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VMware, Inc. (VMW)
Q4 2012 Earnings Call
January 28, 2013 5:00 p.m. ET
Pat Gelsinger - Chief Executive Officer
Carl Eschenbach - President and Chief Operating Officer
Jonathan Chadwick - Chief Financial Officer and Executive Vice President
Paul Ziots - Investor Relations
Adam Holt - Morgan Stanley
John DiFucci - JPMorgan
Walter Pritchard - Citigroup
Emily Chan - Sanford Bernstein
Sonya Banerjee – Goldman Sachs
Kash Rangan – Merrill Lynch
Stephen Patel - ISI Group
Brent Thill – UBS
Philip Winslow – Credit Suisse
Previous Statements by VMW
» VMware Management Discusses Q3 2012 Results - Earnings Call Transcript
» VMware Management Discusses Q2 2012 Results - Earnings Call Transcript
» VMware's CEO Discusses Q1 2012 Results - Earnings Call Transcript
Welcome to VMware's Fourth Quarter and Full Year 2012 Earnings Conference Call. On the call we have Pat Gelsinger; Carl Eschenbach and Jonathan Chadwick. Following their prepared remarks, we’ll 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, not as a substitute for, or in isolation from, GAAP measures. Our non-GAAP measures exclude the effect of 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 and acquisition-related items. 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 60 days on our company website under the Investor Relations link.
Our first quarter 2013 quiet period begins at the close of business On March 14, 2013. Unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2011.
With that, let me hand it over to Pat.
Thanks Paul and good afternoon everyone. 2012 was a strong year for VMware with solid Q4 results despite the tough economic environment. We do not take this momentum for granted and I would like to first thank all of the people of VMware, our partners and our customers for their passion, engagement and support throughout the year.
Total revenue for 2012 increased 22% to $4.6 billion, with license revenue up 13% to $2.1 billion and non-GAAP operating margins up by 140 basis points. Unlike most vendors, VMware challenges the status quo. By finding new ways to solve complex IT problems, we have helped more than 400,000 customers save billions of dollars, dramatically increase the agility of their IT environments and significantly improve business outcomes.
We see a tremendous market opportunity in 2013 and beyond as we focus on what our customers value most, VMware’s role as a pioneer of virtualization technologies that simplify IT infrastructure from the datacenter to the virtual workspace. In 2013, VMware will execute against three growth priorities in support of our unique role in the industry and the core opportunities we see ahead. The software-defined datacenter, hybrid cloud, and end-user computing.
In the software-defined datacenter, we will continue to deliver innovations in networking, security, storage and management, as powerful as those we led and continue to lead in server and desktop virtualization, delivered simply through the vCloud Suite. For hybrid cloud, we will enhance our ability to deliver a compelling set of enterprise class cloud services that allow customers to run any application anywhere, on and off premise as they choose. And in end-user computing, the Horizon suite will deliver on our vision of a virtual workspace for both existing PC environments and emerging mobile devices in a secure enterprise environment.
As we enter Q1 we are actively focusing our investments and resource to capitalize on these opportunities. And by definition, there are areas we plan to de-emphasize across the business to do this. One thing I have learned over the years is the importance of prioritization and execution. So I have been working with my leadership team to ensure we have the right level of resources in the proper places for 2013 and beyond. This focus on prioritization includes two-tiered realignment process.
First, a portfolio rationalization in favor of our differentiated strengths and the products our customer base and prospects care about most. The decision to commit our cloud application platform efforts to the pivotal initiative is an example. And second, a realignment of resources as we scale back in some areas of the business and increase prioritized investments across geographies, product groups and operations. This includes shifting talents in new roles that support our core growth opportunities as well as some targeted headcount reductions.
Focusing our talents and resources for realignment is a responsible and healthy course of business. That said, these are plans that impact our people and we make them with careful thought and respect. Jonathan will provide more detail on the realignment process in his section of this call. To be clear, VMware has invested considerably, having added over 6,700 people over the last three years to accelerate our growth opportunity. We will continue to grow, invest, and hire in 2013 in support of our focused growth priorities. For example, we expect to close fiscal year ’13 with headcount up by approximately 1000 people.
You will also see us continue M&A activities and strengthen alliances, again, in support of our focused growth priorities of the software-defined datacenter, hybrid cloud, and end-user computing. Looking at 2013 in perspective, we are out to make our customers’ environments incrementally better. We will radically change them by solving the hardest infrastructure problems in elegant, simple and powerful ways. Our aspirational goal is to become the greatest infrastructure software company of this decade, $10 billion and beyond, by delivering software innovations that bring agility, efficiency and choice to our customers while simplifying everything about infrastructure and IT.
