VMware (VMW) Earnings Report: Q3 2014 Conference Call ...s.t.st/media/xtranscript/2014/Q4/12922736.pdf · The following VMware conference call took place on October 21, 2014, 05:00

CompanyName:VMWareIncCompanyTicker:VMWSector:Technology

Industry:ComputerSof tware&ServicesEventDescription:Q32014 EarningsCall

©2014TheStreet,Inc.AllRightsReserved Page1of 17

VMware(VMW)EarningsReport:Q32014ConferenceCallTranscriptThefollowingVMwareconferencecalltookplaceonOctober21,2014,05:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

PaulZ iots;VMware;InvestorRelationsManagerCarlEschenbach;VMware;PresidentandCOOJonathanChadwick;VMware;COO,CFOandEVPPatrickGelsinger;VMware;CEO,DirectorandMemberofMergers&AcquisitionsCommittee

OtherPart icipants

AbheyLamba;MizuhoSecuritiesUSA;AnalystBrentThill;UBSInvestmentBank;AnalystHeatherBellini;GoldmanSachsGroup;AnalystKashRangan;BofAMerrillLynch;AnalystKeithWeiss;MorganStanley;AnalystMarkMoerdler;SanfordC.Bernstein;AnalystMatthewHedberg;RBCCapitalMarkets;AnalystMichaelTurits;RaymondJames&Associates;AnalystPhilipWinslow;CreditSuisse;AnalystRaimoLenschow;BarclaysCapital;AnalystRajeshGhai;MacquarieResearch;AnalystRichardSherlund;NomuraSecurities;AnalystWalterPritchard;Citigroup;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator:

Welcome,andthankyouforstandingby.(OperatorInstructions)Thiscallisbeingrecorded.Ifyouhaveanyobjections,youmaydisconnectatthistime.

IwouldnowliketoturnthecallovertoPaulZ iots,VicePresident,InvestorRelations.Sir,youmaybegin.

PaulZ iots (InvestorRelationsManager):

Thankyou.Goodafternoon,everyone,andwelcometoVMware'sThirdQuarter2014EarningsConferenceCall.Onthecall,wehavePatGelsinger,ChiefExecutiveOfficer;CarlEschenbach,PresidentandChiefOperatingOfficer;andJonathanChadwick,ChiefFinancialOfficerandChiefOperatingOfficer.Followingtheirpreparedremarks,wewilltakequestions.

Ourpressreleasewasissuedaftercloseofmarketandispostedonourwebsite,wherethiscallisbeingsimultaneouslywebcast.Slideswhichaccompanythiswebcastcanbeviewedinconjunctionwithliveremarksandcanalsobedownloadedattheconclusionofthewebcastfromir.vmware.com.Wehavealsoincludedinourearningsreleaseandpostedonourwebsitehistoricaldataforrevenueandunearnedrevenue,excludingrevenuesineachperiodattributedtotheproductsandservicescontributedtoPivotal




softwareandtheproductsandservicesassociatedwithdivestituresconsummatedbyVMwarein2013.

Onthiscalltoday,wewillmakeforward-lookingstatementsthataresubjecttorisksanduncertainties.Actualresultsmaydiffermateriallyasaresultofvariousriskfactors,includingthosedescribedinthe10-Ks,10-Qsand8-KsVMwarefileswiththeSEC.

Inaddition,duringtoday'scall,wewilldiscusscertainnon-GAAPfinancialmeasures.Thesenon-GAAPfinancialmeasures,whichareusedasmeasuresofVMware'sperformance,shouldbeconsideredinadditionto,notasasubstitutefororanisolationfrom,GAAPmeasures.Ournon-GAAPmeasuresexcludetheeffectonourGAAPresultsofstock-basedcompensation,amortizationofacquiredintangibleassets,employerpayrolltaxonemployeestocktransactions,theneteffectofamortizationandcapitalizationofsoftware,certainlitigationandotherrelateditems,acquisition-relateditemsandrealignment-relatednetgainsandcharges.

Asmentioned,wehavepresentedhistoricaldataforrevenueandunearnedrevenue,excludingPivotalandall2013divestitures.Youcanfindadditionaldisclosuresregardingthesenon-GAAPmeasures,includingreconciliationswithcomparableGAAPmeasures,inthepressreleaseandonourInvestorRelationswebsite.

Thewebcastreplayofthiscallwillbeavailableforthenext60daysonourcompanywebsiteundertheInvestorRelationslink.Ourfourthquarter2014quietperiodbeginsatthecloseofbusinessDecember12,2014.Unlessotherwisestated,allfinancialcomparisonsinthiscallwillbeinreferencetoourresultsforthecomparableperiodof2013.

Withthat,I' llturnitovertoPat.

PatrickGelsinger(CEO,DirectorandMemberofMergers&AcquisitionsCommittee):

Thankyou,Paul,andgoodafternoon,everyone.ItwasgoodtoseemanyofyouatourrecentFinancialAnalystDay.

Overall,wehaveonceagainmetourguidanceforthequarter.Wearepleasedwithourrevenuegrowthof18%andthatouroperatingmarginexceededourguidance.We'reparticularlypleasedwiththeseresultsinthecontextofindustrydisruptionandeconomicchallenges,whichareaffectingbusinessesaroundtheworld.

Lookingahead,ourroadmapofgroundbreakinginnovationisunparalleled,andweareseeingcontinuedstronggrowthandmomentumwithournewproductsandservices,includingAirWatch,NSX,VSANandvCloudAir.Wearealsocontinuingtoattractthebestleadersintheindustryacrossallofourbusinesses.

Customersaretellingmethattheirbusinessesarefacingmorechangeanddisruptionthaneverbefore.Businessmodelsthatonceseemedsolidandpermanentarebeingreplacedbyfluid,rapidlyshape-shiftingnewapproaches.Theyalsorecognizethatinthisfluidworld,softwareisnowtheprimarymeansofengagingprospectsandcustomersandisthekeydriverofinnovationandgrowth.CustomerscometoustoembraceanewmodelforIT,asoftware-basedfluidITthatisabletoseparateitselffromtheconstraintsofhardware,onethatisabletoinstantlyprovisionapplications,onethatoffersthegreatestchoicewithoutcompromiseandaboveall,onethatoffersanewmodelforsecurity,optimizedforaworldwithmillionsofapplications.Thisistheworldofthesoftware-definedenterprisethatisenabledbyanewmodelofIT.WehelpourcustomerstakeadvantageofthisnewmodelofITthroughourSoftware-DefinedDataCenter,HybridCloudandEnd-UserComputingofferings.

Thesepast3monthswererichwithcustomerandindustrymomentumaswehostedourVMworld2014conferencesinSanFranciscoandBarcelonaandourAirWatchConnecteventsinAtlantaandLondon.Intotal,wehostedapproximately33,000attendeesacrossourindustry-leadingeventswherewefeatured




demos,keynotes,hands-onlabsandnumerousactivitiesforourcustomersandpartners.Wealsoannouncedthewaveofnewproductsandservicesacrossourthreestrategicbusinessimperatives.

