Vmware, Inc.

ladies and gentlemen thank you for standing by and welcome to today's vmware's q2 fy 2021 earnings call i would now like to hand the conference over to your speaker today mr paul zayas thank you please go ahead sir thank you good afternoon everyone and welcome to vmware's second quarter fiscal 2021 earnings conference call on the call we have pat gelsinger chief executive officer and zane roe executive vice president and chief financial officer

Following their prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. Slides which accompany this webcast can be viewed in conjunction with live remarks and 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 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 substitution 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 dispositions, certain litigation matters, and other items, as well as discrete items impacting our GAAP tax rate. 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. Unless otherwise indicated, all financial metrics provided on this call are for the consolidated VMware entity, including Pivotal. Growth rates compare our Q2 FY21 results with the recast of prior period financial information to include Pivotal due to the Pivotal acquisition, which is accounted for as a transaction by entities under common control in accordance with GAAP. The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our third quarter, fiscal 21 quiet period, begins at the close of business Thursday, October 15, 2020. With that, I'll turn it over to Pat.

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Thank you, Paul, and everyone who has joined our call today. In light of these uncertain times, I am pleased with VMware's solid execution and financial performance in Q2, driven by strength in our subscription and SaaS product offerings. We experienced good sales execution in both the Asia-Pacific and EMEA regions with some COVID-related challenges in the Americas. Our any cloud, any application, any device strategy continues to resonate with customers, and our five franchise platforms consisting of modern applications, multi-cloud, networking, digital workspace, and security help form the digital foundation that addresses customers' hardest technology challenges. As organizations everywhere navigate a world transformed by the pandemic, many of our customers accelerated their cloud plans while some slowed their on-premises projects. The on-premises impact was overcome by continued strength in our subscription and SaaS offerings globally, and we believe as the economy recovers, we will see resumption of on-premises projects. Over 20% of VMware's total revenue is now generated from our subscription and SaaS product offerings, with a greater than 40% increase year-over-year, and we expect our momentum to continue. Stay tuned to hear more about SaaS announcements at VMworld in September. that will turn updates across the businesses In the modern app space, we continue to see customers engage with Tanzu, our comprehensive portfolio of products and services that help customers modernize their applications and infrastructure and build new modern apps. This past quarter, we closed the acquisition of Octorin, which will help to further expand our intrinsic security strategy to containers and Kubernetes environments by embedding the Octorin technology into the VMware Carbon Black Cloud. As we continue to build relevance with the Tanzu platform in the federal sector, the United States Space Force has recently committed to the Tanzu platform to help deliver a continuous DevOps environment with increased velocity and agility. Next week, we are expecting thousands of enterprise developers to join us for our virtual Spring 1 conference as we continue to increase mindshare with this audience. We continue to further our multi-cloud strategy, which includes our cloud platform, cloud services, and cloud management offerings. We are helping customers with cloud modernization and cloud migration, while also innovating across the cloud platform and ecosystem. We have reached general availability status for new first-party services offerings with Google Cloud and Oracle. In addition, Microsoft unveiled its next generation Azure VMware solution earlier this quarter. We announced the availability of the second generation of VMware Cloud on Dell EMC, a Dell Technologies cloud service from VMware that delivers simple, more secure, and scalable infrastructure as a service to customers' on-premises data center and edge locations. We also launched new capabilities for VMware Cloud on AWS for app modernization, business continuity and resiliency, and cloud migration. We are further enhancing VMware Cloud on AWS with our Datrium acquisition, which will expand the VMware site recovery offering with Datrium's world-class cost-optimized disaster recovery as a service solution. With VMware Cloud Foundation, we have continued to see major adoption at large firms like Daimler and have seen a number of large customers across financial services and service providers reaching production at scale in the past few months. Additionally, Forrester positioned VMware as a leader in the Q3 2020 Forrester Wave for infrastructure automation platforms, and IDC has ranked VMware number one in the worldwide cloud system and service management software. Our increasing focus on network security was reinforced this quarter with our acquisition of Lastline, a pioneer in anti-malware research and world-leading AI-powered network threat detection and response. Lastline is being integrated into NSX to provide a complete internal firewall capability, enabling NSX to address broader opportunities across data center and cloud and branch firewall sectors while accelerating the customer journey towards intrinsic security. We are seeing good adoption of our load balancing offering as large customers at scale build out their cloud environments and replace legacy hardware appliances. As an example, a large financial institution has chosen NSX Advanced Load Balancer as their de facto next generation load balancing solution. While companies, governments, and organizations are slowly returning to the office, a remote everything, work from anywhere environment is now the new normal. We've recently introduced a suite of new workspace solutions in VMware Workspace ONE Intelligent Hub to help customers improve business resilience and prepare for the new distributed hybrid workforce of the future. We also unveiled VMware Horizon 8, our flagship VDI platform, bringing more secure delivery and management of virtual desktops and applications across the hybrid cloud. VMware has been recognized as a leader in the August 2020 Gartner Magic Quadrant for unified endpoint management for the third consecutive year.

