Q1 2021 Earnings Call

[music].

At this time I would like to have the conference over to Mr. Paul.

President Investor Relations. Please go ahead Sir.

Thank you good afternoon, everyone and welcome to be a more as first quarter fiscal year 2021 earnings conference call on the call. We have that goal singer Chief Executive Officer, and Zane Rowe Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions. Our press release was issued after close of market and I suppose.

Sit on our website, where this call is being simultaneously webcast slides, which accompany this webcast can be viewed in conjunction with life remarks and download it at the conclusion of the webcast from higher Duffy on where dot com.

On this call today, we will make forward looking statements that are subject to risks and uncertainties actual results may differ materially as a result of various risk factors described in the 10-K's tank use an 8-K b M or files with the SEC, we assumed all but two and do not currently intend to update any such forward looking statements. In addition, during today's call we will discuss certain non-GAAP for.

The initial measures. These non-GAAP financial measures, which are used this measures of the Anworth performance should be considered in addition to that as a substitute for or an isolation from GAAP measures.

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 certain litigation matters and other items as well as 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 our Investor Relations website.

Unless otherwise indicated all financial metrics provided on this call or for the consolidated Vmware entity, including pivotal growth rates compare Q1, 21 results with the recast of prior periods financial information to include pivotal due to the pivotal acquisition, which was accounted for as a transaction by entities under common control in accordance with gap.

The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations like our second quarter fiscal 21 quiet period begins at the close of business Thursday July 16 2020.

That I'll turn it over to Pat.

Thank you Paul overall, I am proud of our solid performance and strong execution in Q1 fiscal 21 during its unprecedented times.

As we navigate through this global pandemic alongside our customers partners community industry in the World. We continue to see our vision resonate with customers as we help them build where unmanaged connect and protect any application on any cloud across any device.

Q1, well all geographies were impacted by the Cobot 19 pandemic, we were pleased with sales execution, including improved linearity throughout the quarter and end of quarter execution.

Total revenue for Q1 was $2.734 billion up 12% year over year, a non-GAAP EPS was $1.52 cents per share up 21% year over year.

Comprehensive strategy is increasingly being embraced by our customers to enable their digital foundation.

Customers continue to look to be up where for solutions across app monetization multi cloud digital workspace intrinsic security and virtual cloud network as they rely more heavily on fewer strategic partners.

These extraordinary times with a global pandemic, and then unsettled macroeconomic environment, ensuring the safety and well being the bar employees and addressing our customers rapidly changing needs have been our top priorities.

We serve as an essential digital service to those customers, who provide essential services, helping them build business resiliency to scale efficiently and more securely. We've proven that we can work effectively going to distribute the manner essentially flipping to work from home over a weekend I T investments enabled us to execute a good core.

To support our customer seamlessly and ship a record number of major new product releases, we have remained and work from home mode in order to provide our employees flexibility and contribute to flattening the curve around the world.

Even as we gradually reopened our sites, we will have a more distributor workforce overtime, enabling our employees to choose their work environment.

At a time when business as usual is not an option many of our customers and partners have asked us how we can help the maintain business continuity. During these times, whether it is a government mandated closure a preemptive remote worker initiative or unexpected hospital network expansion, we rapidly enable customers to respond.

Effectively with workspace, one we're uniquely positioned to help our customers enable their employees to productively work remotely worst securely with carbon black cloud increased productivity with Vmware SD Wan and scale their applications with Vmware cloud.

Stores are innovating with Vmware in extraordinary ways to make a difference utilizing Vmware Vanderbilt University Medical center recently transformed them empty parking garage into a much needed coated 19 screening area and the Braskem medicine transition their staff to work from home and their students to learn from home.

We're also developing enterprise grade application with customers and then accelerated fashion.

We're working with the you case and National Health service to bring their contact tracing application to their citizens to help save lives and restart the country as an example.

We have also seen that coded 19 is not stopping customers from their cloud migration projects with customers like I eat trustmark heat advancing their partnership with US this quarter and leaving on the Vmware cloud Native you asked to meet their needs.

Can you to be front inline with our company values and our commitment to making a positive global impact we have made monetary donations to nonprofit organizations doubled our Vmware Foundation matching gift program and are seeing or employees take action in their communities across the globe through our citizens plants for P. approach.

In Q1, we delivered a comprehensive portfolio of products and services to help customers modernize their applications and infrastructure.

The new offerings featured Vmware tend to a portfolio of products and services that transforms the way enterprises build run manage application software.

Earlier this month, we announced the acquisition of October Green, which will bring intrinsic security to containerized applications, running and kubernetes and build security capabilities into the fabric the existing my key and Devops ecosystems.

We made major updates to the core portfolio across Vmware Cloud Foundation, the largest evolution of the severe and a decade, NSX TV sand and be realize operations cloud continuing to bring innovation to our leading infrastructure stack a powerful on premises environments and public clouds.

Across the world.

More recently, we have provided updates across many of our cloud partnership offerings, including an extension and expansion of our preferred Vmware club partnership with a w. us as well as new service offerings based on via more cloud technologies from Microsoft Azure, Google Cloud WMC and Alibaba cloud.

We also introduced new security offerings, this past quarter, including VM, where advanced security for cloud Foundation, which will enable customers to replace legacy security solutions and delivered unified protection across private and public clouds, we continue to see customers embrace our security offerings, including bank of Montreal.