StartingwiththeSoftware-DefinedDataCenter,theseannouncementsincludedthedebutofVMwareEVO:RAIL,thefastestwayforcustomerstobuildanddeployaSoftware-DefinedDataCenter.EVO:RAIListhefirstsolutioninthefamilyofhyper-convergedinfrastructureofferingsfromVMwaregoingfrompowerontovirtualmachinesinminutesandwillbeavailablefrompartners,includingDell,EMC,Fujitsu,Inspur,NetOneandSupermicro.Inaddition,wewereexcitedtoannouncetwoadditionalpartnersinBarcelonalastweek:HPandHitachiDataSystems.

Wealsoannouncednewvirtualization,cloudmanagementandIntegratedOpenStacksolutionsthatdramaticallyadvancetheindustry'smostcompleteproductportfolioforimplementingaSoftware-DefinedDataCenter.WewerealsoexcitedtoannouncejointinnovationswithGoogle,PivotalandDocker,whichofferourcustomerscontainerswithoutcompromise,helpingthemtorunandmanagecontainer-basedapplicationsmoresecurelyonacommonplatformatscaleinprivate,publicandhybridclouds.NoothervendoroffersthisuniquecombinationofefficientcontainerscombinedwiththesecurityandmanagementofVMsonacommonplatform.OurOpenStackandcontainerannouncementsenableustoprovidethegreatestchoicetoourcustomerswithoutdisruptiontotheirITenvironments.

LastweekinEurope,weannouncedkeyinnovationstoourcloudmanagementplatformtoenablecomprehensivemanagementofapplicationsandinfrastructureonhybridclouds.WeunveiledVMwarevRealizeSuite6,whichispurposebuiltformanagingthehybridcloud.AndwealsointroducedvRealizeCodeStream1.0,anexcitingnewproductthatprovidesasingledashboardforend-to-endvisibilityoftheentireDevOpsprocess.

WecontinuetoseeVMwareNSXgainsignificantmomentumandindustryvalidation,withmorethan250payingcustomerstodate.Overthepastquarter,weannouncedastrategictechnologyandgo-to-marketpartnershipsforNSXwithAristaNetworks,F5andHPaswellasatechnologyandglobalreselleragreementwithDelltodeliverNSXsolutionsworldwide.

AtVMworldEurope,weannouncedplanswithCSCfortheirnewweb-scaleInfrastructureasaServiceplatform,whichwillbebuiltonOpenStackandVMwareSoftware-DefinedDataCentersolutions,includingNSX.WealsoannouncedthepartnershipwithPaloAltoNetworkstodeliverunifiedsecurityforthehybridcloud.

Onthehybridcloudfront,I'mexcitedtoreportthatVMwarecontinuestorapidlyexpandthecapabilitiesandglobalfootprintofourvCloudAirhybridcloudplatform,thebestandfastestwaytoanenterprise-classhybridcloud.It'sstillearlyinthegameforthesecularshifttoenterprise-classhybridcloudcomputing.VMwareislistedasoneofonlyfuvemega-providersinGartner's2015PlanningGuideforCloudComputing,andwebelieveit'sbecauseofourrapidlyexpandingserviceofferings,geographicreachandextensivepartnernetwork.

Infact,atVMworld2014Europe,weannouncedanumberofnewservicesaswellasanothernewVMware-operateddatacenterlocatedinGermany.ThisnewCentralEuropeanlocationwillhelpaddressGermanandEUcomplianceanddataprotectionregulationsanddemonstratesourcommitmenttoexpandourHybridCloudServicesaroundtheworld.

OneoftheexcitingnewservicesweannouncedisVMwarevCloudAirObjectStorage.ThisisbasedonEMCViPRtechnologyandoffersextremelyscalable,cost-effectiveanddurablestorageforunstructureddata.

WehavealsoseenexcitingprogresswithourEnd-UserComputingBusiness.WeunveiledVMwareWorkspaceSuite,whichoffersasingleintegratedportaltoaccessVMwareHorizonandAirWatchmobileandcontentmanagementsolutionsandVMwareHorizon.Theresultisaunifiedexperienceacrossmobileand




desktopdevicesthatalsoprovideacomprehensivemanagementdashboardforIT.

WealsoacquiredCloudVolumes,aleadingproviderofreal-timeapplicationdeliverytechnologythatenablesVMwareHorizon6customerstolowertheirinfrastructureandmanagementcostswhilegivingendusersamorepersonalizedexperience.

Finally,wealsoannouncedaseriesofnewandexpandedpartnerships.TheseincludedanagreementwithSAPtodelivermobilesecurityinasimplifieduserexperienceformobileapplicationsandacollaborativeeffortbetweenVMware,NVIDIAandGoogletodeliverhigh-performancevirtualdesktopsandworkstation-classgraphicstoGoogleChromebooks.

Insummary,ourbusinessisgrowing.Weareconfidentinourstrategy,andourportfolioofgroundbreakingnewtechnologiesishelpingcustomersrealizethedramaticbenefitsofanewsoftware-definedmodelforIT.

I' llnowturnitovertoCarltotalkmoreaboutourbusinessperformanceinQ3.Carl?

CarlEschenbach(PresidentandCOO):

Thankyou,Pat.Weremainpleasedwiththeincreasingbreadthandgrowthofournewproductofferingsacrossall3ofourbusinesspriorities,theSoftware-DefinedDataCenter,HybridCloudandEnd-UserComputing.Customerscontinuetomovefrombuyingpurelystand-alonevSpheretopurchasingoursuiteandadditionalproductssuchasnetworkvirtualization.

Wecontinuetotransitionfrombeingacomputevirtualizationcompanytoaproviderofabroadrangeofcloudinfrastructureandmobileofferings.We'reparticularlypleasedwiththeongoingperformanceofournewestproductssuchasNSXnetworkvirtualization,VirtualSANstoragevirtualization,vCloudAirhybridcloudandAirWatchmobilityproducts,althoughthesenewestofferingsarestillsmallinrelationtoouroverallbusiness.

Operationally,ourglobalsalesteamsremainconfidentinsellingourpowerfullineupofsolutions.OurELAbusinesspipelinecontinuestoremainstrong.Althoughdealsarebecomingmorecomplex,thisreflectsthefactthatcustomersarechoosingtoincludevCloudSuiteinnewemergingproductsaspartoftheirELAs.Asaresult,largerdealscantakemoretimetoputtogetherascustomerslooktodevelopamorestrategicpartnershipwithus.Ingeneral,itwasachallengingenvironmentforlargedealsgiventhechangeinturbulenceintheindustry,andwewerenotimmunetothisinQ3.

GiventhisandbecausealargerfederalELAthatImentionedinlastquarter'searningscalldidnotyetclose,wehadexpectedaslightlystrongerbookingsprofileforthethirdquarter.Approximately29%oftotalbookingswereELAs.Weclosed3dealsgreaterthan$10millioninthequartercomparedtofivedealsinQ3lastyear,whichincludedourlargestdealever.

Meanwhile,thechannelenablementactivitieswehavetalkedaboutpreviouslycontinuedtobearfruit.Thisresultedinanotherquarterofimprovingtransactionalbookings.

Ourrenewalperformanceduringthequarterwasonceagainverystrong.Q3wasthehighesteverin-quarterrenewalrateforsupport,andourin-quarterrenewalrateforELAsalsoremainedatnearrecordlevels.Theaveragetermforsupportremainedwellabove24months.