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the legacy, vertically integrated, hardware-reliant, proprietary platform, or a cost-effective, open, interoperable, software-defined platform that can enable a large ecosystem to build innovative services. We view the VMware Telco Cloud as the software operating system for 5G and beyond, and our momentum in the last quarter shows the industry is agreeing. We are excited to be partnering with DISH to bring 5G speed and performance to the majority of the U.S. population with the world's first open radio access network offering. With VMware, the new software-defined cloud-native 5G network will be equipped to deploy new services in a cost-effective manner with great agility. In addition, we announced the collaboration with Intel designed to develop an integrated software platform for virtualized RAN to accelerate the rollout of both existing LTE and future 5G networks. Before I wrap up, I want to acknowledge the recent Dell Technologies 13D filing about their considerations of a potential VMware spinoff. As we stated previously, our board has formed a special committee of independent directors, and we are in discussions with Dell. We have over a year to go as any potential spinoff would not occur prior to September 2021. While we believe that a spinoff may be value enhancing to VMware and its stockholders, we will continue a mutually beneficial partnership with Dell supporting our customers, regardless of any outcome. Meanwhile, we remain focused on enabling customer success. We do not plan to comment further on these discussions. I'm excited to mention VMworld will be online September 29 through October 1. We expect over 100,000 attendees to join us for a completely digital experience, including general session keynotes featuring customers and guest speakers, as well as hundreds of sessions and customer case studies. I'm particularly excited about the new innovations we'll be announcing that span AI and ML, modern apps, new security offerings, and key new partnerships with leading technology and services companies. Make sure to join us. In closing, we are honored and humbled to continue to work with our customers as they traverse these uncertain times, confident that as we help them develop and deploy their digital foundation, they will be better equipped to accelerate their business objectives. We are committed with our partners to deliver the trusted digital foundation that gives every customer an unconditional path to a better future. With that, I'll turn it over to Zane.

Thank you, Pat. We're pleased with our financial performance in Q2, driven by growth in our subscription and SaaS offerings. The team continued to execute well while operating virtually, and Q2 results demonstrated the value of our diversified products and services portfolio, despite anticipated COVID-19-related impacts to bookings, particularly in Americas. We're accelerating our efforts on subscription and SaaS product offerings in the current environment, which delivers value to customers as well as increases recurring revenue for VMware. In Q2, total revenue grew 9.2% year over year to $2,875,000,000. The combination of subscription and SAS and license revenue grew 11.4% to $1,350,000,000, with subscription and SAS revenue up 44% year over year to $631,000,000. Subscription and SaaS revenue comprise 22% of total revenue in Q2, an increase of more than 5 percentage points versus Q2 of last year. Within subscription and SaaS, the largest revenue contributors include VCPP, Modern Applications, EUC, and Carbon Black. We're also pleased with the performance of VMware Cloud on AWS, which once again grew revenue in triple digits year over year. In addition, the Amazon reseller channel performed very well in Q2. These contracts will be recognized as revenue in future quarters. Our on-premises perpetual license revenue for the quarter was $719 million, down 7% year-over-year and in line with our expectations at the beginning of the quarter. Non-GAAP operating income increased 20% year-over-year in Q2 to $950 million. operating income benefited from both higher than expected revenue performance and lower spending tied to the impact of COVID-19 on the business. Non-GAAP operating margin for the quarter was 33%, up nearly three percentage points year over year, with non-GAAP earnings per share of $1.81 on a share count of 423 million diluted shares. We ended the quarter with approximately $9.4 billion in unearned revenue, and $4.7 billion in cash. Early in Q2, we redeemed $1,250,000,000 of notes, which were originally due to mature in August of this year. Cash flow from operations in the quarter was $719 million, and free cash flow was $643 million. RPO, which includes our committed and non-cancellable future revenue, was $10.3 billion, up 17% year-over-year, 54% of which is classified as current in line with historical levels. Total backlog was $36 million, which consisted of orders received on the last day of the quarter that were not shipped that day and orders held due to our export control process. License backlog at quarter end was $8 million. For Q2, growth in total revenue plus the sequential change in unearned revenue was 2% year over year. Growth in combined subscription and SAS and license revenue, plus the sequential change in unearned subscription and SAS and license revenue was 12% year over year. How do you solve a monster-sized problem? With Miro. Turning to product bookings. In Q2, as Pat mentioned, a number of on-premises projects in America has experienced a slowdown due to COVID-19. This had an impact on our core SDDC and VSAN product bookings, each down in the low single digits year-over-year, as well as NSX product bookings, which declined in the mid-single digits. A go-to-market focus on annual contracts for EUC resulted in ACV growth of over 35% year-over-year for EUC SaaS bookings in Q2, while total EUC product bookings, including on-premises license bookings and TCV SaaS bookings, declined in the high single digits. We've seen good demand from customers wanting to purchase our EUC portfolio as SaaS, which we believe will position us well into the future. We're also pleased with the progress we're making with our two large acquisitions last year, Pivotal and Carbon Black. In Q2, Carbon Black had strong product bookings as customer count increased to over 20,000. Total bookings for our modern applications BU exceeded our expectations with particular strength in services for the quarter. Pivotal and Carbon Black have also helped us make progress in building out our five franchise platforms of modern apps, multi-cloud, networking, digital workspace, and security. In Q2, we repurchased $130 million of stock in the open market at an average price of $141 per share. Through the end of Q2, we've utilized $810 million from our current authorization of $2.5 billion. Turning to our outlook for Q3 and the remainder of the year. Due to the impact of COVID-19 on the global economy and on our business, we continue to have limited visibility and a higher level of volatility than we've seen historically. With that in mind, we expect Q3 total revenue to be $2.8 billion, up 5.4% year over year. We expect combined subscription in SAS and license revenue to be $1,265,000,000, up 5.6% year-over-year, with subscription in SAS contributing just over half of this revenue. We expect non-GAAP operating margin to be 27.5% for Q3, with non-GAAP earnings per share of $1.42 on the diluted share count of 423 million shares. As we look at the full year, we expect total revenue for fiscal 21 to be incrementally better than what we indicated on our last call. We now expect total revenue for FY21 to be approximately $11.6 billion, up 7% versus fiscal 20. Combined subscription and SAS and license revenues forecast to be approximately $5.5 billion for fiscal 21, up nearly 9% year-over-year, with over 45% of this total generated from subscription and SAS. We expect operating profit for the full year to benefit from some of the short-term COVID-19 impacts on expenses that we've seen in the first half of the year, including variable costs such as T&E, employee-related, and facilities expenses. Non-GAAP operating margin is expected to be 30.5% for fiscal 21, and full-year non-GAAP EPS is expected to be $6.62 a share on a diluted share count of 423 million shares. Operating cash flow is expected to be approximately $3.7 billion, and free cash flow is expected to be approximately $3.4 billion. Overall, we're pleased with our Q2 financial performance and our team's ability to manage through the immediate effects of COVID-19 on the business. As I mentioned earlier, we plan to accelerate certain product initiatives through the remainder of the year to further support our customers' digital transformations and grow our subscription and SaaS product offerings. This pandemic has accentuated the need for companies to become more digitally enabled, and we believe the growth of our diversified portfolio will continue to provide value to our customers, partners, and shareholders. I'll turn the call back to Paul for Q&A. Thanks, Zane.

