Q4 2022 VMware Inc Earnings Call
Good afternoon, everyone and welcome to Vmware's fourth quarter and fiscal year 2022 earnings conference call. On the call, we have Rangarajan Raghuram, 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 the close of market and is posted on our website, where this call is being simultaneously webcast. Slides, which accompany this webcast can be viewed in conjunction with live remarks and downloaded at the conclusion of the webcast from IR.Vmware.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 10-Q's and 8-K's Vmware 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 VMWare's performance should be considered in addition to not as a substitute for or in isolation from GAAP measures.
Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation employer payroll tax unemployed stock transactions amortization of acquired intangible assets realignment charges 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 and on our Investor Relations website.
The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our first quarter fiscal '23 quiet period begins at the close of business Thursday, April 14, 2022. With that, I'll turn it over to Ragu.
Thanks, Paul.
Good afternoon, and thank you for joining us.
Q4 was a solid end to a good fiscal year. Revenue for the fourth quarter was $3.53 billion.
An increase of 7% from the fourth quarter of fiscal year '21.
Revenue for fiscal year '22 was 12.85 billion.
An increase of 9% from fiscal year '21.
We are at an exciting time in our industry.
Organizations large and small transform and modernize to become software-based digital enterprises.
This transformation is characterized by an explosive growth in new business applications and new digital experiences.
Deliver from the cloud from the data centers and from the edge to employees and consumers on diverse smart devices.
There's emerging distributed relative computing is what we call multi-cloud.
And it is the next phase of enterprise technology.
We aspire to be the leading platform vendor of theirs, multi cloud era, enabling businesses and organizations to build run and secure that obligations powering that transformation.
We are pleased with the progress we have made over the past 12 months to capture this opportunity.
At the start of the fiscal year 2022.
We highlighted the focus areas that will help drive our customers' innovations and continue to drive value for our shareholders.
The first is a focus on accelerating multi-cloud innovation on offerings, which we have begun through the delivery of our VMWare Cross cloud services.
A set of integrated SaaS offerings designed to deliver customers.
A faster and smarter pops to the cloud.
The second is a focus on accelerating our subscription and SaaS offerings.
We have made strong progress here, including the launches of VMWare cloud Universal.
And we realized cloud universal.
At the end of the fiscal year '22, our revenue from subscription and SaaS offerings rose to 25% of our overall revenue.
Third is our successful completion of our spinoff from Dell technologies to become a standalone company.
Positioning us well to become the Switzerland of this new multi-cloud industry.
Fiscal year '23 is an important year in our transformation. The progress we will make this year will position us to drive accelerated growth in fiscal year, '24 and beyond.
During fiscal year '23, we expect to achieve our goal of making all of our major products available as a subscription or SaaS offerings.
Specifically, all of our STDC offerings will become available as cloud delivered software.
Joining a kanzu cloud management security and then to use a SaaS offerings.
And they'll help further accelerate our business model transformation.
The second area I'm excited about is the progress we are making in our multi-cloud capabilities across our portfolio.
In order to drive this innovation.
We are specifically, focusing our product and go to market efforts on three big customer solution areas.
One is accelerating our customers' application transformation by providing a modern platform, but the depths that cops capabilities.
Our multi cloud management offerings to help them build manage and secure their modern apps on any cloud.
Tanzu and cloud management form the core of the solution.
Two is accelerating customers' ability to modernize and migrate the enterprise workloads to all major hyperscalers sovereign clouds private clouds on the edge with Vmware cloud built on vSphere, NSX and VSAT.
And three is accelerating the delivery of any workspace for the distributed workforce of today and the future.
Workspace for the distributed workforce of today and the future.
Our SaaS the carbon black workspace one and the horizon offerings completed the solution.
Yeah.
The Tanzu and cloud management portfolio accelerate our customer space of digital innovation by helping them build new applications more easily deploy and operate them more securely in any Kubernetes environment on any cloud.
We see opportunity to attracting and acquiring new customers through our tons of kubernetes operations solutions, while providing an evolutionary journey for our existing Vmware tons of application services customers.
The key Q4 accomplishment was making VMWare Tanzu application platform generally available.
The key Q4 accomplishment was making VMWare Tanzu application platform generally available.
Customers are leaning into this new offering including, for example, the next generation, leading health care solutions company.
Whose partnering with Vmware to build a consumer-centric technology foundation.