Movingtoregionalbookingsperformance.Wesawsimilargrowthacrossallthreegeographies.Overall,bookingsgrewyear-over-yearinourAsiaPacificregiondespitecontinuedsoftnessinJapan.WeonceagainhadsolidgrowthinChina,whichisincontrastwithmanyofourpeers.WhileinEMEA,bookingsgrew,inRussia,geopoliticaltensionsweighedonthebookingsperformance,andwesawanover50%declineyear-over-year.InaweakGermaneconomy,wesawlowerbookingsthanexpected.WithournewGermansalesleadershipteamnowsolidlyinplace,weexpecttoseebetterbookingsperformancegoingforward.Overall,performanceintheregionwasaidedbystrongexecutioninSouthernEuropedespitethechallengingmacro




environment.

IntheAmericas,asyouwillrecall,wewereforecastingastrongfederalperformancedrivenbyaparticularlylargeELAopportunity.ThislargerELAdidnotcompleteinthequarter,whichledtoayear-over-yeardeclineinourfederalbusiness.Wecontinuetotrackthissubstantialopportunity.Givenallofthis,overallbookingsintheAmericaswereupinlinewiththerestofthebusinessbutnotasmuchaswewereforecasting.

Takingalookatproductgroups.End-UserComputing,includingAirWatch,grewlicensebookingsover60%year-over-yearinQ3.ThecoreVMwaresalesforceinourchannelareincreasinglyleveragingEUCinbringingtheexpandedportfolioofproductstoourenterprisecustomers.

WithinEnd-UserComputing,ourdesktoplicensebookingsonceagaingrewdoubledigitsyear-over-year.Inaddition,wesawstrongmomentumfromHorizonDesktopasaService,ourcloud-baseddesktopserviceintroducedinQ1.

AirWatchhadaverystrongquarterandcontinuedtobuilduponitsleadershipposition.WebelieveAirWatchincreaseditsnumberonepositioninmarketshareandenterprisemobilemanagementandsecurity.Wecontinuedtoaccelerateourjointgo-to-marketeffortsandbroughtdeepercollaborationamongtheVMwareandAirWatchsalesforces.

Movingtocloudmanagement.Ourcloudmanagementplatformcontinuedtobeanindustryleaderforcloudmanagementandautomation.OurdirectsalesforceinthechannelcontinuedtoworktowardsmakingthenonakedvSpherevisionareality.Greaterthan75%ofourvCloudSuitelicensebookingscontinuedtobeattachedtoELAs.Ourcloudmanagementpenetrationisnowover12%ofourinstalledbase,leavingusplentyofroomforgrowth.

AsuccessfulVMworldBarcelonabroughtannouncementsofawaveofnewcloudmanagementofferingsandcapabilities.TheseincludeupdatestoVMwarevRealizeSuite6,acloudmanagementplatformpurposelybuiltforthehybridcloud;amajorupdateofVMwarevRealizeOperations;andabetalaunchofVMwarevRealizeAirCompliance,anewadditiontotheVMwarefamilyofcloudmanagementSoftwareasaServiceofferings.

Finally,weextendedourpositionincloudmanagementwithourlaunchofvRealizeCodeStream.vRealizeCodeStreamwillaccelerateapplicationreleasesandextendtheagilityprovidedbycontinuousintegrationtocontinuousdeliveryenablingfrequent,reliablesoftwarereleaseswhilereducingoperationalrisks.

Nowover80%ofourmanagementsuiteisinitssecondgenerationofdevelopment,enablingITmanagerstobettermanagebothmodernapplicationarchitecturesaswellastraditionalthree-tierbusinessapplicationsthatarebothdeployedonpremiseorinthepubliccloud.

Inaddition,wearewellunderwaywithourvSphere6publicbetaprogram,whichisreceivingagreatresponseandwillmakevSpheremoreandmoreappropriateforcloudnativeapplicationswithenhancedBigDataandHadoopsupport.

Ournetworkvirtualizationplatform,VMwareNSX,gainedsignificantmomentumonceagaininQ3.Weareextremelypleasedwiththebookingsperformanceinthequarteraswesawsuccessesacrossawidevarietyofindustries,marketsegmentsandgeos.AttheendofQ3,NSXhadover250payingcustomers.WewereparticularlypleasedwiththesuccessofNSXintheU.S.federalsectorinQ3,andwefinditexcitingthatourU.S.federalgovernmentisrapidlyadoptingsuchanewtechnology.

AtVMworldinSanFrancisco,theteamhadover11,000attendeesatNSXsessions,andNSXwasnumberoneintermsofmeetingrequestsinhands-onlabparticipation.OurcustomersareembracingtheNSXsolution,notonlyasanetworkvirtualizationplatformbutasanetworksecurityoneaswell.Ourhighlydifferentiatedmicrosegmentationcapabilityisdrivingsignificantinterestinourcustomerbase.Withtractionacrossall




geosandverticals,weareclosingkeyarchitecturalwinsascustomerslooktotransformtheirnetworkoperationsinasimilarwaytheydidwithcomputethroughtheuseofvSphereandservervirtualization.

MovingtoVirtualSAN.Wecouldn'tbemorepleasedwiththeproduct'sperformanceinitssecondquarterofavailability.Weareseeingsuccessesacrossawidevarietyofindustries,marketsegmentsandgeos.InQ3,wesawasignificantincreaseinVirtualSANbeingsoldthroughthechannel.

TurningtoHybridCloud.OurvisionofaHybridCloudworldisbeingadoptedbycustomersastheyincreasinglyseektocombinetheiron-premiseinvestmentswiththebestthatthecloudhastooffer.WegrewourHybridCloudbusinessover80%year-over-year.IampleasedtonotewehavecontinuedtoseesignificantmomentuminoursecondquarterofofferingvCloudHybridService-DisasterRecovery,andearlycustomeradoptionhasbeenextremelypositive.InQ3,wealsoannouncedexpansionofourhybridofferingthroughvCloudAirOnDemand,whichisanewonlinechannelhelpinguscapturethesecularmoveofworkloadstoratablecloud-deliveredmodels.

WecontinuetoexpandourglobalfootprintbyannouncinganEarlyAccessPrograminourfirstlocationsinJapanandGermany,openingupourfirstvCloudAirlocationinNewJerseyincollaborationwithourpartner,CenturyLink,andannouncedtheEarlyAccessProgramforourvCloudGovernmentServiceintheU.S.

InQ3,wesawverystrongPSOconsultingbookings.OurcustomersarelookingtoVMwaremorethaneverforexpertiseinhelpingthemdeploythesoftware-defineddatacenter,transitiontotheHybridCloudandtransformtheirdesktopandmobileenvironments.WeareseeingmajorFortune50companiesleverageVMware'sprofessionalservicesasamovetowardsfulldeploymentofacompletesetofsoftware-defineddatacenterdeployments.

Insummary,whenwelookinparticularattheperformanceofournewertechnologiesandthemomentumweareseeing,wehadasolidQ3.We'recontinuingtoinvestinenablingoursalesforceandchannelaroundournewgrowthproductsandseethesemarketopportunitiespayingoffinthecomingquarters.

Ourindustryisgoingthroughasignificanttransformationasourcustomersshifttoasoftware-definedenterpriseandanewmodelforIT.WearelookingforwardtohelpingourcustomerstakeadvantageofthischangethroughourtechnologyleadershipacrossourSoftware-DefinedDataCenter,HybridCloudandEnd-UserComputingofferings.

Withthat,letmeturnitovertoJonathan.