Canadian multinational financial services company, who recently chose Vmware carbon black.

We continue to see extraordinary interest and of software driven approach to the five to network and Vmwares telco cloud.

Carriers deploying our telco cloud solution has seen substantial improvements in capex and opex as well as agility and deploying new services. We now see the opportunity to extend these benefits to the radio access network using Virtualized ran deployed on telco cloud, we're pleased to be expanding our partnership with Intel.

To address carrier needs in this area will provide additional details regarding our partnership at a future date.

As we look for the future or thoughts are with those that have been most greatly impacted by code that thinking we're committed to helping our customers navigate this pandemic, while also continuing to help ensure our employee safety and well being.

Taking the opportunity to drive the company faster toward our future. This week. We also made some organizational change is directly related to accelerating our strategy and adding key new talent to the company.

As we look at a much higher level of volatility in the market. Our strategy is more relevant to customers than ever. Although there is a level of economic uncertainty now we remain confident in our long term prospects and how we are enabling our customers with their digital transformation.

In many ways. The pandemic has driven a decade of digital transformation in a few short weeks, our technologies and our team have responded and of extraordinary manner, even as challenges of bound for health care improvements, new educational platforms remote work environments and global digital access.

While we must focus on solving the immediate challenges of coated 19, we're also accelerating to a new post pandemic world of how we will work, we're and live thank you and overdosing.

Thank you Pat.

We were pleased with our Q1 performance and financial results were ahead of earlier expectations against the backdrop to the challenging Cove at 19 environment.

Our team adapted quickly to support our customers' needs in particular with the rapid deployment of work from home related solutions.

We continue to see strong demand for many of our products and services, including our expanding subscription and SAS offerings, which had revenue growth of 39% year over year in the quarter.

Q1 success also demonstrated continued strength in helping drive a positive ROI and enhanced resilience for customers undergoing their digital transformations.

In Q1 total revenue grew 11.6% year over year to $2.734 billion.

The combination of subscription and SaaS and license revenue grew 16.6% to $1.232 billion, but subscription and SaaS revenue of $572 million.

Within the category, we had the strongest revenue performance from our E C.

Carbon black and Vela cloud offerings as well as Vmware cloud on Mws, which had triple digit revenue growth rate for the quarter.

Our on premises perpetual license revenue was $660 million up over two percentage points year over year, primarily driven by stronger than expected. He you see license demand.

Non-GAAP operating income increased 25% year over year in Q1 to $818 million operating income benefited from lower spending directly tied to the impact of coven 19.

Non-GAAP operating margin for the quarter was 29.9% up over three percentage points year over year with non-GAAP earnings per share of one dollar and 52 cents on a share counts of 422 million diluted shares.

We ended the quarter with over $9.2 billion in unearned revenue and $5.9 billion in cash which includes the proceeds from a $2 billion bond offering completed in April.

Early in Q2, we redeemed $1.250 billion of notes, which were originally due to mature in August of this year.

Cash from operations in the quarter was $1.374 billion and free cash flow was $1.287 billion.

Our PEO, which includes our committed and non cancer, both future revenue was $10.1 billion up 19% year over year, 54% of which is classified as current and in line with historical levels.

Total backlog was $4 million, which consisted primarily of orders held due to our export control process.

License backlog at quarter end was $2 million.

For Q1 growth in subscription SaaS and license revenue plus the sequential change and I know its subscription SaaS and license revenue was 16% year over year.

Growth in total revenue plus the sequential change and unearned revenue was 6% year over here.

Turning to product bookings for Q1, you see you had a good quarter at the beginning of fiscal 21, we shifted emphasis from total contract value to annual contract value for you see SaaS product bookings. This impacted total you see product bookings in Q1, which grew nearly 10% year over year.

Our focus on an annual SaaS contracts, where you see resulted in HCV bookings growth of over 20% year over year.

We saw strong demand from customers for our VDI solutions, which helped grow on premises perpetual license bookings approximately 40% year over year.

NSX and Vsan and also had strong quarters, each with product bookings growth of over 20% year over year.

We were pleased with carbon blacks performance in Q1, with an increasing customers to over 15000 as well as strong product bookings growth, particularly in carbon black cloud.

And our modern applications business, which includes pivotal Hep T O and away front had product bookings performance ahead of expectations in Q1.

Core SDDC product bookings declined mid single digits with total core SDDC bookings down 7% year over year.

These results were negatively impacted by covert 19, and followed a particularly strong Q1 last year when core SDDC product and total bookings grew in the low teens year over year.

We repurchased 1.5 million shares in the open market in Q1 at an average price of $117 in 52 cents.

Through the end of Q1, we utilized $681 million from my current authorization of $1.5 billion.

Regarding our outlook for Q2, and the remainder of the year, we're seeing greater economic volatility and a far less visibility globally, which makes any kind of forecast more challenging.

That said our view on Q2 performance given the status of our pipeline and the current economic outlook is for total revenue of approximately $2.8 billion, including $1.3 billion, 45% from combined subscription SaaS and license revenue for the quarter.

We currently expect non-GAAP operating margin of approximately 28% for Q2 with non-GAAP earnings per share of one dollar and 44 cents on a diluted share count at about 422 million shares.

