conference is being recorded. 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 first quarter fiscal 2019 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 on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, acquisition, divestitures and other related items, including the gain on Pivotal Software’s IPO and non-GAAP tax rate adjustments. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in the press release and on our Investor Relations website.

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 fiscal 2019 quiet period begins at the close of business Thursday, July 19, 2018. In addition, VMware adopted ASC 606 on a full retrospective basis effective February 3, 2018. Accordingly, the financial results for the first quarter of fiscal 2019 presented in our press release and discussed on this call have been prepared under ASC 606. Additionally, in order to provide meaningful comparisons to prior periods, VMware has provided financial statements for the first quarter of fiscal 2018 and supplemental financial information for each quarter of fiscal 2018 as well as the full fiscal years 2018 and 2016 adjusted for ASC 606 in our press release and slide deck accompanying this call. All year-over-year comparisons discussed on this call, including both first quarter fiscal 2019 results and our forward-looking guidance are comparisons to the corresponding periods of fiscal 2018 as adjusted for ASC 606.

With that, I will turn it over to Pat.

Pat Gelsinger

Thank you, Paul. Before discussing our strong start to fiscal 2019, we want to once again acknowledge Schedule 13D filing made by Dell in February concerning a number of business opportunities they are considering and the further 8-K filing made by Dell in mid-May. Our February 2 press release in response to the 13D filing which outlines our sound governance practices, including that the VMware Board is committed to taking actions that are in the best interest of all stockholders can found in our website. We do not have any further update at this time.

Moving on to our business performance, Q1 was a strong start to the year and we are pleased with our results which continued to be driven by broad-based strength across our diverse products and services portfolio and in all three geographies. Q1 total revenue grew 14% year-over-year with non-GAAP earnings per share growth of 18% to $1.26 per share. Three primary factors continued to contribute to our ongoing strength in Q1. We continued to see the market respond positively through all aspects of the VMware strategy. The second factor is our strong and consistent global execution. And the third factor is the continuing positive market environment for well-positioned enterprise companies such as VMware. We remain confident and pleased with our outlook and growth opportunities.

Turning to business highlights, this quarter, we articulated a powerful networking strategy as we unveiled our expanded vision for the future of networking, the virtual cloud network, and delivered on that vision with an expanded networking portfolio. The virtual cloud network will enable organizations to create a digital business fabric for connecting and securing apps data and users in a hyper distributed world. The expanded VMware NSX networking portfolio will enable consistent pervasive connectivity and intrinsic security from the software-defined data center to the branch cloud and telco environments. The expanded VMware NSX portfolio now includes NSX data center now supporting containerized cloud native and bare-metal applications and higher performance for telco NFV applications; NSX SD-WAN by VeloCloud for branch to data center and cloud conductivity now integrated with VMware NSX data center; NSX cloud now adding support for applications running in Microsoft Azure; NSX hybrid connect to migrate workloads across environments legacy to modern and across private and public clouds using the VMware platform; and AppDefense to secure and protect applications. To execute on this vision and expanded NSX portfolio, we are delighted that longtime industry leader, Tom Gillis has joined us as Senior Vice President and General Manager of the Networking and Security business unit.

The end-user computing business experienced another strong quarter driven primarily by Workspace ONE, which was comprised of integrated desktop, mobile and identity management functionality. We introduced the number of updates to the Workspace ONE platform to make it the first and only intelligence driven digital workspace. This baked in intelligence improves user experience and enables predictive security across customers’ complex distributed environments. We further reinforced our commitment to an intelligence driven offering by acquiring the assets of user behavioral analytics startup, EA Security. Early in the quarter, we were excited to announce that VMware Cloud on AWS is now available in Europe and will offer new capabilities to accelerate and simplify enterprise cloud migration and hybrid cloud deployments. We continue to see customer momentum and interest in this groundbreaking offering. We closed a multiyear and multimillion dollar deal in Q1 with MIT, one of the top universities in the country. They have made a significant commitment to the cloud and are consolidating their multiple data centers as part of the transformation of their IT environment.

Using VMware Cloud on AWS, they are able to seamlessly and rapidly migrate thousands of VMs into the AWS environment. MIT is a great example of one of our top VMware customers and they have adopted the VMware Cloud on AWS platform and the opportunity presented by the powerful combination of VMware and Amazon. Brink’s Inc. is excited about using VMware Cloud on AWS as the foundation of their global infrastructure. This allows the company to easily move workloads between its private cloud and the public providing agility for production services and disaster recovery. This flexibility improves service levels to customers and is a key driver in Brink’s technology and business transformation.

We have a rapidly growing customer pipeline for our joint Pivotal Container Service offering that is based on Kubernetes. PKS is the only Kubernetes platform that has a built-in networking and security capability with NSX and deep integration with vSphere making it a compelling choice for customers. As stakeholder in Pivotal which was formed in 2013 from a combination of VMware and EMC assets, we were pleased to see their successful IPO. Core software-defined data center or SDDC license bookings which is both compute and management grew in the double-digits year-over-year. Core SDDC was supported by good overall management performance as well as continuing strength in our VMware Cloud Provider Program, or VCPP.