JonathanChadwick(COO,CFOandEVP):

Thankyou,Carl.We'repleasedwithourQ3financialresults,exceedingthemidpointofourrevenueguidanceandexceedingnon-GAAPoperatingmarginguidanceforthequarter.Q3totalrevenuewas$1,515,000,000,$15millionabovethemidpointofourguidancerangeandup18%year-over-year.Licenserevenueof$639millionalsoexceededthemidpointofourguidanceandwasup13%year-over-year.

Wealsoremainpleasedwiththeincreasingbreadthanddiversificationofourbusiness,withnon-standalonevSpherelicensebookingsonceagaingreaterthan50%oftotallicensebookings,upfrommorethan40%inQ32013.Specifically,licenseandsubscriptionbookingsintheseareasbeyondstand-alonevSpheregrewover25%year-over-year.WeachievedthislevelofgrowthdespitethesoftnessinELAsweexperiencedinQ3.

Inaddition,wearecapturingthemarket'smovementtoHybridCloud.WhileourHybridCloudandSaaSofferings,includingAirWatch,vCloudAir,vCloudAirNetworkandDesktopasaService,arerelativelysmallcomponentsofouroverallbusinesstodayatjustunder5%ofourtotalrevenuesforQ3,theseofferingswereupover100%year-over-yearinaggregate.

Movingontooperatingmargin.OurQ3non-GAAPoperatingmarginwas30.4%,significantlyaboveour




guidance.Thiswasduelargelytohigherrevenuesthanoriginallyplanned.Giventhemomentumweareseeinginournext-generationproductsandtherapidchangesinthemarket,weexpecttocontinuemakinginvestmentsinournewerbusinessareaswhilemaintainingclearleadershipinkeyareassuchascomputevirtualization.

Dilutednon-GAAPEPSforQ3was$0.87onapproximately434millionshares.Overall,Q3wasastrongP&Lperformanceforthecompany,andwearepleasedwiththeseresults.

I' llnowfocusonkeyadditionalhighlightsthatwillbehelpfulinunderstandingourQ3performance.Ourbalancesheetremainsstrong,withcashandshort-terminvestmentsatquarterendof$7.1billion,up7%sequentially.InQ3,ouroperatingcashflowwas$606millionandfreecashflowwas$506million.Duringthequarter,werepurchasedapproximately400,000sharesofourstockforatotalof$43millionatanaveragepriceofaround$99pershare.

Totalunearnedrevenueendedthequarterat$4.37billion,up20%fromQ32013andofwhich$1.65billionislongterm,up17%year-over-year.Approximately89%ofourunearnedrevenueswillberecognizedratablyoverfuturequarters.Theunearnedrevenuemixislargelyinlinewithpriorperiodsandisprimarilyareflectionofourstrongsupportbusiness.

It'simportanttonotethattheparticipationofrenewalratesforoursupportbusinessremainhighandthatcustomersenjoysignificantongoingvaluefromVMware,includingallfutureproductupdatesandupgrades.Ineffect,thismodelisagreatcombinationofaperpetuallicensebusinesswiththeongoingrevenuesandcashflowsassociatedwiththeservicessubscriptiontofutureupgradesandupdates.I'dencourageyoutorefertotheslidesandfinancialtablesaccompanyingthisearningscallforfurtherdetailsonourresults.

Nowturningtoguidance.Wearereaffirmingthemidpointoffullyear2014revenueguidanceat$6,020,000,000witharangeofbetween$6billionand$6,040,000,000,representingyear-over-yeargrowthofbetween15%and16%.ExcludingPivotalanddivestitures,wecontinuetoexpectthemidpointofour2014totalrevenuegrowthtobeapproximately17%.

We'realsoreaffirmingthemidpointoffullyear2014licenseguidanceat$2,590,000,000witharangeofbetween$2,580,000,000and$2,600,000,000,orup14%year-over-year.ExcludingPivotalanddivestitures,wecontinuetoexpectmidpointofour2014licensegrowthratetobeapproximately15%.

Wecontinuetoexpectthatnon-GAAPoperatingmarginfor2014willbeapproximately31%.

Movingontooperatingcashflowfor2014.Weexpectoperatingcashflowofbetween$2.1billionand$2.3billion.Thisrevisedexpectationnowreflectsacombinationof3mainitems,firstly,softerbookings,includingtheELAandfederalbookingsinQ3Carljustdescribed;secondly,weexpecttoseeincreasedcashtaxpaymentsaswecontinuetotransitiontobeinganetcashtaxpayer;andthird,certaininstallmentpaymentsrelatedtotheacquisitionofAirWatchwillnowbepaidincashoverthecourseof2014ratherthanstock,whichwewereoriginallyconsidering.Asareminder,wecontinuetoviewthelargegovernmentELAasasubstantialopportunity.

Finally,wearereaffirmingourexpectationofapproximately$350millionofCapExin2014.Remainingguidancefor2014isincludedintheslidedeckpostedonourInvestorRelationswebsite.

ForQ42014,weexpecttotalrevenuetobebetween$1,670,000,000and$1,710,000,000,up13%to15%year-over-year.LicenserevenuesforQ4areexpectedtobebetween$765millionand$785million,up11%to14%year-over-year.GiventhetypicalseasonalstrengthofQ4,weareexpectingtobuildbothlicensedeferredandtotaldeferredrevenuebutatalowersequentialdollarvalueincreaseascomparedwithlastyear.

Weexpectnon-GAAPoperatingmarginforQ4tobeapproximately33%to34%.Thisreflectsourexpectationof



©2014TheStreet,Inc.AllRightsReserved Page8 of 17

astrongseasonalquarterforrevenuesinQ4andisconsistentwithourfullyearnon-GAAPoperatingmarginguideIjustprovided.

Andfinally,otherincomeandexpenseisexpectedtobeapproximately$5millioninQ4.

Insummary,Q3'srevenueandoperatingprofitresultswerestrong,andwewerepleasedwiththeseresults.WesawgreatprogressinourmobilitysolutionsfromAirWatch,ourNSXnetworkingproductsandinearlystagereturnsfromstoragevirtualization.WealsocontinuetoseeouroverallHybridCloudbusinessdowell.Thesebusinessareasarekeyelementsofourlong-termstrategy,andwewerepleasedtoseetheresultsofourcontinuedinvestmentsinthesenewerareasbegintopayoff.

Andwiththat,I' llturnitbacktoPaul.


Thanks,Jonathan.(OperatorInstructions)Operator,let'sgetstarted.

QUESTIONS&ANSWERS

Operator:

(OperatorInstructions)AndourfirstquestioncomesfromBrentThillfromUBS.

Brent Thill(Analyst-UBSInvestmentBank):

Thanks.Goodafternoon.CarlandJonathan,whenyoutalkedaboutthesoftnessyousawontheELAs,aswewentintotheyear,youtalkedaboutaprettybigpipeline.SoIguessIwouldjustassumethatthecloserateswerejustlowerthanthepipelinestillthereandthatyouhaven'tcompetitivelylostthesedeals.Thesedealshavejustslipped.Ifyoucouldaddmorecolor,that'dbehelpful.


