Q3 2021 VMware Inc Earnings Call

[music].

Until then thank you for standing by and welcome to the V., and where you sleep and White 2021 earnings call.

At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session on.

That's good question during the session you will need to press star one on your telephone and I would now like to have the conference over to your speaker today, Mr., Paul and sites Vice President I think that's true relations. Please go ahead.

Thank you good afternoon, everyone and welcome to the and worst third quarter fiscal 2021 earnings conference call on the call. We have Pat go singer Chief Executive Officer, and Zane Rowe Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions our.

Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. So.

Slides, which accompany this webcast can be viewed in conjunction with live remarks and downloaded at the conclusion of the webcast from IR day, the I'm worried 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 and the 10-K's 10-Q's and a case, we and we're files with the SEC, 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 volume worst 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 and 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 and the press release and on our Investor Relations website, unless otherwise indicated all financial metrics provided on this call are for the consolidated Vmware entity, including pivotal growth rates compare Q3, a flight 21 results with the recast of prior period 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 GAAP.

The webcast replay of this call will be available for the next 60 days and our company web site under the Investor Relations link our fourth quarter fiscal 21 quiet period begins at the close of business Thursday January 14, 2021 with that I'll turn it over to Pat.

Thank you Paul and welcome everyone.

We are pleased with our Q3 financial performance as we continue to navigate through the global pandemic are any cloud any application anywhere strategy continues to resonate with our customers as they manage through these unprecedented times.

Our performance was again driven by revenue growth of 44% year over year, and subscription and say, yes to $676 million, surpassing on premise license revenue for the first time.

As we anticipated we saw continued COVID-19 and pack the large transformational on premises projects and Q3, even as our pipeline suggests some level of recovery and this area and Q4.

We continue to expand our five franchise platform capabilities to work first and best and the cloud enable a unique multi cloud capability and also support customers who prefer to maintain some or all of their capacity on premises. We are on track to make most of our major product offerings available as subscription and SAS and the next.

Calendar year, providing a broader set of consumption choices for our customers with the flexibility they need.

Now I'll turn to updates across the business.

We hosted our first the all digital Vmworld and Q3 welcoming nearly 200000 registered funds, where we introduced new offerings and partnerships designed to help customers navigate their own transformation journeys.

The M. word tons EU, a complete portfolio for modern applications is now supported the cross Vmware cloud on Mws, Azure, Vmware solution and Oracle cloud Vmware solution.

We also recently announced the packaging of tons EU products into force simple additions targeted directly at the most common application modernization challenges.

We are seeing good customer momentum for our tons you offering for example, if I serve leverage if you have more tons due to build a solution to enable 18000 small and medium businesses the ability to quickly apply for P.P.P. funding.

In an effort to bring kubernetes to more I T administrators, we unveiled a new series of updates across Vmware Vsphere, seven Vmware BC and seven Vmware Cloud foundation that streamline customer adoption of kubernetes and support Stateful applications with new developer ready capabilities and enhance scalability and non.

Operations.

We also showcased and expanded partnership with and video on stage of the Emerald designed to deliver a mainstream mission critical and enterprise grade AI platform that is virtualized and containerized.

Together with and video we plan to deliver a consistent experience for developers and operations from data center to edge to cloud and telco cloud as Weve democratize AI for all enterprise customers.

On the security front, we unveiled Vmware carbon black cloud workload, delivering a breakthrough and protection with Agentless Zero Trust protection for better securing all workloads.

The solution combines carbon black security expertise with Vmware is massive installed base to reduce the attack surface and help customers strength and their security posture.

As we see our customers continue to pivot to distributor workforce models, we're delivering solutions to help businesses enable their employees to work from anywhere.

And where is partnering with these scalar and Menlo security and the area of secure access service edge or sassy to provide into and visibility and protection for distributed Workforces.

We are also developing work force anywhere solutions that combine Vmware NSX secure access service edge workspace, one and carbon black endpoint security capabilities with intrinsic security to enable robust and user experiences and lower operational complexity.

On a related note Vmware was recently position as a leader in the Forrester wave infrastructure automation platforms Q3 2020.

Additionally, Vmware has again been positioned as a leader and the Gartner 2020 magic quadrant for weighing edge infrastructure for the third consecutive year.

I'd be I'm World, We also unleashed new innovations that offer our customers a glimpse into the future. This.

This year, we were excited to unveil project Monterrey, a major architectural evolution of the Vmware platform into a fully distributed system for the data center cloud and edge, while harnessing major silicon and hardware advances.

The result will enable customers to address the changing requirements of next generation applications, including AI and machine learning and Fiveg.

We are collaborating with ecosystem partners to deliver solutions based on project Monterrey, including Intel and video and put saw the systems Dell technologies, Hewlett Packard enterprises and the Lobo.

Oh swear and the innovation front, we are now offering commercial availability of Vmware block chain, so that businesses such as the Australian Securities Exchange and Broadridge financial solutions are provided a trusted scalable decentralized and immutable platform for the next generation transaction processing applications.

Our multi cloud strategy has taken major strides forward with our cloud EMR approximating $1 billion volume, where cloud native U.S. continues to grow revenue over 100% year over year.