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

At this time, in order to ask a question, you will need to press star one on your telephone. To retry a question, press the pound or hash key. Please stand by while we compile the Q&A roster. First question, sir, we have Matt Hedberg from RBC. Your line is open.

Oh, hey, guys. Thanks for taking my questions. And congrats on the results. Obviously, a difficult environment. The SAS subscription was particularly impressive. You know, Pat, I guess my question is, you in particular have very strong visibility on global IT demand environment. And now that we're through some of the initial aspects of COVID and based on your conversations with executives, do you still think that Q2 was the low point for demand? And how do you think about the return of spending in the U.S. in particular? Thanks. Thanks.

Hey, thanks, Matt. And, yes, you know, it was pleased with the performance overall and subscription and SaaS in particular. You know, it was just good execution by our teams. And, obviously, the Q2 results, you know, were, you know, So emphasized by big customer commitments such as our 22, 10 plus million dollar EAs, you know, the greater than 40% subscription in SAS again was particularly nice, great momentum in VMC, VCPP, Horizon VDI, APJ and EMEA, despite some of the weakness that we saw in Americas and some of the on-prem products. You know, we do think that, you know, the environment remains a pretty uncertain one. As we indicated, we're in this Nike swoosh kind of recovery cycle as we see it with Q2 and Q3 being the bottom quarters. So we expect Q3 to still be challenging with recovery and Q4, Q1. And into next year, a lot of remaining uncertainties as countries start to go back into second waves and fits and starts certain segments of the industry being challenged, travel, entertainment. All of the aspects of the retail segments have been challenged, branch segments, so lots of uncertainty overall. But as I've indicated in the past, Matt, we expect that IT is comfortably better than the GDP and that software and cloud are comfortably better than IT overall. And we see that continuing to be the case, but we still think it's several quarters of recovery. until we're back to a more normal economic environment.

Hey, Matt, this is Zane. I just add, you know, while I mentioned we don't have great visibility into the latter half of the year, it is that outperformance in the second quarter that had us raise our outlook for the remainder of the year to be, you know, about 7% up in total revenue versus what I indicated on the last call, which was mid-single digits. So we felt incrementally better, not only with our performance for the first half of the year, but generally our outlook for the remainder of the year as well. Thank you, Matt. Next question, please.

Next question, we have Mark Murphy from JP Morgan. Your line is open.

Thank you very much, and I'll add my congrats. And to Zane's point there, great to see the increase in the full year guidance. Pat, I wanted to ask how you are thinking about VMware's ability to generate new pipelines to be closing in future quarters in this kind of environment where you don't have the face-to-face sales interactions and just how your sales teams are overcoming that and also what to expect for lead generation coming up in the VMworld online event.