Thanks,Brent.ThisisPat.AndI' lljuststarttheQ&Asessionwithafewcommentsaswegetintoithere.Overall,ourELAscontinuetodemonstratethestrategicrelationshipofcustomers,andclearly,thebreadthoftheportfolioisdemonstratingthat.AndwereallyhadanextraordinaryresponseforthatcomingoffofVMworld.Andthat,combinedwithournewgrowthproductsandtheoverallgreatfinancialperformance,wereallydofeelgoodaboutthequarterperformanceevenaswediscussedsomeoftheareasthatclearlyareopportunitiesforusgoingforward.SoCarl,ifyouwanttodiveinabitmore?


Yes,sure.Brent,Ithinkyou'reaskingaboutQ3bookings.Soletmesaythefollowing.Asisalwaysthecase,wehadplannedtobedownsequentiallyfromQ2,butwewereexpectingtohaveabitstrongerquarterinQ3thanwedidfromabookingsperspective.Ithinktherewasactuallyafewthingsthatledtothesofterbookingsforus.First,weexpectedtohaveastrongquarteroutofourU.S.federalbusiness.AsImentioned,lastquarter,weweretrackingaratherlargefederalELAtocoincidewiththegovernment'syear-end,andthisopportunitydidnotcloseinthequarter.ButIcantellyou,we'restillactivelyengagedwiththegovernment,andthisisanopportunityinourpipelinegoingforward.

Wealsosawsomemarketsnotperformaswehadexpected,specificallyRussia,JapanandGermany,Imentionedinmyopeningcomments.AndanytimeyouhavetheseverylargemarketsinbothEMEAandAPJnotperforming,itmakesitdifficultfortheoverallregionstohaveareallygoodbookingsquarter.

AndI'dsayweareseeingsomeofourlargerELAsbecomemorecomplex.Thisisbecausecustomersactuallyareinterestedinallofoursolutions.AscustomerslooktodeploythefullSoftware-DefinedDataCenter




architectureandlooktoleveragethingsliketheHybridCloudandevenAirWatch,we'reseeingourlargerELAstakeabitmoretimetoclose.AndweactuallyviewthisasaverypositivethingasweareencouragedthatourcustomersarelookingtoVMwareasastrategicpartnerfortheirfutureneeds.

Andlastly,Brent,Iwouldsay,it'simportanttonote,wedon'tbelievewe'reactuallylosinganyofthedeals,right,inagivenquarternecessarilytothecompetition.Ourcustomersareveryloyaltous,andtheycontinuetolooktousasoneoftheirmoststrategictechnologypartners.AndIwilljustkindofreferbacktoQ3fromlastyear.Ithinkinayear-over-yearbasis,itwasamoredifficultcompare.Wehadfivedealsgreaterthan$10millionlastyearinQ3,whichincludedourlargestdealever.


Thankyou,Brent.Nextquestion,please?

Operator:

ThenextquestioncomesfromKashRanganfromMerrillLynch.

KashRangan(Analyst-BofAMerrillLynch):

Higuys,thankyoufortakingmyquestion.IfyoulookattheinternationalversusU.S.growthrate,Imean,thatdeltahaswidenedquiteabitthelastfewquarters.IthinkQ1,youhadaboutequalgrowthrate,14%ineachgeography.AndIthinkthisquarter,itwas27%U.S.,andinternationalwasahighsingledigits.

Ijustwantedtocompareandcontrastthatcommentvis-à-visyourcharacterizationthattheAmericasbookingswerejustinlineoverallbecauseitwouldseemlikesomethingwasmoreweightedtowardsU.S.Andalso,Jonathan,Iwasn'tsureifImissed,maybeImissed,ifyoureiteratedthecalendar'15guidance,whichyouprovidedattheAnalystDay.


Butyoucanaskmeaboutforeignexchangethere,Kash,butyouwent2015instead.Sospecifically,don'tforgetthatrevenueiscomingoffthebalancesheet.Andsoforthemixofinternationalanddomesticrevenuesinparticular,it'sreallyreflectinghowcertaintransactionsendedupgettingrecognizedandastheysatisfiedcertainrevreccriteria.

SoinQ3inparticular,wehadalargerdeferralthatendedupgettingrecognized,andtheconditionsaroundtherevenuedeferralgotsatisfied.Andthatledtoaslightlyhighermix--orledtothehighermixofdomesticrevenuesthanyou'rereferringto,separatefromtheconversationthatCarlwasreferringtowithrespecttooverallU.S.bookingsand--bookingsspecificallyversusrevenues.

Andthenwithrespectto2015,Ididn'tbringitupbecauseIfeltwecovereditinquitesomedetailattheAnalystDay.Andsoatthispoint,we'rejustreferringyoubacktothatframeworkthatweprovidedinAugust.Andasyouknow,we'regoingintoourseasonallystrongerQ4.

AsImentionedacoupleofmonthsago,we'reseeinganumberofournewerproductsperformquitewell,buttheyaresmallerdollars.Andwewanttoseeanotherquarterorsoofperformancebeforewegiveyouformalguidancefor2015,andthat'swhatwe'recommittedtodoinJanuary.


Thankyou,Kash.Nextquestion,please?

Operator:




ThenextquestioncomesfromWalterPritchardfromCiti.

WalterPritchard(Analyst-Citigroup):

Thanks.SoKashdidn'taskthis,soIwill.Onthecurrencyfront,Jonathan,couldyouwalkusthroughtheimpactduringthequarter,whatyou'rethinkingintermsofimpactforQ4?AndthenIknowyou'renotprovidingaspecificrangefornextyear.Butaswe'relookingatnextyear,asIknowyourmaintenancesortofrollsthroughandhasadelayedimpactonFX,couldyoutalkabouthowweshouldbethinkingaboutcurrencyinthatperiod?


Yes,sure.Thanksverymuch,Walter.Sothekeythingtoknowisthatforourbusiness,about75%orslightlyoverofourbillingsareinU.S.dollars.I'mnotsosurethat'suniversallyunderstood.We'reactuallysomewhatinsulated.AtleastintermsofreportingasaU.S.report,we'resomewhatinsulatedfromtheneteffect.

OurdeferredrevenueonthebalancesheetisalsoreportedinorrecordedinU.S.dollars.Sowiththecombinationof75%ofbillingsbeinginUSDaroundtheworldandourdeferredalsocomingoffthebalancesheetinU.S.dollars,wehadaslightheadwindsequentiallytorevenueinQ3.AndwehadamodestbenefitinOpExand--becauseoftranslationofeurocostsandothernon-USDdenominatedcurrency.SoneteffectinQ3,toplinevery,verymodestlyimpacted,andEPSwasimpactedpositivelyprobablytothetuneofabout$0.005orso.

NowasIgoforwardinto2000--deferredsinQ3,probablyimpactednegativelytothetuneofabout$5millionto$10millioninQ3specifically,inotherwords,lowerdeferredbuildonthebalancesheetattheendofQ3duetoforeignexchange.Sothosearetwosignificantsetofimpactsbecauseofthewaywebillourcustomersandpartners.

Aswegointo2000--aswegointoQ4,obviously,notinthebusinessofforecastingcurrencymovements.Butifthecurrencyratesstayroughlythesamepositionthey'reintoday,we'reestimatingabouta$10millionheadwindtorevenues,andthatisincorporatedintotheguidanceIsharedwithyouforQ4specifically.Thereisalsopotentiallyafurthernegativeimpactonyear-over-yeardeferredrevenuebuildinQ4ifcurrencystaysthesame,butwe'llupdateyoumoreonthatinabout90days'timeorsowhenwedoQ4.ButhopefullythathelpsyouthinkaboutitintermsofQ3andQ4impact.