This past quarter, we announced new releases across the integrated VMware vRealize cloud management platform that make it easier for customers to implement, use and manage their private and hybrid cloud environments. In addition, we unveiled new releases of VMware vSphere and VMware vSAN, which powers the industry’s leading hyper-converged infrastructure solutions to help customers securely run their business critical and modern applications in the data center at the edge in the public cloud or in hybrid cloud environments. Additionally, our market leadership is again validated by the April 2018 Q4 ‘17 IDC worldwide quarterly converged systems tracker, which places VMware in the number one market share position for HCI Software.

At Mobile World Congress 2018, we announced updates to our telco software and cloud services portfolio helping service providers prepare for a 5G world. We continue to grow our presence in telco core and edge networks through our network functions virtualization solutions, including another major European carrier committing to the VMware NFV architecture. Most recently, we announced VMware integrated OpenStack 5, which is available in both carrier and data center additions. This new version adds features to help customers simplify scale and secure production OpenStack environments. In Q1, we celebrated the important milestone of our 20th anniversary and saw continued outstanding recognition in the industry. Just recently, Forbes named VMware number 21 on the Forbes list of America’s best employers. In addition, VMware was named number 7 on Fast Company’s top 10 most innovative companies and enterprise.

In closing, as we celebrate 20 years of innovation, VMware software continues to serve as the essential ubiquitous foundation for the world’s digital infrastructure. We remain committed to helping our customers become digital businesses that deliver better experiences for their customers.

And with that, I will turn it over to Zane.

Zane Rowe

Thank you, Pat and thanks to all of you for joining us today. We are pleased with Q1 results, which reflect the strength of our broad and increasingly integrated product and services portfolio. We saw success with customers buying our solutions to modernize data centers, integrate public clouds, transform networking and security, and empower digital workspaces. The strong start to fiscal ‘19 has us well-positioned to continue to execute on our strategy.

For Q1, total revenue grew 14% and license revenue increased 21% year-over-year. Hybrid cloud subscription and SaaS represented over 10% of Q1 revenue for the first time. Our VMware Cloud Provider Program, which is the largest component within that category, once again grew revenue over 30% year-over-year. This growth was driven by our cloud partners’ demand for VMware’s cloud products and services. We increased investments in key R&D and sales and marketing initiatives in Q1, particularly in our hybrid and multi-cloud strategies, which we discussed last quarter.

Our non-GAAP operating margin for the quarter of 29.8% was better than expected due to strong revenue growth. Non-GAAP EPS was $1.26 per share, up 18% year-over-year on a share count of 411 million diluted shares. Our GAAP net income of $942 million included a gain of $781 million from the recent successful Pivotal IPO. Unearned revenue at quarter end was $5.8 billion, with $2.4 billion of this amount long-term. Cash and short-term investments totaled $12.6 billion. Total revenue plus the sequential change in total unearned revenue grew 17% and license revenue plus the sequential change in unearned license revenue grew 21% year-over-year in Q1. We continue to see high level of customer satisfaction resulting in strong renewal rates and SnS bookings growth for Q1.

License bookings for our NSX portfolio, including VeloCloud grew over 30% year-over-year in Q1 as use cases continue to expand beyond micro-segmentation, automation and application continuity to cloud and container networking as well as branch transformation and security. vSAN license bookings grew 70% year-over-year with continued strong performance for vSAN standalone and VxRail. We see customers picking vSAN, because of performance, scalability and deep integration with vSphere. All 10 of our top 10 deals this quarter included vSAN.

EUC license bookings were up in the low-teens as Workspace ONE, our platform for securely delivering any application to any device was a highlight. We continue to be pleased with demand for our Workspace ONE SaaS platform, which comprised more than half of customer spend in Q1. And as Pat mentioned, core SDDC license bookings, which is both compute and management, grew in the double-digits year-over-year. Compute license bookings increased in the low-teens and management license bookings grew in the strong double-digits year-over-year.

As we have mentioned in the past, management attached to large deals can vary considerably from quarter-to-quarter. Total bookings for compute increased in the high single-digits and for management in the strong double-digits year-over-year. As a result of our Q1 overachievement, we are increasing guidance for total revenue, license revenue, non-GAAP operating margin and cash flow from operations for the full year. We now expect license revenue to be $3.610 billion, an increase 12.8% year-over-year and total revenue to be $8.780 billion, up 11.7% year-over-year.

Non-GAAP operating margin for fiscal ‘19 is expected to be 33.6% with non-GAAP earnings per share of $6.14 on the diluted share count of 410 million shares. For modeling purposes, we haven’t changed our assumptions around our remaining 900 million in stock repurchase authorization. We are also increasing our fiscal ‘19 guidance for cash flow from operations to $3.6 billion. We expect capital expenditures of $280 million and free cash flow of over $3.3 billion. At this time, we won’t be commenting on future capital allocation in consideration of Dell’s 13D filing. We look forward to providing you with an update and will continue to leverage our strong balance sheet to deliver value to shareholders.