Paul Hyperscale offerings are now available and transacting volume were cloud, including Microsoft Google Alibaba, I, B M and Oracle as well as the Vmware cloud and Deli M.C.

Our unique solution is increasingly being viewed as the most effective path for customers such as torches Porsche group to execute a multi cloud strategy and Chevron, which is leveraging azure Vmware solution to advance and scale its cloud journey.

The M. World, We also announced a new set of cloud management offerings to enable organizations to consistently deploy operate and govern applications infrastructure and platform services across a multi cloud environment.

And where we realize cloud universal combined hsas and on premises management software and to a single subscription giving customers flexibility on their cloud journey.

Additionally, we acquired Salt stack, a pioneer and building intelligent event driven automation software.

Salt stack will enable vmware to significantly broaden its software configuration management and infrastructure and network automation capabilities.

We launched the Fiveg telco cloud platform, a consistent cloud first network architecture to accelerate Fiveg and the edge innovation powered by a field proven carrier grade and high performance cloud native infrastructure with intelligent orchestration and automation. This new platform includes Tom.

And do kubernetes grid, and embedded kubernetes distribution and will allow communication services providers to reliably build manage and run containerized workloads across private telco edge and public clouds.

We continue to see momentum with key communication service providers, including NTT, Docomo Rogers and Singtel turned to VM, where telco cloud solutions.

And with our foundational technology partners, including Intel and Qualcomm, we remain well positioned to help our customers create monetize and deliver an array of new applications and services for both consumer and enterprise markets through Fiveg.

We are also collaborating with Samsung electronics to further our mutual offerings and Fiveg.

With our evolution to SaaS and subscription, helping our customers with consumption is critical we.

We recently launched Vmware success, Threesixty, a comprehensive customer lifecycle offering that provides our customers a unified and simplified way of realizing value continuously from Vmware solutions, the offering and helps customers achieve outcomes faster through ongoing success planning adoption guidance and design.

Workshops with dedicated and proactive support.

In closing Q3 was another good quarter for Vmware with our focus on delivering the digital foundation for an unpredictable world. The company is shaping the future and strategic areas that are top priority for every business from App Dev to multi cloud and from networking and security to digital work spaces.

Thank you to our customers partners and TV everywhere for their focus and execution over to using.

Thank you Pat.

In light of the current environment. We are pleased with our Q3 financial performance highlighted by 44% year over year growth and subscription and SaaS revenue.

The expanded breadth and depth of our portfolio enabled vanweigh to delivered good growth in the quarter, even as a number of our customers business plans were impacted by Cove at 19.

While the timing of certain projects, particularly those focused on Prem had an impact on bookings in Q3 the value. That's the inwards digital foundation brings to customers is driving the continuity of customer demand that we see extending into the fourth quarter.

In Q3 total revenue grew 8% year over year to $2.864 billion, while the combination of subscription and SaaS and license revenue grew 10% to $1.315 billion.

Subscription and SaaS revenue comprised 24% of total revenue in Q3 with better than expected growth and VCP modern apps and Vmc and eight of the U.S.

B and C. On HW has continued to show great traction and Q3 with triple digit year over year revenue growth highlighted by continued expansion of the Amazon channel and workload expansion from large PMC customers.

In line with guidance and our expectations on Prem perpetual license revenue for the quarter declined 12% year over year to $639 million with large transformational projects slowing due to the impact of Cove. It.

Non-GAAP operating income increased 17% year over year in Q3 to $888 million once again benefiting from better than expected revenue performance and lower spending tied to the impact of Cove. It on the business.

Non-GAAP operating margin for the quarter was 31% with non-GAAP earnings per share of one dollar and 66 cents on a share count of 423 million shares.

We ended the quarter with over $9.2 billion, and unearned revenue and $3.9 billion and cash.

Cash flow from operations in the quarter was $992 million and free cash flow was $908 million.

Total backlog was $33 million substantially all of which consisted of orders received on the last day of the quarter that were not ship that day and orders held <unk> export control process like.

License backlog at quarter end was $9 million.

Our PEO, which consists of committed and non cancelable future revenue was $10.2 billion up 10% year over year.

55% of this amount is current and in line with historical levels.

The Q3 growth rate for revenue plus sequential change and unearned revenue was impacted by the addition of unearned revenue from the carbon Black acquisition in Q3 of last year and.

As well as they continue to increase and mix of our subscription and SaaS offerings.

Adjusting for the acquired unearned revenue for carbon Black and Q3 last year total revenue plus the sequential change and unearned revenue declined 4% year over year, and subscription and SaaS and license revenue plus the sequential change and unearned subscription and SaaS and license revenue increased 1% year over year and Q3.

Turning to product bookings in the quarter, a core SDDC products were flat year over year, which was slightly better than we expected.

Given the delay in the large transformative on Prem projects that we discussed last quarter, we saw product bookings declined for Vsan and NSX and do you see in the low to mid teens year over year.

He sees HCV SaaS growth rate was in the mid single digits year over year, driven by demand for horizon Hsas.

We saw a slowdown for workspace, one projects, which are more transformative and natures as customers focused on establishing work from anywhere protocols.