Thankyou,Walter.Nextquestion,please?

Operator:

ItcomesfromPhilWinslowfromCreditSuisse.

PhilipWinslow(Analyst-CreditSuisse):

Hi,thanksguysfortakingmyquestionandIappreciatethecolorthatyouguysprovidedfromageographicperspectiveintermsofQ3.ButasyouguyscontemplatedyourQ4guidance,wonderingifyoucouldhelpusgetasenseforwhatyoubakedin,intermsofsortofthegeographies,whereyou'reseeingstrengthorweaknessinthepipelineandjustsortofhowyouthoughtaboutconversionratesintermsofthepipelineforthisQ4guidancemaybeversushowyou'vedoneinpriorquarters.


Yes.Thanks,Phil.ThisisCarl.I' lltakethatone.Soasyoucouldimagine,aswegointoeveryquarter,wetakealookatourpipeline.AndbasedonourpipelineheadingintoQ4andtheconversionrateswe'veapplied




againstit,we'vebakedthatintotheguidancethatweprovidedforQ4,andwehaveconfidenceasweheadintowhatisalwaysourseasonallystrongestquarter.

PhilipWinslow(Analyst-CreditSuisse):

DidyouwanttosayanythingaboutthegeosinQ3justto--Iknow--


I'msorry.Ican't--Iprovidedsomecolor,right,onthegeosinmypreparedremarks,right?IntheU.S.,wesaidwehadsomeheadwindsbecauseofourfederalperformanceintheAmericas,specificallyaroundourELAbusiness.InEMEA,wesaidwesawsomesoftnessinbookingsfrombothGermanyandRussia.Idon'tthinkanyone'simmunerightnowtowhat'shappeninginRussia.

AndasfarasGermanygoes,right,Ithinkwe'restartingtoseesomeeconomicheadwinds.AndIhavetalkedaboutinthepastthatwehaveupgradedourtalentinGermany.Andwehaveasolidteamnowonboard,andI'mverybullishontheirabilitytoleadthatregiongoingforward.

AndthenasIlookatAPJ,right,IindicatedthatJapanonceagainwassoftforus.Andobviously,Japan,beingoneofthelargestmarketsinAPJ,ifthat'sdown,it'stoughforthequartertohavestrongbookings.ButotherareasinAPJthatwerestrongforuswereAustralia,NewZealandandIndia.


Thankyou,Phil.Nextquestion,please?

Operator:

ThenextquestionisfromRaimoLenschowfromBarclays.

RaimoLenschow(Analyst-BarclaysCapital):

Thankyouandthanksfortheclarificationonthecurrency.AquickquestionIhadislikecanyoutalkalittlebitaboutwhatyouseeintheNSXpipeline?Obviously,sincethesummer,yourgeneralsalesforceispushingitaswell.Whatareyouseeingintermsoftheirabilitytogetitintoaccountsandcommunicatewiththeclientsthere?Thankyou.


Yes,thanks,Raimo.I' llstartandturnitovertoCarl.Overall,ourNSXresponseisreallyaccelerating.AndinQ2,wetalkedaboutthe150customersbreakingthe$100millionrunrate.AndinmyQ3comments,250customersnowpayingontheplatform.Andwereallyseethataccelerationofcustomeradoption.

WehaveenormousmomentumaswegointoQ4inthatregard.Sowefeellikewereallyhave,asweindicatedlastquarter,turnedacornerinthestrategicvalue.Andtheusecaseslikemicrosegmentationarereallycapturingtheindustry'sattentionasveryrapidwaystoadoptnetworkvirtualization,getimmediatebenefitwithoutamassivenetworkrearchitecting.Butnowthatwe'reintheaccount,westarttoharvestawholesetofadditionalusecasesbeyondthatfirstmicrosegmentationusecase.Sowearefeelingveryencouragedbytheadoptionthatweareseeingeventhough,right,itreallyismorematerialin2015.Carl,anythingtoadd?


Ithink,Pat,youcoveredtheusecaseswell.We'reseeingacoupledifferentusecases,asPatindicated,firstfornetworkagilityandtheprovisioningoflayer227services.Andthesemicrosegmentationusecasesisverymuchresonatingwithourcustomers.Andit'soneofthebiggest,ifyouwill,usecasesforNSX.




I'dalsojustliketostate,right,thatI'vebeenextremelypleasedwithoursalesforce'sabilitytounderstandnetworkvirtualizationandnetworksecurity.Andweareseeingoursalesforceveryquicklybuildarobustpipelineasweheadinto2015aroundNSX.Andalso,ourchannelisstartingtoevolve.Andinjustlastquarter,itwasthefirstquarterweevenhadNSXonourpricesforourchanneltosell.

SoI'mextremelyencouragedwithourabilitytotransitionoursalesforcetobeabletosellNSXaspartoftheSoftware-DefinedDataCenter.AndasPatsaid,wefindsomereallygoodusecasesthatourcustomersarestartingtoleverageandusetodeploytheplatform.


Thankyou.Nextquestion,please?

Operator:

OurnextquestioncomesfromHeatherBellinifromGoldmanSachs.

HeatherBellini(Analyst-GoldmanSachsGroup):

Great.Thankyou.Ijusthadafollow-uptoKash'squestion.YoureferredtoyourcommentsatVMworldAnalystDayasaframeworkfor2015.AndIthinkalotofus,atleastprobablybasedonallofourinboxes,thinkthat,thatwasaguidancerange.Soinlightofwhatyourcommentsareaboutthemacroenvironmentandthecurrencyheadwind,Iguessitwouldbeveryhelpfultojustknowifyouguysarestandingby,whatIbelieveyourphrasewas,wasthat,thatwas--mid-teensrevenuegrowthwaswhatyouwereexpectingforcalendar'15.


Yes,Heather,thisisJonathan.Thatframework,youcaninterpretitasguidanceifyoulike,butthatframeworkweprovidedwasjustliterallythat.AndIthinkIwasprettyclearatthatpointthatwe'llcomebackandgiveyoumoreexplicitguidancein--allthegorydetailinJanuary.Again,justtorepeat,therationaleforthat,it'sweseeanopportunity.Wetalkedaboutourtotaladdressablemarket,butwe'regoingintoourseasonallystrongestquarternow,Imean,justexitedoursecondseasonallyweakestQ3.AndweneedtoseehowQ4playsout.

Wehaveaportfolioofnewproductsthatcanandarecontributingmovingforward,butmanyarenewerandtheyrequiremoredata.Soeachquarterthatgoesbyprovidesadditionalinsightsasforthelikelyperformanceoverthenextyear.Sowe'reobviouslyhighlyoptimistic.

GivenQ3also,rightnow,we'rewatchingELAcloseratescarefully.Sowhatwe'redoingiswe'restickingtowhatwesaidacoupleofmonthsago.We'reproviding2015guidanceontheQ4callasweindicatedat[FAD].Sonochangeishowwethinkaboutit.


Thankyou,Heather.Nextquestion,please?

Operator:

Yes,itcomesfromRickSherlundfromNomura.

RichardSherlund(Analyst-NomuraSecurities):

Yes,thanks,justacoupleofquickoneshere.ThisdoubleIrishtax,doyouhaveanyexposurethere?Andifyoucouldtouchonwhat'sdrivingtheaccelerationintheservicesbusiness.Andanymorelightyoucan




shedonthisfederalcontract?IsthisarenewalELAoranewELA?Andifyoucangiveusasenseofwhatmighttheissuebethere.


