Q3 2020 Earnings Call
Good day, ladies and gentlemen, welcome to todays VM, where third quarter fiscal year 2020 earnings call.
As a reminder, today's conference is being recorded and at this time I'd like to turn the floor over to Paul's <unk>, Vice President of Investor Relations.
Thank you good afternoon, everyone and welcome to Viom worst third quarter fiscal 2020 earnings conference call on the call we have Pat Gulf singer Chief Executive Officer Insane Roll Executive Vice President and Chief Financial Officer. 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 slides, which accompanies this webcast can be viewed in conjunction with life remarks, and downloaded at the conclusion of the webcast from IR deck Vmware Dot com.
On this call today, we will make forward looking statements that are subject to risks and uncertainties. These forward looking statements include statements regarding Vmwares proposed acquisition of pivotal actual results may differ materially as result of various risk factors, including risks related to our ability to consummate the pivotal acquisition as planned as well as additional risks described in the 10-K's 10-Q's and eight case.
More files with the FCC, 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 even worse performance should be considered in addition to 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 acquired intangible assets employer payroll.
Tax on employee stock transactions acquisition disposition, and other items, including the gains or losses on pivotal software and 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 in that or Investor Relations Web site.
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 fiscal 2020 quiet period begins at the close of business Thursday January 16, 2020 with that I'll turn it over to Pat.
Thank you Paul Q3 was another solid quarter for Vmware, we're pleased with our results. We continued to see traction and customer momentum in support of the M. worse vision to delivery software architecture that enables any app on any cloud delivered to any device.
In Q3 total revenue increased 12% year over year with non-GAAP earnings per share of $1.49 cents per share.
We are thrilled to walk in carbon black to the Vmware family and we remain on track to close the acquisition of pivotal by the end of the fiscal year.
Customers have resoundingly affirmed that both acquisitions will offer tremendous value as we help them with their digital transformations.
We recently hosted over 65000 customers partners and Influencers at our Vmworld 2019, and before me that's demonstrating strong momentum in support of our strategy having traveled through all these regions recently I've been delighted by our team's strong execution and the enormous customer interest in market potential for solar.
Since globally.
The bespoke fragmented security solutions up today have failed our customers offering us the security industry that is ripe for disruption.
With carbon black now a part of the Vmware family, we're simplifying security by making it intrinsic across the key control points of endpoint workload network identity, and analytics and carbon black accelerates our efforts here.
With carbon Black Vmware is now poised to take a significant leadership role and security for the new age of multi cloud modern apps and modern devices, we'd be security as an essential and common thread throughout our offerings carbon black together with the security driven value add from our networking with micro segmentation and you.
The computing cloud and compute offerings in the aggregate represents approximately 1 billion of business for us this year.
With this acquisition, we launched a new security business unit, including carbon black and our App defense offerings under the leadership, a former carbon black CEO , Patrick morally as general manager.
Since the close of the acquisition, we announced multiple new carbon Black cloud solutions, and then enhance partnership with Dell, making carbon black cloud the preferred endpoint security solution for del commercial customers.
We believe the combination of carbon black Vmware will bring a fundamentally new paradigm to the security industry.
Another highlight of the quarter was unveiling of 10 zoo a portfolio of products and services designed to transform the way enterprises build run and manage software on kubernetes.
We also announced and began customer beta for project Pacific. This breakthrough re architecture of the Vmware Vsphere platform will transform disappear into Occupancies native platform, which will enable enterprises to seamlessly add kubernetes to their existing environments.
Great containers nvme, some common infrastructure accelerate development, an operation of modern absent be sphere, while continuing to take advantage of existing investments in applications technology tools and skill sets.
By utilizing innovations from both the I'm weren't pivotal Vmware will be positioned to deliver the most comprehensive enterprise grade kubernetes based portfolio for modern applications, helping customers to succeed at each step of their cloud native journey.
We continue to execute against our Baltic cloud strategy, as we drive and expand our cloud partnerships to offer our customers choice and flexibility.
The more cloud on ADW US is now available in the <unk> reduction, bringing the total number of available global regions in Europe to five globally to 17, just over two years.
I was delighted to have firms, including Hs market, Japan Airlines, and Samsung Sds joined us on stage across Vmworld, Europe , and there'll be form events to provide testimonials of the success. They are seeing with our cloud strategy and offerings, including Vmware cloud and ate up U.S.
We also further expanded our partnership with Microsoft to deliver greater impact to customers across client cloud and data initiatives.
News included the introduction of Vmware workspace, one for Microsoft endpoint manager to enable monitor management for Windows 10.
As your Vmware solutions momentum with new stories and geographies. The addition of new cloud migration capabilities with Vmware H.C. acts and the ability to extend a azure to the branch and edge with Vmware SD weighing by Velocloud.
We continue to see some of the worlds largest companies commit to the Vmware enterprise grade solutions, we're seeing particularly strength and the financial sector, including JP Morgan Chase and one of the largest financial institutions in Europe , having increased their investments and Vmware technology.