Traction for our modern applications portfolio drove strong product bookings in Q3, and we also saw a good performance for carbon black cloud.

As VM waste development and go to market efforts have evolved to focus on our five franchise platforms of modern applications multi cloud and.

Net working digital workspace and security we plan to start highlighting the performance in these areas in upcoming quarters.

In Q3, we repurchased 1.8 million shares and the open market at an average price of $144 per share.

Through the end of Q3, we utilized over $1 billion from our current repurchase authorization of $2.5 billion.

Turning to guidance for the full year EPS why 21, we're now projecting total revenue of $11.700 billion up 8% year over year.

We expect subscription and SaaS and license revenue of $5.560 billion for 521 up 10% year over year with subscription and SaaS representing over 45% of this amount.

We expect non-GAAP operating margin to be 32% and expect non-GAAP earnings per share of $7.03 on a diluted share count to 423 million shares for the fiscal year.

Cash from operations is expected to be $3.75 billion, and we expect free cash flow of $3.45 billion for fiscal 21.

For Q4 total revenue is expected to be $3.225 billion up 5% year over year.

We expect subscription and SaaS and license revenue for Q4 to be $1.660 billion up 4.5 percentage over here with subscription and SaaS, representing approximately 43% of this amount.

Q4 is typically our seasonally strongest quarter for our on Prem product portfolio.

We expect non-GAAP operating margin of 33.5% and non-GAAP EPS of $2.04 per share on a diluted share count of 423 million shares.

We typically get some color on how we're thinking about our upcoming fiscal year at this time I'll point out that any forecast given the unprecedented and unpredictable economic impact Cove. It is having across the globe has a higher degree of uncertainty the normal.

Fortunately the pandemic hasn't had the level of financial impact on our business. We initially expected this year and our current forecast for 8% total revenue growth for flight 21 exceeds the mid single digit forecast, we've guided to earlier and there.

For flight 22, we expect total revenue to grow in the high single digits factoring and continued growth and a larger mix of our subscription SaaS portfolio Inc.

Incremental improvement and our on Prem performance and our current expectation for F Y 21 growth.

We expect and fly 22, non-GAAP operating margin to be similar to our early view for F. Why 21 of approximately 28%, which reflects investments and subscription SaaS and the unwinding of the Opex benefits experienced and fight 21 due to the impact of Cove at 19.

We're pleased with our overall progress in the midst of the global pandemic and while operating virtually we.

We will continue to invest in and focus on further expanding our subscription and SaaS portfolio, which we believe will drive company growth customer satisfaction and shareholder value I'll now turn it back to Paul for Q and a.

Thanks, saying before we begin the Q and eight 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.

Ladies and gentlemen, and my Dream.

And question, you won't need to Pat Taiwan.

Following <unk> question Brad.

Okay, and then I get to ask a question. Please press star one.

Your first question is from Phil Winslow Your line is open.

Great. Thanks, guys for taking my question Congrats on a solid quarter Pat a question for you. Obviously, you called out some push outs of those large trends transformed and type transactions. This year, but what are you hearing from customers, especially sort of and the contracts or the forward guidance that you're giving for fiscal 2000 students or sort of how those come back because obviously.

The the BCP business has been good and modern asked me good but how are you thinking about sort of the return and some of the more transformative on premise deals and how are you incorporating that into that but early look and next year. Thanks.

Hey, Thanks, Phil I'll get started without one.

We're pleased with how we executed and Q3 and now three quarters and in a row were ahead of our expectations. Despite the pandemic.

Against that we view the overall you know macro environment pretty consistently you know and we continue to expect a gradual recovery through the next year beginning in Q4 and as we anticipated than indicated last quarter. We saw this impact on the large transformational projects there in Q3, particularly on prime projects.

And our pipeline is suggesting some level of recovery and this area in Q4, and we do expect as the economy recovers, we expect to see some incremental improvements with our on print products and Q4 and continuing into fiscal year. A 22, you know and overall the customer conversations digital transformation is more important than ever.

So they're seeing that priority, but again a lot of turbulence a lot of the old prioritization going on inside of that picture overall business and we are starting to see some of that recovery and Q4, and we expect that to continue in the next year.

Phil I would just add this is Zane you know we would expect the first half obviously to be you know more impacted and the second half of next year. As we you know as you break out next year and as Pat mentioned, you know, we see incremental recovery on the on Prem products and and feel good about sub and SAS continuing to grow nicely into a into F. Y 22, I'll also point out.

And as I mentioned in my prepared remarks, you know this year has surprised us and and obviously, we're coming in at 8% higher than the mid single digits that we expected early in the year. So we're pleased with the momentum we are seeing heading into the fourth quarter here. Thanks.

Thanks, Phil next question please.

Yes. Your next question, Inc. From that Paul break your line is open.

Oh, great. Thanks for taking my question and congrats on the results here as well you know Pat I know you previously said and security market is ripe for disruption and was wondering if you could provide a bit of an update on the relative size of your security business as well as you know how carbon our hobby and more carbon black cloud workload and.

You know just your broad and some zero Trust initiative.

Help that's that cloud cloud security growth.