Yeah, it's a great question, Mark, and thank you for that. Overall, when we comment on this last quarter, that was one of the areas of uncertainty is how well we could do for generating a new pipeline. And we do think with the increase in the second half guide that Zane just referenced that we're more comfortable. incrementally that we have been able to generate pipeline we do see that building we particularly see it in segments like telco like financial services like government you know those areas in particular that we're seeing more strength in the business and we continue to build these new sales muscles as we've described it Clearly, there has been a rebalancing of IT budgets in areas that have just been extremely successful with work from home and how quickly we were able to adjust. Some of the on-prem projects were pushed a bit down in access to data center, so a bit more challenging. But overall, we feel good about the pipeline generation that we've seen and are laying clear that we can see momentum build in the second half and into next year. Thank you, Mark.

Next question, please.

Next question, we have Cash Rangan from Bank of America. Your line is open.

Hi. Thank you very much. Congratulations on the quarter. The subscription SaaS product offerings growth of 44% looks very solid. It's increasing as a percentage of revenue. I'm curious if we can elaborate your thoughts on how you plan to accelerate certain product initiatives. It looks like you certainly want to make this a bigger profile as far as your business is concerned. I'm curious if we can connect the product initiative with digital transformation to help connect those dots and help us see how this could be made possible. Thank you so much once again.

Yeah, thanks, Cash. And, you know, overall it was another good quarter in the subscription and SaaS area for us. And obviously offerings like VMC on AWS, you know, triple-digit growth again, and really good momentum from the Amazon sales channel. We also saw VCPP, you know, be incrementally stronger in Q2, which was nice to see also. And then the new areas like security and pivotal, right, as we bring those into the company and we start, We're having success of making those part of our bigger sales and bigger deals. We expect that's going to be an area of acceleration and those are subscription and SaaS as you know. And then areas like EUC and the VDI offerings. So overall a good set of offerings now. We're really getting the scale and maturity in the offerings. You know, we are going to be making more announcements at VMworld around additional subscription and SaaS solutions and programs to accelerate those offerings. You know, we expect that it will be a bit more modest in the growth rate next quarter year over year as we start to lap some of the carbon black acquisition. that we have been able to uniquely benefit from. But overall, we continue to see this being a strong area of growth, one that we're putting more focus on, and obviously one that our customers have been very pleased with. And in this COVID environment, where there just has been an acceleration of cloud and SaaS offerings overall, we're leaning into that, I think, at a very good time in where the markets are overall. Thank you, Cash. Next question, please.

Next question, we have Mark Morler from Bernstein. Your line is open.

Thank you very much, and also congrats on the quarter. It's nice to see. Subscription in SaaS was strong, but license was down as the expected year over year. Could you give a bit more color on exactly how license is acting? Are you seeing the tradeoff between the same solutions driving what would have been a license revenue to a cloud revenue? Or are you seeing more of a shift between specific products occurring that's negatively impacting the licenses? And specifically on the products themselves, has it been acting as you expected?

Sure, Mark. I'll start, and then I know Pat will have a few comments as well. I mean, generally speaking, yes, it is. And as we pointed out, we were clearly impacted by COVID, and most particularly in the Americas. It has been acting in line with our expectations. We talked about pre-COVID as we set up the year that this would be a year where we'd be focusing more on our subscription and SaaS businesses. So while it's off, and we actually expect it to be off, if you look at our Q3 guide, we expect it to come off further. Part of that was planned for as we laid out the year, even pre-COVID, but there's no doubt that license has been more impacted with COVID than, say, our subscription and SaaS products.

Yeah, and a few points to add on the license. You know, clearly we were expecting sub-SAS to be faster and license to be less so. You know, some of that was uniquely impacted by the Americas and the on-premise offerings that we've already indicated. So that was a little bit weaker than we were initially forecasting for the year, but is somewhat offset by the strength and subscription in SAS. We do believe as the year goes on and as the economy accelerates that we do expect to see recovery in that area and some of the specific products inside of that. And I would also emphasize, again, you know, examples like 22 ELAs over $10 million, right? You know, it's, you know, compared to... 2013 last year, we are still seeing this large strategic commitment to VMware, and those 22 ELAs are largely license-based offerings, even though increasingly we're seeing it in those large ELA subscriptions and SaaS as well. So overall, the strategic commitment is high to VMware, acceleration of subscription and SaaS, and the segments that we saw that weakness were largely what you'd expect. Things like travel, entertainment, healthcare and such were the ones that were more uniquely impacted as overall IT budgets were reprioritized. Thank you, Mark. Next question, please.

Next question, we have Walter Pritchard from Citi. Your line is open.

Hi, thanks. Question on Pivotal and Tanzu and the container strategy. And I'm just wondering, you've had now, you know, going on seven, eight months here with Pivotal. And I know you had some caution early in the year around how that might play out. And just wondering how you're feeling about the contribution from Pivotal and the momentum of that business now seven or eight months in and with the Tanzu launch and so forth.