Well those investment at Vmware. During Q3 include strategic collaborations across multiple countries and regions, including China and spans the Vmware portfolio, including cloud he had hyper converged infrastructure offerings.
And the telco and communication service provider space I was also thrilled to personally amounts her spend at multi cloud partnership with Deutsche Telecom I T service provider T systems, and further adoption of our telco offerings, including telecom and NTT Docomo.
As customers are looking to their five t. buildout, we see increasing interest and Vmware solutions as key enablers of this critical transition.
Before I hand, the call over to saying and I want to announce that Maurizio Carly executive Vice President of worldwide sales and services will be transitioning in his role at the end of the fiscal year Red Seal has made a significant impact on the company's since he joined nearly 11 years ago and on behalf of Vmware I want to thank him for his many contributions and making.
Yeah, I'm worried the great company. It is today, which CEO will continue with the company serving as a strategic advisor John peer Bellard, who has also been with the company for 11 years and currently leads Vmwares <unk> sales team will assume the global sales leadership role beginning at the start for fiscal year 21.
In closing Q3 was another solid quarter for Vmware I'm very proud of our team for these results I'm pleased with a meaningful expansion of the Vmware portfolio with carbon black and later this year with pivotal. Thank you very much let me hand, it over to saying.
Thank you Pat we're pleased with our financial performance and execution this quarter, which resulted in total revenue growth of 12% and license revenue growth of 10% year over year.
Our hybrid cloud subscription and SaaS recurring revenue grew approximately 40% year over year and represented over 13% of total revenue in the quarter.
We continue to invest in our fast growing cloud businesses, and we expect that carbon black along with our tends to portfolio, including pivotal will further accelerate our influence and impact in the security and develop a communities as well as meaningfully increase our hybrid cloud subscription SaaS revenue.
Q3, non-GAAP operating income was $759 million, resulting in a non-GAAP operating margin of 30.9%.
non-GAAP earnings per share was $1.49 cents on a total share count to 414 million diluted shares.
We ended the quarter was $7.9 billion, an unearned revenue and $2 billion in cash.
Growth in the revenue plus the sequential change and unearned revenue for the quarter was 18% year over year or an increase of 12% excluding unearned revenue assumed in the acquisition of carbon black.
Both in license revenue plus the sequential change and honor and license revenue was 21% year over year or an increase of 13% excluding unearned revenue assumed any acquisition.
We closed the carbon black acquisition on October eight.
The beginning unearned revenue balance from the acquisition was $151 million carbon black contributed over $10 million in total revenue in the quarter post acquisition.
At quarter end, we had license backlog of $33 million and total backlog of $71 million.
Our PEO, which includes our committed and noncancelable future revenue was $8.5 billion.
We had a strong quarter across our products and solutions portfolio. In Q3 was six of our top 10 customers purchasing the Vmware Cloud Foundation solution stack.
This platform solution consistent the full software defined data center stack and is offered on private clouds public clouds as well as partner managed clouds.
NSX license bookings were up 50% Vsan license bookings are up over 35% and you see license bookings once again increased over 20% year over year this quarter.
Core SDDC continued to perform well with core SDDC license bookings up in the high single digits year over year and total core SDDC bookings up in the mid single digits.
Compute license bookings grew in the mid single digits with total compute bookings up in the low single digits year over year.
Management license bookings increased in the mid teens with total management bookings up 11% year over year.
In Q3, we repurchased $242 million in stock and ended the quarter with a little over a billion dollars remaining under our current repurchase authorization, which extends through the end of F. why 21.
Turning to guidance for the full year, we're projecting an increase in total revenue to $10.100 billion up 12.5% year over year.
This includes the addition of carbon blacks financials post close which accounts for the largest portion of the revenue increase.
We expect license revenue of $4.245 billion for Fytwenty up 12% year over year.
We expect non-GAAP operating margin to be 33% and expect non-GAAP earnings per share of $6.58 on a diluted share count to 416 million shares for the fiscal year.
Cash flow from operations has been updated to include the impact of acquisition and integration costs of approximately $100 million related to our most recent acquisition announcements.
As a result cash flow from operations is expected to be $3.850 billion.
We expect free cash flow a $3.570 billion for fiscal 20.
Moving to a Q4 guidance license revenues expected to be $1.390 billion, an increase of 13% year over year and total revenue is expected to be $2.950 billion up 13.8% year over year.
We expect non-GAAP operating margin of 37.6% and non-GAAP EPS at $2 in 16 cents per share on a diluted share count a 414 million shares.
We expect the proposed acquisition a pivotal to close before fiscal year end and we will update you on its impact on the quarter and the upcoming fiscal year on our next call.
As I mentioned on our last call due to common control accounting rules. Upon the close of the acquisition, we will Recasts Vmwares historical financials to include pivotal.
Detailed guidance for Q4 and a full year is contained in the slide deck on our website accompanying this call.