For Q2, we expect total revenue to be $2.145 billion, an increase of 11% year-over-year and license revenue to be $875 million, an increase of 11.7% year-over-year. We exited Q1 with $122 million of license backlog compared with $99 million at the end of Q4. License backlog is the license portion of unfulfilled orders at quarter end. For Q2, we expect non-GAAP operating margin to be 33.5% and non-GAAP earnings per share to be $1.49 on the diluted share count of 413 million shares.

Before wrapping up, I will highlight a few ASC 606 impacts on our balance sheet that I mentioned on our last call. Under 606, there is substantially less deferral of license revenue in connection with the treatment of on-premises license sales. License revenue and license bookings have a tighter correlation for on-premises software sales and as a result deferred license revenue substantially declines under 606. The primary contributor to deferred license revenue is from our SaaS bookings. Also the treatment of commission expense changes, so we defer more commissions and amortize cost over longer duration. This results in a near-term benefit to margin, which we expect to be more prevalent in the second and fourth quarters due to sales seasonality.

As mentioned in the opening, we have adopted the full retrospective method, so all P&L and balance sheet year-over-year comparisons are consistent. We have provided P&L and certain balance sheet items for each quarter in fiscal 2018 under ASC 606 as supplemental charts in our financial statements this quarter as well as in the appendix of the slide deck accompanying this call. In summary, Q1 was a great start to the year. Our VMware team and our partners are delivering solutions and value to our customers throughout their digital transformation. This is both good for their business and for our shareholders.

With that, I will turn it back to Paul.

Paul Ziots

Thanks, Zane. Before we begin the Q&A, I will ask you to limit yourself to one question consisting of one part, so we can get to as many people as possible. I will also remind you we will not be commenting on Dell’s prior 13D or 8-K filings during the Q&A. Operator, let’s get started.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Kash Rangan from Bank of America/Merrill Lynch.

Kash Rangan

Congratulations on a spectacular quarter and a start to the year. I had just one question. If you could just talk about the customer example you talked about, Pat, Brink’s was going to be using the AWS service in conjunction with VMware. For a company like that, how do you foresee assuming that this kind of trend sustains with other customers also of VMware take up the AWS service? What does this mean for the potential book of business for the core VMware business, the bread-and-butter SDDC products and the consumption of these products, how does that profile change or not change with AWS partnership potentially in full swing? That’s it for me. Thank you.

Pat Gelsinger

Sure, Kash and thanks for the comments. Good start to the year. And as we see customers like this, I mean, clearly like if we look at MIT, they are decreasing over time the amounts of their on-premise environment over time. But as we said before, when they moved to VMC, it’s a richer service offering for us. So, that’s a good move for them as we are taking advantage of our full stack, but this hybrid value proposition really says to get the best of both worlds. So it’s reinforcing the value of us on-premise. And as we have talked about in the past, Kash, where we see customers who maybe uncertain about the value of their VMware footprint with the value of VMC, now they say, oh wow, this is the strategic bridge to the future, so it really reinforces both sides of the equation for us, the private cloud transformation. In a number of cases, we see this will be the first time they use vSAN or NSX at scale combining that with their public cloud. So we see this some model of hybrid cloud on both the Brink’s and MIT examples are really demonstrative of that. Overall, the VMC service is off to a very good start. We are adding more services to it. We did the European rollout this past quarter we will be doing APJ next quarter. We are seeing customers accelerate. And any new service like this, Kash takes a while to mature. To me, I always say enterprise services you just need to be in market for a while, so customers will really start running production on it and now that we have at-scale production customers using the service, to us it’s been a pretty important milestone this quarter to see customers like MIT and Brink’s. And overall as I said, I think it reinforces the value of VMware both in the cloud and on on-premise as a result of our unique hybrid offerings in the marketplace.

Paul Ziots

Thank you, Kash. Next question, please.

Operator

And we will take our next question from Karl Keirstead with Deutsche Bank.

Karl Keirstead

Hi, thanks. A question for Zane. Zane, I wouldn’t mind drawing a thread through a few of the numbers from this quarter that stand out to me. In addition to the big license outperformance, your long-term DR growth was also quite high. And for three quarters in a row now, your cash flow generation has been extraordinary 41% operating cash flow growth this past quarter, 83% before that, 57% growth before that, so between cash flow, the license outperformance and long-term DR, just it feels to me like VMware is signing a lot of very large long-term deals with large prepays. And so I am just wondering if you could try to explain that for us, are you guys altering the invoicing terms at all perhaps you are going through a big ELA renewal cycle that could explain those numbers and if you are, when do you anniversary that? Thank you, Zane.

Zane Rowe

Sure, happy to get some color there and let Pat chime in as well. Nothing has changed as far as the business. Obviously, we were very pleased with our first quarter bookings outperformance license revenue growth and total revenue book growth. And we believe it bodes well for the future and the rest of the year. So there is nothing that’s really changed when you think about the companies that we are dealing with and the ELAs that we are signing. So we are very pleased with our performance there. As it relates to cash flow, there were a few dynamics that I would say year-over-year at least as you look at the first quarter this is why we tend to guide for the full year cash flow, but not only did we have a very strong fourth quarter and obviously from a cash perspective we are benefiting from that quarter-to-quarter, but also year-over-year if you recall the stub period fell into a month one period of last year. So when we had a strong cash flow quarter coming in the fourth quarter of last year, we missed a little bit of that in the stub period. So, we had an easier compare on a year-over-year basis. We feel really strong about the business. We feel good about the products across the board. The portfolio is truly selling well and customers are embracing the strategic message, so no change as far as that and just very pleased with business overall.

