Vmware, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the VMware's fourth quarter and fiscal year 2021 earnings call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question during that time, you will need to press star, then the number one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker for today, the Vice President, Investor Relations, Mr. Paul Zayats. Thank you. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to VMware's fourth quarter and fiscal year 2021 earnings conference call. On the call, we have Zane Rowe, CFO and interim CEO. Following Zane's prepared remarks, we will take questions. Raghu Raghuram, COO, Products and Cloud Services, and Sanjay Poonen, COO, Customer Operations, will join for Q&A. 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, disposition, 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. The webcast replay of this call will be available for the next 60 days on our company website under the investor relations link. Our first quarter fiscal 22 quiet period begins at the close of business Thursday, April 15, 2021. With that, I'll turn it over to Zane.

Thank you, Paul. And thank you to everyone for joining us today. We realize you're used to hearing Pat's voice as we start these quarterly conference calls. I want to thank Pat for his leadership. which helped put VMware in a position to execute on our strategy and drive long-term value. Pat is a true partner and a friend, and of course will still be a VMware board member. We're pleased with our Q4 financial performance, as it was a good finish to the fiscal year. Q4 total revenue increased 7% year-over-year, with non-GAAP EPS up over 8%. We finished fiscal 21 with $11.8 billion in total revenue, and non-GAAP EPS of $7.20 a share. This past year was one of unprecedented disruption and uncertainty, and we're proud of what the team accomplished. As we quickly adapted to a distributed workforce, we helped our customers accelerate their work from anywhere journey and their application and cloud modernization initiatives. We're seeing customers continue to choose VMware to help them deliver the digital foundation to power their apps, clouds, security, and user experiences. Large global customers continue to align and partner with us, and the nature of our strategic relationships with our largest customers continues to grow. In Q4, we closed deals with significant aerospace and telco customers and saw particular strength in the financial sector, including wins with HSBC and Wells Fargo. We see financial services customers utilizing a combination of franchise solutions, ranging from modern apps and cloud infrastructure to networking in our digital workspace offerings. We also continue to see momentum with key communication service providers, such as NTT Docomo and Telia, increasing their focus on VMware solutions, as well as new and expanded contracts with additional Tier 1 communication service providers globally. In the retail sector, a large customer that's standardized on our technologies in their private cloud is leveraging VMware as a platform for their cloud migrations, while also investing in edge cloud infrastructure and using Tanzu for containers in their retail edge locations. We see this as a repeatable use case for other retailers, along with other e-commerce app development use cases retailers are building on top of Tanzu. Our work with life sciences and healthcare customers is enabling their critical apps to run on our hybrid cloud and is helping to secure their user devices for employees working from anywhere. In addition, our partner ecosystem is driving momentum for VMware solutions. We're expanding the reach of our solution through key strategic partnerships from our VCPP partners to hyperscalers to system integrators. For example, earlier this month, we announced an expansion of our partnership with Accenture, resulting in the launch of their dedicated VMware business unit. The group will bring together approximately 2,000 professionals across a variety of industries with expertise in hybrid cloud and cloud migrations, cloud native and application modernization, as well as security. We also recently formed a joint innovation lab with Lumen, designed to drive edge computing, Security and Secure Access Service Edge, or SASE, for customers in a number of industries. Looking at the broader portfolio, we continue to further our multi-cloud strategy and are seeing traction as customers align app requirements to the cloud of their choice, whether it's private, hybrid, or public. This quarter, we expanded our resale program with AWS to include additional VMware technologies and services, such as VMware Cloud Disaster Recovery and vRealize. Additionally, VMware Cloud on Dell EMC, a Dell Technologies cloud service from VMware, expanded to the EMEA market with immediate availability in the UK, Germany, and France. We continue to deliver on innovation with Tanzu. With the announcement of general availability of Tanzu Advanced Edition, we now have three Tanzu editions in the market, Basic, Standard, and Advanced. Each edition is targeted at a common customer challenge of modernizing infrastructure and applications. Tanzu Advanced includes all the capabilities that enterprises need to embrace DevSecOps and manage complete container lifecycle. We continue to see strong positive reception to all three Tanzu editions. We also added container security to VMware Carbon Black Cloud, leveraging technology from our recent Octorin acquisition to provide visibility into on-prem and public cloud Kubernetes clusters. Our NSX portfolio offers a comprehensive set of L2 to L7 capabilities, implemented completely in software. We recently released the latest version of NSX, which included enhancements across routing, identity firewall, load balancing, and cloud. In FY21, VMware was recognized by top industry analyst firms as a leader in 13 key reports across cloud management, networking, hyper-converged infrastructure, and end-user computing. In November, Forrester named VMware a leader in the Forrester Wave Hybrid Cloud Management Q4 2020. More recently, we were named a leader in December's 2020 Gartner Magic Quadrant for hyper-converged infrastructure software. And in January, VMware was positioned as a leader in three IDC MarketScape reports related to the end user computing space, including the worldwide unified endpoint management software 2021 vendor assessment. From a broader corporate perspective, I'm personally pleased to highlight that we recently unveiled our 2030 agenda, which encapsulates how we will drive ESG goals into every aspect of our business. Our 2030 agenda is integrated into the business and is focused on three business outcomes, trust, equity, and