Now as we look to our next fiscal year, we're expecting the strength. We're currently seeing in the business to continue.
Eliminate currently were planning for a fiscal 21 total revenue growth rate in the low double digits not including the impact from the proposed pivotal acquisition.
We also expect hybrid cloud subscription then SAS to drive much of the future growth of the business and show a significant increase in its percentage mix of total revenue.
And that's why 21, we will continue to invest incrementally in our fast growing hybrid cloud subscription and SAS portfolio.
While these incremental investments will drive operating income expansion, we expect they will impact next year's operating margin by up to two percentage points, including carbon black.
In closing, we're pleased with our Q3 financial performance and the ongoing strength of the business.
Our customers are depending on us to assist them navigating their digital transformation and multi cloud journeys using a broad product and solutions portfolio and we're seeing this in our financial results.
The investments were making in and the strength of our growing hybrid cloud subscription and SaaS businesses will drive sustained performance and growth for us I'll turn it back to Paul before we begin with Accuen a.
Thanks, saying before we begin the Q in a I'll ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible operator, let's get started.
And ladies and gentlemen, if you would like to ask a question. Please join the queue by pressing star one on your telephone keypad.
If you would just make sure that your mute function, it's turned off to allow us to receive that signal.
Once again that star one for any questions at this time, we'll pause for a quick moment.
And first from Wells Fargo, we have Phil Winslow.
Great. Thanks, guys for taking my question Congrats on a another strong quarter I just a question for the team <unk> numbers from Gardner and I'd for you that have been relatively weak on the server shipments side, and then weve seen mixed results from hardware networking and storage vendors, but if I look at your computer bookings built strong growth.
NFX fees and similarly high growth rates, a you'd really question is what sort of driving that gap that that delta between call. It a high level trends and obviously the strong growth that being worse thing. Thanks.
Hey, Thanks, Phil and though where we are pleased with the quarter and the continued good performance you know as we look at your comments on the gap you know, we've just a and those who said in the past through just historically not seen a strong correlation between our business in the hard work spend cycles, which does tend to be a lot more cyclical in nature also the S.
You see growth is driven largely by workload growth and STB see just has a very compelling customer ROI that even in pretty much any economic environment. They see very substantial tcl and also we'd say the breadth and depth of our portfolio as we increasingly see the hybrid cloud and SaaS component of it now 13.
Percent of revenue and a growing at approximately 40% increasingly we're seeing that growth beyond the a private cloud or the data center in into the hybrid and public cloud offerings as well.
Phil This is Zane I'll just add you know as you point out we saw it really good bookings strengths in the quarter and we have a solid guide for the rest of the year I talked about our PEO, which for the third quarter was eight and a half billion dollars, which is also grow nicely year over year, reflecting the ongoing strength of the business. So yeah. We feel good about the guide we feel good about our pipeline heading into.
Q4.
Thanks, Phil. Thanks next question please.
Next we have Matt hedberg with RBC capital markets.
Oh, Hey, guys. Thanks for taking my question Oh, a congrats again on the quarter I have a product question for pad on tends to he can you talk a bit more about you know at its at a high level. What this means for developers you know really in a hypercard architecture built on kubernetes, and and maybe a little bit more on the price on the timing of project Pacific.
Yeah, Thanks, Matt and anxious to talk anytime I get about a ton zoo, we're really excited about the capabilities and yeah, we really see this coming together and as we would say that a this bridge between the developer in the operations a world and Kubernetes is playing this critical bridge.
Between those and as I've said, maybe since Java, we've not seen a technology or the VM itself as important as kubernetes, Yeah. We've been working on project Pacific now for several years and we really see this ability to combine containers N.V. items in a consistent operating environment gives customers the best above.
Both World Security scalability compliance agility and speed from my containers for a new workloads development you know when the tansu portfolio brings together this comprehensive developer centric kubernetes portfolio building from Hep deal and we're excited to bring the pivotal <unk>.
That's the pads and the pks offerings, but also then to be this next layer of how infrastructure is operationalized, an automated and though we expect the customers are going to pick kubernetes and our offering of making this intrinsically available into the core obese fear offering really will be this unique.
Bridge between those two worlds also the tends to portfolio is a focus on multi cloud offerings with 10 Zoo mission control and building on a hep deal, which will allow us to embrace public and private as no one else Ken. So overall, we've seen extremely positive response from the market on a tan zoo, we see.
You know a both a mission control as well as a Pacific are now in beta with customers, which has been oversubscribed. So we've seen a lot of customer interest than this and we're quite looking forward to the next major version to be sphere, including a these capabilities.
Thank you Matt next question please.
And next question I'll be from catching up with bank of America.
Hey, guys. Congratulations on get another very nice quarter, Pat we do a survey every six months, we speak to people and this time surprisingly wanted to talk to your priorities was server virtualization I'm curious to get your tick up, especially as you look at the gap between silver shipments in your own performance or we are we likely to see the beginning of.
Halo effect.