Rick,we'reactuallylimitingtoonequestion,please.Sowouldyoujustpickonethatyouprefer?


Theservicesbusiness.


Rick,I' llgiveyouanupdateontheIrishtax,ifyouwanttopickoneother.


Yes,theservicesbusiness,ifyouwould,then,please,theaccelerationthatyou'reseeinginthatbusiness.


SoontheIrishtaxissue,obviously,we'veallbeentrackingthatcarefullyandunderstandingwhat'sgoingon.Asyouknow,wedopaytaxinaccordancewithallrelevantlawsandregulations,whichiswhatyou'dexpect.We'reaglobalcompany.Wehavemany,manyjurisdictionswe'reoperatingin.WedohaveoperationsinIrelandaswedisclosedinour10-Qand10-K.We'reobviouslycurrentlyanalyzingallthechangesthatarebeingproposedintheIrishtaxlaw.Theyhavenoimmediatechanges,noimmediateimpacttous,asyouknow,becausethey'renoteffectiveuntil2020.Andthere'sanumberofcompanieswhoaregoingtobeaffectedbythosechanges,butIthinkwehaveplentyoftimetoplanforthem.SoI' lljustleaveitatthatatthispoint.


Yes.Andasitrelatestocloudservicesandprofessionalservice,I'mgoingtosplitthatupwithmyselfandPat,Rick,ifthat'sokay.Soletmetaketheprofessionalservices.Ihadhighlighteditinmypreparedremarksbecausewe'reactuallyreallyencouragedthatourcustomersarelookingtoVMware,notjustforourtechnologybutourintellectualpropertyonhowtostandupsomeofthesenewSoftware-DefinedDataCenterarchitectures.

Andinthequarter,wehadsomeverysizablewinswhereFortune50companieshavecometous,twoinparticular.One,afinancialservicescompany;theother,apharmaceuticalcompany,havecometousandaskedforourhelpinstandingupanewgreenfieldSoftware-DefinedDataCentertohelpthemmigratetheirlegacyworkloads,innewplatformthreeworkloadsontothisnewarchitecture.Sowe'rereallyencouragedthatourcustomersarecomingtousbothtechnologicallyspeakingandalsoforourservice--servicesintellectualproperty.

AndI'dliketoaskPattotalkalittlebitmoreaboutcloudservices.


Yes.Andwe'dsayonthecloudservicesareathatwe'reactuallyfeelingveryencouragedbyourabilitytocaptureourcustomers'workloadsaswellasnewserviceofferingsforouroverallcloudserviceportfolio.We'reseeingthatinourvCloudAirandourvCloudAirNetwork.We'reseeingthatwithAirwatch,newserviceslikeourDesktopasaService.Andoverall,theseclearlyaregrowthopportunitiesforusthatcomewithadifferentbusinessprofile,aratablerevenuemodel,whichisincludedinourunderstandingofourbusinessgoingforward.Seeingthat100%year-on-yeargrowthandnowatapproximately5%,thisisbecomingamore




meaningfulportionofourbusiness.Andyouwillseeusspeakmorespecificallyinourguidefor2015aboutthisaspectofthebusinessaswell.Butthiswasanencouragingquarterforus,notjustinournewproductareasbutinthis--thenewcloudservicesareaasaportionofourbusiness.


Thankyou,Rick.Nextquestion,please?

Operator:

Yes,anditcomesfromMattHedbergfromRBCCapitalMarkets.

MatthewHedberg(Analyst-RBCCapitalMarkets):

Yes,thanksfortakingmyquestionsguys.Asafollow-uptoanearlierone,youtalkedaboutastrongpipelineforNSXandwantedtocontinuetoinvestinnewbusinessessuchasthat.I'mwonderinghow--ifyoucouldsortofquantifyhowsupplyconstrainttheNSXbusinessisintermsofthesalesforce.Andhowareyougoingtoaddressgettingasolutionthatseemsprettyrevolutionaryoutthereandsortofbuildingafullstacksalesforcethatcansellandimplementit?


Yes.Soletmetakethatone,Matt.Soaboutayearago,westartedtobuildaspecialistsalesforceofbothsalesrepsandsystemengineers,pre-sellsystemengineers,toaddressthisopportunityaroundNSXandnetworkvirtualization.Andweare,sofar,veryencouragedwithnotonlythespecialistorganizationbut,asImentionedearlier,aboutoursalesforce,ourcoresalesforcebeingabletoatleastrecognizeopportunitiesaroundnetworkvirtualizationandthingslikemicrosegmentation.

Ithinkit'salsotonote,andPatmentionedalittlebitofthisinhispreparedremarks,thatwe,inaveryshortamountoftime,havebuiltaveryrobustecosystemaroundNSXwithpartnerslikePaloAltoNetworks,F5,Aristaandanumberofothernetworkandsecuritycompanies.Soit'snotjusttheVMwaresalesforcethatarespecialiststakingthistomarket,butwe'retakingittomarketinconjunctionwithanextremelyrichsetofecosystempartners.Andweareveryencouragedwiththepipelinebuild,asImentionedearlier,andtheabilityofbothoursalesforceandourecosystemtobeabletoarticulatehowpowerfulthisplatformisaroundnetworkvirtualization.


Thankyou,Matt.Nextquestion,please?

Operator:

Yes,AbheyLambafromMizuhoSecurities.

AbheyLamba (Analyst-MizuhoSecuritiesUSA):

Thanks.Carl,youmentionedabout--thatyou'restillworkingonthelargedealinthefederalvertical.Canyougiveussomedynamicsonthedecisionprocessoverthere,what'sholdingthatup?Andwhatcanyoudotoovercomethat?Andsimilarly,thedealsinEuropethatdidnotclose,aretheystillinthepipeline?Andwhatneedstohappenforthemtoclose?


Sure.LetmestartwiththefederalELAthatIsharedwithyouduringlastquarter'sconferencecallandthenagainthisquarterbecauseIindicateditdidn'tclose.Anytimeyou'redealingwiththegovernment,right,ina




dealofthismagnitude,thetransactioncanhavealotofvariabilityinwhenitactuallywillclose.Iwouldsaythisspecificopportunityhadnothingtodowithoursalesexecutioninthequarter.Wecontinuetoworkextremelycloseandactivewiththegovernmentonthisopportunity,anditremainsinourpipelineasweheadintoQ4.Andwe'reveryencouragedoverallnotonlywiththisopportunitybutwithourfederalbusinessasawhole.

AsitrelatestoEurope,again,IthinkwehadquiteasolidquarterinEuropeevendespiteacoupleofregionslikeGermanyandRussianotperformingatthelevelwehadanticipated.WedidseestrengthinEurope,inSouthernEuropespecifically.IfyoulookatFrance,whichhasbeenbattlingtheirowneconomicchallenges,wehadareallysolidquarter.SoinEurope,Ithinkwehadagoodquarter,andIdidn'tseealotoflargeELAsslipfromonequartertothenext.



Operator:

Yes,RajeshGhaifromMacquarie.Yourlineisopen.