To help give you a deeper understanding of our software innovations and strategies, it is my pleasure to invite you to join us for the EMC and VMware strategic forum on March 13th in New York, which we will host for analysts and investors. At this forum, my management team and I will discuss our strategies for the Software-Defined Datacenter, HyperCloud and end user computing strategies as well as providing more information about the pivotal initiative. With that, I’ll turn it over to Carl.
Thanks Pat. As an 11 year veteran, I have to say we’ve become more aligned than ever since Pat joined VMware a short five months ago. Both the CEO and CFO transitions have been seamless and we’re focused, motivated and ready to execute in 2013. I want to start by thanking all of the people at VMware, our partners and our customers for contributing to the strong financial results in 2012.
Our financial performance was driven by our product performance and it was an outstanding year on many fronts, including the introduction of new products such as VMware View 5.1, which simplifies the delivery of a desktop with better total cost of ownership and the vCloud Suite which I’ll speak more about in a moment. Throughout the year, we made six acquisitions and welcomed employees from iTHC, Cetas, Wanova, DynamicOps, Pattern Insight and Nicira.
We also continued to expand our international footprint in customer facing activities, particularly in key markets such as China, Japan, Eastern Europe, Russia and Latin America. All of this was accomplished while maintaining our high standards of product and service quality. In 2013, we will continue to be aggressive with investments in areas supporting our priorities of Software-Defined Datacenter, HyperCloud and end user computing.
In Q4, we benefited from a full quarter of availability of the vCloud Suite, our first solution to deliver the Software-Defined Datacenter. The vCloud Suite integrates VMware’s leading virtualization, availability, networking, security and management portfolio into a single skew and simplifies customers’ adoption of Cloud Air technologies. We exceeded our bookings planning for vCloud Suite in Q4 and as expected, most vCloud Suite bookings were ELAs. The vCloud Suite comes in three flavors, standard, advanced and enterprise. Our enterprise version with a list price of $11,495 per CPU, had more bookings in Q4 than either the standard or advanced versions.
vCloud Enterprise Suite now includes vCloud Automation Center, formerly DynamicOps, which allows customers to rapidly deploy and provision Cloud services across private and public clouds, physical infrastructures, Hypervisors and public Cloud providers. In addition, nearly 1,000 existing vSphere Enterprise Plus customers, took advantage of our free upgrade offer to vCloud Suite Standard and by doing so, acquired additional management and network virtualization capabilities.
Customers are buying our vCloud Suite for three primary reasons. The first reason is because customers understand and buy into our vision of the Software-Defined Datacenter and they believe the vCloud Suite is the best way to participate in this vision. The second reason is that as our customers are deploying more mission critical in tier 1 applications, they require higher levels of SLAs. the vCloud Suite combines better management, automation, high availability and security functionality meeting these service levels all in a single solution. And the third reason is because of the significant return on investment and convenience customers enjoy when purchasing Cloud infrastructure and management capabilities in a single SKU with simplified entitlements at favorable prices.
As expected, blended ASPs for vCloud Suite were more than three times the blended ASPs for vSphere in Q4. We were also pleased that blended vSphere ASPs were higher in Q4 as compared with Q3. In Q4, our management products and EUC products combined were once again greater than 20% of total license bookings. This figure does not include management products which are bundled into the vCloud Suite SKUs. Note that moving forward, we expect to sell more and more of our management products as part of the vCloud Suite, which will make this figure less relevant. We had continued success in the quarter with our vCenter Operations Management Suite and vCloud Automation Center, which are both sold as part of the vCloud Suite as well as outside the suite.
The vCenter operations management suite is one of our fastest growing products, since vSphere and investments in our channel recruitment enablement and sales incentive during 2012 had been paying off. Sequential license bookings for vCloud Automation Center grew significantly in Q4, which was the first full quarter since closing our DynamicOps acquisition. vCloud Automation Center has been gaining traction particularly with our financial services customers and is now a standard component in vCloud suite enterprise which is our high-end suite offering.
In 2013 we are also making large investments across the board in end-user computing go-to-market activities, including increased focus at verticals such as financial services, the public sectors and healthcare. While we were pleased with record U.S. revenues of $639 million in Q4 at a growth rate of 20% year-over-year, our Q4 U.S. bookings did not come in at the levels we expected for either our ELA or transactional businesses. Generally speaking, we saw weakness across the U.S. as a whole. As an example, despite our federal business performing better in Q3 than we had expected, for the full year 2012, federal bookings were down versus 2011.