Pat Gelsinger

And I will just add to that a little bit, when customers view you as a strategic partner, right, deals get bigger and longer, right, it’s very simple that way and I say the strategy resonance that we are seeing in the marketplace has clearly been benefiting us to get bigger, longer term great renewal rates all of those factors in the business. The other aspect to that to really emphasize as I have said in my prepared remarks, the market is good for well-positioned tech companies. So all of those things just help us as we are building up, right, deferred cash flow etcetera, they are all just I think evidence of those broader positive statements we have said on the tech market and the VMware strategy resonating with our customers’ needs.

Karl Keirstead

Great. Thank you both.

Paul Ziots

Thank you, Karl. Next question, please.

Operator

And we will take our next question from Mark Murphy with JPMorgan.

Mark Murphy

Yes, thank you. Congrats on the strength and Zane, I am very glad that you are still here with us today. Pat, I wanted to think back to…

Zane Rowe

Thank you, Mark.

Mark Murphy

Pat, back at VMworld last August, I think you stated that what vSphere was to the first 20 years NSX is becoming to the next decade and I think at one point you also said that NSX could grow from a few thousand customers to hundreds of thousands over time and I know we are seeing that pretty broadly. So with a few more quarters under your belt, since then are you gaining confidence in those statements and the ability to make NSX consumable for the mass-market like vSphere has been?

Pat Gelsinger

Yes. So there is a lot in that question. So let me just tease apart a little bit. Long-term, we continue to see the networking opportunity to be as big or bigger than the compute opportunity, so it’s that pervasive. The second sort of piece of it is this quarter’s rollout of our virtual cloud network vision and strategy is demonstrating a much, much broader perspective of our overall networking strategy in the NSX portfolio. And if you think about it, Mark, we went from having essentially one product right, the NSX data center to now we have NSX data center, NSX for telco, the SD-WAN with VeloCloud, we have NSX cloud for Azure and Amazon, we have launched the hybrid use cases on the new security capabilities with AppDefense. So we have significantly broadened the capabilities that we have as part of the NSX family. We are now at 4,500 customers for NSX, but I will say it’s still largely a high-end product. We haven’t really brought it into the mainstream offering and that’s something that we are definitely working on for the future, Mark, is to have versions of the product that are more mid-market for the hundreds of thousands of vSphere customer. Today, the product and the family really has been largely for the enterprise customer, tens of thousands of customers as opposed to hundreds of thousands. So, we do see this as something that’s critical to our future. One example of that would be the VeloCloud or SD-WAN, which already has 2,000 customers for it and it’s a much more consumable simple product with a narrower use case, but a broader market appeal. So as we broaden the family, you will see us creating versions of it that are more mid-market focused and attacking many other use cases containers, multi-cloud, native cloud, hybrid use cases, security use cases, all of those together really give us this perspective that NSX for the long-term, right, has a larger market opportunity than compute and we are making good time on accomplishing that vision.

Paul Ziots

Thank you, Mark. Next question please.

Operator

We will take our next question from Raimo Lenschow with Barclays.

Raimo Lenschow

Hi, thanks for taking my question and congrats from me as well. I just wanted to double click on the EUC performance you are still going ahead of the market and so congratulations on that one. What impact does the greater proportion of SaaS revenue on the Workspace ONE have on the business and the growth that we are seeing there? That was my question. Thank you.

Pat Gelsinger

I missed the piece of that question. Yes, and overall and Zane can fill me in – fill us into the specifics a bit more, but overall, the EUC business for us continues to be very good. The Workspace ONE vision as we have talked about is performing very well. This integrated platform for all devices across all use cases with consistent management, security, identity all of that is going well, we are now I will say over 50% for the overall EUC portfolio as SaaS with the mobile piece of that now trending well above 50%, the desktop piece somewhat below 50%, but as a whole, we are now well over 50% for that as SaaS and we are really seeing that as one of the leaders of our as-a-service offering, subscription offering. VCPP, our cloud provider program and EUC have been leading the way on that transition overall. And our objective is to keep pushing that forward to be more subscription-based and more cloud-based in the future and another good quarter of performance from that team.

Zane Rowe

Yes, Raimo, we are not going to breakout the percent SaaS beyond what Pat articulated, but obviously, we are very pleased with the growth we are seeing in particular with Workspace ONE, where customers have that choice. And as you can see by the results, many are choosing the SaaS option on that particular product, so couldn’t be more pleased with Workspace ONE and the success we are seeing there.

Paul Ziots

Thanks, Raimo. Next question please.

Operator

And we will take our next question from Matt Hedberg with RBC Capital Markets.