Yeah. Thank you and you know as we've indicated you know as we look across the full range of our security offerings, the portion over and networking business, though the carbon black business and the euro expanding role that we have and a workload as well that were about a $1 billion total and our overall so.

Security offerings, and a Q3 carbon black cloud delivered steady growth and we still have work to do to complete our intrinsic security strategy and the integration work around that you know I was extremely happy with the carbon black cloud and workload protection. This no idea being able to use the b M to have an agentless approach.

So this is transformational we announce the deal availability six months free as I described at Vmworld 2020, It's a bad day for cyber criminals is we're going to start really pushing this broadly across the massive Vmware installed base here were also Ah integrating your security more.

Centrally and to our work from anywhere solution <unk> as part of our sassy offering of which she will secure access service edge will be integrating more directly carbon black with workspace, one with fellow cloud and our partnerships that we announced with a Z scalar and Menlo and were expanding.

The integration into the endpoints as well as and to our networking solution as well as our workload. So security is playing an increasingly crucial role in our product line. Overall also one for our customers. We saw a rapid increase and the number of attacks as we've seen through the cobot period as I saw.

And have a cynically you commented you know the bad guys did and take a break despite the pandemic. So overall and some more important piece good momentum with our intrinsic strategy and some major deliverables as last quarter.

Thank you Matt next question please.

Your next question and somewhat Murphy and Phil.

Thank you I'll add my congrats Pat a few months ago, you had commented that financial services public sector and telco were all strong in your second half pipeline I'm curious did some of that business or convert over and fiscal Q3 or is that more keyed up for Q4.

Sure just given your comments about some recovery there and then in the Q4 pipeline and maybe maybe Dan can comment on that too and Oh and just within that can you comment on the five G activity and the telco segment.

Sure sure and your overall you know again, we're pleased with the Q3 year to date perform and so overall good resonance to the strategy that we had you know, particularly the strength and the SAS and subscription and 44% and the quarter you as it pertains to the three sectors I talked about financial services.

A telco and.

And public sector public sector was good in Q3, and though we saw a good performance there we saw reasonable performance and telco and financial services War of the pipeline. There is seen in Q4 that we've seen so a bit more recovery and those areas and Q4, but even as we think about.

And so telco we commented on the a.

Three major brands that are now a partnering with us they will Rogers Singtel and NTT Docomo, one of the largest providers and the world. So we are seeing a solid momentum.

And telco, we do as a I've predicted before starting to see that inflection point for Fiveg investments overall, and we're clearly seeing a customers move from I'll say small pilots you know some locations that now, saying how do I start deploying fiveg across my entire network. So I think we're.

Well on track and our timing for the Fiveg opportunity is very good I believe it'll be somewhere really work and to have our telco cloud solution being seen as the operating system for Fiveg. The overall, so I think we're right on track with what we said and seeing more momentum and the service provider.

Her and financial services and that represents a good amounts of our Q4 pipeline.

Yeah, Mark I'd, just add some additional color maybe on Q3 that'd be helpful. If you look at our larger deals. We had 16 in Q3 that were over $10 million versus the 19, we had on the same quarter last year. So it was a tougher compare there were also slightly larger deals.

In the quarter of last year, and we've been talking about the impact, particularly on on Prem for these transformative a transformative deals obviously that did impact us and Q3, you know other sectors that did well obviously, we saw good strength on the public side and pharmaceuticals actually had a good quarter as well, but you know as Pat mentioned, we feel good about demand heading into the fourth quarter.

Thank you Mark next question please.

Your next question and that's from Walter Pritchard. Your line is open.

Hi, Thanks, and I'm wondering Zane and Pat if you could talk about the pace of rollout and adoption of the subscription offerings on on the core the fear side, you're expecting as you.

Outline for next year, and and then how that's factored into the high single digits revenue and 28% margin for 2020 2022 excuse me.

Yeah, and I would say you know maybe I'll start and then ask Zane to jump on you know, we're pleased with the sub and SAS momentum overall it was another good quarter for that building on the good momentum we had from Q2 and we expect that to continue in Q4 now you know we also said that we cross sub subscription and SaaS.

S. Cross license for the first time and Q3, we expect that to reverse in Q4 as license always says a great Q4 quarter, but we expect that to flip back and really be the case for the entirety of next year as we see that sustained subscription and SAS and as I said, we're expecting all of our major product.

Offerings, a sub and SAS and the next year. So that's on track. We're also gonna have increasingly flexible purchase mechanisms for customers for the cloud migration and one example of that was the flex offerings for V. you realize that we launched and are well received so that's really sort of a a first step in that direction for across the portfolio.

We're putting in place programs incentives for customers to help and with that with the pivot to sub and SAS. We're also doing more work on our SAS operations to be able to help take scale and really bring that to our customers and as you well know in a SaaS business, it's really much much more about consumption and their success and we rolled out our success three so.

Yes, the offerings this quarter as well.

And last comment there would be you know, we just see that we're well underway with the sub and SAS conversion, but we're also uniquely position on prem to satisfy both sides of the business as we think no one else is as well positioned to do both the on Prem and the cloud offerings a zane yeah.