Our international revenues in Q4 also reached a record level of $654 million, which is an increase of 24% as compared with the fourth quarter of 2011. Strong demand in Japan in China once again led our growth in Asia Pacific region and we continue to see increased opportunities for larger deals in these countries and many others. Weakness in Australia was once again an exception in Asia Pacific due to a struggling economy.
European bookings were slightly higher than expected in Q4. As we executed well on selling the vCloud Suite and we witnessed a small budget flush at the end of the year, we believe the budget flush occurred because throughout 2012, European companies were protecting their capital budgets and had pent-up technical demand. Bookings in Germany were strong while Russia bookings were lower than we had expected. Jonathan will speak to the revenue guidance in a few minutes but from a bookings perspective, we expect stronger growth in the second half of 2013 versus the first half of 2013 on year-over-year comparison basis.
Enterprise license agreements were approximately 33% of total fourth quarter bookings, a record high. Although we did not close any ELAs greater than $10 million as we would normally expect to do in Q4 for the U.S. This is about nine percentage points above Q3 and slightly higher than 8 points sequential increase from Q3 to Q4 last year. We had a healthy mix of new ELAs as well as ELA renewals in the quarter, and we continue to see a very nice attach rate of non-vSphere solutions to our ELAs. As I indicated earlier, vCloud Suite is mostly sold via ELAs and in fact, 75% of vCloud suite bookings in Q4 were associated with ELAs.
Given the ongoing tough market conditions and increased customer scrutiny around their IT investments, our continued strong ELA results reflect the confidence customers show in the VMware platform. Now, turning to our transactional business. Although we had solid bookings in both unit volume and dollar value in Q4, our transactional business did not grow at nearly the same rate as our ELA business. Over the next year, we are putting in place programs to help drive additional transactions via our channel partners. We are also working with our channel partners to increase uptake of our adjacent products.
For the fourth consecutive quarter in 2012, we achieved an all time high in percentage of renewals within the quarter for our support business. This reflects a vote of confidence from our customers in our products, solutions, technical support and upcoming product enhancements. Our VMware service provider program once again tracked well in the quarter as public Cloud providers continue to leverage our Cloud infrastructure program for their service delivery. We believe this ecosystem of providers is second only to Amazon in public Cloud market share and this program is one of the faster growing parts of our business, with bookings growth of over 50% for the full year 2012 as compared to 2011.
You heard Pat emphasize Hybrid Cloud as one of our priorities for 2013. With our partners, we will be expanding our capabilities aggressively in 2013, building on our private Cloud footprint with an ever richer set of complementary public Cloud service offerings. This is exactly what our customers tell us they desire, a compatible, high quality, secure and resilient hybrid Cloud platform.
As Pat mentioned earlier, network virtualization is one of the next big steps for our customers on the path to the Software-Defined Datacenter and I’m very pleased with the progress we’ve made expanding our portfolio in this area, most recently with the acquisition of Nicira in Q3. We also took important steps in the fourth quarter to best align our engineering and go to market efforts to take advantage of our early lead in this space. In addition, I’m happy to announce that we expanded our leadership strength with the appointment of Steve Mullaney, former CEO of Nicira as Vice President and General Manager of our network and security virtualization group. And most importantly, excited at the benefits we’re delivering to our customers.
I’d like to share a couple of examples from two leading innovative customers. eBay, a long time VMware customer, is leveraging network virtualization to dramatically improve what they call speed to innovation by delivering self-service on-demand Clouds for their application developers. Provisioning of the network used to take one week or more and now that time has been reduced to 30 seconds. This means more productive developers turning out more innovative applications faster for the eBay marketplace. Network virtualization is transforming eBay’s business.
Rackspace, the second largest public Cloud in the world, has been in production with their open-static Cloud running on Nicira since August of last year. They continue to grow their Cloud every month and this is a real testament to the scale and production quality of open-static and our network virtualization platform.
Importantly, these types of customers will be critical to our efforts to accelerate adoption over the coming years. I’d like to remind you that though we are early in this market, we are excited that the proof of concepts customer interests, design wins and momentum is very similar to where we were in the early days of server virtualization. We’re particularly encouraged by the number of proof of concepts in trials started in Q4 with some of the largest enterprise end service provider customers in the world. We will continue to provide updates on our progress over the coming quarters.
Now, over to Jonathan for the financials and guidance.
Thanks Carl. I’m very proud to have joined the VMware team, especially at this point in time with such significant opportunity ahead. It’s been an incredible first three months and through Pat, Carl, the management team, the Board of Directors and the employees I’ve had the pleasure of interacting with, I think firsthand just to have the culture of VMware inspires people and enables great accomplishments.