Matt Hedberg

Hey, guys. Thanks for taking my question and congrats again on the results. It was good to hear about the continued success of vSAN and I guess I wanted to dig a little deeper into your hyper-converged offering VxRail. Pat, you talked a little bit about in your prepared remarks, but I am wondering if you could give us a little bit more into what’s driving the success there and perhaps how it’s contributing to some of your Dell revenue synergy targets?

Pat Gelsinger

Yes. And overall, another very solid quarter 70% year-over-year growth that and we saw that both vSAN and VxRail customer accounts now over 14,000 as we ended Q1 and just a very solid trajectory. We do see that this is an area of particular strength for our Dell synergies and Dell VxRail is the going extremely well and they also are effectively being a partner for us on vSAN and vSAN-ready nodes. So, across the board, Dell is an effective channel for us in vSAN in our hyperconverged offerings as a whole. It would also – we did vSAN 6.7 this quarter, so another major release of the products, so adding increased feature function. It would also point out that vSAN is part of the VMC offering on AWS. Right, it’s also now part of our VCPP program for our broader cloud providers. So, those channels are also emerging very well. And overall, IDC has recognized us again as the number one market share position for HCI overall and we are growing faster than our nearest competitors, so not only we are number one, but we are growing faster than number two by a good margin. So, overall, I think we are a tremendous trajectory for this product than we think that hyper-converged becomes a more and more important category for our customers and we are the clear leaders in delivering that in the marketplace.

Paul Ziots

And Matt, I will add also that 70% consists of the combined vSAN plus the vSAN portion of VxRail, the combined results 70% year-over-year license books growth. Thank you, Matt. Next question please.

Operator

We will take our next question from Walter Pritchard with Citi.

Walter Pritchard

Hi, I am wondering, Pat, if you could give us any customer metrics or when you might be able to give those customer metrics around VMC and then your sort of multi-cloud strategy, what are your customers telling you about using that in other cloud potentially and is there demand for that and is that potentially viable over time as you think about customers moving more to multi-cloud?

Pat Gelsinger

Yes, thanks Walter. We are not yet at the point we are giving customer metrics on VMC. We are seeing nice acceleration in customer accounts, customer usage etcetera. And as we indicated on other products, we will give periodic customer metrics and we had key milestones for EUC, you can expect to hear from us in the future in that respect. Also as we have laid out our broader cloud strategy, we have said that it’s really two things consistent infrastructure, which is VMware cloud and consistent operations, which is our Cross-Cloud services, so we really view both of those aspects. And for the consistent infrastructure portion of our cloud strategy, we also saw very good performance from our VMware Cloud Partner Program this quarter again growing over 30%. So, that’s growing extremely well for us and we are starting to see some uptake from our Cross-Cloud Services and this would include things like cost insights, our Wavefront product line, the Log Insight product, which is now as a service and we will be introducing other products in that family also the NSX cloud offering that we launched for Azure this quarter. So, we are building up more momentum there. And overall, customers are asking for more, go there looking for VMware cloud to be available on more regions, more clouds, more offerings, looking for more Cross-Cloud services from us. So we are seeing a lot of demand for the strategy that we have laid out and anytime the markets demanding more product from us faster than we could engineer, I consider that a pretty good strategy. We feel a real pull from the market overall in that category of our products and you are going to hear more from us as we come up on VMworld sort of across all aspects of those offerings, Walter.

Paul Ziots

Thanks, Walter. You squeezed a two-parter in, but we let go. So, congratulations. Next question please.

Operator

And we will take our next question from Heather Bellini of Goldman Sachs.

Heather Bellini

Hi, I will make sure to only ask one so that I don’t get in trouble. I just was wondering if you could share with us a little bit, Pat, about how you are seeing the ELA cycle versus like this time last year you look very bullish on IT spending, you have been very bullish again this year, but how are you seeing the ELA cycle and the attach rate of ELAs and the growth of ELAs versus your expectations?

Pat Gelsinger

Yes. I’d say Q1 is not the biggest EA quarter for us overall, but year-on-year growth in EAs, the EA opportunity continues to get larger as Zane said for us. Overall, our renewal rates, the renewal amounts, the in-quarter renewals, the size, every aspect of EAs continue to be a good metric for our business as a whole. As Zane said, we are seeing near 100% attach rate of EAs with new businesses as well on our growth business areas, so all aspects of EAs for us are good. We are also seeing that those EA conversations continue to be great ones as essentially points in the conversation with customers to be buying cycles. So, those end up being hey, we have an EA renewal coming up in two, three, four quarters, let’s start architecting that, let’s talk about the new product areas that we have as part of it. So, overall, it continues to be a great aspect of our sales cycle and our customers have gotten quite comfortable with that periodic discussion that we have to really expand their strategic relationship with us. Zane?

Zane Rowe

Yes. Heather, I would just add you may not have seen it on the slide, but as Pat pointed out, we saw some strength here year-over-year with 36% of our total bookings this quarter were EAs versus 32 last year. And as you think of that renewal opportunity, the increase we see this year is actually a little higher than the increase we saw last year, the expected increase in EAs coming up for renewal is a little bit higher. So we see great opportunity there as well. And also, Heather, the attach of newer things to EAs, I think that was referring to our top 10 deals, whereas it’s not every…

Pat Gelsinger

Yes, I should have been, right, but our top deals there 10 of 10 with vSAN, 10 of 10 with NSX, 9 of 10 with EUC, we are just seeing this buying cycle really be an opportunity for our customers to take advantage of the full portfolio of our offerings.