Yeah, thanks, Walter. And overall, we'll just say the integration, the execution is on track. We're starting to see some good co-selling momentum, and one of our largest deals this quarter was Daimler, which was both a foundation deal, VCF, plus Tanzu. So these integrated deals of both the run environment as well as the build and manage environment are really coming together for us, and we're quite excited about that. We had The successful Tanzu launches of vSphere 7, Tanzu Kubernetes Grid, the base Kubernetes offering, the management Tanzu management offering TMC as we call it, all of those are now starting to gain momentum. We did exceed our overall bookings for Tanzu in the quarter, so we're starting to see the momentum emerge. And we'll say, overall, there's a marked increase from customers' interest in app modernization. And as they move their Kubernetes project sort of from this original phase of developers playing around with it and moving into the enterprise production phase, the value proposition of VMware is starting to really materialize. Also, some of our largest deals in Q2 included it, such as our DISH deal, some very large government agencies such as Space Force with an eight-figure commitment to the Tanzu platform, all a testament of the network effects and synergies of it being part of VMworld. Also, you know, a paid advertisement spring one, you know, our featured developer conference is coming up in September as well. So that's a pretty important event for us to further accelerate developer momentum around the Tanzu portfolio.

Thank you, Walter. Next question, please.

Next question, we have Remo Lenschild from Barclays. Your line is open.

I will click on some of the product bookings for some of the key products, like Visa and NSX. Can you just kind of help us understand a little bit some of the drivers there? Thank you.

Yeah, thank you, Remo. And obviously, we'd say both VCN and NSX were just impacted and we had the year-on-year decline largely because of the overall COVID and America's comments and on-premises project delays that we referenced earlier. Overall, you know, if I just dig into vSAN first and then a little bit more on NSX, you know, on vSAN, you know, we continue to see that we're gaining share in the marketplace, our HCI offerings. We saw again from IDC that VMware gained share last quarter. Our HCI offerings, we're now getting more and more solutioning with our full VMware Cloud Foundation. We're twice as large as number two in the marketplace. And the vSAN and NSX components play critical roles as part of both VCF, VMC, and our VCPP solutions. So it's becoming a piece of our bigger cloud offerings. When we look at NSX, obviously the same sort of effect with regard to America's on-premises projects. But I'd also point out that we saw particularly good performance in EMEA and APJ with greater than 30% year-on-year growth in the product bookings area. So overall, we're starting to see some global strength to some of those economies. Also for NSX, a very good quarter for Avi, our load balancing solution. With Lastline, we're expanding our market to address more of the firewall and security capabilities. We'd also say that we had a little bit of a unique issue that a lot of our pipeline for VeloCloud was associated with retail, hospitality, travel solutions where a lot of branch projects and a lot of those, for obvious reasons, were delayed or put on hold. So we had a little bit of unique issue on VeloCloud. But overall, we're very confident in our vSAN and NSX strategy. The portfolio was strong, and we're seeing more and more market opportunities in front of us. And we do expect that we'll see good momentum in those areas as we go forward. Thank you, Raimald. Next question, please.

Next question, we have Phil Winslow from Wells Fargo. Your line is open.

Hey, thanks guys for taking my question and congrats on a strong quarter, especially in this environment. I have a question about accelerated shift to cloud, which a lot of people are thinking is going to be the result of the COVID-19 pandemic. Kind of two parts here. How do you view sort of VMware as positioned to help your customers accelerate that shift with things like cloud foundation, obviously the cloud partnerships that you have, but also can you talk through sort of the monetization of it? We think about sort of lift and shifting, you know, an on-premise workload to the cloud. What is the monetization opportunity for you?

Yeah, and maybe I'll start, you know, at the high level, and I'll ask Zane to comment a bit more on the monetization aspects. You know, at the highest level, as you said, you know, this was a, you know, in the COVID period, we've seen an acceleration of cloud overall. And as customers, you know, it's not like they're starting new projects. Largely, it's accelerating existing projects, existing plans that they had are being accelerated. And for us, it was a tremendous quarter. We definitely saw that momentum with VMC, their cloud migration projects, and as we have the full range of our hyperscale solutions, where the VMC offerings and the VMware cloud offerings are 60% cheaper from a TCO perspective. We're able to do cloud migrations 4x faster than replatforming to native services. It really is a much better way to accelerate to a multi-cloud, hybrid cloud future. Good roadmap execution by Amazon. Very happy to see the next version of Azure being announced and becoming GA in the second half of the year. Google announced their first production GA versions of their offering. We're starting to see hybrid customers emerge. And I'll say we had a major European financial company taking advantage of the VMware Cloud solutions now, including the Google offering. Oracle announced the GA of the VMware solution and all of their availability zones across the globe. So that was a very powerful announcement. Also, IBM had their biggest ever deal on the VMware cloud platform. So a lot of momentum as we think about it globally. And I think as I already commented, our VCPP, the 4,300 total VCPP partners, we saw a bit of acceleration in that area of the business this quarter as well. So overall, The VMware position of accelerating cloud monetization and cloud migration is now being well accepted in the industry as a very unique position and capability that we offer.

Phil, I wouldn't have much more to add on the monetization. I think it's mostly caught up in our subscription and SaaS revenue, which is up nicely on a year-over-year basis. You know, as we pointed out, VCPP also had a very strong quarter, both sequentially and year-over-year, so we're very pleased as that captures much of that. And as we turn more to solution selling, we end up selling more and more of that stack in different forms. So as you think about our franchises, that's been the broader part of the shift to cloud, and each of those franchises have its own opportunities and avenues as our customers are shifting to the cloud. So we believe it helps, you know, across the board, both on subscription and SaaS, And in some cases, quite frankly, it has a carryover effect on on-prem as well. So we feel like we're well positioned there.