We're not currently reinstating formal guidance for the full year, however, with the immediate global economic challenges, resulting from covert 19, and its anticipated impact on our customers. We believe it's reasonable to expect revenue growth to be in the mid single digits for full year F. why 21.

As economies around the world recover we would expect to get back to a more normalized double digit growth rate and that's why 22.

In the short term given this outlook, we expect operating margin to be approximately 28% for full year EPS by 21.

We remain focused on driving long term value through margin accretion combined with strong revenue growth in the business.

This quarter highlighted our strength and opportunities in a challenging economic environment. The Vmware team demonstrated great execution in Q1 supporting customer needs with the challenges presented by covert 19.

Well, we don't have good visibility into the underlying economic backdrop for the remainder of the year. We remain confident that we will continue to support our customers develop and enhance our portfolio and focus on driving long term value in growth with that I'll turn it back to Paul.

Thanks, saying before we begin to 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.

Thank you and ladies and gentlemen, if you have a question. Please press star one on your telephone keypad, if you're using any speakerphone. Please make sure your mute button. It's turned off line your signal three truck right now.

Thanks again, everyone that star one for question first.

Kash Rangan Bank of America.

Hi, congratulations team on a very much of LCR, considering everything that we're going to I just had one big question, let it go cloud and visitor consummation and it looks like your booked a couple of couple of a dip growth rate with the Amazon partnership Congratulations that's that's fantastic Oh, so you've seen bookings.

Look really good I'm curious Battersea Dr. customers post this out pandemic about how how you're coming out of the other side what doesn't life looked like what would be somewhere as far as a new imperatives for different consummation, maybe thinks are accelerating to the cloud because of what we're going through maybe not what do you see out there with respect to customer buying behavior.

So much.

Yeah, and you know it was a good quarter for us with respect to the overall a cloud in the transformational activities that were doing there bill and we would say overall that you know as customers are going through the phases of the pandemic a tree arash new normal new opportunity that overall, we do expect that there will be a bit about.

Acceleration of cloud activities, but it isn't fundamentally shifting their cloud focus radio. These feel that transition was already underway as you well know a cash customers were already putting more but important so on their subscription or SAS. Their cloud offerings. We expect if anything this will accelerate those a bit but industries that were largely focused.

The on premise they'll continue to be that way right for different regulatory costs and other reasons, but overall this will be a bit of an accelerant a into the cloud in subscription offerings. So were you know our focus and accelerating those areas of our businesses will be reinforced but also we'd say the hybrid strategy that we've laid out in the building there really is extremely well pursue.

Sure right, we help people get to the cloud more cost effectively or solutions now, 50% faster than alternatives and getting to the cloud with lower T. C O since ability to be private public Highbred really is a powerful point and you saw the great results. We had this quarter as we saw extensions of our eight ws relationship new offerings format.

As you are new offerings from Google New offerings from Alibaba, a new version of our Dolly and see solution. So overall, we're really nicely position here in the multi cloud hybrid cloud future.

Thank you cash next question please.

Well hear from mouth, Walter Pritchard City.

Hi, I'm kind of wondering if you could talk about on the you see side strong results. There how do you think about sustainability of but that strength as we move into a post covered world and in and also your prioritization of product development in that area. Given it's a small part of your revenue, but in area, you're seeing quite a bit success.

Yeah. Thank you Walter and you know overall, the cobot environment clearly was a tailwind for you see business and we saw lots of compelling on market opportunities. We're very pleased with how that team did in Q1 of this year. There we saw that across a range of verticals, we saw it and finance health care public sector.

In particular, and we're also seeing it as a critical enabler of many companies being able to address their work from home environments and they'll literally tens of millions of people there were able to work this quarter because of solutions like workspace. One they'll we've had you know examples like veterans administration, Nebraska Medicine birds.

And Catholic education, almost 100000 students down under Cognisant. All of these are just great. Examples of it but we do believe it will be a continued a tailwind a while our overall product strategy, we feel pretty good that we are well aligned on digital transformation and what we're doing with our five pillars before it but on the margin as.

This is Tony you see as a result of this good environment.

Well I'll try just add you know I mentioned in my remarks, obviously, we're very pleased with the the surge in demand we saw in particular for VDI solutions, which helped grow our on premises license bookings by 40% on a year over year basis. We've also been focused on B, a the HCV subscription, which we believe add some value and allows us to both land and.

Expand with new customers too and we saw a nice increase of over 20% there as well so very pleased with the as a whole category and we think theres a lot of room to run here.

Thank you Walter next question please.

Next step is Mark Morris.

Thanks.

Thank you very much and congrats on the quarter, Yeah look really nice so I'd like to look at the question about cash and cash cash flow on a net cash the person, but cash flow on the go forward basis can you give us color on the conversations you're having with clients relating to deferred.

Payments changes and payment terms cashing could be strong this quarter better than some others any color would be appreciated.

Sure Mark Yeah, and I'm glad we can talk to cash or otherwise the other cash [laughter] wherever you prefer in this case you know as you pointed out we're very pleased with the first quarter cashed fundamentals where were great. You know we were very pleased with a receipts and our ability to add to drive cash flow we believed.

Longer term it goes in line with the business I'd characterize it as largely in line with the characterization I made for the remainder of the year and for the second half of the here, we are affording flexibility for those customers that need it and we do think there'll be some pressure there, but overall, we feel very good about our overall cash position, we feel good about the balance.