Paul Ziots

Thank you. Next question please.

Operator

And we will take our next question from Phil Winslow with Wells Fargo.

Phil Winslow

Hey, thanks guys for taking my question and a great start to the year. I just wanted to go back to the vSAN, Pat, you described obviously NSX has been maybe as big if not bigger than compute, but if I look at the commentary you all made about standalone vSAN plus they call it the allocated portion of vSAN up 70% year-over-year. I mean, that’s still super healthy growth there and still pretty high run-rate, how do you think about sort of the ultimate opportunity with vSAN kind of relative to compute, relative to NSX. I mean, how do you just think about that and how has it evolved and we have talked about this maybe a quarter or so ago you guys did about how it’s involved to now sort of any use case, not a specific use cases, but how do you just help us kind of qualify think that through?

Pat Gelsinger

Yes. We see that vSAN and the software-defined storage and HCI is a multibillion dollar business. We gave a TM view a couple of years ago, Phil, which is largely still accurate that this is a $6 billion, $7 billion, $8 billion TAM for the different areas of the portfolio. And while networking is a bit bigger than that, storage was still a multibillion dollar software-defined storage opportunity as we laid out that TAM view a couple of years ago and it’s largely true today. And I think everything that we are seeing is that the market, not just buying vSAN, they are increasingly buying HCI, right. And HCI includes a compute, a storage management products as that bundle and that’s the market shift that we are seeing and increasingly you will see us and Zane included this in his prepared remarks that we are increasingly focusing on selling a complete solution to customers and we break the 4 solution sales that we are focused on are the private cloud or the full SDDC stack, the public cloud, VMware cloud, our VCPP, our Cross-Cloud services, but embracing the public cloud. Third is transforming network and security and that’s what we launched with our virtual cloud network this quarter, which includes the full range of the NSX family that I described and transformed the workplace or Workspace ONE offering. So, central to the SDDC opportunity is this, right, vSAN piece of it, but it’s a bigger buying transition as people go to buying the full solution either as a complete software solution or as a complete software hardware solution like with VxRail. So that’s the shift in the marketplace we are seeing, where I will say people are no longer putting the Tinker Toys together themselves or saying give me the solution and that’s the behavior that we see overall. So, the storage piece by itself a large market that we have lots of growth to go yet. I tease my team saying how many vSpheres have storage attached to it? The answer is 100%. And I’d say what’s your market opportunity for vSAN, 100% of vSphere attach rate, so that’s where I am pushing them into the future is to continue to make it that simple and easy that we are attaching vSAN to every one of our compute nodes in the future and part of this larger migration to the complete solution either software or software plus hardware.

Paul Ziots

Thank you, Phil. Next question please.

Operator

And we will take our next question from Jason Ader with William Blair.

Jason Ader

Thank you. I wanted to drill down on your broader cloud strategy and obviously it sounds like VMC is off to a great start, but what’s the opportunity for VMware to establish similar partnerships with Azure and GCP?

Pat Gelsinger

Yes. And you obviously, the two foundational relationships that we have launched for Amazon and IBM and we said those were our two key public cloud partnerships both of those are going very well as I indicated, while we don’t breakout numbers specifically, the VMware Cloud Provider Program, of which IBM is central had another very good quarter, so that’s seeing a great momentum and the IBM partnership is going well. But as you suggest, we do see that customers will be using multiple cloud providers in the future, so we are expanding our relationship with Azure. We announced the new NSX cloud offering for Azure this quarter. We also have a great partnership with them on the VDI offering, the horizon on Azure offering is starting to see nice take up from them. We will be expanding our support for our management products on Azure. We also announced the PKS offering, which is a partnership with Google and Kubernetes. We also have a great partnership with Google on the client side, there are Android offerings, there are Chromebook offerings and you can see us filling in more of those service offerings with the other clouds and we really see that our strategy as we have called it is a multi-cloud one, where we enable customers to take advantage of private cloud in combination with multiple public cloud providers. And while we are leading the way with our Amazon and IBM partnerships, we will fill out that portfolio of both cloud partners and service offerings that we have that uniquely enable customers to go to the multi-cloud hybrid cloud future.

Paul Ziots

Thank you, Jason. Next question please.

Operator

And we will take our next question from Mark Moerdler with Bernstein Research.

Mark Moerdler

Thank you. Congrats on the quarter. So, Zane, bit of a modeling question, adoption of ASC 606 increased FY ‘18 license revenue and I would expect there is a similar somewhat change in FY ‘19 as you are recognizing the term subscription revenue as build and not over time. Can you give us a bit more color on exactly how we should think about the impact of that on both on a go forward basis, current basis and since it’s creating a tailwind, how sustainable will that tailwind be? Thanks.