Given all the strategic initiatives that reimburse pursuing on the technology side that that makes you look more like the new word and less so up the old work and not to put words in your about up but just curious how viom are also broadly fits into this word of Dev ops, where you have a lot of cloud monitoring companies called management companies or don't reimbursed play.
Monster attack that market, because you have a significant installed base and you could do some really.
Big strategic bets here. Thank you so much.
Yeah. Thank you cash and we really see yourself in this hybrid cloud a multi cloud world as quite uniquely position and the hybrid cloud world. What we're seeing customers to do is they want to migrate to the cloud and in some cases, you're here and talk about cloud first store their cloud migration strategies, but to do that.
They run into this brick wall that you know how do they re platform their applications and for that you know the Vmware hybrid cloud. It's just like the easy button. It allows them to migrate safe money in the process really create this highly efficient hybrid cloud environment and those are many of the success stories of our Vmware cloud on eight abuse offering.
But then as they've done that now we also say we enable you to modernize we give you the ability to re factor those applications rebuild them in the best than them as your business justifies. It does your business needs right for you to satisfy your digital transformation objective and for that you know the tons who capabilities I was just.
Ascribing, you're really are the easy button for them to do that as well and doing that in the very cloud native manner embracing the latest a developer a technology. So we see it does this ability to migrate and modernize do it with hybrid cloud and multi cloud Vmware is just position to be able to do those things says no weather.
Their vendor is and we're really seeing a very positive response from customers as they start to understand the benefits of that and going faster into their future as well as to do so efficiently.
Thank you cash next question please.
Next is from Walter Pritchard with Citi.
Hi, Thanks, maybe a question for office Sunday print initially on the call I'm wondering you have to I presume you're talking up the assassin hybrid, especially next year, maybe an update on on the DMC bookings performance sort of how that's coming in maybe any any order magnitude size and and as it relates to the comment about mostly growth being driven by that so.
Dream, how does the AMC play into that as you look into next year as you've got other revenue streams like I like pivotal and I guess carbon black that are in there as well.
Yeah, I'll start on that one a walter always good to hear from you and generally we've continued to see momentum in our B.M.C. you on eight up U.S. offering. They said we announced the next region a this quarter with the stock home region. We're now at 17, a really have a good global footprint. He goes we saw at a b.
World and to be forums.
The expanded customer references like Pfizer ill I chest market, you know Japan Airlines Samsung you know these are just world class names that are viewing this as a critical part of their strategy here on the expanded ecosystem, we rolled out cloud competency partners I S fees were seeing or BCP Pete.
Partners now begin reselling them, making this part of their offerings as well and really as I was just commenting on the last question. This ability to migrate to the cloud in a highly efficient way is really being seen as a powerful tool for our customers as they look to their hybrid a multi cloud futures Zane.
Yeah, well tied just add you know as you point out the 40% increase we saw this quarter. We expect a you know that strength to continue well into next year. The the outlook that we gave does anticipate a material increase in the hybrid cloud subscription and SAS category of which Vmc is an important part and as we've said all along PMC not.
Only helps with in that category, but also quite frankly helps with all of our products, including VCF and many others that are that our on premise well. So there's definitely a halo effect when we think about the vmc opportunity and it's one of the many growth areas. We have between Vmc Velocloud health as we look to see our our increase.
He said hybrid cloud in subscription and SAS grow nicely into next year.
Thank you Walter next question please.
Next we have Mark Murphy with JP Morgan.
Yes. Thank you I'll add my congrats I Pat I was wondering if you can offer any thoughts on the U.S. Department of defense is $10 billion, yet I contract, which is being awarded to Microsoft as of now rather than a Amazon and <unk> are you optimistic that Vmware could play a role in that contract.
Or in other government projects since you're the critical hybrid partner for all three of the major public cloud platforms.
Yeah. Thank you a mark and we'll just say overall that you know we're following the Jed I know you've been closely as so I'm sure. Many of you are as well and you know we're looking forward to getting to the eventual outcome of the appeals process. We'd also point out that the Jed I contract vehicle itself is one of many right and this represent.
It's just a piece of a much much broader set of cloud opportunities.
In the government overall, we're well positioned with our current partnerships and we do expect that so through those partnerships that will have a thriving government business. Both on premise as we have had as well as in hybrid and the cloud offerings you as you note given our very high market share in.
The government or hybrid cloud is uniquely valuable to government customers and as we've discussed in the past we've seen extremely high interest from sea iOS and the government as they see huge value for this really this ability to migrate to the cloud as I was commenting earlier in the queue in a <unk> session. So we really see that's a we have great.
Opportunity in the government and with our hybrid cloud offerings and the government space in the future.
Hey, Mark.
Next question please.
Next we have Karl Keirstead with Deutsche Bank.
Oh. Thank you my question is for Us and I'd, just like to clarify the impact that the inclusion of carbon black is having in your guidance. So for the fourth quarter or where you guided to license of 1.39 billion. In total revenues of 2.95 billion is the change from the implied prior guidance entirely harbor.
