Vmware, Inc.

Thank you for standing by and welcome to the VMware SQ1 FY 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that the base content is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Paul Zayats, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to VMware's first quarter 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. 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, 8-Ks VMware files with the SEC. We assume no obligation to and do not currently intend to update any such forward-looking statements. In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, acquisition, 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 second quarter fiscal 22 quiet period begins at the close of business Thursday, July 15, 2021. With that, I'll turn it over to Zane.

Thank you, Paul, and thank you to everyone joining us today. Before we move into Q1 results, earlier this month we announced Raghu Raghuram as the next CEO of VMware, effective June 1st. Raghu is the architect of our future, an industry thought leader, and has successfully steered the company's strategy and technology evolution across our rich history. This is an exciting milestone for VMware, which, along with the Dell spin-off plan, marks the company's transition into its next chapter. Raghu will say a few words following our Q1 results overview. Also, on behalf of the company, I'd like to thank Sanjay Poonen for his years of service, his passion, and his leadership. We wish him well on his next endeavor. We're pleased with our Q1 financial performance. Q1 total revenue was $3 billion, an increase of 9% from the first quarter of FY21, with non-GAAP EPS of $1.76 per share, up 16% year over year. We continue to see customers utilize a combination of our solutions ranging from modern apps and cloud infrastructure to networking and our digital workspace offerings. We're also seeing momentum with our subscription and SaaS portfolio and are on track to make most of our major product offerings available as subscription and SaaS by the end of this year. Customers remain focused on building out hybrid and multi-cloud environments and are changing how they consume technology, asking for more flexibility and choice. Recently, we introduced VMware Cloud Universal. a program that provides customers like Western Union, who is subscribed in Q1, with flexibility in utilizing VMware hybrid cloud offerings as they progress on their cloud journeys. With VMware Cloud Universal, customers can deploy applications on their choice of three VMware technology-based infrastructure stacks, VMware Cloud Foundation, VMware Cloud on AWS, or VMware Cloud on Dell EMC. VMware Cloud Universal joins our product-specific universal offerings such as VMware vRealize Cloud Universal and VMware Horizon Service Universal. In conjunction with these universal offerings, we continue to drive innovation around three key customer priorities, cloud, app modernization, and enabling a distributed workforce. In Q1, we announced updates to the VMware vRealize Cloud Management and cloud health portfolio, expanding our support for Amazon Web Services, Google Cloud, Microsoft Azure, and VMware Cloud on AWS. These new and enhanced capabilities enable customers to manage and govern their hybrid and multi-cloud environments more securely. This past quarter, we secured a deal with Pirelli, helping them with consistent infrastructure and management capabilities. And in Q1, VMware Cloud on AWS achieved PCI DSS certification at the highest level available for a cloud provider, expanding our ability to support customers that require PCI for cardholder payments processing e-commerce applications. In the modern app space, customers are embracing Tanzu, our comprehensive portfolio of products and services to modernize their existing applications and build new modern apps. We recently unveiled expanded cloud workload protection capabilities to deliver better security for containers and Kubernetes, helping customers with increased visibility and compliance. In Q1, we saw customer momentum with our Tanzu platform across key verticals, including financial services, and also secured a key one with Telcom Italia, where we helped them deliver better digital experience and modernize their operating infrastructure. We also recently announced that VMware Tanzu has been selected by US Army Futures Command to enable a software factory where they can use modern cloud native development practices. We're helping customers run their modern apps with new releases of vSphere 7 and vSAN 7, which are developer and AI ready, scale without compromise, boost infrastructure and data security, and simplify operations. This includes the next step in our collaboration with NVIDIA to deliver an AI-ready enterprise platform that combines the industry-leading compute virtualization software VMware vSphere and the innovation of NVIDIA AI Enterprise Suite. We also continue to see momentum with our Dell Technologies partnership. A new example of our collaboration includes plans to build a simplified, more secure, high-performing edge platform using VMware Cloud Foundation on Dell VxRail that can consolidate a variety of edge workloads and use cases. Additionally, VMware and Dell continue to help unleash the potential of 5G as an accelerator at the edge, enabling customers to derive real-time insights out of that data wherever it lives. VMware and Dell also continue to collaborate on solutions such as VMware Cloud on Dell EMC, VeloCloud SD-WAN, digital workspace, and security, helping joint customers in their digital transformation journeys. Over the past year, companies have seen the benefits of remote work and want to become truly distributed businesses where their employees can work from anywhere. We recently unveiled VMware Anywhere Workspace, a solution designed to help customers manage multimodal employee experiences, secure the distributed edge, and automate their workspace. VMware Anywhere Workspace brings together three innovative solutions. VMware Workspace ONE, VMware Carbon Black Cloud, and VMware SASE. This is built on our SD-WAN technology, which was recently recognized by IDC as a leading offering in 2020. Additionally, VMware Carbon Black was recognized as a visionary in the 2021 Gartner Magic Quadrant