VMware Inc (VMW) CEO Patrick Gelsinger Presents at Barclays Global Technology, Media and Telecommunications Conference (Transcript)

|
About: VMware, Inc. (VMW)
by: SA Transcripts
Subscribers Only
Earning Call Audio

VMware Inc (NYSE:VMW) Barclays Global Technology, Media and Telecommunications Conference December 5, 2018 2:30 PM ET

Executives

Patrick Gelsinger - CEO & Director

Analysts

Raimo Lenschow - Barclays

Raimo Lenschow

Okay. Welcome back. We have our next keynote speaker here, Pat Gelsinger from VMware.

Patrick Gelsinger

Hey. Thanks, Raimo.

Raimo Lenschow

Pat, hey. Good to have you. I think we established long ago that we had only two guys that have been working on the farm and can handle cows and stuff like that. Did you have any clicks on that one? Come to us as well.

Before I start, Paul is always very nice to let me read the Safe Harbor statement for once and kind of try that out and then we can kind of go on to Q&A if that's okay with you guys. So statements made in the discussions which are not statements of historical facts are forward-looking statements based on current expectations. Actual results could differ materially from those projected due to a number of factors, including those referenced in VMware's most recent SEC filings on forms 10-Q, 10-K and 8-K. Did I do that okay? That's the short version, well, it seems like a short version.

Patrick Gelsinger

Yes.


Raimo Lenschow

Disappointing?

Patrick Gelsinger

Yes.

Question-and-Answer Session

Q - Raimo Lenschow

Okay. I want to start big picture because it's not all the guys in the room here are software guys but you referenced some -- referenced something on the earnings call, that was last week? Two weeks ago, around IT spending, how IT spending and its nature is changing, it's not just the IT, IT guys. It just kind of feels broader now. Can you kind of elaborate on that a little bit?

Patrick Gelsinger

And I've described that -- as I -- the words I used are tech is breaking out of tech, right? And increasingly tech is being bought by the marketing leader, the business leader, finance, plant managers, et cetera. So you are seeing technology become more and more integrated to every aspect of business in every aspect of consumer, right.

Raimo Lenschow

Yes.

Patrick Gelsinger

Clearly, I mean some of the conversations, the biggest car company owns no cars, the biggest hotel company owns no hotel rooms, and we're just seeing this across more and more dimensions of every business. So as a result the buying behaviors of technology are becoming more robust less subject to the normal cyclical cycles and I believe we are in for a very good period of technology for a number of years to come. And two years ago I had a little bit of a public stack with Gartner and IDC as they were predicting approximate GDP level growth rates for techs and I too paid a loss by at least a factor of 2 and I was right they were wrong. This year they raised their forecast. And again, I still believe they are going to under call the year for tech growth rates overall. And I believe that even though even in a situation where I think most people would expect that GDP growth rates are to decline a bit next year due to a variety of factors, I think tech growth rates will comfortably exceed GDP growth rates by 3, 4, 5 points next year and for a sustainable number of years into the future. We just see the tech environment as a very good one for a number of years to come and obviously there will be winners and losers inside of that. But for companies that are well-positioned against what I call the super powers, right, these technology forces that are just causing more and more growth and expansion, and my big four are cloud, mobility, AI and IoT, I think all of these are just powerful forces, right. They have long cycles associated with them and companies well-positioned to harness and be benefited from those are in for sustained good growth for many years to come.

Raimo Lenschow

So when you talk with kind of leaders and your customers and say like when it all seemed started there was a little bit suspect or cynical as we are as multi-tech. So this whole digital transformation seems real?

Patrick Gelsinger

Oh, yes. And I think you don’t go to a CIO today, you don’t go to a business leader that they don’t have digital transformation as part of one of the core agendas for their business. So yesterday I was in the D.C. and it was digital government.

Raimo Lenschow

Yes.

Patrick Gelsinger

And we had better part of 1,000 CIOs, core leaders of government, so -- and that’s the case. I was in Japan a couple of weeks ago and met with the Minister of Technology and it was like, okay, here’s our technology agenda for Japan. I was in -- met with Prime Minister Modi in India and -- about a month ago. And it was okay, here’s how the digital agenda for India is, you’re seeing it at the national level, you are seeing it at the business level of each functional area inside of that. So I think we’re in for a sustainable era. It’s not just talk but it’s real programs that are going behind the digital transformation agenda that you see pretty globally and pretty widely dispersed across industries, whether they’re medical, financial, supply chain, retail, et cetera.