And blacks in other words is for for Q on the Rep side is that a guidance reaffirm.
And then for fiscal 2001, where you guided to low double digit growth safe to assume carbon black is kind of 1% to 2% to set the right way to back into organic and then lastly, operating margins at 2% hit is that entirely due to carbon black or is your organic.
Operating margins going to be down thank you.
Hey, Carlton So I'll take that one question multipart question, so starting with with the fourth quarter, it's a reaffirmed and a small increase based on the strengths were seeing a in the rest of the business as well so I'd say the increase in in total.
Revenue for the for the fourth quarter, which obviously it amounts to 10.1 for the full year is primarily driven by the addition of carbon black although there's a little bit more that we've that we've got in there as well so carbon blacks a big contributor to the increase but again if you recall. The guide also highlighted some of the growth that we're anticipating for the second half the year.
Based on what we said last quarter. So we feel really good about the pipeline heading into the fourth quarter and the solid guide for the year as we move to F. Why 21 again. This is our preliminary view of F. why 21, I'll be offering a lot more guidance on our next call. The on the combination we've talked about being you know a proxy.
Smitley two points a combination of both carbon black and pivotal with the recasting the restatement of pivotal the large part of that those two points is actually attributed to carbon black on a year over year basis. So you're correct in calling out the carbon black portion on being a big contributor on a a on a year over year basis to the.
Organic growth if you think about the a the growth of the business excluding carbon black and then on the operating margin. When you know we've given you saw some guide for the combination both acquisitions I'd I'd split the two points into one being the incremental investments that we continue to make in our our high growth areas with the quote organic.
Hybrid cloud subscription SaaS businesses, you know businesses like Velocloud cloud health and I've Vmc businesses that are contributing to you know the fast part of the 40% growth that we saw even this quarter and then the other portion is attributable to rolling carbon black into the financials as you look at a year over year basis.
So hopefully that gives you at least at a high level the general sense for how we're thinking about the strength that we're seeing this year moving into next thank jump Carlson. Please.
Please.
Next we have raimo lenschow with Barclays.
Hey, Thanks for taking my.
My question.
Can I just oscar onto the security not a carbon black has closed and Pat you got some time talk with customers like how comprehensive almost solution your customers expecting from you.
The endpoint or like you know Pf at the end of X retro firewall et cetera, like so so what's there and what what the reception from the customer base and you know in terms of fire how broad they want to see you in that space.
Yeah, the enthusiasm for carbon black is high and the strategy of the intrinsic security has resonated very well you know one just to.
Force that a bit this idea that we're going to build security into the infrastructure, we're going to build it into V sphere, we're going to build it into NSX as we've been doing with microsegmentation, but further enhance it with carbon black build it directly into workspace, one and really bring security and management together and somewhat on the clients.
Space feel some you know when we laid out our airwatch strategy a number of years ago. We said, we were going to bring workspace, one we're going to bring mobile and desktop together well, we're going to redefine the category you gotten we're going to bring management and security together into a client offering and where to tie that together with an end to end set of cloud.
Analytics and that comprehensive strategy as weve laid that out people have resonated two very well now obviously, we're just getting started on this journey, we're just bringing the first offerings a into the marketplace. You know the strategy people immediately say when I stand up and describe how the security industry is broken everybody's nodded their heads.
Absolutely helped me right in this regard so we'll really see the all that the response to the strategy is good. The early response from customers is very positive and you've even seen the capabilities like Dell, saying. This is a key part of our preferred unified workspace offering. So we're starting to see the partners respond to that strategy as well, but it's early days we go.
A lot of work to do but so I couldn't be more pleased and obviously with Patrick more early in the carbon black team. The formation of our new security business unit. We think we are well off the starting blocks and an exciting race to not just delivery exciting new capability to be somewhere but redefine a broken industry. Thank you.
Next question please.
Next we have brand Phil with Jefferies.
Good afternoon, Xenazine alluded to that 50% growth and then NSX and I was wondering if you could just talk to you.
And what you're seeing in deal sizes and kind of attached with the rest of the portfolio.
Yeah overall, we were super happy with a NSX and obviously, a the growth is being accelerated by Velocloud and the inclusion of an RV into the platform you know eight of our top 10 deals included NSX and Velocloud the old this vision.
The networking and security further reinforces the last point on security, becoming a intrinsic we also had a great product announcement quarter for new capabilities NSX intelligence. The launch of I'd, Yes, and I P. S. The integration of the RV and load balancing into the platform.
And you know as I described that vmworld greater than 50% <unk> a reduction in Capex and Opex that customers are really now buying into the strategy that in networking. It's time to replace hardware with software that is resonating in the marketplace and I think the great results. This quarter are clearly demonstrably.
With that so residents.
Thank you Brian next question please.
Next we have Keith Weiss with Morgan Stanley .
Excellent. Thank you guys I'm a follow on to an earlier question on operating margins.