for endpoint protection platforms. and recognized as a leader in the Forrester Wave Endpoint Security Software as a Service Q2 2021. Our commitment to ESG continues to be a priority across the company. As part of our 2030 agenda, we took meaningful steps towards our sustainability goals with the recent launch of our Zero Carbon Committed Cloud Partner Program. Designed to accelerate the transition to zero carbon clouds by 2030, through VMware Cloud Partner data centers that are powered by renewable energy sources. We're also proud to have been recognized on Forbes Best Employers for Diversity 2021 list, having made significant gains in our position over the last year. Now let's move to more detail on our business performance as well as our forecast. We had good performance overall in the quarter, including relative strength in our commercial business, which benefited from increased focus on partner collaboration and sales coverage. In Q1, the combination of subscription and SAS and license revenue grew 12% year-over-year to $1,387,000,000. Subscription and SAS revenue increased 29% year-over-year, with the largest revenue contributions coming from VCPP, modern applications, end-user computing, Carbon Black, and VMware Cloud on AWS, which grew over 80% in Q1. We're pleased with the growth and progress of our subscription and SaaS portfolio in Q1, and we'll continue to focus on our product development and go-to-market efforts on making subscription and SaaS a larger part of our business. ARR for subscription and SaaS was $3 billion, an increase of 30% year-over-year. While we continue to drive growth in our subscription and SAS portfolio, license revenue exceeded our expectations, declining 2% year-over-year to $646 million. Our better-than-expected total revenue growth was the primary contributor to strength in non-GAAP operating income, which increased 13% year-over-year in Q1 to $923 million. Non-GAAP operating margin for the quarter was 30.8%, with non-GAAP earnings per share of $1.76 on a share count of 422 million diluted shares. We ended the quarter with $10.2 billion in unearned revenue and $5.7 billion in cash, cash equivalents, and short-term investments. Q1 cash flow from operations was $1,266,000,000 and free cash flow was $1,196,000,000. For Q1, RPO was $11 billion, up 9% year over year, and current RPO was $6.2 billion, up 12% year over year. Total backlog was $52 million, substantially all of which consisted of orders received on the last day of the quarter that were not shipped, and orders held due to our export control process. License backlog at quarter end was $14 million. We're pleased with our product portfolio performance in Q1. Core SDDC product bookings increased over 20% year-over-year, with compute increasing over 20% and cloud management up in the high teens. Compute growth was strong for both on-prem deployments and subscription and SaaS offerings, such as VCPP and VMC on AWS. Cloud management growth was driven by vRealize subscription and SaaS, which enables customers to manage both on-prem and multi-cloud environments in a consistent manner. While large transformative projects are starting to show signs of recovery after a slow year, NSX and VSAN product bookings were still impacted in Q1, resulting in single-digit year-over-year declines. Subscription and SAS ACV bookings for EUC, which constituted approximately three-fourths of total EUC product bookings, grew over 30% in Q1, primarily driven by Horizon. Total EUC product bookings increased in the mid-teens year-over-year. We continue to focus on integrating Carbon Black and Tanzu into our product development and go-to-market selling motions. Tanzu was included in five of our top 10 deals in Q1. In Q1, we repurchased 2.5 million shares in the open market at an average price of $148 per share. As of the end of Q1, we utilized $1.8 billion from our current repurchase authorization of $2.5 billion. VMware remains committed to maintaining an investment-grade profile and credit rating. And to that end, we expect to use free cash flow primarily to de-lever following our planned spin-off from Dell. In addition, we will continue to invest in growing our business both organically and inorganically and return excess capital to shareholders through share repurchases. We'll provide further updates to our capital allocation plans as we near the planned spin-off this fall. Turning to guidance for fiscal 22, we're increasing full-year guidance to incorporate stronger-than-expected performance in Q1. We now expect total revenue of approximately $12,800,000,000 or a growth rate of approximately 9% year-over-year. We expect to generate approximately $6,330,000,000 from the combination of subscription and SAS and license revenue or an increase of approximately 12.5%. with approximately 53% of this amount from subscription and SAS. We're increasing guidance for non-GAAP operating margin for the full year to 28.5% and non-GAAP earnings per share to $6.88 on the diluted share count of 423 million shares. We're also increasing our cash flow from operations guidance to $3.9 billion and increasing free cash flow expectations to $3.52 billion. FY22 guidance does not include the impact of incremental debt we expect to incur in conjunction with the planned spin-off from Dell later this year. For Q2, we expect total revenue of approximately $3,100,000,000, or a growth rate of approximately 8% year-over-year. We expect approximately $1,485,000,000 from combined subscription and SAS and license revenue in Q2, or an increase of 10% year-over-year, with approximately 53% of this amount from subscription and SaaS. We expect non-GAAP operating margin of 28% for Q2, with non-GAAP earnings per share of $1.62 on a diluted share count of 423 million shares. In summary, we're pleased with our progress in Q1 and the momentum we're building with our subscription and SaaS portfolio. My thanks to the VMware team and our customers and partners for a good start to the year. I'm looking forward to working with Raghu to accelerate our progress towards being the company that leads our customers to the multi-cloud computing era, creating value for them, our partners, and our stockholders. I'll now turn it over to Raghu to make a few comments before we open it up for Q&A.