Yeah, and as we've commented before, the VMC solution, also the hyperscalers, all of those are the full stack. You know, management, lifecycle, compute, network storage. So it's a very rich VMware offering as customers migrate to that solution. Thank you, Phil. Next question, please.

Next question, we have Keith Backman from BMO. Your line is open.

Okay, thank you very much. A good segue from Phil. Pat, I wanted to ask you, you made a comment that you thought as the economy improves, on-prem spending will likewise improve. And I want to try to understand your reasoning behind that. Is it because the most impacted industry, travel, leisure, you think, come back? Or is there something broader? Because I think many investors view this transition to the cloud as a certainly has a lot of momentum and question whether the economy will actually turn that around. And if I could just sneak in one clarification, Zane, is there any way you could give us the organic rev growth for the quarter? Thanks very much.

Yeah, and let's just pull that apart a little bit more, Keith. Good question. And we see the, I'll say the recovery and on-premise, if I can phrase it that way, driven by three or four factors. One is just that as the economy recovers, we expect overall business to improve. Second is COVID lockdowns are lifted. People start getting back into the data centers. Also, many of these projects have very powerful economics associated with them. right where boy my on-premise environment 30 40 percent cheaper than a cloud only a public cloud only environment powerful economics to be unleashed and we've also seen that many of those projects now of the industry leaders as we've talked about before customers like fed fedex and comcast and jp morgan customers have gone big on this strategy bank of america all of these you know have now demonstrated at scale economic value in an on-premise and hybrid environment. Also, as customers look at that on a global basis, they're clearly seeing that certain segments, SMB, travel entertainment, those areas, as you suggest, many of those projects we expect as COVID starts to moderate, economies start to recover, SMB starts to recover, that those will be more on-premise environments. Finally, I'd say many of the things that we've talked about, and we've talked about our great momentum in 5G and telco, those will start to usher in edge projects as well, which will largely be on-premises-based projects. So overall, we see lots of those signals are out there, and we think that it will be a recovery. even though, as you say, there's a lot of momentum on cloud subscription and SaaS, and that's represented in our numbers. But I think as we look at our pipeline, we're pretty comfortable that our comments are backed by good, solid data as measured inside of the pipeline that we're seeing for the rest of the year and into next year.

Hey, Keith, and I'll just add with your second part on organic growth. You know, we don't typically break that out, but as you well know, Pivotal is included both in this year and in last year as we recast our results to include Pivotal, which is actually a slight headwind on a year-over-year basis if you think about that growth rate. So that's a headwind. Carbon Black is a smaller number. We clearly got a tailwind, I'd say, just over 10 points if you were to look at that subscription and SaaS element with and without. But beyond that, we don't typically break them out as they're now so integrated within the rest of the company already.

Thank you, Keith. Thank you, Zane.

Sure. Next question, please.

Next question, we have Keith Weiss from Morgan Stanley. Your line is open.

Only two things are forever, love and Liberty Mutual, customizing your car insurance so you only pay for what you need.

Hi, this is Sanchez Singh, and thank you for taking the question. Pat, you mentioned on the call that the board is looking at the potential spin and evaluating those opportunities. I know you don't want to address it directly, but maybe if I take it from a different angle, has there been, have you, as the company felt constrained in terms of pursuing, you know, strategic options, strategic partnerships, because on the face of it, it doesn't seem like you have, you have major partnerships with all the three major cloud providers. So I'm trying to understand, you know, historically, Has there been any sort of limiting of the opportunity that could potentially open up with a different structure?

Yeah. And, you know, overall, our ability to pursue our strategies, strategic partnerships, you know, have clearly been well supported by the current capital structure. So we're very happy with that. We have been able to also be aggressive with M&A. So clearly we've had good support and our capital structures, Dell, has very much supported that as well. You'd say some things being able to use equity for acquisitions is maybe an area that we hadn't been able to pursue before. So those kind of opportunities might be opened up. Should a spin out to occur and overall we do think that it could be positive for equity and debt market holders in the future as we've indicated. Overall, though, we say we've had good support by Dell. This has worked well. We've seen good acceleration from Dell in their VMware business. And we feel good about today's structure as well as what might happen in the future. And, you know, per the earlier comments, a special committee has been formed. They're evaluating and discussing with Dell. And we won't have anything else to say on this topic at this time. Thank you, Sanjit. Next question, please.

Next question, we have Jason Adder from William Blair. Your line is open.

Yeah, thank you, Sanjit. I want to ask Keith's question somewhat differently. Pat, do you think COVID is actually growing the structural headwinds to on-prem? And if so, what are the puts and takes on your business from that?