Raimo Lenschow

Yes. You must be -- I mean this year must be a good year, because not only are you proving Gartner wrong, you’re also proving the Wall Street wrong because like a few years ago everyone was like everything goes to the public clouds and you guys are going to be like suffering. Now as you’ve always said hybrid cloud is going to be the way forward. Now last week at AWS, AWS comes out with kind of on-premise kind of solution. Can you talk a little bit about that vision around hybrid; why is that starting to resonate even with the big cloud guys? And then I have a question on the mix.

Patrick Gelsinger

Yes. When we talked about hybrid five or six years ago sort of like particularly the VMware guys get the memo. Everything is going to public cloud and you’re obviously just trying to position your legacy businesses still relevant. So now fast forward five years later Google, Amazon, Microsoft, everybody has a hybrid cloud strategy Red Hats -- IBM’s acquisition of Red Hat, read the press release. It was like mentioned -- almost every single line was based on their hybrid cloud strategy. So everybody sees that strategy now.

And why were we so confident when we talked about it, right, probably five or six years ago, when I call it the three laws, right: The laws of physics, the laws of economics, and the laws of land. Laws of physics, right? Hey, if you need 50 millisecond response time, you’re not doing a 500 millisecond round trip to the cloud, right? Speed of light is speed of light, I don’t care whose cloud it is, you still got speed of light, right? And if I need to decide, if it’s a shadow or a bicycle, right, the robotic arm needs a 50 millisecond response time, I’m going to do that on-premise or close to the factory floor, laws of economics, right? Your bandwidth still costs, right? And how many pictures of your cat need to go to the surveillance cloud, right? Now, the pictures that are relevant that need further diagnosis. Machine learning, right? It’s the learning phase or the entrant phase. The entrant phase, probably 80% or 90% of all machine learning will be implemented close to the source of the telemetry.

So we see that pattern over and over again, the economic models and then the laws of the land. So I was just with a major Latin American oil company, national oil company, they are repatriating all of the workloads out of the public cloud, right, based on government policy. And again you have laws of the land, laws of economics, laws of physics and in a world of increasing edge and IoT, right, there will be more infrastructure built closer to the edge across every industry. So because of that, it’s not that, “Hey, I was right. They were wrong. We judge the industry dynamics better.” I think that many of the others and those economics and those laws are now favoring a hybrid position that's sustainable we believe. And as I said on CNBC on last Friday, hybrid is not a way station through the future, it is the future, and we say that with great confidence.

Raimo Lenschow

What do you think, the discussion is still out there around the mix, like remember, like how much is kind of hybrid, like how much is public, how much is on-premise, how much is private cloud, how is your thinking evolving there?

Patrick Gelsinger

Yes, and we do think that the continued growth of public cloud resources, that will probably best sort of thumb in the air, it's probably 2023 is when you hit 50-50 measured by workloads. So we still have a number of years to go until you get to that 50-50 point. But as you start to see edge and IoT accelerate their growth rate, we don’t think it's going to be 70-30 public-private. We do think that there’s going to be an increasing amount of force that’s going to drive on more edge and IoT use cases, 5G will also be a contributor to that. So my best thumb in the air is you’re sort of going to be 60-40, 40-60 in that range for a sustainable period, right, well past even what we might get to in 2020 to 2023, that sort of equal point measured by workloads. But again it's not going 90-10, it's not going 10-90, there’s going to be some nice balance of those two. And the other thing I'll observe is that in the history of computing, now this is my 39th year in technology, hard to say that out loud but we've seen the swing of technology forces from centralization to decentralization over the history of the industry and cloud is going to force the centralization, edge and IoT will be a force of decentralization as we go forward and we don't see that this world either swings one way or the other ever.

Raimo Lenschow

Yes, okay. And then going back to victory, last like I think three years ago like on Wall Street you were written-off, your share price was down and we've seen a huge momentum over the last few years.

Patrick Gelsinger

I hope you all bought in at [$0.43].

Raimo Lenschow

Yes. Not all of us. Yes. But can you talk a little bit about the -- how much of that was like that realization of hybrid cloud and people just have to come around to your vision versus what you did as well as the company?