By utilizing the VMWare Tanzy application platform. They can transform their developer experience and accelerate their development and delivery of differentiated consumer experiences.
As we help customers accelerate modernization.
Organizations are also looking to Vmware for multi-cloud management offerings to establish consistent application and infrastructure operations.
Our customers are using both modern apps and cloud management to modernize their digital infrastructure and bridge the gap across any cloud.
VMWare's management offerings play a key role as the central hybrid cloud control plane across our customers' private and public clouds.
VMWare's management offerings play a key role as the central hybrid cloud control plane across our customers' private and public clouds.
Vmware cloud is our modern cloud infrastructure that delivers resiliency security and operational capabilities required in a trusted enterprise infrastructure foundation.
Built on Vmware Cloud Foundation.
VMWare cloud is now available everywhere.
On Hyperscale or cloud in the data center on sovereign clouds in telcos and at the edge.
Our customers are pleased with the speed and cost benefits they get by using Vmware when adopting and deploying their applications to the cloud.
For example, Carhartt, an American apparel company continuously innovate to deliver exceptional e-commerce and production environments.
The global premium work with brand use Azure Vmware solution to establish a reliable cloud infrastructure for critical workloads and easy to manage more secure digital workspaces.
Another key component to our cloud infrastructure stack is Vmware visa, which continues to receive recognition.
Including being again named a leader in the Gartner Magic quadrant for hyper converged infrastructure software.
In November 2021.
This year, we look forward to advancing our differentiation for running modern workloads with new releases of vSphere software and support for even greater choice and flexibility with our hyperscale or offerings.
We continue to see momentum with all of our Hyperscale cloud partners, providing more choice and more flexibility for our customers.
We also support our customers relationships with their preferred providers and system integrators.
For example, to help global organizations accelerate IT and business reinvention.
We recently announced an expansion of our strategic partnership with Kindle.
Focus on App modernization and multi cloud services.
Our [anywhere] workspace offering powers today's distributed workforce by removing the friction that can exist between systems and employees.
This creates better employee experiences and brought her most effective security through a set of comprehensive SaaS services and use it and endpoint management edge networking and security.
A powerful example of helping our customers with work from anywhere opportunities is the MD Anderson Cancer Center.
Their use of anywhere workspace, including Vmware sassy has enabled their researchers and physicians to work remotely during the pandemic.
Their researchers now have the ability to access sensitive and bandwidth-intensive data like X rays from anywhere.
This has freed up research a time to focus on more critical patient care tasks.
Across all of these multi-cloud services, we have built our cloud networking and advanced security services, which include NSX networking, SD Wan, SASE.
And security services as well as carbon black cloud as a key component in providing consistent connectivity visibility and zero-trust security across all clouds.
We continue our commitment to embedding environmental social and governance into everything we do.
VMware was recently recognized into just 100.
A comprehensive ranking of ESG and stakeholder performance.
For the fifth consecutive year.
This year we ranked number one overall.
Number one overall.
In the environmental category, leading all companies in sustainable products and pollution reduction.
Additionally, on the social impact front. VMWare was named among the best places to work by Glassdoor.
<unk> was named among the best places to work by Glassdoor.
And achieved 100% on the human rights campaign Foundation's 2021 corporate equality index.
And named one of the best places to work for LGBTQ equality.
Our LGBTQ equality.
In summary, we are pleased with our progress in fiscal year '22.
We are pleased with our progress in fiscal year 'twenty two.
And excited about our opportunities in fiscal year '23.
We expect to unleash the next phase of product innovation as we focus on our mission of providing the trusted software foundation to accelerate our customers' digital innovation.
And we expect to make significant progress on our business model transformation.
Our progress in fiscal year, '23 will position us to accelerate in fiscal year '24 as we continue to drive value for all of our stakeholders.
Thank you to our customers, our partners and the VMWare team for helping close a successful fiscal year '22 and look forward to a great '23.
Thank you, Raghu. We're pleased with our Q4 and full-year fiscal '22 financial results, which have us well-positioned for FY '23 and beyond given our attractive long term financial model.
Total revenue for the quarter was $3.5 billion and combined subscription and SaaS and license revenue grew 11% year over year to $1.9 billion.
Our Q4 subscription and SaaS revenue of $868 million grew 23% year over year.