Well, I do think, as we've indicated, that COVID has been a bit of a headwind for on-premise growth, and that affected us in Q2, and we clearly saw that, particularly in the Americas, also in some segments uniquely. As you said, travel, entertainment, healthcare, SMB have been more affected. That said, as we saw, as we indicated in APJ and EMEA, where we did see a bit more strength, clearly we're seeing the pipeline building for on-premises projects and why we're indicating the guidance that we're giving in those areas. But when you get down to it, a multi-cloud, hybrid cloud solution set simply has compelling economics. And we've seen that from a number of customers now at scale. And economics always matter. And the on-premise environment clearly also has some governance benefits associated with it for data management and data privacy. Also, there are certain, you know, highly sensitive security-related segments of the market. So, overall, you know, clearly it has been a headwind, and we expect that it will be somewhat as we continue to work through the swoosh, as we've called it, of recovery. And there, you know, as you've seen in our numbers and others, there's a lot of excitement around some of the subscription and SaaS offerings, and clearly that's becoming a bigger benefit for our business as well.

Thank you, Jason. Next question, please.

Next question, we have Brent Phil from Jefferies. Your line is open.

Thanks. Good afternoon. Pat, is there anything in the license component that you couldn't subscriptionize or put into a recurring cloud package? So meaning, could you take any of the on-prem services? Is there anything prohibiting architecturally you doing that, or is this Or is there some other concern over that?

Well, you know, for something to be considered subscription in SaaS, you have to have cloud-delivered value associated with that offering. And a number of the products were not architected that way. It's not that they couldn't be architected that way, as we're seeing in many cases, as we've done, for instance, with the VDI Earth Horizon solution offering. It's essentially the same bits now that over a couple of years we've re-architected it to become a cloud-based solution. We see a number of those capabilities across the product portfolio. We now are offering that, for instance, with the vRealize products. where we've built the products now as a cloud-based product, even managing on-premise environments. So we're one by one going through the portfolio and bringing more cloud and subscription value into those offerings. And as those become fully available, that becomes also an element of our subscription and SaaS businesses. We deliver more of that as a cloud-delivered offering. Clearly, the move of VMware Cloud Foundation to VMC is a great example of that, where we've taken the same on-premises bits, now delivering it as a cloud-based offering. Dimension is another good example of that, which is essentially an on-premise infrastructure solution being managed as a cloud offering. delivered offerings. So all of these are examples of that. All of those are gaining momentum and really portend the overall movement of VMware to be much more of a subscription and SaaS-based company as we go forward.

Thank you, Brent. Next question, please.

Next question, we have Itai Kitron from Oppenheimer. Your line is open.

Thanks, Brent. Pam, maybe I wanted to kind of drill into EUC. I mean, last quarter, it completely was a very nice source of upside as remote work kind of kicked in. Can you talk about the pattern quarter over quarter? How did that business operate? And is the low-hanging fruit with regards to work from home already done over there? What else is there to do on that front?

Yeah, and overall, EUC continues to play a critical role enabling organizations to work from home, to distributed workforce, to business continuity. We do expect that those are multi-quarter trends. This isn't just a near-term blip. We do see this as shifting the waterline overall for the category. We did see Q2 saw the same kind of benefits, particularly in the Horizon VDI solution that we saw in Q1. The Q2 mix, though, was more weighted toward the SaaS solution versus license in Q1. So customers largely, if they needed more license in this triage phase, they acquired them in Q1. We saw that. Now it's much more deploying the scalable Horizon cloud-based solutions. Consistent with the COVID impact in America, we did see some impact on our transformative Workspace ONE deals in Q2 of the year. Overall, IDC continues to recognize us as a leader as they did this quarter. Also, I'd point out that this is a very nice aspect of our Azure and Microsoft relationship as our Horizon Azure solution is seeing good momentum as well. So we see this very much as a long-term trend because essentially everybody is now gearing up for a long-term view of a distributed workforce at scale.

I'd just add, you know, our EEC product bookings are primarily SaaS. And within that, the sales teams have been focusing on the annual contracts, which helped drive our ACV up over 35% year-over-year. So a lot of dynamics within that Q2 number, but we were pleased with the ACV increase on a year-over-year basis. Thank you, Itai. Next question, please.

Next question, we have Alex Kurtz from QDAC. Your line is open.

Yeah, thanks for taking the question. Hope all is well. Just on the second half of the year and what you're expecting as far as close rates, implied close rates from what you saw in the quarter versus what you expect in the next couple of quarters, and then OPEX, it's just been a challenge this quarter, next quarter, as far as bringing new people in and hitting headcount targets. So kind of what the implied views are on close rates and OPEX.

Yeah, I'll take the first part of that and let Zane talk about OpEx. Overall, we feel good about our pipeline for the second half of the year. We've done quite a thorough analysis of what that looks like. Based on that pipeline is the increased guidance that Zane commented on earlier. Those close rates are, I'll say, our typical close rates, and we do feel quite comfortable with that. Clearly, we've taken a more conservative view of that, given the turbulence that we have in the marketplace overall. It's a very unpredictable environment. given all of the different dynamics across the industries. But we've done a pretty thorough scrubbing of that pipeline field that this Nike swoosh, as we've called it, as it takes place over several more quarters, leads everybody to be a bit more careful. with how we manage it, so a lot more scrutiny on the pipeline. And as I commented on earlier to one of the questions, that we are developing the muscles to build that pipeline virtually as well. So we do feel comfortable that the deals are real, the business is there, and we've shown in Q1 and Q2 that we can execute it.