Patrick Gelsinger

We think obviously as we went through that period we were confident that we have the right long-term view, a lot of work to go execute it and I think some of these things people had appropriate skepticism. Can you really go execute? Also with the Dell-EMC merger, wow another piece of turbulence in the middle of this and then out of that the Amazon relationship was probably the single thing that caused that spark that people said “Oh! You are part of the cloud, the multi-cloud, the hybrid cloud future.” And I think that was probably the one single thing that caused most people's perception to shift in that process.

Raimo Lenschow

Yes, yes.

Patrick Gelsinger

So I think that collection of things, NSX, vSAN, these growth factors that we laid out, they were growing rapidly two years ago and they are growing rapidly and they’re big businesses. So all of these things have come together pretty nicely. Obviously we look forward to the Dell vote being completed next week but we laid out a synergy plan, we've executed that plan. We've really I think built the reputation for being a say-do company in a say-do a culture. We say something, we go execute it and we’re delivering on that on a pretty consistent basis.

Raimo Lenschow

Yes. Okay. You mentioned VMware on AWS a little bit or like that agreement. Can you just -- and I know you're kind of a bit more technical and may be like can you just lay out like how easy or difficult look like. What needed to happen from both sides? I mean on face value for someone like me, it's like, "Yes, like you're now doing AWS.” But it’s not going to be that easy.

Patrick Gelsinger

No, it’s a big engineering project and when Andy and I started the VMware Cloud on AWS both of us committed hundreds of engineers for the project. They did create a new hardware instance. They had to create a new networking model. We had to do new integration into their backend. We had to create a whole new network interface, storage interface, that as part of that VMware Cloud. We had to integrate into their identity system, their cloud, billing system. So a lot of work that’s done to go create that offering for it, and obviously, we’re happy with the momentum since we announced it a year ago.

We’re accelerating or exceeded our customer count this year that we’d set our business goals against, so that’s going well. But then the relationship is also one where we knew that that was the starting point, not the ending point.

Raimo Lenschow

Yes.

Patrick Gelsinger

And so we’ve continued to innovate like the elastic stores, the elastic capacity. Okay, that’s pretty cool.

Raimo Lenschow

Yes.

Patrick Gelsinger

Right? You can just point to it and all of a sudden will grow and shrink based on how much you actually use. Customers sort of go “Wow! That’s pretty cool.” We have demonstrated at the VMworld for instance, we migrated the whole data center of a few thousand workloads, right, on stage at the VMworld, pointing it to a 4 node cluster that had no capacity, right? It just sort of auto-magically grew to have a whole data center come into it, it was like, wow, the operational benefits for that, the RDS announcement, right? Where it wasn’t just us taking workloads to their cloud, it was also bringing services from the Amazon Cloud back on-premise. It was like “Wow! That’s pretty cool.” Right? This is really an on-ramp and an off-ramp to the public cloud and now of course the Outposts announcement, where Amazon has said we’re going to be in the on-premise hardware business. We’re going to do that with the VMware software stack, as well as with the native stack that has VMware value-add and sort of as I described with the SDDC of the native Amazon of solution, because they’re ought to be a disruptor and an enabler of their customers to have that full Amazon experience, hardware, software, management, automation on their customer premise as well. This is really sort of the next chapter, right, of a very nice story that we’re building now with Amazon.

Raimo Lenschow

Yes. And you noticed as well when you talked with Andy that their thinking it’s evolving a little bit like -- it’s amazing like what like Oracle launch, when you call it cloud that claims, and everyone was laughing and now then you have to add a stack and now we have AWS the event-driven. And even the partnership there kind of with you, it seems like they’re realizing re-platforming and stuff is ain’t going to happen or not that quickly?

Patrick Gelsinger

Yes. If you think about it five years ago be made public statements about Amazon to move there, you sort of went to Hotel California, right? Check in, you’re never checking out. And basically Amazon’s statements and Andy’s statements at the time, where if you’re running an on-premise data center, right? You’re just stupid.