For the full-year fiscal '22, subscription and SaaS revenue totaled $3.2 billion and increased to 25% of total revenue, which puts us on track to surpass $4 billion in subscription and SaaS revenue for fiscal '23.
Our subscription and SaaS portfolio is comprised of three customer solution areas.
Tanzu and cloud management.
Cloud infrastructure and end user and secure edge.
Cloud infrastructure includes our Vmware cloud offerings, such as VCPP, Vmware cloud on AWS and VMWare cloud on other hyperscaler platforms.
End-user and secure edge includes workspace one, horizon, carbon black and our SASE offerings, such as Vmware SD Wan.
Total subscription and SaaS ARR increased to $3 $6 billion in FY '22, up 24% versus FY '21. And for the full year subscription and SaaS revenue surpass license revenue for the first time.
License revenue in Q4 grew 2% year over year to $1.35 million.
Term license revenue was $191 million and comprised 18.5% of license revenue in Q4 up from $95 million in Q3.
Term license revenue for the full year FY '22 was $442 million up from $119 million in FY '21.
This growth was due to new and expanding product offerings and customers moving from on Prem license to term offerings.
Services revenue for Q4 was $1.628 billion, an increase of approximately 3.5% year over year with software maintenance revenue up 3% year over year to $1.346 billion.
Our large installed base provides an opportunity to convert recurring software maintenance streams to subscription and SaaS delivering incremental value to customers by driving continuous innovation as well as enabling additional upsell and cross-sell opportunities.
Our non-GAAP operating income for the quarter was $1.137 billion. This stronger than expected result was due to both higher revenue performance and lower than expected growth in expenses.
Non-GAAP operating margin for the quarter was 32.2% with non-GAAP earnings per share of $2.02 on a share count of 423 million diluted shares.
Other income and expense for Q4 included $21 million of loss on the early repayment of our $1.5 billion bond obligation due in August 2022.
We ended the quarter with $11.2 billion in unearned revenue and $3.6 billion in cash cash equivalents and short term investments.
We paid $11.5 billion special cash dividend at the beginning of Q4 on November 1st, 2021.
Cash flow from operations for FY, '22 was $4.4 billion, which was stronger than expected due to the strength of the P&L in Q4, as well as timing of cash tax payments and other expenses.
Q4 cash flow from operations was $1 billion $137 million and free cash flow was $1.14 million.
In Q4, we paid down $2 billion in debt consisting of $500 million of term loan commitments and the $1.5 billion bond due in August of this year that I referenced earlier.
RPO in Q4 was $12 billion up 6% year over year and current RPO was $6.8 billion up 9% year over year.
Total backlog was $88 million substantially all of which consisted of orders received in the last three days of the quarter that were not shipped and orders held due to our export control process license backlog at quarter end was $14 million.
In FY '22, our subscription and SaaS bookings increased to over 32% of total bookings excluding PSO.
Subscription and SaaS bookings are the leading indicators of the progress, we're making with our multi-cloud solutions.
Turning to Q4 product bookings, which include subscription and SaaS and license bookings and our cloud application platform and cloud management area management product bookings grew in the strong double digits year over year.
We were also pleased with the customer interest in our new tons do application platform, which became generally available in the quarter.
In cloud infrastructure, which includes compute storage and networking, our Q4 compute product bookings grew in the high teens year over year driven by contributions from solutions such as VCPP Vcloud suite and Vmware cloud.
[vSAN] was up in the mid-single digits. NSX grew in the low double digits and EUC had strong double digit product bookings growth year over year in Q4.
In Q4, we repurchased approximately 2.5 million shares in the open market at an average price of $119 per share.
Our capital allocation framework remains unchanged as we plan to use our cash generation and balance sheet to invest in growing our business paying down debt and returning excess capital to shareholders through share repurchases.
At the end of Q4, we had approximately $1.7 billion remaining on our existing repurchase authorization of up to $2 billion.
Turning to guidance for fiscal '23. Our outlook for the year is consistent with the long term framework laid out at our analyst meeting last October as well as the preliminary FY '23 outlook provided on our Q3 call.
FY '23 total revenue is expected to be $13.750 billion, an increase of 7% versus fiscal '22.
As we've discussed previously, we're increasing our product development and go to market focus on subscription and SaaS product offerings, which we believe will help accelerate future topline growth and lifetime customer value.