RajeshGhai(Analyst-MacquarieResearch):

Yes,thanks.Carl,Iwantedtodigintoyourcommentearlierthatgivenyourwiderproductportfolio,ELAsaremorecomplexandtakinglongertoclose.Canyoutellushowmuchlongerthesalescycleshavebecomeandifyouaretakinganystepstopotentiallyreducethecomplexityofdealsandpotentiallyshortenthesalescycle?Andrelatedtothat,whatsortofELAgrowthratesareyouassuminginyourQ4guidance?


Yes.SoIthinktherewasmultiplequestionsinthere,butletmetrytoworkthroughthat.Sofirstofall,ourELApipelineremainssolidasweheadintoQ4,whichobviouslywetookintoaccountinourguidance.InQ3,IhadindicatedsomeofthelargerELAs.Andspecifically,netnewELAsaretakingabitlongertoclosebecauseofthecomplexityofnotjustVMwarebutthecustomerintroducingthedesiretohaveallofourproductsaspartoftheELA,notjuston-premisesolutionsliketheSoftware-DefinedDataCenterarchitectureandvCloudSuitesbutalsointerestedinvCloudAirsothattheycanbuildaninsurancepolicyintotheiragreementwithustoleveragethepubliccloudinthefuture.

We,comingoutofQ3,havedoneacoupleofthingstomakesurewe'retrackingELAcloseratestodeterminewhetherinQ3thiswasaspecificissuewithinagivenquarterorifweseeabiggertrendaroundELAcloserates.AndaswemonitorthatthroughoutQ4,we'lltakeallofthatintocontextwhenwethinkaboutguidancegoingforward.



Operator:

Yes,itcomesfromKeithWeissfromMorganStanley.

KeithWeiss (Analyst-MorganStanley):

Iwantedtoaskaboutlicensebillings.BecauseIknowweallcalculatebillingsoffoftheincomestatementandthebalancesheetandIknowbookingsandbillingshavesomevariability.Butwhenwecalculateit,wecomeupwithahighsingle-digit7%to8%typelicensebillingsgrowthversuswhatwehadinasolidmid-




teensgrowthinthefirsthalfoftheyear.Anythinginparticularthatwouldbesortofimpactingthatcalculation?Orisitjustsortofareflectionofthatweakerbillingsquarter--weakerELAbillingsinthequarter?


Yes,Ithinkthat'sit.SojusttobuildonCarl'scommentary,itreallyisareflectionofbookings,fundamentally.It'shardtobuilddeferredifthebookingsdon'tcomeinoverall.ButIthinkCarlhastalkedaboutitinacoupleofdifferent--inhispreparedremarksandalsooverall.Weareseeingsignsofsignificantgrowthinanumberofthenewproductareas,butthey'rejustnotbigenoughyettohaveanimpactandobviously,withalargerfederaldealnottranspiringinthisparticularquarter,whileitremainsanopportunity,obviously,hasanimpactonlicensebillingsgrowth.

Carldidpointout,andIjustreiterateit,thatthistimelastyearaswellwasaparticularlystronglicensebillingsnumberaswellasyouwillcalculate,mainlybecausewehadourlargestdealeverreportinQ3,pluswehadfiveELAscomparedtothreeELAsthisquarter.Sothere'sanumberofdifferentfactorsinthere,butfundamentally,it'sthesamereasonsthatCarloutlinedforyou.


Thankyou,Keith.Nextquestion,please?

Operator:

Yes,MarkMoerdlerfromSanfordBernstein.

MarkMoerdler(Analyst-SanfordC.Bernstein):

Thankyouverymuch.SodrillingalittlemoreintotheELAs.Youdiscussed,aswe'vealreadytalkedaboutalittlebit,thatyou'reseeingthedelaybecausethey'readdingmoreproductsintothemix.IsthistranslatingintotheELAtotaldollarvalueofthedealsgoingupinthepipelineastheytakelongeror--andthenewdealsbeingbiggerthantheywerebefore?


Yes.Soagain,whenwethinkaboutELAs,letme--justonecommentIdidn'tmakeearlierthatrelatestoELAs.Inthequarter,wesaidwehadaverygoodELArenewalrate.SoourELAsthatcameupforrenewalwithinQ3,wewereverygoodatrenewingtheminagivenquarter.NetnewELAs,becausetheydoincludealotofnewproducts,right,aretakingabitlonger.

WhenwelookattheELAsthatwedorenewal,right,they'reroughlyinlinewiththesizeandscopeoftheELA,right,thatwehadclosedinitially.Sosomeofthemcanbelarger,someofthemcanbesmaller.ItreallyjustdependsonwherethecustomerisatintheadoptionoftheirtechnologythattheyhadfromtheoriginalELA.


Thankyou,Mark.NextquestionandIthinkthelastquestionplease?

Operator:

Okay.ThatcomesfromMichaelTuritsfromRaymondJames.

MichaelTurits (Analyst-RaymondJames&Associates):

Hi,MichaelTurits,thankyou.Soyoureducedyourcashflowguidance,guys,byabout$400millionatthetopandatthebottom.CanyougiveussomesenseofhowmuchofthatwasfromtheincreasedcashtaxpaymentsandtheinstallmentpaymentsonAirWatchversusthebookingsimpact?Andshouldthoseothertwo




factorsreverseaswegointo'15?


Yes,Michael,that'sagreatquestion.SoIwouldsayjustoverhalfoftheadjustmentthatyou'veheardustalkaboutisduetobookingsoverQ3inthebackhalfoftheyear,includingtheslippageoftheparticularlylargefederalopportunity.Andtheremainder,justunderhalf,isduetotheothertwofactorsImentioned.You'llseea--ifeverythinggoesasplanned,you'llseeafairlylargetaxpaymentinQ4appearinthecashflowaswecontinuetotransitiontoacashtaxpayer.Wepaidalmost--relativelysmallamounts,ifany,cashtaxesoverthelastfewyearsasweutilizedNOLs,netoperatinglosses,sincethetimeoftheIPO.Andwe'reclearlyfullyinthattransitionnowtobeingacashtaxpayer.ThatwillimpactQ4.Andobviously,youshouldexpectustobeacashtaxpayergoingforward.

AndthentheseconditemImentionedwastheAirWatchacquisition-relatedpayments,whichweactuallyhavetheoptiontopayineithercashorstock.Andaswe'veevaluatedusesofcashoverthecourseofthebackhalfofthisyear,we'reanticipatingpayingcash.Butthequickanswertoyourquestionisjustoverhalfisbookings.


Sothankyouallforyourtimeandattentiononthecalltoday.Insummary,we'remakinggoodprogressacrossallthreeofourstrategicpriorities.Iwanttothankourcustomers,ourpartnersandemployeesfortheirpassion,supportandengagementaswelookforwardtofinishaverystrong2014.Thankyouverymuch.

Operator:

Thankyouforyourparticipation.Thatconcludestoday'sconferencecall.Youmaydisconnectatthistime.

Allrightsreserved(c)2014TheStreet,Inc.

Pleasefeelfreetoquoteupto200wordspertranscript.Anyquoteshouldbeaccompaniedby"ProvidedbyTheStreet"andalinktothecompletetranscriptandwww.thestreet.com.Anyotheruseormethodofdistributionisstrictlyprohibited.

THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"ANDTHESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.

THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.

Documents

VMware (VMW) Earnings Report: Q3 2014 Conference Call ...s.t.st/media/xtranscript/2014/Q4/12922736.pdf · The following VMware conference call took place on October 21, 2014, 05:00