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VMware (VMW)

Q3 2012 Earnings Call

October 23, 2012 5:00 pm ET


Paul Ziots

Carl M. Eschenbach - Co-President, Interim Principal Financial Officer and Chief Operating Officer

Patrick P. Gelsinger - Chief Executive Officer and Director


John S. DiFucci - JP Morgan Chase & Co, Research Division

Adam H. Holt - Morgan Stanley, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

Brent Thill - UBS Investment Bank, Research Division

Walter H. Pritchard - Citigroup Inc, Research Division

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Mark L. Moerdler - Sanford C. Bernstein & Co., LLC., Research Division

Brian Marshall - ISI Group Inc., Research Division

Jason Maynard - Wells Fargo Securities, LLC, Research Division



Welcome, and thank you for standing by. [Operator Instructions] Today's conference is also being recorded. If you have any objections, please disconnect at this time. And now I'll turn the call over to your host today, Mr. Paul Ziots, Director of Investor Relations. Sir, you may begin.

Paul Ziots

Welcome to VMware's Third Quarter 2012 Earnings Conference Call. On the call, we have Pat Gelsinger and Carl Eschenbach. 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, 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 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 fourth quarter quiet period begins at the close of business December 14, 2012. 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 Carl.

Carl M. Eschenbach

Thanks, Paul, and good afternoon, everyone. The financial and business results of our third quarter 2012 were once again strong despite a tough economic environment. The quarter went as expected, and we achieved record quarterly results for total revenue and non-GAAP operating income.

Total revenue for the third quarter increased 20% and license revenue increased 11% as compared with the same period last year. Our non-GAAP operating margin was 32.2%. Trailing 12-month free cash flows were $1.9 billion. After investing approximately $1.2 billion for acquisitions, including Nicira and DynamicOps, our balance sheet remains strong with cash and investments at quarter end of $4.4 billion. We ended the quarter with total unearned revenues of $3 billion.

Before I walk through financial details for the quarter, I'll first provide perspective on our business. Based on a record turnout at our recent VMworld user conferences, we see further validation that our customers are accelerating their journey to cloud computing. We hosted approximately 29,000 registered attendees at VMworld events in San Francisco and Barcelona and planned to host more than 20,000 people in the coming weeks at our Asia Pacific VForums and VMware Solutions Symposium series.

At these events, we answered two of our customers' major questions about cloud computing. The questions we hear most often are regarding what technology is needed in transitioning IT from a traditional siloed environment to a cloud environment and how IT should operate in this new cloud era. The Software-Defined Datacenter has emerged as the clear path to cloud computing, and has significantly expanded VMware's market opportunities. VMware's recent announcement of our vCloud Suite, is our solution to the Software-Defined Datacenter. It is an integrated suite of virtualized compute, storage, network and management functionality.

The vCloud Suite enables customer to automate IT and move them from being reactive in nature to becoming dynamic organizations that can deliver innovation. Although vCloud Suite became generally available late in the quarter and it's still early going, we're pleased with the initial bookings figures for Q3. Most suite sales have been tied to ELAs just as we had anticipated.

Cloud Ops is a set of consulting services provided by VMware and our Partner Ecosystem. It's a roadmap for the necessary business and IT transitions customers need to take as they migrate to Software-Defined Datacenter. Response to both the vCloud Suite and Cloud Ops have been encouraging from both partners and customers alike.

Feedback on our removal of vRAM pricing limits in the third quarter has been overwhelmingly positive. The resulting simplification in our pricing practices has made VMware easier to do business with, and remove a potential obstacle in closing deals. And 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 year-over-year bookings growth of greater than 50% in Q3.

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