We forecast the combination of subscription and SaaS and license revenue to be approximately $7 billion $20 million, an increase of 11% with subscription and SaaS revenue of $4 billion $40 million up 26% versus fiscal '22.
We plan for subscription and SaaS to reach nearly 30% of total revenue for fiscal '23 and we expect our subscription and SaaS AOR growth rate for FY '23 to exceed our subscription and SaaS AOR growth rate for FY '22.
We expect non-GAAP operating margins for the full year to be 28%, which reflects investments in support of expanding our subscription and SaaS offerings and we expect non-GAAP earnings per share of $6.97 on a diluted share count of 427 million shares.
As I mentioned earlier, we had strong cash flow from operations in Q4, which resulted in us exceeding our cash flow guidance by over $250 million.
Taking into account the expected impact a portion of that outperformance has on the upcoming year due to timing. We currently forecast cash flow from operations of $4.2 billion and free cash flow of $3.75 billion in FY '23.
For Q1, we expect total revenue of $3.185 billion or a growth rate of approximately 6.5% year over year.
We forecast the combination of subscription and SaaS and license revenue to be approximately $1 billion of $555 million, an increase of 12% with subscription and SaaS revenue of $910 million up 23% year over year.
For Q1, we expect non-GAAP operating margin to be 27% with non-GAAP earnings per share of $1.56 on a diluted share count of 424 million shares.
Additional guidance details for Q1, as well as FY '23, including considerations related to tax rate are contained in the slide deck accompanying this call.
Our Q4 FY '22 performance marked continued progress towards Vmware's strategy of becoming a multi-cloud subscription and SaaS company, given our mission-critical portfolio and deep customer relationships.
Closing out the year, we delivered another quarter of consistent results across key financial metrics.
This performance enables us to drive further innovation as we scale, our multi-cloud platform, helping customers accelerate their journey to the cloud.
Our subscription and SaaS portfolio expansion will continue to deliver value for our customers and shareholders as we grow the business.
I'll turn it back to Paul for Q&A.
Thanks, Zane. Before we begin the Q&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. If you would like to ask questions. Please press star one on your touchtone telephone.
If you are joining us today using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again that will be star one if you would like to signal with questions.
Our first question will come from Matt Hedberg with RBC capital markets.
Hey, great, guys. Thanks for taking my questions. Congrats on the strong close to the year.
First of all, it was great to see the reacceleration of subscription and SaaS and I think you talked about all products being available.
And SNS offering in fiscal '23. Can you talk a bit more about how you plan to roll that out? Or are there any sales incentives that you are contemplating? And I guess in conjunction with that, how do we think about the license option sort of the perpetual license options on a go-forward basis?
Hi, Matt. This is Raghu. Before I answer your question, let me take a minute to.
comment on today's news, obviously all of us have been
News, obviously all of us.
Watching the news, the events that are happening.
In Ukraine.
Sure.
Are obviously, much larger global scope and seriousness and impact.
Impact.
And the conflict is horrible for all those involved.
We sincerely hope the hostilities cease really soon.
And our thoughts are with everybody that's impacted of course, including our employees and our partners and our customers.
Our customers are.
In the region and as a critical infrastructure supplier.
As a critical infrastructure supplier.
VMWare have made all the preparations necessary for business continuity for all of those affected as well.
And with that are turning my response back to your question, Matt. Yes, we are very excited about FY '23. We are very pleased about how we finished up with the FY '22.
With that are turning my response back to your question, Matt. Yes, we are very excited about FY 'twenty. Three we are very pleased about how we finished up with the FY 'twenty two.
And as we have spoken many times before on this type of a call and other locations.
We set out two key objectives and two key goals for last year.
One was to begin the process of accelerating our innovation around the multi-cloud opportunity and second is accelerating.
Our subscription and SaaS transformation.
We made significant progress on both of them last year.
And this year, we are very excited about the progress we're going to make if you look at our product portfolio we have.
Set ourselves up very nicely for accelerating the multi cloud innovation.
Our Tanzu Kubernetes operations.
Continues to mature very nicely.
Our Tanzu application platform was [GA] in the fourth quarter and that has received very strong interest from customers.
Because it attacks the problem that a lot of customers are facing and they are building new applications in the cloud.
Tax the problem that a lot of customers are facing and they are building new applications in the cloud.
By accelerating the path to production of these new applications.