And we think it will will will grow in line with the business.

Also emphasized that relationship with Dell and DFS helps us present go a flexible cash options through our Delaware financial services partnerships, which gives them the flexibility they need but allows us to continue to execute our business as we have in the past, yes pet point out there many ways that we're helping both customers and partners in this area. Thank you.

Got it come next question plays a very much.

<unk> from Barclays is not next.

He farmer tell me about and you guys were the first of kind of react to the crisis and just a t. tightens down kind of think about executive pay et cetera, and not only anywhere like two months in from that action like how would you characterize what you're seeing now versus your initial expectation. Thank you.

Yeah as I've mentioned, the you know we see this sort of the in the three phases of the response and you're always customers went through triano should be normal a new opportunity you know the economy was hit hard right and I think many of those implications aren't fully realized through the economy, yet and as a result, we expect the next couple of quarters to be.

Tough quarter. So overall for the market no market segment, no Geo a isn't you to those effects.

But you know were surprised how quickly customers were able to adapt them to a work from home environment has been up, particularly Starlink and I think the I T systems, you know the infrastructure investments that people made we're really just pretty fabulous.

I think I've talked to you know probably a couple of hundred Ceos over the last two months and you are really has been a spectacular how quickly they been able to adjust.

That said, we do see that you know this a pandemic because it's a spurred.

Rapid expansion of work from home goes I've described that we've seen you know decades of momentum in weeks right. Just how rapidly the people have been able to adjust your own clearly we're starting to see some recovery in some areas of the market like Asia, they're starting to come back, but we have a long way to go until that's the case, maybe the last jungle.

I can't comment here Raimo would be you know and I've spoken that tech is stronger than GDP and software and cloud is stronger than tech and that priority order. If you would where you know every everybody will get affected by a major GDP impact, but technology digital transformation.

Is more important so what will be several points stronger than the GDP and cloud and software will be several points stronger than tech.

Overall, we believe that that ordering will remain the case and we expect that uniquely positioned technology companies as we see Vmware arm will emerge from the crisis, even stronger than we entered it yeah. Ryan I'd just add you note as we mentioned there is not tremendous visibility as you think you know further through the year and into next year, but our general.

He says aligns with that that any of those large institutions or portraying for the rest of the or we think it'll be a challenging second quarter in third quarter, and then see progression. After that that you know we feel good about the business until get about the general guide.

Thank you Rymill next question please.

Winslow from Wells Fargo.

Yeah. Thanks for taking my question I'm glad to hear that you all are doing well.

Pat You mentioned, obviously this is a huge launch in terms of products.

Yeah it'd be fair itself, you said in footwear, but you really want to focus in on on be fear with with the true coronary betting that committed could translate into view fear or the question water customers now that you had been out there and obviously had been several months and.

I've been dream or what are the telling you about your strategy. What are they are talking in terms of their or their path to cloud native incriminate any change in that you ever given to the current environment. Thanks.

Yes. Thank you fill in great to talk to you. The you know overall the response to the teams you launch, which we did in March was very strong here. We just shipped the new version of these fear a few weeks ago. So I think it's a little bit early to say, how quickly and how rapidly that uptick but the customer interest is truly tremendous.

And we are thrilled as they're starting to see kubernetes become popularized available a broadly and or kansu launch was the full set of capabilities. It was the team zoo application services leveraging the pivotal what capabilities that was 10 zoo mission control leveraging the Hep C O.

Ladies and then what we called project Pacific or the Kansu Kubernetes grid, which is now being shipped as part of a b sphere and overall, we say we're off to a good start in this area and we call. This a the business unit for me as a call them. The modern application Bu and that business area, the whole tansey businesses performed well.

In Q1 overall ahead of our expectations as we would have we seen its starting to come into a our big deals as well five our top 10 deals. This quarter included 10 zoo. So we're starting to see some good early attach rate as well and obviously, we're not finished yeah. This is the area or Oct arenas, joining our family as.

Well to do a container security. So we expect that we're going to continue to build and launch new capabilities. In this area, because we see yourself uniquely positioned to bring vmc entertainers together in a way that nobody else in the industry is positioned to do but also do that on premise and then the cloud so a true multi cloud hybrid cloud.

It would be so overall good start to I think is the most critical product area for us over the next couple of years. Thank you. Phil next question. Please.

Matt Hedberg RBC capital markets.

Okay, guys. Thanks for taking my questions and congrats again on a quarter.

That does your broken VM cloud I need to be U.S. is impressive kinda I'm wondering if you could provide a bit more detail there and then you've talked about companies moving faster to the future as a result, Colgate wondering if you know if you're seeing adding in need of U.S. kind of usage.

With that money go there would be helpful. Thank you.

Yeah, and I'll say, you know a couple of things about the AAMC offering.

You are aware.

Because you've heard me talk in the past, Matt where it takes two years for a new product to become mature enough that customers really trusted and start to build on it and what we first launch the Vmc Servicenow Ws, we thought we could do better than that well guess what took two years and starting late last year. The two year anniversary we saw.

You know really start to take off nicely in the markets seem to triple digit growth. This quarter was really exciting a big customers like I each house or eight figure deal. This past quarter, you know consuming hosts counts in Q1 was up over 200% year on year, so customers starting to consume.