Now we’re on stage hugging and describing our joy in hybrid cloud strategy. And I’d say both companies’ views have been affected by customers. The market influences would change their strategies substantially over the five years for both of us. And that’s progressing very well. And I think the industry sees that in an extremely positive way. In fact, maybe the best leading and being at reinvents, the incredible audience, the energy that they have, 50,000 people just amazing. But I came off the space and my first customer meeting was with a CIO of a major oil and gas company. And I go into the meeting and I’ve noted for a number of years and he says, “Well, we were trading off and as your Amazon strategy today, I am setting on Amazon VMware. Because I’m convinced that you’re going to be sustainable in your partnership in building a hybrid cloud future into the future, I'm going to bet on you guys.” And that was unexpected to me. Right, so that people were really viewing, can I really bet on this relationship, and now that we have done multiple phases of major innovation together, I really believe that customers are going to tip over in large ways to believe that yes we can build a hybrid cloud future on VMware and Amazon and that relationship.

Raimo Lenschow

I apologize for the question in advance. The cynical view at least more a couple of years to go when you announced it because everyone was trying to defend the view, you were still back, where it was “Oh! This is just a tactical step for AWS”. They didn’t want to get their workloads in, people were it's tough to re-platform at the same time, so you get in the end, eventually re-platform and then become [VMware]. Like that relationship that you with them is getting closer and closer, that is more and more unlikely. So how -- it is just a two part question now?

Patrick Gelsinger

Yes, and I think for that as I sort of joked Andy, I said that customers -- if it was that easy to re-platform your application right onto a whole new environment, all people would have already done it. But the reality is it's not easy right. I mean you’ve done it, what have you done. You’ve gotten the same application running on the new platform, that’s an awful lot of investment just to put it on to a new platform environment. And if I meet with CIOs over and over again I think every engineer that you have looking down at infrastructure is an engineer that isn’t looking up at applications of business value. My job is to enable you to take those resources and have them look up and for that we want to be the easy button for your existing workloads to go to and from the cloud. Your new workloads to go to and from the cloud and you can contain your environments to go to and from the cloud. So it is a hybrid cloud, multi-cloud future and we are this infrastructure layer that makes it easy, consistent, enterprise, great and allows you to have a choice of different cloud environments for the future.

Raimo Lenschow

Yes. You mentioned multi-cloud because like we spend a lot of time on the AWS relationship but if multi-cloud is true you need to go and work with Azure and with Google. What's going on there?

Patrick Gelsinger

Yes, we’re building more assets with Google and Azure, the CloudHealth acquisition was a critical piece of that. They are the number one management platform for multi-cloud environments for Azure, Amazon and Google. We will be building out now as part of VMware …

Raimo Lenschow

Oracle?

Patrick Gelsinger

Full -- I don’t know if they have that yet but we will add that too sure, but the full VMware environment as well. So now we are going to be able to provide full cost and compliance and security metrics across the VMware on-premise environments to Azure, to Amazon, to the VMware Cloud on Amazon, all of those from a common portal or common set of metrics and tools as well. We've also announced -- for instance with Azure we announced to our Horizon service on Azure. So you can now get Office 365 and VDI service. We also announced VeloCloud on Azure, right and it's the preferred SD-WAN solution for Azure environment. So we’re building up more there but I expect we have more to do with them.

Raimo Lenschow

Yes, okay. And how do you see the openness of Azure versus like ever since Steve Ballmer left, it looks like that there are a lot more open, you see Azure kind of embracing Red Hat kind of still because they needed it. Do you see that in your relationship as well?

Patrick Gelsinger

Yes, we definitely see that Satya is bringing a freshness and openness but it's a big company. Some bigger cultures take a long time but Azure and I have known each -- or Satya and I have known each other for 25 years. We sort of came through the ranks of Intel and Microsoft about the same time, so we know each other pretty well and he has done a good job.

Raimo Lenschow

Yes. I wanted to double-click on Dell and I don’t want to ask about the financial stuff, because I don’t want to probably get to heart of it. Just more like talk about the relationship there. Because like on the one hand, like it’s a hardware -- Dell too is a hardware services company with sort of your assets in there, but you are like pure software. Like how does that play out, how’s these synergies coming through?

Patrick Gelsinger

Yes. We said, there are key areas of synergy, we laid out the plan to a $1 billion for synergies, we said we will get to $700 million this year, we’re on track to do that. Key areas that exemplify those synergies are things like VxRail, right, the joint hyperconverged solution that we’ve announced now Workspace ONE integrated to the Dell client right as well. So pro support managed, deployed right from Dell are all built from Workspace ONE going forward. So we’re getting more synergy value, also more sales capacity, right. It was fun being in D.C. yesterday, hey Dell’s business is just more advanced and more mature than any of the federal customers in the state, local education than us, so we’re getting those values.