sustainability. Recently, we also performed well in the areas of sustainability, earning the distinction of being included in the 2020 Dow Jones Sustainability Index among the world's leading ESG benchmarks. Now let's move to more detail on our business performance as well as our forecast. In Q4, the combination of subscription, SaaS, and license revenue grew 8% year-over-year to $1,721,000,000. We saw a large enterprise demand strength throughout the quarter, which allowed us to close a record 35 deals over $10 million. This was balanced with good performance in our commercial business as well. Subscription and SaaS revenue increased 27% year-over-year for the quarter, with strong growth in our VMware Cloud Provider program, end-user computing, Carbon Black, and VMware Cloud on AWS offerings. We continue to invest and expect to see further growth in this important area for us in FY22 and beyond. Our focus is on scaling existing offerings as well as adding new solutions. VMC on AWS once again had a great quarter with both workloads and revenue nearly doubling year over year as we continue to expand functionality and use case adoption. As of the end of Q4, ARR for subscription and SAS was $2.9 billion, an increase of 27% year-over-year. License revenue for the quarter declined 2% year-over-year to $1.14 billion. Now, this was better than expected as we had a strong deal closure rate throughout the quarter. Non-GAAP operating income increased 8% year-over-year in Q4 to $1.133 billion, primarily driven by better-than-expected revenue growth. Non-GAAP operating margin for the quarter was 34.4%, with non-GAAP earnings per share of $2.21 on a share count of 423 million diluted shares. We ended the quarter with $10.3 billion in unearned revenue and $4.7 billion in cash, cash equivalents, and short-term investments. Cash flow from operations for fiscal 21 was $4.4 billion, which was well ahead of our expectations. Q4 cash flow from operations was $1,324,000,000, and free cash flow was $1,242,000,000. Now, this strength was primarily due to our emphasis on closing certain deals prior to calendar year end, which resulted in receiving the associated cash in FY21 rather than FY22. In addition, we benefited from early collections and advance payments from partners and customers, as well as certain other expenditures which were lower than expected in FY21. With subscription and SAS becoming a larger share of total revenue, we're now providing our end of period total and current RPO. For Q4, RPO was $11.3 billion, up 10% on a year-over-year basis, and current RPO was $6.2 billion, up 12% year-over-year. Total backlog was $93 million, substantially all of 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 $23 million. Overall, our product portfolio performed well in Q4, with customers continuing to purchase solutions that contain multiple products. Core SDDC product bookings increased 12% year-over-year in Q4. highlighted by strength in our vRealize management offerings, which are now available both on a perpetual and SaaS basis. Compute product bookings also performed well, growing in the low single digits year over year. NSX and vSAN had single digit year over year declines, which was an improvement for both versus Q3 of FY21. These two technologies continue to be further integrated into our broader solutions. Three quarters of our EUC product bookings are now SaaS. EUC's ACV SaaS growth rate was 30% year-over-year in Q4, driven primarily by Horizon and our initiatives related to Anywhere Workspace. Given our focus on SaaS ACV, EUC product bookings decreased in the high single digits year-over-year. Carbon Black Cloud once again grew in the high double digits year-over-year, and we continue to make progress in expanding our endpoint and workload protection capabilities and delivering intrinsic security value to our customers. Our Tanzu portfolio exceeded expectations and had a strong attach rate in eight of the top 10 VMware deals in Q4. In Q4, we repurchased 2.7 million shares in the open market at an average price of $140 per share. At the end of Q4, we've utilized over $1.4 billion from our current repurchase authorization of $2.5 billion. Turning to guidance for fiscal 22, we expect total revenue of approximately $12,700,000,000, or a growth rate of 8%, which is consistent with the early outlook provided on our last call. We expect to generate approximately $6,300,000,000 from the combination of subscription and SAS and license revenue, or an increase of 12%, with approximately 55% of this amount from subscription and SAS. We expect non-GAAP operating margin of 28% with non-GAAP earnings per share of $6.68 on a diluted share count of 422 million shares. As I mentioned earlier, we had very strong cash flow from operations in Q4 due to a number of initiatives that resulted in exceeding our cash flow guidance by over $650 million. While we're extremely pleased with this result, the bulk of this overachievement was accelerated from our upcoming fiscal year. Taking that into account for FY22, we currently expect cash flow from operations of $3.8 billion and free cash flow of $3.42 billion. On a normalized basis, taking into account the acceleration of cash into FY21, cash flow from operations would be roughly flat on a year-over-year basis for FY22, in line with our operating performance. For Q1, we expect total revenue of approximately $2,910,000,000 or a growth rate of 6%. We expect approximately $1,320,000,000 from combined subscription and SAS and license revenue in Q1, an increase of 7% year-over-year with over 55% of this amount from subscription and SAS. Our expected growth rate for Q1 license revenue is impacted by continued growth in subscription and SAS and the strength we saw in Q1 last year. We expect non-GAAP operating margin of 27.5% for Q1, with non-GAAP earnings per share of $1.49 on a diluted share count of 422 million shares. In closing, we're pleased with our Q4 performance, the improvements we're seeing in the macro environment, and our expanding opportunities to engage with our customers and partners. We're committed to executing at scale as we continue to build our subscription and SaaS business and invest in our future growth while delivering technologies and solutions today that help our customers and partners with their digital transformations. Before we go to questions, I'm pleased to tell you that we are making progress on the potential spinoff of VMware from Dell. While our special committee of independent directors continues to evaluate the spinoff, we believe that it could be value-enhancing to VMware and its stockholders. We will not be commenting further on these discussions until there's more definitive news to share. With that, I'll turn it back to Paul for Q&A.