And utilize it feel we expanded and renewed and extended our relationship with Amazon, We opened up the Kws GVE cloud region West Coast. So, we're seeing more and more fed ramp up capabilities to reach that market and bringing new services for at migration de our datacenter migration. So overall it.

As a very good period of time, and we're seeing great momentum in that relationship with Amazon. Yeah. Overall, we think in this environment as I said two or responded the cashes question earlier, we expect while customers that need to be on premise will be on premise customers that are looking to move to cloud. They will do so we don't see.

This is a fundamental shift, but a bit of an acceleration right of those cloud services sold on the bubble. This will drive acceleration and we're seeing that in our overall cloud offerings and in particular with the Vmc on AWB us offering.

Thank you Matt next question please.

Well go to keep Bachmann bank of Montreal.

Hi, Thank you very much and Pat like when on carbon black or large financial institution in North America.

Wanted to ask about STD presidency, rather [laughter] [laughter] why did that ask about the FTC, but in particular I know you said it was down.

Mid single digits in that context. The question is how do you see that fairing for the balance of the year I would assume.

Given the backdrop of guidance it that would continue to decline mid single digits or.

You know nothing else decline, but I just wonder if you could offer some color and I wanted you to add a little bit to what you just referred to because the question is cloud native versus club neutral and what I mean by that is as more workloads to go to the cloud it would seem to me that the virtualization engine ADW health and Microsoft in particular with hyper V.

I'm trying to get more organizations to use cloud native tools, such as hyper V.

But I just wanted to see people speak a little bit to what your expectations for growth for the next few quarters, but then also raise it up a little bit can talk about the dynamics between cloud native tools versus cloud neutral, which is really supporting.

Our strategy.

This was gonna have to be the short version Keith, but let's go ahead and start without I'll say art well pads getting his notes together [laughter].

[laughter], Yeah, you're right the the SDDC bookings being down we're on a tough compare you know if you. If you recall, we had double digit growth in core SDDC for the first quarter of last year, driven by exceptionally strong E quarter. So there's definitely a tough compare all that being said SDDC was impacted by co that theres no doubt we had some head.

And in a portion of our transactional business in particular that area. That's more exposed to the SMB segment. We also did see some softness there in a P.J. of course. This is counter to some extent by the strength we saw on Vmc on HW S and some of the other areas, but we definitely saw softness there and we do think that as we contemplate the remainder of the air and the impact for the remainder of the.

Here the on premise system some of the core elements will be more impacted in other parts that merging parts of the business, yeah, but all violate Paul's rule of the one part of why shouldn't give a bit of perspective on the cloud data versus cloud neutral. We're clearly you know the idea of being able to run of one stack you know the Vmware Cloud foundation on premise on Google.

Amazon Azure.

Ali Baba Oracle and then further with kansu being able to take advantage of container and kubernetes services in a cloud neutral way is compelling to customers, but also emphasize that you know if it was easy to move your apps to the cloud Native services customers would have done have already right. You know it's hard to migrate application.

It was an existing workloads and complex high availability resilient till workloads and that's the core of the via more value proposition. So we'll say deal in those cases, you're seeing queued residence to our message around multi cloud and hybrid cloud and customers always want choice radio the ability to have more flexibility to decide where.

Which workloads wrong on what availability zones in their own data centers what countries, maybe there's a local requirements as well were German workloads for one on German data centers and you know so one so that the flexibility is of increasing interest on the part of customers now clearly when they look to build their next generation applications, but making considerations.

Of cloud native and where do and how do they containerized those that's very much for the kansu strategy comes to play in a very powerful way because now you can say not only do you get the best of a modern Containerize kubernetes development capabilities, but you also have cloud choice as part of that and that really is quite compelling to customers and while it's early.

But you know going back to the <unk> earlier question that I think fill asked or your we are seeing good residents to that tends to strategy.

Thank you Keith Thanks, so much in place.

Nexus Heather Bellini Goldman Sachs.

Great. Thank you so much guys for taking my question then Uh huh.

That's the hearing your families. During these challenging time Pat.

Question for you given you always have a much better crystal ball than many others. I was just wondering if you could share with us.

How your view.

The penetration is changing the pandemic and maybe you can share was that what you thought.

Real estate penetration of knowledge workers, maybe six months ago versus now that you're looking out in the conversations you're having with yeah and CEO.

Might look like going forward.

Thank you yeah, yeah, thanks, Heather and always a pleasure you know overall this is just a radically increase the ability to have managed devices also a meaningful acceleration of BT guy or which really I was sort of pay some customers need of it but a lot of 'em behave well just use steal a subset of apps that are managed apps as ups.

Goes through a true full VDI experience. So unquestionably this has been an accelerant, though this is meaningfully accelerated more customers need. It people are viewing work from home, but it's not a spurious thing, but we're going to be here awhile and a you know if a virus broadly or a vaccine as broadly deployed a year or a year.

In a half from now I got to make my workforce productive in this environment. So we see a meaningful uptick we think that's going to last for a number of quarters.

This business every device needs to become managed every device needs to become secured right. So we're seeing acceleration of our carbon black offerings every device. They used to have good quality of service. So we're seeing acceleration of our Belo cloud offerings sort of call about our business continuity of suite of services. So I think we're in a period of time, where yeah. This is gone.