Yeah, and just touching on OPEX, I think we lost you on some of the questions there, but generally speaking, hiring has been strong. We feel good about growth rate with our teams through the course of the year. I would bracket some of the OPEX into COVID-related, and obviously that we hope will be short-lived. We actually want to have teams out there selling more, and we want to actually be spending on marketing and sales programs because we believe strongly that it drives top-line growth. All that being said, you know, as you see, we're exceeding our expectations on the amount of spend, you know, tied to some of the savings we're seeing, you know, with the COVID atmosphere that we're in. And you see that drop down to the bottom line. But some of that we expect we will start increasing through the course of the year.

Yeah, and maybe I'll just pile on, you know, we never stopped hiring, right? And that also gives us some maturity to particularly our sales teams to go execute. So we've continued to build those sales teams through the year, you know, getting them on the new product areas, bringing them in, getting them up to speed. We're continuing to hire in Q3 and Q4 as well. So we have, you know, the teams, the capacity, particularly in the sales area to go execute the business that we've laid out. Thank you, Alex. Next question, please.

Next question, we have Robert from Roman James. Your line is open.

Thanks. It's been close to a year since you acquired Carbon Black. Can you elaborate on how you're feeling about the acquisition at this point and where you stand in terms of integrating it with the existing portfolio?

Yeah, thank you. And overall, we're very happy with the acquisition. The team, it just feels like it's always been part of VMware, a great cultural fit. We had strong bookings growth in Q2. We're at 20,000 customers now. So ARR grew almost triple digits for our cloud-based offerings. In June, we added Lastline to the portfolio. We closed Doctrine, so we're beefing up our overall security portfolio of products. Also, you know, this aspect of the synergies of bringing this intrinsic security and integrating it with our Dell Unified Workspace, our Workspace ONE, our NSX, our vSphere offerings, all of those integrations are well underway. And you can expect to see some exciting announcements on this at VMworld.com. coming up in late September. We had some great wins. Conduit was a great win. Okta, Zoom, a major federal agency. So we're starting to get much more of the VMware effect where we're able to make them part of bigger deals, bring them into more enterprise portions of the market where Before the Carbon Black was part of VMware, they were much more of a low-end enterprise commercial play, and we're now starting to bring them into the large enterprise customers as well. And if anything, COVID is driving a bigger footprint of protecting remote workforces. Customers now went from 100 sites to 10,000 sites. And that broadening security footprint is putting more of a premium on how we manage a remote workforce. So we're seeing an increased amount of interest for both the VMware offerings overall and for Carbon Black in particular.

Thank you, Robert. It looks like we have time for one more question. So the next question will be the last question, please.

Last question. We have Brad Zelnick from Credit Suisse. Your line is open.

Thank you so much, guys. I really appreciate you taking my question. Zane, the upside in margins for both the quarter and the full-year guide was great to see, especially given the upside in SaaS and subscription. Obviously, you're benefiting from COVID-related savings, but have synergies from Pivotal and or Carbon Black contributed here? And if so, how should we think about the contribution to margins on a go-forward basis?

Yeah, I'd say it's a great question, but I'd say not initially. Obviously, we're very pleased, as Pat pointed out, and I mentioned my prepared remarks, with the performance of both Pivotal and Carbon Black as they get integrated into VMware. I wouldn't say that they're contributing on the margin side at this point. It's more some of the COVID-related benefits. short-term impact that we're seeing as far as significant margin improvement. We did outperform on revenue, which helped us with margin profile in the second quarter. But we do look over a period of time to see contributions from Pivotal and Carbon Black as they begin to grow within the company. So that's, as we think about long-term margin expansion, that's part of the portfolio that will be driving that.

Thanks so much, Zane. Squeeze one in just for Pat real quick. Pat, on the last question about Carbon Black, that's just one example of really successful M&A that you guys have been doing. You know, just given that you've demonstrated such an ability to flex that muscle, how are you thinking about that as a lever? And when you come across build versus buy decisions within the business, you know, how should we think about that going forward?

Yeah, we're going to continue to exercise the same kind of perspective that we've had where, you know, we're not bashful about our organic R&D. You know, we've continued to invest and we keep that as a very high investment level for us as a company. But we've been unhesitated to use our balance sheet and we've done more acquisitions so far this year than I expected at the beginning of the year. And it's been a good buyer's market for a number, so we've taken advantage of that, as you've seen and we've talked about today with Lastline and Octarine as two examples. So, overall, we're going to continue to do that as we look forward. And we're uniquely good, I think, at making those acquisitions effective. And we have a tremendously good track record, you know, for doing that. And we'll be highlighting some of those innovations as part of VMworld. Maybe then just wrapping up, you know, very much appreciate you all joining our call today. Proud of the VMware team for our solid execution and financial performance this quarter. Particularly excited about some of the new partnerships and new innovations that we'll be talking about and announcing at our virtual VMworld that begins on September 29th. And I hope to see every one of you there. Bring your friends. It's going to be a great party. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.