Just to add you know obviously, it's it's ratable revenue recognition as we head into F Y 22, and we do expect the southern SAS mix to become a bigger part of our mix for the upcoming year and years beyond that.

So we do expect revenue to progress and and grow nicely you know along with those with those bookings growth of course Weve also been focused on HCV. So as you look at our total bookings and they are impacted by tighter duration as we focus more on HCV and our southern SAS categories versus TCV, and example would be even the CPP.

Which has had a great year and continues to show strong growth and you don't get that same level of booking so we'd point more towards revenue growth and we would bookings growth as you think about the mix of both on Prem and the the southern SAS businesses that we have but we're generally very pleased with the 44% and this quarter that'll continue obviously, we lap carbon black next quarter, which.

Will impact our growth next quarter, but we like the the strength and the trend were seeing well into next year. Thank.

Thank you Walter next question please.

Your next question is from what Mike and I can Robert.

Thank you very much and congratulations on the solid quarter, one a follow up a little more on the shift to subscription and SaaS subscript to subscription and SaaS normally creates a headwind near term to revenue, but helps things like CRP outperform which is what we saw at Vmware can you give us any sense and how you think about the.

The impact of the shift is having on the revenue and order in other words, how much faster could revenue have grown if it did come in and license and maintenance versus subscription and SaaS.

Yeah, It's a great. It's a great question Mark I'll start you know because of the nature of our product portfolio. There's there's no doubt that it's having some impact and we've got a number of models to think about how you would break out you know one versus the other but where you know the way we're running the business and the way we think about the products that candidly, we're looking at the two businesses as two opportunities and wait.

We don't like necessarily call one out as a headwind there is no debate, though if you were to just you know and some of the cases, we've talked for a number of quarters about E. You see for example, you when you think about Vmc and VCF. There are options that are more on prem or otherwise you know sort of where you would recognize the revenue up front versus the sub and SAS portfolio that we've been pushing we're very comfortable.

And with the Smile that you alluded to with the long term value that we're going to be getting out of our southern SAS portfolio. So we're very encouraged by not only the growth we're seeing there, but the long term value for our customers and ourselves, obviously, which is why we're sort of thinking about them independently, although as one company and not trying to call out the headwind.

Yeah, and as we said you know as we are converting customers more and more into that we're also going to be presenting more flexible models go for customers. So they're going to be able to essentially make that migration at their business pace, a four year old we've done that with a b. realize offering as we said and we're getting good response from customers.

And for that also many times so that as customers are making now to this and the dollar for dollar switch right. It's a moving to a richer offering as well as to become part of our cloud offerings go they're buying into the full solution of Vmware. So we do see benefits for a richer portfolio of our solutions as well as there.

Taking that migration to our cloud based offerings. So overall, we see it as a great opportunity for greater lifetime value and those customer relationships and all of our indications. So far are very strong and that direction.

Thank you Mark and.

Next question please.

Comes from Raimo Lenschow your line.

Hey, Congrats from me as well and quick question on you see you commented on like strength and horizon and kind of maybe a kind of more pushback or push out a little bit on workspace, but can you talk a little bit about the dynamics there because it does seem all that and with more working from home you wouldn't think that this area.

I see a lot more focus from clients like and well is it more tactical there's a strategically at the moment or what's going on there. Thank you.

Yes. Thank you Raimo and up you know really has been a bit of both sides of the business and overall you see you know a great role as part of our you know enabling organizations to work from anywhere the business continuity resiliency we.

We saw a lot of strength and the horizon VDI solution and horizon cloud in particular, and you know where customers needed a day a VDI solution. We just saw very strong growth and those are scaling up and as a result, our payroll and as we saw and Q2, our horizon SaaS mix was particular.

The strong and as we continue to grow year on year.

A lot of the workspace one deals M.D.M. deals et cetera are much more transformational deals and they would be like.

Lining up with I'll say the comments that we made around transformative deals and overall, where they were more impacted by Cove and we also saw that we had a unique exposure to some of the vertical segments and we have particular strength and health care travel retail leisure and those segments were uniquely impacted by.

I co bid as well so I think we had some unique aspects to our business and those vertical markets that we're uniquely hurt by Cove and overall, though we continue to feel very good about the business growth Gartner gave us.

Another U.M. leadership Magic quadrant third year in a row. We also saw that our offerings as we bring together our complete sassy solution for work from anywhere are getting a lot of interest from the marketplace. So we feel well positioned overall, even though the business itself had some unique dynamics.

And side of it okay.

Okay. Thank you.

Thank you Rommel next question please.

Question is from Robert your.

Okay and.

Excellent. Thank you guys for taking the question.

One for Pat and and one for his name Pat when you talking about the delays that you're seeing and these are large transformational deal went.

When I think about larger deals and like transmission, just taking place to be and what I'm thinking about the enterprise license agreement that you guys. Typically side is this where you're seeing those delays and and these are like you typically three year contracts do you have to wait another three year forget and get on board with this or is there sort of inter like inter sort of renewal.

All periods, where you come back and get this demand on a go forward basis.

Yeah, I'll say generally we're seeing those large deals just take longer and our renewal rates are very strong. So we don't have any concerns in that regard, but you know the big deals are taking longer it may be a quarter longer to go finish. It. There is another sign off required there looking and saying boy you know my priorities.