From being 10% to 20% of the workforce to maybe double or more of that over the next couple of years, because so much of the workforce now we'll be working from home permanently or on a majority basis for quarters to come and as we're in this I'll say second phase right moving from Treehouse to new normal people are saying.

Oh I'm gonna be here for the next six or eight quarters I now have to be efficient secured and well manage in this distributor workforce environment. So this will be a sustainable change and how customers use these kind of technologies for the long term.

Thank you Heather. Thanks next question please.

Frank girlfriend Jefferies is that now.

Thanks, and let me separate companies are kind of characterizing may over April I'm curious if he had any color in terms of what you're seeing in a month bad anything different than you've seen coming out I mean April thanks.

No Brent I mean, I think it's coming in as expected you know our our guide as I mentioned beyond the second quarter, we lack that kind of visibility that we would traditionally has and we think these are unprecedented times, but I wouldn't say, there's been a significant shift I mean, obviously in software we push hard through the end of the core.

Her and then and then things you know build gradually after that that I'd say the teams are still engaged where we're still confident that the sales teams even in a virtual way are doing a great job out there and of course, you have as Pat mentioned this strategy is resonating and I think he's on as many customer calls if not more than [laughter] Britney was when it when it was traveling around so there.

There's still a tremendous interest to get through this yeah. I think one thing that we point to that is different right is that you know we've shown that in Q1 that we can close business effectively.

Now it's really a question can we develop new business new projects New pipeline Pcs were often delayed so now it's really developing new sales muscles that it isn't just about closing business that was already in the pipeline, but it's also generating new business, creating new projects with customers working with them the accelerate and deliver those into the.

Future. So that's definitely a change a and as we finished Q1 and got it dove into Q2 is really about building pipeline for not only Q2, but the rest of the year as well.

Thank you Brent next question please.

And at Nextera, Brad Zelnick credit.

Hi, This is remic done on for Brian Thanks for taking the questions and congrats on a strong quarter, maybe one for Pat you mentioned that customers are looking to decrease the amount of strategic vendors that are leveraging and paramount with the momentum you're seeing with carbon black I'm just as there's the this year how conversations.

Around carbon black and progress throughout this period of disruption and and maybe where you see share gains coming from and in that segment of the market [noise].

Yeah. Thank you and let me first say you know security business unit the carbon black team. Some the other things you put into their Q1 performance execution was great.

And we saw the cloud carbon black cloud have triple digit growth from the most comparable prior quarter 15000 customers. Now. We've also seen that this idea of fewer strategic customers is a powerful thing where you know they trust to be m., where they're doing lots of things with us they're building on or you see or.

Our networking products, let's say, Oh, you're going to build security directly into that so I need one less vendor one less set of management training et cetera. This is a powerful a motion now we got a lot of work to do.

You know the Dell on the box offering is doing well we've seen the integration projects that we have with workspace one be sphere and NSX are all in flight and well underway. We got a lot of work to do there a was great to you know in Q1 bank of Montreal, a big win for US. So excited and that was very much Vmware relationship when right where.

It was definitely all of the M., we're coming to the table, but lots of other great wins as well. This quarter. We're also very dedicated to building a broad ecosystem Elon our security partnership ecosystem, we announced the expansion of our relationship with Dr., but also in areas such as Zhu.

And the teams others as we're doing deeper integrations to deliver more complete solutions for end user computing and work from home environments, where security becomes an essential piece of now having you know instead of having a few campuses now I have thousands or tens of thousands of campus is measured in ever.

The home with every worker so all of a sudden the security profile in Europe still a potential a points of intrusion are so much larger that we see this becoming even more critical so our idea of an intrinsic security platform.

From a credible trusted vendor like Vmware I think this strategy will be even further accelerated beyond the good success. We've had in Q1 as a result to this environment. Thank you Ray next question. Please.

Jason Heater William Blair.

Yeah.

Yes, Thank you Rob.

When you talk about visibility being weak or is that just customers slowing down spending and just kind of.

Not giving you their plans for the year and that's kind of across your different business. A your verticals or is this driven more by the hard hit verticals in the percentage of your business.

Covered by those verticals, that's really just kind of starting on the brakes.

Well I would say, there's two more period and let me just characterize a little bit clearly, there's you know travel and entertainment. The most impacted industries, but every industry is being impacted in some way chico's. So we're starting to see China and some of the Asian economies just start to emerge, but we think we have a long way to go until we're now.

More and more and geos different segments, a SMB being more impacted than enterprise.

And that's a result, we'll just say a lot of uncertainty visibility limited and most Ceos have become more important to the business. In this process you know the criticality of technology digital transformation has increase not diminished per my earlier comments on the priority and we're spending will occur but.

Everybody is now looking at those budgets are saying, Oh, which are the projects that are now most critical I wasn't planning on having tens of thousands of work from home people in my January priority setting now I do so everybody is now, saying, which projects become more important which ones get more funding right or shift around yeah, we'd say overall, we're not seeing deal.

Last for US you know, we're not seeing customers great.

Engaging with us differently, but we do see priority shifts very different views of their pipeline turning into deals at different points in time, So that's where we're going through let me see this period of uncertainty built last a couple of more quarters, we've given our best view of the coming period as we can financially, saying anything to add no I think it.