And also, I’ll say Michael in this regard, he said publicly if it’s good for VMware, it’s good for Dell tech, right, which is a pretty important statement. How much benefit does Michael get from the Amazon relationship or the IBM relationship that we forged over the last couple of years? Still approximately zero. How much value does he get from the Outposts announcement that we did with Amazon? Negative. You have a new hardware competitor, right, at that level. But he is still supportive of that as it’s a positive step from VMware. And after the vote next year -- next week, which we’re hopeful all that concludes properly, you will have a big growing hardware juggernaut uniquely and preferentially favoring a growing innovative software company in VMware that’s clearly independent. But also interdependent in creating value together, I think it’s a pretty perfect dynamic.

Raimo Lenschow

Yes, okay. Perfect, next one. I think some of you have your copy already and that’s why I kind of sneak in the next question because it gets a little technical. The -- talk me through like the world -- the way you see the world evolving around virtualization versus containers and that it’s getting a little bit technical, but I think it’s really important to understand this?

Patrick Gelsinger

Yes. How many customers run their container environment in VMs today? Close to 100%.

Raimo Lenschow

Oh! Okay.

Patrick Gelsinger

Yes. And to sort of say, who’s the most advanced, who will be the smartest at figuring this out? Maybe Google, right? Say they invented a lot of the container technologies. They were the source of Kubernetes. How many of the Google’s containers run in VMs? A 100%, right? You sort of say what’s going on there. Largely VMs have solved infrastructure problems, right? Networking, resource optimization, security, isolation, all the things have been solved by VMs and they’re closing their relationship with VMs with hardware. Those are solved problems.

Now containers, what problems are they solving? Largely, they’re solving application problems, patch, CICD, rapid deployment, right, OS image management, all of those types of things. Largely it’s a app value proposition. Now, someone has suggested, hey I could take the app value proposition of containers and replace VMs. So you just solved all those hard infrastructure problems over the last two decades. So why do you want to resolve them with containers? Right?

Raimo Lenschow

Yes.

Patrick Gelsinger

And the answer is there’s just a lot of hard work to resolve problems. What we said is we're going to make containers super easy, in fact it's going to be, we're going to make the VMware infrastructure the dial tone for containers and Kubernetes going forward so it's super easy for our customers to embrace and deliver it just because they solve different problems and we're going to make it easy for them to solve their app problems with Kubernetes and containers and build it on top of the virtualized infrastructure that we build, deploy and manage at scale.

Now imagine that you are one of those cool new app kids, right? Oh man, get rid of that VM. That’s a stupid idea. And so on. And then you walk into your CSO or CIO’s office and you say I just need you stand-up a whole a new hardware environment to run my cool kid new containers. Right. I need you to put a new management, new networking, new resource optimization environment, a whole new world to run it and then I need you Mr. stupid CIO to figure out how to connect those things together and make sure my entire environment is operationally secured and efficient. And the CIO looks at you and says what? Why am I doing that? Because almost every new application is some ugly composite of new things and old things, right? You need to connect to the database, you need that ERP environment, you need that identity system. You have common networking tools to manage it. So we're saying let's be the easy button for people to embrace those cool kid new container environments given that operational integrity from the old to the new. Because how many of the application environments that our customers run are going to become container or containerized? Right? Hey, it could be 3, 4 decades. And so all of those things have been modernized and between now and then it's going to be this complex environment and just about the time we're going to finish our containerization of everything, the next cool kid technology is going to emerge. So that's how we -- that's what we're seeing the VMs, the container make it super easy for our customers to move smoothly across it. We've announced PKS partnership of Pivotal, almost in market for a year, seeing good uptick. We've announced cloud PKS which analysis -- we are running that as a service across multiple cloud environments for you. Azure, Amazon, Google on-premise, VMC, we've also announced the acquisition of Heptio, which was super exciting because they are like -- Joe and Craig the founders of Heptio were two of the three creators of Kubernetes. So now VMware has sort of jumped through the fronts of the line, the container technology really be helping to curate that container, Kubernetes open-source ecosystem and the ability to essentially monetize their services as layers of added value on top of our platform frame. So I feel really, really excited about the environment we're in. We also see that Red Hat was one of the early movers in this area and the IBM acquisition I think is was very positive for us.