We're shifting around because I'm not spending as much time and the data center, yet we can't have our teams back and place you're and we see that on the subscription and SAS side of our business you know, but overall as Zane said, you know 16 10 plus million dollar deals, we still see a lot of activity there.

We're also seeing continue to see good attach of our strategic products as part of it you know three of 10 included BMC on Amazon or four of 10 Tan Zoo. You know, we really you know continue to see NSX Vsan and you see management have high attach rate overall, so we feel very comfortable that our strategic.

<unk> position and our strategy is highly resident to our customers digital transformation, even though we'll just say big transformational deals, yes, a little bit more challenging and this cobot environment.

Thank you and Keith.

Keith well.

Come back if we have time at the end for your second question, because we keep it to one question, Okay and the others will get upset [laughter]. Thank you got it. Okay. Next question. Please your next question and it's from Brent Thielman.

Okay.

Thanks. This is a part of and for Brent can you remind us how the sales force is incentivized today with both perpetual and sub and says on the price list.

And do do incentives, you, one way or another or our EPS.

Generally commission neutral between those two and as loan buttons.

Yes. Thank you you know, it's a little bit complicated right because different products have different characteristics, but you know the sales force is compensated for both ray perpetual and the SaaS products generally there's an uplift because most of the SaaS products have an HCV characteristic and.

Associated with them also we have specialist sales teams, who solely sell particular product areas for instance, where cloud right. There's a specialist team and they're only compensated on selling those products as well. So overall, let's say you know we are in that sales force transformation process as well and as were building more subscription and so.

Psas and the portfolio, we're incenting our sales force to get ahead of where our business outlook is so we're driving a more I'll say, a rich portfolio of their quotas and their compensation to lead the way with our customers and the subscription and SaaS piece, but overall, we have many segments of our of our cash.

And where base that are gonna be perpetual forever right, you know and as we look at public sector Telco financial service says as three that I've talked about with a strong bias to a long term position of mostly or entirely.

On premise you are we really will have that dual view of our sales compensation into the future. You know we'd also say some of the offerings like success 360 that we launched this quarter that are really driven to consumption success of our customers were a lot of the SaaS business is smaller initially and it's about growing.

It overtime and our success 360 offerings are starting to get great momentum with our customer success teams and sales force and being attached to deals. So overall, we're well on that transition and we'll certainly talk more about it as we go into our next fiscal year or will make more aggressive adjustments to our subscription and.

<unk> sales incentives things part of next question. Please.

Our next question if some Scott all right, thanks, Ted and I need something.

Thank you maybe this one is for Pat Pat I'd Love to ask you about some of the.

Younger emerging businesses like NSX and Vsan and in contrast to the core EPS DDC portfolio that came in flat on the bookings front and as Haynes had maybe slightly better than expected. If I heard you correctly I I think that.

The bookings growth was down low to mid teens for some of these products like NSX and Vsan and I'm wondering why that would be because typically they've been able to sort of power through some cyclical downturns, but this time it feels like they're getting dragged down a little bit more than we would think by these the on Prem delay.

Yes, and I'm just wondering if you could help us understand why whether there's anything else going on architecturally inside large enterprises that might be impacting the the bookings growth for some of those previously high growth businesses. Thank you.

Yes, I think you know there there's maybe two factors one is just the big transformational deals and NSX vsan and large components of those areas. So we just saw more impact and many of those projects a lot of those are a major transformation of data centers moving to private cloud.

And we saw we saw more impact are there you know overall, we're very pleased with our positions on both of those product areas and we're continuing to see for instance, like VX rail had growth. This quarter. So that portion of the V. sand business was good. We also had a great momentum and some portions of the NSX business like the Abhi load balance.

Sure you know doubled year over year, it's a smaller piece of the portfolio also great interest and some of the new areas such as the firewall capabilities I'd OSI P.S.. So we see a lot of interest in it would also point out that on the NSX side, a lot of momentum around SD Lan and our work from anywhere.

The second factor and additional I'll say, the big transformational deals as the year on year compare and we had a very strong you know uniquely strong position and our growth Q3 of last year, so that sort of come towards the numbers that you see and Q3 of this year, but those would be the big factors with the transformational deals by far being the biggest.

And I'll just add just to get some color there and you know the year and year compare for instance for NSX was a positive 50% last year and Vsan was well over 35% last year. So significant challenge and when you think about the year over year compare and obviously as as Pat alluded to you know we didn't have and I mentioned earlier, we didn't have the size even a lot.

And just deals weren't of the size and scale of the large deals that we had last year and that definitely impacts products like NSX and Vsan and got it. Thank you Buck Carl and.

Thank you next question. Please next question is from.

Well, we will line open.

Yes. Thank you I'd like to direct Zane if I could think could you give us some of the puts and takes that we should be thinking about for free cash flow and F. Y 22 for instance, you're guiding operating margins to decline by over 500 basis points I assume that would be a headwind and mix I heard some conflicting comments it's.