How should we think about kind of the longer term trajectory on Han operating margins, particularly in light of the the hybrid SaaS businesses growing really well and becoming a better part have a bigger and bigger part of the overall revenue mix is is there a kind of bottoming out at some point in the future. We should think about in terms of when sort of those impacts kind of.
Normalized.
Yeah. Keith This is saying you know we're <unk> as you would expect we balanced both the top line and the bottom line in both the perpetual business as well as the hybrid cloud and SaaS businesses, and we think there's tremendous value to be had in both obviously initially the hybrid cloud and SaaS business.
As grow from a from a lower base, but we see no reason why they couldn't be growing and ultimately get to a <unk> the margins that you've seen a at the company historically out of the out of the perpetual businesses and we've got examples of that within the company, where they're growing up to those levels with our our portfolio of more.
Mature hybrid cloud and SaaS businesses, so as we grow we see tremendous value in that we see value in growing the operating income line as well as reaching higher operating margin lines as we take on you know the higher growth with a with that category. Obviously as you would expect you know we've taken it will take a couple of points off that.
<unk> as we include the a the acquisitions as well as as we continue to grow and invest in some of the high growth areas that we're seeing in the company already you know you've got 40% growth in the category. So we take a long term view of that growth and the investments in the strategy behind all that so we feel like those those margins individually will continue.
To grow and and obviously has an impact on on the broader operating profile in growth profile of the business, but we feel very good about the return on investment we're getting in that in those areas.
Thank you Keith next question please.
Next from Goldman Sachs, we have Heather Bellini.
Great. Thank you very much happy Thanksgiving to you all just wanted to ask a question Pat you've always done a great read on the T. spending environment. Then you know if ever called it out when it's been getting better when it's been getting worse you. Obviously have a really good track record just given the breadth of the product portfolio.
I was just wondering if you can share with us what are you seeing as we close out this calendar year and you know kind of whats here what are you thinking in terms of next year.
I T spending growth rate versus versus what we're going to end up seeing in COVID-19. Thank you.
Yeah, Thanks, Heather and my view really hasn't changed from what we discussed last quarter here, we continue to see a great interest the digital transformation.
By customers here on there. So you know areas of concern ERISA positiveness, and let's say, we continue to take a pretty centrists view of those as we look outside into the future and I think our Q3 performance globally was a great representation of that go between a b M World.
Europe Asia and U.S. I've been in all three Geos since we spoke la last getting too many air miles in as a result, and I'll. Just say you know digital transformation is alive and well customers believe it's the key to their future and the Vmware offerings continue to have great residents to them on a global.
Basis, So we feel a very very solid about that outlook.
Thank you Heather next question please.
Next we have Kirk materne with Evercore ISI.
Hi, yes. Thanks, Thanks, very much and Pat I was wondering if you could just talk about your partnership with GCP, a little bit I realize it's early days on that front, but just any sort of incremental takeaways you know since last we heard from you and just maybe some thoughts on whether or not the the acquisition of cloud simple Viking and go maybe helps accelerate that part.
You said now that there's obviously a lot more resources behind that that particular from thanks.
Yeah. Thank you for that and you know overall I'd say you know we feel good about our overall a portfolio of cloud a partnerships are obviously, a Google a that offering is a soon to come to the marketplace. There solid interested in the offering we have a good pipeline of customers, we do see the cloud.
Bill acquisition as a good move for them to accelerate their capabilities and a there's no change and the VM where so.
Support of cloud simple as via more cloud verified a partner a in the marketplace and clearly we've seen a global interest as Google is so driving a more aggressive build out of their capabilities for their enterprise customers have a Google cloud and as part of that to the Vmware offering.
Really does have great residents by mutual a customer. So we're looking forward to this in the marketplace. While simple was good but we always put it in the context of having the most complete set of partners on the planet Amazon Azure, Google Oracle IBM partnership the a 43.
300, Vmware cloud partners a worldwide now we're almost 100 cloud verified partners and seeing a global strength in that community and clearly B.M. Wars, Multek cloud and hybrid cloud strategy is unrivaled in the industry.
Thank you Kurt. Thank you next question please.
Next we have Brad Zelnick with credit Suisse.
Great. Thank you so much for taking the question Zane just to put a finer point to a prior question on margins in the proxy filed around the pivotal acquisition you laid out two scenarios showing revenue and operating margins for deferring mixes of of hybrid cloud and SaaS and I appreciate pivotal and carbon black are not included in this but being that.
Those acquisitions should be accretive in year two is it fair to say that the trough in margins should be somewhere around 31% as the business model transitions as it was laid out in that proxy. Thanks.
Hey, Brad Yeah, I'll give some color I mean, yeah I wouldn't you know those what you read in the products here, obviously I'm you know typically forecast done with a number of embedded assumptions for for a variety of purposes. So I wouldn't read into you know what's in there versus what we offer for guidance as you know what we typically do is give you you know the.
Current here and then in the third quarter I'd like to give you at least a sense for for where things are heading.