Covered I mean, obviously, we were thrilled last year with a number of really really large deals that were able to execute against and while we don't think that's necessarily change we think that'll be a little tougher as as customers are thinking about their financial times and how deep. They go with us at that point in time. So overall, we're pleased with the the strategy and we're pleased with the out.

Outlook granted as I mentioned earlier, we just don't have that same level of visibility that we have historically had thank you. Jason next question. Please.

Well now here family.

Oppenheimer.

Hi.

Hi, guys great numbers.

All of questions for me first one on you see I'm, saying can you can you kind of.

Record Trust, how much of that business is done is license versus subscription.

Software again more of our longer term margin question.

You know you've done it clearly very well here working from home is there a way to think about your long term margin potential a little bit differently now that I guess, we've all discovered which actually do just fine working from home how do we think about down from a long term perspective.

Sure Yeah, I'll start with the the next you know this quarter, we highlighted the fact that we actually saw it you know stronger growth in license than we have historically.

On which was unique but still less than less than half of the of the total E. U C. Basket is is license license bookings. So you know we we're still very pleased with the trajectory that the SaaS business has been on and obviously as I mentioned and particularly with our HCV focus we saw nice growth there on a year over year.

Your basis as well so we feel very pleased with with where the where the product is performing and how is proceeding I'm not sure. Paul is going to let US go to the second point I think the others will be upset with me. So we'll save that for the next time to tight next question. Please.

Next step is James <unk> type for Sally.

Hey, guys congrats on a great quarter and Roger both are doing what you are all doing well, but one thing I hope to dive into as your color on what you're seeing vertically, including what the troubled areas of retail hospitality travel in oil and gas as was the opportunity around carriers with Fiveg, which historically isn't a big area for Joe just wondering how.

This could evolve for Vmware over the next year, given what you're showing what the various customers like Deutsche on and Vodafone. Thanks.

Yeah, and I'll just start on that you're generally feel our biggest verticals or federal the federal government public sector, the financial sector and telco or the three biggest ones for US you know generally financial has done well in this period of time go even though.

Like there's some general forecasted that may get to be more trouble those SMB implications et cetera happened through the marketplace. So far business has gone well with them and they are well underway to digital transformation with us.

Federal has remained.

Quite strong and if anything stimulus dollars will probably drive even some potential upside.

In those areas telco, we think is a huge opportunity and Oh, you know the telco environment. If anything has proven more important more resilient to this period of time and the focus on Fiveg is one that you know vmwares been driving and focused on for several years now we've had.

So a good wins that we've been seeing the Deutsche Telekom example, that we gave last quarter around Oh ran was very powerful want us we're seeing the overran initiative.

The one where essentially you know opened ran right open radio access and that network enables the U.S. strengths of Silicon software and cloud to come into the Fiveg network and we think this is industry shaping for years to come and part of the reason that so we announced our expanded partnership with into.

Well in this area the last quarter. So overall, we feel like we're well positioned in those verticals and all of those we see good business opportunity for overtime somebody other segments will be more challenged as you'd expect travel and entertainment retail yeah. We believed to have you know greater impact in this period of time.

We also say SMB will have greater impact, but all of those are smaller business areas for Vmware, even though we don't think any segment any geo [laughter] any country all of them will be affected.

And such a turbulent environment. Thank you Jim next question. Please.

Well go to Alex Kurtz Keybanc capital markets.

Thanks, and thanks for taking my question I just want to go back to your earlier comment about five a year top 10 deals and including can do I guess I.

No. It's early but you know they're changing tangent.

Taking a skill set of projects the number of beyond the number of NSX licenses you might need.

The overall size or too early to tell.

Yeah I'll just start it's too early to tell you know, we just launched the product.

Hi, Yes, our objective is high attach rate to the Vmware platform, we launched a version of our B.M., where cloud Foundation right that includes Kansu and you are now you're saying the whole stack or the Hawaii gas stack plus the payoffs capability is obtained zoo. So we're quite excited about being able to put Tom.

Top and bottom up for that solution. We have our first offerings are they tend to mission control the multi cloud control plane and we've closed our first deals for T. and see a as well with some a large.

Banks around the World here, we're also seeing a good engagement. So you know such as the NHS is leveraging our tends to development capabilities for some of their work a recently in their fights against a co bid. So overall very positive response from the marketplace quite excited to see it in five of the.

10 early deals, but we have a long way to go to declare success or what the financial implications of that could be for us over time. Thank you. Alex next question. Please.

Next page by Morgan Stanley.

Hi, I because he had to thing for for Keith Weiss and congrats to the embarking on a strong Q1 I had one question on sort of unpack a call out of the product cycle. It seems like you have a major product cycle going on Apple Cup I was wondering package could sort of put this is what you context relative.

To some of the other major product cycles, how long do you think this product cycle a lot compared to what we saw maybe what the NSX seats, and maybe three or six some of the past ones and then for the gain on the product cycle as the company to gain traction How's that was expats itself in the model maybe differently than some of the other way.

Ones when it comes to no license persist that and maybe metrics on how to track success with the if it with the with this current price cycle. Thank you.

Yeah on the product cycle. The first the first reason I highlighted that as I had was the fact that we could operate so efficiently during a pandemic and we switch from work from home and yet we were able to deliver on every product release essentially on schedule and this was NSX. It was V saying it was we realize.