Because now people are saying that I trust Red Hat for this open source technology. Maybe do I trust IBM for that? Maybe not. And so now VMware is in a unique multi-cloud position that’s even more positively seen in the industry. So we are feeling quite positive in that domain as well.

The other one you asked about is function-as-a-service and when was the last point in time where there was consensus in the application development community around a major new software development deployment vehicle? It was almost 30 years ago with Java.

Raimo Lenschow

Yes.

Patrick Gelsinger

Right, at that point. So containers and Kubernetes are clearly the one that have consensus in the industry. The function-as-a-service is -- this whole idea of server-less function-as-a-service is very interesting layers nicely on top of containers. But I do not see it becoming the next thing, right, at scale. There’s certain classes of event-driven applications that function-as-a-service is very clever for and does a very good job, but I don’t see it as a wholesale replacement for containers. I see it as a nice adjunct or addition to what people would do with Kubernetes and containers, but we see Kubernetes and containers both, that’s the real deal. That’s the one that has industry consensus and we are going to bet heavily right on making that successful.

Raimo Lenschow

Okay, perfect. Yes. That’s a good summary. The -- let’s switch gear a little bit to, we spend a lot of time on the classic infrastructure. Now, let’s talk about the new exciting product. So we have NSX, vSAN, all very interesting. The growth rates are really good. You talked earlier about sites and it's almost asking a father to pick your favorite child. It's something like, okay, what's the level of excitement on either of them if you have to make choice?

Patrick Gelsinger

Well, the three most important things for VMware to do in the coming year are: the continuation of NSX as a multi-cloud, hybrid cloud, container networking to the WAN layer, right? We call that the virtual cloud network, right, and we are absolutely committed that that is one of our critical priorities. New products like VeloCloud, super-hot, right? The second priority for us is cloud. The third priority for us is containers, right?

So those are the big three for us to accomplish in the next year. If we come out of next year, that people really see us as leading in those three domains, score. We’re well-positioned for many, many years to come.

Now, obviously, I love my vSAN child. It’s not as important as my NSX child, right? And vSAN is seeing a lot of great momentum -- this is converged infrastructure, hyperconverged infrastructure, the momentum that we’re seeing with Dell, we’re building on that as a platform for new products and new offerings like Dimension, right, where we manage from the cloud workloads running on-premise or to the edge. We’re seeing real competitive acceleration of that -- of enterprises saying the software-defined storage market, right, is becoming my way that I’m going to do storage in the future including backup multi-cloud environments et cetera. So it’s a very hot product for us, continuing to see good work, just not quite as important as my top 3.

Raimo Lenschow

Okay, perfect. I mean, it’s my last question before I open it up for Q&A. So a warning for all of you guys. If you look at the evolution of VMware, like as the CEO now like how do you see the mix of the different products in terms of evolving over time? And so if we sit here, hopefully in 10 years or when we retire or whatever like -- but if we would sit here like -- I mean what would be a successful kind of path for you?

Patrick Gelsinger

When we think about where we are now, obviously compute is our biggest business, that core vSphere business. But we now have very substantial greater than $1 billion businesses and management and end user computing networking. Storage is getting there. So we’re well on path to have $5 billion plus businesses. So it's like, well, that's pretty good compared to where -- when we were asked that question five years ago, we had one. Now we have at least other new business areas that are growing at very healthy rates, as well as at continued healthy rates. But increasingly the world that we’re building is one where we’re delivering these as solutions, right, where the individual products become less important where, yes, you could buy vSAN for me but increasingly I want to sell you the full solution, right? You could go buy an individual cloud solution but I'm selling you VMware Cloud and those integrated offerings become more and more important to the buying, the selling motion that we're building VMware Cloud foundation, the VMware Cloud, Workspace ONE for end user computing and the full NSX Virtual Cloud Network, those are the big solutions that we're selling but the individual products become less important. And how fast did compute grow last quarter? I'm not even sure I'm going to be able to answer that question because it's increasingly an allocation out of those solution sales that we do. So it's going to be very much about all those solutions hitting the market, differentiating and allowing us to sell bigger and larger transactions with a much richer stack of VMware technology in it because there’s four major use cases. And the other one that we go with that is the increasing shift to cloud infrastructure and I'll say if we get those solutions selling and we are respectively and substantially growing our cloud and that's a service business and if we are sitting here, a year from now when we can say we've done those things, then VMware is extremely well-positioned for many years to come.