Everything is very dynamic in where we stand today, we believe there's tremendous opportunity in those hybrid cloud subscription and SaaS businesses. So I think it would be premature for me to say sort of at what point, we bought them out given the fact that we're always looking at that trade off between topline growth and operating margin and where we have conviction around long term.
Value for shareholders. So as we manage those dynamics were at a point right. Now were in addition to carbon black and the pivotal acquisition, we still see tremendous opportunity and benefit in continuing to invest in the businesses that are that are fast growing. It just so happens those happened to be our hybrid cloud and SaaS businesses, which is why I alluded to.
The fact that we're going to continue to invest into those next year. The carbon black element. You know is that is essentially taking the the piano carbon black and layering it in while we integrate it into the company. So that's the dynamic you see as we've called out you know up to two points of of operating margin impact on on that part of the business.
I wouldn't want to go into it much further than that candidly just because when you've got a business. That's growing 40% you essentially want to want to continue to feed that and I did point out that pivotal will be we will be recasting our financials with pivotal. So you would expect to see our history change as it relates to the pivotal acquisition and that will impact.
The year over year impact of both revenue as well as our operating margin impact related to that pivotal acquisition. So hopefully that gives you little bit more color into how we're thinking about the opportunity in the acquisitions again I would separate that from what Youve, what you've observed in the proxy filing.
Thank you very rare thanks, so much.
Sure.
Next we have Michael Turits with Raymond James.
Hey, Thank you very much a patent let's come back to a vmc again <unk> can you just update us on what the use cases are if they're the same as they've been or if they're expanding and are you doing anything changing anything in go to market around vmc, whether its leadership whether its channel.
Expand those use cases.
Yeah in terms of use cases, I'll say you know, they're continuing to build out the use cases that we've described them before right data center extension right I won't more capacity.
Datacenter evacuation I'm getting out of a data center and on making a choice.
To a new data center location DDR as a a use case and the one that I think I commented on last quarter was VDI right where customers are saying. This is the best way for me to run a VDI now we do expect that as a particular, particularly with our Tan zoo announcement and the increasing focus that we.
I have on new developer or opportunities that we're also going to begin to start layering into that new application development as well will people actually start, saying my new hybrid cloud or my new kubernetes, a build environment will land into a Vmware cloud foundation or VM were cloud offering and our.
Unique ability to have those being a hybrid will be very effective. So those are sort of the use cases were seeing customers resonate to those and now is the offering is maturing in the marketplace. We're just seeing people get more comfortable saying Oh. This is a good data center strategy for me to start layering it and maybe I'm going from three to two data centers and this.
Becomes my third and I'm gonna have to availability zones. So it because my third of my fourth so I become more resilient in the process since I'm introducing this data center, which are essentially has elastic capacity I can run my private clouds more aggressively in terms of their use case and as a result, I'm going to make the tone.
Total more efficient than they ever were before and drive my private cloud data center from maybe 30, or 40% utilization to 70, or 80% utilization and drive an aggregate reduction and the cost the my a footprint and in many cases, we've seen customers who have a as as I joke, great D.R. is like the fifth priority on the top.
Three things see I always get done or it's just the always this thing that you're trying to catch up well now if you have an operational hybrid cloud environment. You active active environment that is far more de are capable than ever before so those would be some of the meat and potatoes use cases that were seeing a for vmc, but I'll say, we see it everything and.
Some of the customers today are already viewing this as their target development environment, because now they see this multi cloud strategy that I've laid out they've also seem the ability to access you know some of the Vmware cloud services that enable Amazon services as well with BMC and they're excited about some of the new offerings like dimension.
Where were now starting to say, we're going to manage from the cloud into your on premise as well overall key piece of our comprehensive hybrid cloud multi cloud strategy.
Thank you Michael next question please.
Next we have Keith Bachman with bank of Montreal.
Hi, Thank you very much for taking the question proposing and Pat I wanted to ask you about you see had a license bookings increase over 20% could you revisit how with the addition of carbon black.
The Standalone as you see a category may get some boost and or how should we be thinking about that as we look over the course of F.F. why 21. Thank you.
Yeah, well overall, we're super pleased with or you see performance you know we've continued to see this idea of the digital workplace platform really resonating with digital transformation, which includes employee experience. A we've continued to see great response from far stirring Gartner with our strategy.
And as I said earlier in the call you felt like we redefined the you see category for mobility, a desktop into one carbon black is now going to become management and security and is redefining that category again and that idea really resonates with customers because sometimes they're finding they have 10 15, even 20 agents.
Running on their clients you know, it's just out data bloat wear and we're going to walk into that and help clean up a lot of that historical a mess that they're having so overall this strategy for us is resonating well people don't replace their workspace solution quickly you know as you see <unk> quarter by quarter racking up good concern.
Just a double digit 20% growth rates you know that shows we're gaining share customers are resonating with the strategy and we believe that carbon black coming into that is gonna be a meaningful accelerant you know the other aspect of carbon black you know their focus really has been more on P.C. a replacement of anti virus and we feel.