And so like some of the on premise license spend may improve from some of these pent up deals and yet SaaS and subscription and I would assume continue to outgrow the company's weighted average, but if you could just give us any thoughts as we approach next year and our free cash flow assumptions that would be helpful. Thank you sure Keith Yeah I don't.

Carl text and you the question and he was hoping to line up for me. So I'll I'll definitely give you some color.

On a on this year and then you know we we don't get too far ahead of ourselves into F Y 22, but happy to give you at least some of the dynamics. You know first off you know this has been a good cash flow year for us. If you think about the strength, we've seen and knows he f. through the course of this year.

And it's come in stronger much like our financial performance I'd say, our our operating cash flow performance has held up and and actually with the latest increases has increased for the year I will point out that you know part of that and the first part of the Irrs due to the strength that we saw in Q4 of last year. So we will expect to be impacted on into F. Y 22, as you think about.

You know this Q4 versus the Q4, we had last year and.

There's also been some movement quarter to quarter, you'll notice if you look at our Oh CF and this quarter you see significant strength on a year over year basis. There are obviously, some timing differences and and a number of differences and movement and across the quarters.

That we've experienced and and seen to this year and part of it's just prudent cash management as you would expect so we would expect to see some movement coming out of that this year and and you know some headwind into next year a day.

Based on the the trends you're seeing not a significant though and on the sub and SAS. At this time, we're still very pleased with the bookings strength, we see on the sub and SaaS business and even though you know cash comes and I'm on a ratable basis or at least more ratable versus perpetual we're still pleased with the performance, we see on both sub and SAS and <unk> as well as on Prem.

So don't want to get too much more than we did into into F. Y 22, It's a good call out though there are a number of moving pieces. Obviously, we're quite pleased with the strength. We saw through the course of this year and Ah you know I'll update you more and terrified 22 and a quarter. Thank.

Thank you Keith and chair and thank you next question. Please.

Next question Mr., Kurt and the time and money.

Okay.

Hi, Thanks, very much and.

Happy seem to be holidays and to everyone. So Pat I was wondering you mentioned, the and see a triple digits on net at where Kws right now and where you just give us some thoughts on how things are going with what azure as well as GCP and and maybe just in general what clients are talking to you about in terms of multi cloud strategies and.

Great. Thanks, Hey, Thank you, yeah, and I'd just say this was a tremendous quarter for us on our overall, a multi cloud strategy and a you know the accelerated momentum that we saw with our top enterprise customers was very very encouraging.

And our business and now we've sort of although you know we finished the strategy and the sense that we have all of the Hyperscalers are now Ji aid all are transacting hero. The specific question on Asher you know we had a day. The first azure offerings are now shipping and we hope youre seeing a strong interest fall.

Following a vmworld engagement with the Azure sales teams as I mentioned Chevron adopted ABS for their multi cloud journey a it was a very oh, I'll say exciting to see Microsoft coming behind that strongly but I will say you know the the lead horse for US remains our preferred partnership with Amazon.

And we had a very strong quarter triple digit growth and that offering again, Amazon showing up to sell that offering has proven to be a very strong and have a dedicated sales team is ramping nicely. We're also getting some tremendous industry feedback like I'd see recently published a survey.

You know, 350% plus three year ROI idle they'll half the cost a half the time, you know extraordinary and metrics as people use it for their cloud migration and big companies like your largest pharmaceutical and the world you know signing up a major banks signing up for this to become a data center.

Sure and you know as your question and a would suggest you know the multi cloud aspect of this where we have customers who are now you're truly buying in and saying I really view Vmware as my multi cloud partners scale. You know a great example of that was Doris Borsch, who are now has Google Amazon Azure and.

Vmware on Prem ill or another a major financial who's using dementia, and our unique offering with Delhi and see on premise along with the Amazon cloud. So we are seeing more momentum to the overall multi cloud strategy and saying I want to be able to they'll have this unique ability to be.

On premise and and the cloud and multi cloud and Vmware is presenting that to customers and scale. So overall this is a a great quarter for us we're seeing good momentum and the business as I also mentioned in the prepared remarks.

That we're now approximately a billion dollars A.R.R. and this area of our business, which to me is a great milestone and the significance of this and the continued growth rate to shows we're on the right track with the customers and where the market is headed.

Thank you Kurt next question please.

Your next question is from zone that Kim I will sell thing.

Excellent. Thank you so much my and my question is for Zane Zone, and just following some of the margin commentary for both this year and next can.

Can you help us to quantify what the Cove and related benefit is this year how much you expect reverts next year and also how we should think about any potential cost synergies from carbon black and pivotal.

And maybe the degree to which that might help next year as well. Thanks.

Yeah. It's a great question, you know I'd say the code that impact.

And it's quite significant this year and when you think about whether it's just t. any marketing expenses facility related.

And even candidly on the head count side, and we delayed as you would expect us to you know at the onset of the pandemic. So you know if I would just sort of you know cut it between revenue outperformance and and co but I'd say, it's it's probably you know two thirds one thirds if you will on the on the.

Question on uncoated versus revenue outperformance, but obviously, we'll take ready outperformance whenever we can get it as well you know along with that Pat and and a number of the team here have been working on how we think about you know work of the future and as as I talked about the margin guide for F. Y 22, we expect you know some of the onetime benefits too.