It was the biggest be sphere release, and probably a 10 years, a major upgrade to BMC and our first tansey release like while it's an incredible amount of software that weve delivered that production scale in the last in April and with that will say this just begins a powerful cycle.

For US you know that we believe like the Tan Zoo comments that I made earlier, we're just getting started you know this will be a one to two year cycle building on those capabilities into the marketplace. The Vmware Cloud Foundation offering is <unk> be severe is being replaced by Vmware Cloud Foundation, we are moving all.

Of our sales motions to say Bcf as we call. It the Vmware Cloud Foundation is the new V sphere and that Vmware Cloud Foundation is the same underpinnings for the Vmc offering with Amazon. It's also the same underpinnings for the Azure offering the Google offering it's all standardizing on.

On this common platform, which is now on premise in the cloud to the edge. You know this strategy. We believe is one that we can be building on for a couple of years to the future. So we've really launched a powerful cycle of product innovation. We've delivered on the things that we promised last year at Vmworld and we're well underway.

And this turbulent period with I think the greatest portfolio software that be emrs ever had and I would just to add you know along with that solution focus there obviously efficiencies that you see in the business, which continue to drive our long term growth as well as margin profile nothing in what we've discussed isn't incorporated in our forecast we continue to focus.

So on subscription then SAS as a big driver for the business, which is the way we the way we guide and forecast. Thank you Sungy next question. Please.

Next is Shannon crops Cross research.

Thank you very much.

One question on your thoughts on acquisitions, when you said capital I'm just curious given the current environment, if you're seeing any opportunity for perhaps and you know technologies that are on that private equity or you know how you're thinking about the potential given obviously closed didn't know carbon black at the end last year. Thank you.

Yeah.

Overall, our capital allocation policy hasn't changed.

You saw we continue to exercise buybacks and with the Op Dream acquisition that we just announced though because you need to do M&A is as I described as we finish last year with pivotal and carbon black that not only were those large right, but we had a lot of work to do to integrate those into the company. So I expected this year to be.

And more modest M&A year, a one we're more focused on tuck ins that said, we're going to continue to look for good opportunities that we do expect that so there will be more cost effective uses of our.

Balance sheet investments for acquisitions as a result to the environment. We're in there and we're going to be looking for those opportunities, but it's going to fit more to I'll say, a modest M&A tuck in kind of focused a year for us because we simply got to finish what we started with carbon black and pivotal and even though those are going very well so far as I've already commented in both of those.

As businesses performed above our expectations for Q1, we believe we have a lot of integration of work to finish up with both of those thank you Shannon next question. Please.

Well go to Brad you saw.

Great. Thanks, very much on E. C were there any short term transactions done there that might create a difficult comp down the road as customers sort of transitory or they moved to work from home.

No I don't believe there any any short term impacts I mean, obviously, we were pleased to see the VDI portion that I mentioned, we did see a strong license growth, which you know will we expect to see continued SNS and attach beyond that and if anything with the HCV focus you know we're focused on Uh huh.

Hi, retention rate and growing and landing and expanding as we talked about as we talked about earlier. So we do see more normalized growth as the year progresses and as the years progress, but we're still very encouraged by the category and what we're doing in the category. So we couldn't be more excited about our position and the overall growth of the portfolio there, yeah, and I'll just add but we feel that some of our.

Business continuity offerings here, we have special 30 day trials for certain segments as certain customers. So if anything we think that we've gotten some new customers who are now considering us that might not have considered us before so I think we see more upside there than headwinds in the future.

Thank you Brad Grey save time for one more question. So this is less question. Please.

And that will come from Robert Me check Raymond James.

Hi Tech congrats on that could result in a container space I'm. Just wondering if you can get from an update on what you're seeing the competitive landscape, who your view as your core competitors, if you're seeing any changes there when right. Thanks.

Yeah, I would give them the comments I made before on just getting comes due in the marketplace. Just launching these fear which includes kubernetes you I'd say, it's pretty hard to give us any real a competitive win loss metrics at this early phase of the market as I've described that before I see that the market becomes five play.

Ears.

You know, it's a I'd be m. red hat, it's the three Mega cloud players, Google Amazon, Microsoft and their native services, and B M, where and when we think about those five you know we're uniquely positioned with a multi cloud hybrid cloud strategy deep partnerships with Amazon and partnerships with Azure and Google as well.

Well, a huge footprint that we can leverage and be sphere. That's a really allows us to present this integration of containers Nvdimms right and we don't think it's an or we think it's an and that we could be both of those and make it just seamless for customers to begin embracing the new kubernetes and container strategies. So we really like our strategy here.

Customers resonate with it and we're pretty excited about the good results we saw in Q1.

Thank you Robert before we conclude Pat will have a final comments to make yeah. Thank you all for joining US today, it's I'm very proud of the team and our strong execution in Q1 and as we're focusing on the immediate challenges Kogan 19 were also accelerating to new post pandemic world of how we how are we to work.

Probably learned and how we live being permanently changed in the result or strategy. We believe is very relevant to customers and even more so in the buyer, but as we look into the future and we're excited to update you in our progress next quarter. So thank you very much.

That does conclude today's conference.

Participation you may now disconnect.

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