Zane Rowe

Sure, Mark. Happy to take at least a couple of modeling questions. As you look at the restatements that recast that we said that we have highlighted in the supplementary material, you will notice that license revenue for the full year for FY ‘18 actually doesn’t change significantly from 606 versus 605. Obviously, as I mentioned in my prepared remarks, there is less deferred license revenue due to the on-prem component. S, there is less of the deferred, which has been recast for the historical period. So if you look-for-like, you actually see in the full year on nearly an $8 billion base, it’s only about a $60 million decline in revenue for FY ‘18. So as you look at the seasonality and as you look at where we are building the business, I would mention that there is not a significant change in how you model the business and how you see us project into the future.

Mark Moerdler

Perfect. Very helpful.

Paul Ziots

Thank you, Mark. Next question please.

Operator

And we will take our next question from Michael Turits with Raymond James.

Michael Turits

Hey, guys. Michael Turits, thanks a lot. I just wanted to ask about compute and management, last quarter compute was a little weaker and you commented that you are facing tougher comps, but it really reaccelerated as did management which you guys are looking together. So, what drove that reacceleration in compute and how do containers play into that?

Pat Gelsinger

Yes. And the overall strength we would say is the power of the portfolio. And we will have quarters of strength and weakness respectively in any individual product, some of that is driven by EA cycles, right, in attach rate of those, but overall, the portfolio as we would say is very healthy and we are seeing good momentum for the portfolio. Obviously any time that compute is successful it’s a foundation for all of our other products. We attach vSAN right and that enables us to sell NSX management associated with it. So anytime we see a good quarter and compute to us is just building more foundation for us to launch into these new areas. We would also point out that compute has multiple routes to market now. Obviously, the VMware Cloud Provider Program is an important aspect of our compute and much of that rate is compute being sold through this broad set of cloud partners. Also, our NFV program as we are selling more to telco is opening up more adjacent market for us and we had as we commented another major European telco win in Q1, so that helps in compute.

Also as you mentioned, management had another very solid quarter as well, which as we are selling more and more of selling motion as they indicated before is the complete software-defined data center as well, which is another benefit that we are seeing. So, collectively, a very good quarter for us in compute, it’s foundational, we are investing and winning new customers and new markets in the cloud, in telco. You also commented on containers and our strategy is fundamentally to run containers in VMs and that’s been essential. And I’d also comment that the number one container company probably on the planet is Google, they run 100% of their containers in VMs right. So, this idea of containers having a value proposition for app developers and VMs solving many of the infrastructure problems we see them as very complementary and we are making it easier and easier for customers to take advantage of both sort of the easy button between the apps of today and the containers of tomorrow with common networking management as well as virtual machines underneath that to make that a very easy transition. So that’s the core of our strategy there and with new offerings like PKS, our partnership with Pivotal and the shared offering and the good early uptake we are seeing there, again we see that, that is resonating well with customers and thus we see that containers will have to attract from, but probably will accelerate the interest in our core compute and SDDC platform.

Zane Rowe

And Michael, I’d just add while we are very pleased with the performance this quarter and for both management and compute with management you will note it has the high affinity to certain EA attach, so as you look at FY ‘18 there were certain quarters where we had some variability in that attach rate and some variability year-over-year on a quarter-to-quarter basis. And I’d say the same in this case with compute, we haven’t changed our long-term outlook for compute, but we are incredibly pleased with the results we have this quarter.

Paul Ziots

Thank you, Michael. Next question please.

Operator

We will take our next question from Keith Weiss with Morgan Stanley.

Sanjit Singh

Hi, this is Sanjit Singh for Keith Weiss. Congrats on the quarter. I am wondering if some of the results the quarter from a international versus U.S. perspective was a pretty big discrepancy in terms of year-over-year growth there. So, obviously, if you could walk through on the dynamics behind the growth rate in the international versus the U.S. and how are you feeling about the U.S. business for the balance of the year? Thank you very much.

Zane Rowe

Sure. I will start and let Pat chime in. We were very pleased with the growth we saw across all geos both international performance and domestic. We were helped to some degree in this quarter which was included in our guidance with FX. So on the license revenue portion we are helped by almost 4 points on FX on a year-over-year basis and I think that is included as you look at the mix between international and domestic, but again couldn’t be more pleased with the broad-based performance not only across the portfolio, but around the globe.

Pat Gelsinger

Yes. And I will just say having double-digit growth in the all three geos just shows the balance across them. We do feel good about our growth rates across all three. Clearly, America is the largest market. Obviously double-digit growth in that market is maybe a little bit harder given the amount of incremental, but again that’s going well. Europe has been a standout geo for us for the last couple of years. We have just had tremendous performance by our European team. And APJ has just great growth opportunities and we are starting to see pretty much all of our countries are performing now across the APJ and APJ is not a geo, it’s a collection of very different markets that you have there. So, we are quite pleased that we are seeing good growth pretty much in every country of the complex APJ marketplace and all of them are showing good outlook for the future as well. So, we feel very good about the balanced performance in this quarter as well as a balanced outlook going through the year.

Paul Ziots

Thank you, Sanjit. Next question please.