You know not not to continue into F Y 22, but there are a number of efficiencies whether it's on the M&A front or Alternatively, just how we do business and how we think about the number of people that need to go to a different sites and what teeny looks like and the future as well as what working from anywhere it looks like quite frankly, and and whether there are efficiencies that can be gone. There. So you know part of that Guy.

And is not only a doubling down on our efforts on subscription SaaS that had articulated.

But a number of the efficiencies that we plan on getting through not only the acquisitions. We made this year, but just how we plan on operating business more efficiently into F 22, and beyond I'd also I'd also add that you know the fast growing subscription and SaaS portion of the poor portfolio generate attractive margins when they are at scale.

Right and most of them you know are still well say and an area of their maturity that some are getting to scale, but many of them aren't yet right. So as they're growing they are actually a bit of a negative on operating margin as they're becoming a larger piece and the whole, but still don't yet have those attractive acts and scale margins that we would expect and this is.

Part of the SAS Smile, we're excited about it we're leaning into it and we're bringing a lot of accountability to the operating margins of those businesses as they scale, but it will be a while until there are as attractive as some of the more mature portions of our business and particularly the on Prem businesses, which have you know very attractive margins.

Thank you Brad. Thank you very next question. Please.

Your next question is from Jason either in line or something.

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Thank you and you guys I was just wondering if you could talk about impact on software maintenance.

And coated and whether you know it affected some renewals rates pricing pressure.

Overall reduction of terms anything on that would be helpful. Thanks.

Sure Jason Yeah happy to give you some color there and we were actually very pleased with the key metrics that we track looking at attach and and looking at the key drivers.

Drivers of our of our maintenance business, where as good as they've ever been and we've had very high and rates. There I will say, we did see a little bit of tightening on duration. If you look at it on average and part of that was again tied to deal size and and and you know the correlation that we typically get with deal size and the opportunity there that the key metrics and the business.

And this quarter, where it was as good as we've seen them, yeah and I'd also say, we're on a journey with our subscription and SAS and build out of the business and that's where my comments around success 360, and bringing much more consumption oriented pieces of our SNS, where many customers will be buying into more premium.

And consumption oriented aspects of our customer success model and support models going forward. So this too will be an accelerant of our subscription and SaaS and will also be a deepening of how we work with our customers on their journeys and their.

Their success.

And growth from land and expand their use of our products going forward. So we're quite excited about those offerings and they just came to market. So this last quarter. So we see that as a further accelerant and Oh, a way for us to drive renewals and consumption for our traditional less and less business, Jason I will.

I'd just add you know obviously you've seen the the decline on that line item that was tied to the size that I pointed out on the on Prem business. So it day I did want to point out that it is directly correlated we've got these great renewal rates, but it is tied to the on Prem performance makes sense. Thanks, Jason next question. Please.

Next question is and Jane Nielsen and line itself.

Hey, guys. Thanks for squeezing me in here most of my questions have been asked but when you look across enterprise versus commercial I guess are you seeing that helped a commercial organization last couple of weeks and given a kind of wave two and then surprised we got to that point with without many questions around on due this quarter.

And any further update on customer interest and how customers are looking to use it and the container world. Thanks.

Yeah. So let me start with the last piece and despite Paul Awesome Awesome I'll squeeze it a little bit on the first piece [laughter] and tansu, Yeah. I'd just say, we're very pleased with our Q3 performance. It was comfortably ahead of our expectations for the quarter continues to build momentum we're having good success.

Bringing forward, our long term pivotal customers as they embrace the larger a ton zoo a strategy and we had a very successful spring one and B M World expanding you know tends to support on Vmware cloud on day to be less support for Azure and work with clouds key partnerships like get lab and confluence.

Yes were announced.

We also oh are beginning to bundle auto.

And do into our core infrastructure offerings with tons of standard and a basic a good momentum and some of the particular areas of Tom Zhou like observe ability, we launched or Kansu mission control. Our multi cloud you know management solution also a steps around spring and having.

And our spring tons EU offerings, bringing forward the largest Java community and you a great customer examples like the five serve example that we mentioned it's just the stellar example of how we can rapidly bring no major applications to production scale and you know this was a you know the SP a P.P.P. loans for eight.

Team thousand small businesses. So overall, a lot of momentum and 14 zoo and we're seeing that really build as we go into the next quarter.

In terms of Ah you know commercial you know it was a good quarter for us and the commercial portion of our business relatively speaking and I'm Super pleased with that.

As an overall area that you know I would have been more concerned about that coming into the quarter and we did outperform a bit our expectations there.

Thank you, Jim and it looks like Weve hit time, so before we conclude Pat had a final statement like thank you all for joining US Q3, another good quarter for Vmware, you know and as we continue to navigate these unprecedented times you know our focus on building that digital foundation to support our customers' highest price.

We are already is just proving highly effective and ill just say as we head toward our holiday we'd want to thank you all but also wish you a very happy and healthy Thanksgiving. Thank you so much.

And ladies and gentlemen, this concludes today's conference call. Thank you for Paul.

You may now disconnect.

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