[noise] launched our workspace one offerings recently for the Microsoft Windows 10 environment. So this really is a key element to accelerate that aspect of the strategy. You also saw that we announced the expanded partnership with Microsoft in terms of window endpoint management being now well integrated with workspace one so the key.
Cohesion of all of those pieces coming together, we think gives us a very nice overall offering in the marketplace. It Keith I would just to add it on our next call we'll get into more detail on how you could think about the combination and obviously the synergies between E C and carbon black, but as Pat points out there are many of those I'd say at the highest level that's included.
In my General guides for for F. Why 21, as well as where we've called out the two points of growth attributable to carbon black as we continue to integrate it with the rest of the company over the upcoming here.
Thank you Jackie on my next question. Please.
Next is Jason Ader with William Blair.
Yeah, Hi, guys, if I could just play Devil's advocate on project Pacific.
Well I would I want to integrate the Ams and containers in the same management platform or wouldn't that had a layer of complexity for running my containerized apps.
Oh, so so much not the case and imagine that youre wanting to do some new application development and containers.
But you might have a decade or true of existing applications.
Right and you have to make those two worlds work together right are you going to stand up a unique management environment just for those container workloads right and great to say deal that I can bring these together seamlessly with a new modern kubernetes management environment and manage my virtual machines through that and now maybe I have a bit.
Rigs Stateful application why would I ever put that into containerized environment, right and get no incremental value from it I probably made at worse in the process of doing that right and now I get this ability to seamlessly intermix. Those two worlds. This is a powerful accelerant also every CIO on the planet realizes the challenged that he has.
Bridging between the infrastructure and operations World and the developer ER and Dev Ops World. You know this is like the Magic bridge between those two worlds and a we're thrilled to see us the ability to bring those two together in a highly efficient way and literally the millions of people the.
It operate Vmware environments today are becoming kubernetes enable tomorrow and that is a powerful force. That's gonna say, we can now go to our Deb and Dev ops teams with a modern most industry compliant upstream kubernetes compatible environment and now present to them a coupon.
Ladies environment or as I've called it a dial tone, Hey, just land your kubernetes workloads here. We got show you know this is a powerful bridge between those two worlds and as we've demonstrated that project Pacific not only is it not a detriment in fact, we run containers faster than bare metal or Linux only environment because of the.
Huge efficiencies that we built into the Vmware environments. So overtime, so not only get security I get management I got operational consistency I got the most modern development environment Dev ops worlds bridging between these two worlds. This is powerful and that's why we saw extraordinary enthusiasm as we roll this out to the marketplace.
At Vmworld and be forums.
Thank you Jason I think that May have been pets favorite question today, Yes, I appreciate it [laughter] Oh, we have one more person in Q. So this will be the last question. Please.
All right and that will be Gregg moskowitz with Mizuho.
Alright, Thank you and good afternoon, guys that perhaps being Jane favorite question, if a day.
So then you had previously referenced down a bit of a headwind on revenue growth from the mix shifts to I to fashion I was just wondering if you had an estimate for that as it relates to either Q3 or 520 at all.
Yes, it's a great question I'm not sure. It's it's as good as pets, but [laughter], we called out as weak as we called out in the third quarter. Yeah. It was more pronounced on the license revenue side and what we've generally.
Done is steered you more towards more towards total revenue in with the strength we've seen.
In the third quarter candidly in both categories I mean, as you know hybrid cloud subscription and SAS, while we get the bookings now we recognize the revenue over an extended period of time and that sort of the nuance when when you're thinking about the balance between license revenue.
Versus hybrid cloud subscription SAS that sort of the balance that we were contemplating in the third quarter and we mentioned with that strength. We Oh, we saw the guide continue through a through the year. So a you know there's always a little bit a headwind, especially as you as you're growing that just because you essentially recognize the revenue slightly differently, we wouldn't call it out.
Specifically as far as a percent because I think all of our when we think about those businesses, they're all in different points on the maturity curve, but in aggregate you're right. There's always that balance when you're when you're considering a perpetual model versus the the a the SaaS model, but we're comfortable with that bounce we've maintained the a the annual guide almost feel good about.
The trajectory heading into next year.
Perfect. Thank him before we conclude thanks, Greg. Thank you Greg before we conclude I think Pat you may have a final comment yes on the other say I'm very proud of our team for delivering another very solid quarter for Vmware, it's great to have carbon Black Knight was part of Vmware and where as a result, accelerating our efforts to simplify security for our customers works.
Right about the anticipated closing a pivotal in Q4, a which really helps us to be positioned to deliver the most comprehensive enterprise grade kubernetes based portfolio for modern applications and finally, we're looking forward to updating you on our progress on the next call and we wish all of you a very happy Thanksgiving enjoy the time with your family and friends.
Thank you.
And once again, ladies gentlemen that does conclude today's conference. Thank for your participation you may now disconnect.
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