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VMware (VMW)

Q2 2011 Earnings Call

July 19, 2011 5:00 pm ET


Paul Maritz - Chief Executive Officer, Director and Member of Mergers & Acquisitions Committee

Mark Peek - Chief Financial Officer and Co-President of Business Operations

Michael Haase - IR


Adam Holt - Morgan Stanley

Brent Thill - UBS Investment Bank

John DiFucci - JP Morgan Chase & Co

Heather Bellini - Goldman Sachs Group Inc.

Philip Winslow - Crédit Suisse AG

Walter Pritchard - Citigroup Inc

Michael Turits - Raymond James & Associates, Inc.

Robert Breza - RBC Capital Markets, LLC

Israel Hernandez - Barclays Capital

Gregg Moskowitz - Cowen and Company, LLC

Kash Rangan - BofA Merrill Lynch



Welcome to the VMware Second Quarter 2011 Earnings Call, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn today's meeting over to Mr. Mike Haase, Vice President of Investor Relations. Mr. Haase, you may begin.

Michael Haase

Welcome to VMware's Second Quarter 2011 Earnings Conference Call. On the call, we have Paul Maritz, our CEO; and Mark Peek, our CFO. 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.

Statements made on this call include forward-looking statements such as those with the words will, believes, expects, continues and similar phrases that denote future expectation or intent regarding our financial outlook, product offerings, customer demand and other matters. These statements are based on the environment as we currently see it, and are subject to risks and uncertainties. Please refer to the press release and the risk factors and documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-Q and Form 10-K for information on risks and uncertainties that may cause actual results to differ materially, from those set forth in such 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 and not as a substitute for or an isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of intangible assets, employer payroll tax and employee stock transactions, the net effect of amortization and capitalization of software, acquisition-related items and the gain from the sale of our investment in Terremark. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in the press release and on the Investor Relations page of our website.

The webcast replay of this call will be available for the next 30 days on our company website under the Investor Relations link. Our third quarter quiet period begins at the close of business, September 16, 2011. For your planning purposes, VMworld, the leading virtualization and cloud infrastructure event of the year will be held in Las Vegas from August 29 through September 1. As part of VMworld, we will be hosting our Analyst Day on Tuesday, August 30.

Finally, unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2010. With that, let me hand it over to Mark.

Mark Peek

Thanks, Mike, and good afternoon, everyone. The financial and business results for our second quarter clearly exceeded our expectations. We achieved record revenue, non-GAAP operating margin and non-GAAP operating cash flows driven by strength across geographies and record ELA bookings as a percentage of total bookings. The quarter also benefited from a sequential decline in unearned license revenue.

Now for the financial highlights. Total second quarter revenues increased 37% year-over-year and license revenues increased 44%. Our non-GAAP operating margin was a record 31.6% and benefited from the strong sequential increase in license revenue. We expect margins to return to below 30% in the third quarter.

Trailing 12-month free cash flows were $1.6 billion, an increase of 56% from a year ago. Our balance sheet remains strong, with cash and investments of $3.7 billion and unearned revenues of $2.1 billion.

Our results speak to the value of our products. vSphere is the most trusted, widely deployed virtualization platform in the world. Last week, we announced vSphere 5 and a comprehensive suite of cloud infrastructure technologies to not only help customers virtualize their cloud applications, but also help them build and operate modern data centers with cloud architectures. With the introduction of VMware vSphere 5, VMware is evolving the product's licensing to lay the foundation for customers to adopt a more cloud-like IT cost model based on consumption and value rather than physical components and capacity. We are extending our focus beyond delivering virtual infrastructure with vSphere to complete cloud infrastructure suite. We expect these new releases to become generally available in Q3.

With nearly 200 new and enhanced capabilities, vSphere 5 will continue to set the standard in virtualization, delivering better application performance and availability for business-critical applications while automating the management of an increasingly broad pool of data center resources. Paul will speak more to vSphere 5 and cloud infrastructure technologies.

As I mentioned during last quarter's call, we integrated more than 300 people from EMC's Mozy and Cloud Services group in April to further strengthen our cloud initiative. We also closed the acquisitions of SlideRocket, SocialCast and Shavlik during the quarter, and welcomed about 200 new employees from these acquisitions to VMware. Finally, we announced the acquisition of Digital Fuel, which closed in early July. We're very pleased with our results for the first half of 2011 and want to thank all the people of VMware, our partners and our customers.

Read the rest of this transcript for free on seekingalpha.com