Operator

And we will take our next question from Gregg Moskowitz with Cowen & Company.

Gregg Moskowitz

Hi, thank you and I will add my congratulations. Zane, can you update us on the currency impact that is being embedded in your fiscal ‘19 revenue and license revenue guidance, just wondering how much of the raise on today’s call is due to FX and how much is due to just core business?

Zane Rowe

Sure. Yes, we actually haven’t – FX isn’t driving a big part of the raise at all. It was contemplated in our original forecast has only moved off slightly from our forecast of sometime ago. As I just mentioned on the last question, if you looked at the quarterly performance, about 4%, we got a 4% tailwind for license revenue and about a 2% tailwind on total revenue impacted by FX and if you look for the year, you expect to see about just overall 1 point on a year-over-year basis tailwind for both license and total revenue for the full year, so not significant part of our forecast.

Paul Ziots

Thank you, Gregg. Next question please.

Operator

We will take our next question from Brad Zelnick with Credit Suisse.

Brad Zelnick

Thanks very much and congrats. Pat, we noticed that you hired a new worldwide channel chief in the quarter and clearly what you sell today has evolved quite a bit from years past as has the role of the channel more generally. What are your priorities and how are you thinking about channel strategy evolving going forward?

Pat Gelsinger

Yes, glad you asked the question, we just finished our partner leadership summit, so the inclusion of Jenni Flinders as our new Channel Chief was very timely to have her on board to really kick off our expanded channel strategy as part of our recent partner leadership summit. And I will just say partner leadership summit this year for us was tremendous. And I will say over the last couple of years, our partners as we have been transitioning from, I will say, a compute strategy to this broad portfolio was what’s your strategy, why should I be embracing that strategy and this year the discussion is how can I go faster with you? So we really see that, that response from the channel partners was really tremendous as we came off our partner summit. Jenni has come in and she has really emphasized a few areas even her early days, one you might have noticed that we rolled out our master services competency. And the key issue for us is we must have more qualified capabilities. We are seeing excitement from our customers for our products, but we need delivery capabilities, we need partners who have services competencies that can walk into the customer, know the VMware portfolio, implement them for our customers and get them production worthy on these new capabilities quickly. That’s what I have heard critical aspects as we show more discernment from partners who would deliver vSphere or other products to those who are enabling key new use cases like the full workspace offering or this network transformation or the full cloud capabilities. We are also increasingly emphasizing new classes of partners. We are putting more emphasis into the high-end system integrators also borne in the cloud partners putting more emphasis on the network transformation partners and what they can do for us. So right, the competencies improvement, the expanding role of different classes of partners bringing in new partners, those are some of the things that Jenni is driving for us. And while she is barely at the company already making an impact and we are quite excited to have her as part of our leadership team.

Paul Ziots

Thank you, Brad. We have time for one more question. So, this will be the last question please.

Operator

And we will take our final question from Adam Holt with MoffettNathanson.

Adam Holt

Great, thank you. It’s Adam from MoffettNathanson. I appreciate you sneaking. Wanted a clarification, Zane, on your comment about the compute long-term guide, does that suggest that as we are modeling that we should think about compute slowing beginning in the second quarter? And then just quickly turning back to Pat, what you said about the PCS service in the container strategy generally, I just wanted to understand a little bit better your monetization opportunities like the PCS, for example, how you monetize, it sounds like you are also going to see unit growth uptick from containers on VM. Just generally walk us through your revenue streams related to containers will be terrific? Thank you.

Zane Rowe

Adam, I have to be fair to everybody, which of those would you prefer to have answered.

Adam Holt

The latter.

Zane Rowe

Okay, so ready for my compute answer.

Pat Gelsinger

Yes, ready to go, just very quickly, the view is, is that we are capturing workloads and workloads give us the opportunity to monetize the runtime environment of the workload, the networking environment, the storage environment, the management and automation of those workloads, so the focus is how can I capture those next workloads whether they are running in VMs or running in containers whether they are running on premise or running in the cloud. So for us the near-term PKS biggest impact is the networking piece, we offered in many cases for customers already have the compute piece and now it’s adding this as a driver for NSX. And that’s an integrated element of the PKS offering, but also as additional management products for us as well. And the PKS integrates several of the management components for us and you will see us adding more of those components into the future. So, rule one, capture the workload, rule two, find ways to monetize it through the technologies that we have built into that solution or the up-sell that we will have over time as those work as we can deliver more value to those workload customers.

Zane Rowe

Adam, I will just jump in and while Paul is looking away, as I mentioned with management, we do have quarter-to-quarter variability, still feel really good about compute, we welcome outperformance and at times we will have large deals that will drive that number up. And while we haven’t changed our longer term view, I don’t want you to misconstrue that to be a negative bias on compute, we are still very optimistic with compute.

Pat Gelsinger

Great, thank you. And just to conclude thank you all for joining us today. Q1 was a great start to the year with broad-based strength across our product and services portfolio, across all of our geos. And as always, we look forward to updating you again on our next call and look forward to talking to you in the Q2 call.

Operator

That concludes today’s presentation. We thank you for your participation. You may now disconnect.