Raimo Lenschow

Yes. So that whole -- there are -- some of analysts have typical question about like how much is recurring and the SaaS proportion, that’s basically in a way that's the future.

Patrick Gelsinger

Yes. And we have seen -- we have crossed 10% of our revenue now as SaaS recurring revenue. Obviously there’s new products like CloudHealth, Heptio, right, the VMware Cloud, the Outposts, all of these are mostly or entirely recurring. AppDefense is bringing some recurring revenue into vSphere Platinum as well, so all of these are adding to that mix of products. And so we expect to see -- last quarter it was greater than 40% growth rate for those products and then the biggest one has remained VMware Cloud Partner Program, right, where our cloud partners are now taking our technologies and subscription service into the market. So all of those taken together this is going to be a pretty good basket, right, of subscription and SaaS products for us.

Raimo Lenschow

Yes, okay. Good. Let me open up for questions if there are questions in the room. Looks like we were very comprehensive. I mean like maybe one last question from me and just be careful because Zane is sitting in the audience to make sure that you are kind of not running away from the CFO message. There's lot of -- as you think about evolution of the company, you have like -- you started out with one product, you kind of then kind of became like -- scale, you matured it somewhat, your margins went higher. Now you have like multiple products that they are all evolving and still at a very high growth rate but you still capture -- the margins are kind of in the kind of low 30s, up a little bit, give or take. If I think about the evolution of the company, as those new product sets evolve, would you think about then that will have the margins to kind of start doing that stepping stone higher again or do we always need to think there’s so much to do that, well then that’s the next investment area. So how do you guys think about that?

Patrick Gelsinger

The way we think about it is, right now we are in an environment where we are I'd say surrounded by great opportunities to invest in and new product areas even if they are growing rapidly they are still demanding a lot of investment resource, so NSX, boy, I need to build out more capacity, VeloCloud, SD-WAN solution is a rocket ship. I need to build out a lot of sales capacity for them. So a very strong investment cycle even if the product that is well over $1 billion and growing rapidly so I'm not getting I'd say operating margin leverage since I’m investing in this growth rate so aggressively. VMware Cloud and AWS, there’s sort of about two things going against you. One is strongly rapidly we’re building up the regional deployment. So we’re investing heavily in that product area. And there’s a subscription business. So a lot of the revenue is seen as the trailing revenue, right, if I build up more of that service over time. So those combinations, right, do I’d say, create a little bit of a snowplow of investment until we get those to larger scale. And we said long-term we do expect to give operating leverage, even as we’re reasonably flat in the guidance that we’ve set for next year. And that is our view and as subscription businesses get bigger they do start to become more a margin generative over time. And we’ve put a lot of oars in the water. When I was on -- if we have been talking four years ago, some of the questions were, are you doing too much Pat, right? Can you do storage and networking and launch these cloud products and continue your mobile? And we’ve done them, right? And now everybody say, yes, you’ve executed those. But as they get some scale, they're still demanding investments.

So we’re trying to be very balanced. And as we think about operating leverage, we’re also trying to be very balanced in our capital allocation. We’re continuing -- obviously we get past the one special dividend next week. And then we continue to I’d say go back to business as normal. The capital allocation, a healthy view of buybacks, which we've continued to exceed stock-based compensation by a comfortable amount, but also we're very cash generative, so we’re then applying a good M&A discipline and we’ve had M&A success well above the industry, right? We’ve made, I think, very good acquisitions in that regard. And again, those new business areas demand investment also. And so Heptio and CloudHealth for me next year creates operating margin headwinds that we’re offsetting by some of the growth in other areas, trying to put all of those together as we invest for growth. And we'll certainly going to do some M&A next year as well. So we continue to have that, I’d say, that pretty unique combination where we’re able to do organic, as well as inorganic innovation at scale.

Raimo Lenschow

Yes, okay. Good. I think the bankers want me to ask what you want to buy next but I will do that later, yes. Alright, okay. That was really helpful. Thank you. And amazing to see your progress. Thank you.

Patrick Gelsinger

Thank you.