The second part of our portfolio is, of course, helping customers take their enterprise applications to the cloud.
And we have made our Vmware cloud available on all platforms this year or last year, sorry.
And we're going to make a lot more capabilities available on top of that that makes us the premier platform for enterprise application in terms of resiliency, security and cost.
Uh-huh capabilities available on top of that that makes us the premier platform for enterprise application and tons of resiliency security and cost a lot of <unk>.
Of course, all of our customers are having a majority of their employees work from home. So the combination of the innovation that we're bringing about in SASE with respect to the cloud web security firewall and so on and so forth with respect to our anywhere workspace.
All of our customers are having a majority of their employees work from home. So the combination of the innovation that we're bringing about in Sochi with respect to the cloud web security firewall and so on and so forth with respect to our anywhere workspace.
And digital experience for all of employees.
A lot of innovation in each of these areas. All of these are multi cloud-oriented so very excited about that specifically with respect to bringing our products to subscription and SaaS.
This year, we will complete the job offer having all of our STDC portion of our portfolio available in our subscription.
That is compute with the project Arctic that we talked about initial availability in Q4 as previously planned a general availability this year I'm kind of course of [vSAN] and NSX. All of these are significant efforts that have taken us the better part of two years and I'm very excited that this year will be achieving the milestone of making them all available.
That is compute with the project Arctic that we talked about initial availability in Q4 as previously planned a general availability this year I'm kind of course of [vSAN] and NSX. All of these are significant efforts that have taken us the better part of two years and I'm very excited that this year will be achieving the milestone of making them all available.
And the second part of your question is [outside of happens].
The second part of your question is outside of happens.
What are the other things that we're doing.
On the sales and marketing side, we are definitely pivoting our initiatives towards a subscription or SaaS offerings, but in terms of the gates and debates and so on and equally importantly, we are adding a lot of new capacity sales capacity with the folks that are coming in with a knowledge of how to sell.
And thrive in a subscription oriented business model.
We are also arming our partners with the right set of certifications, just last year alone over 10,000 partners.
Individuals and our partners are got the certifications around town zoo and cloud infrastructure under our anywhere workspace solutions.
We are accelerating or reinvesting in our partnerships with our global systems integrators, you might have seen our announcement with [Kindle] and similarly, other global system integrators.
[noise] accelerating or reinvesting in our partnerships with our global systems integrators, you might have seen our announcement with kindred and similarly, other global system integrators.
And.
The emphasis on subscription and sources not just in our global and enterprise customers, but also in our mid-market. We saw significant growth in our commercial pipeline and our volume of deals that we would classify as mid-sized deals even in Q4, and we expect that to carry forward.
This coming year as well.
And we're seeing the customer proof points of proof points that we talked about in the call as well as the proof points that we have put a lot of press releases around.
We're seeing the customer proof points of proof points that we talked about in the call as well as the proof points that we have.
Seeing really significant customers such as a global publisher of advanced technology publications put their entire website up on Tanzu and so that is a classic B2C kind of an environment that is now running on cloud-native applications running on top of Tanzu because it needs to be in a very mission-critical environment.
Three is seeing really significant customers such as a global publisher of advanced technology publications put their entire website upon tons of right and so that is a classic b to see kind of a environment that is now running on cloud native applications running on top of Townsville, because it needs to be in a very.
That's just one example, we have seen examples across every one of these so we are seeing encouraging proof points and customers. We are preparing our channel. We are preparing ourselves for us we are turning the incentives to that side.
Most importantly, our product portfolio is tilting towards multi-cloud innovation and towards subscription and SaaS. So if you put it all together.
I am personally very excited about FY '23. It feels like we are ramping the engines for future growth like we talked about at our financial analyst meeting.
What does it mean for a license?
There are a section of our large customers, especially telcos.
Customers in regulated industries et cetera that prefer to buy License products. So the License business is very important to us and depending upon what type of customer you are and what your preference is, we will sell them either license or subscription, but I expect in general subscription to receive a greater focus from our go-to market.
Organization this year and that is all reflected in our guide.
Matt, I'll just add you know obviously.
With what Raghu mentioned, we're leaning even more into southern SaaS, which is aligned with the framework, we outlined to you and others at our financial analyst meeting last October. So we're encouraged by the momentum we saw in the fourth quarter and as we look to FY '23, as I mentioned, we'll have southern SaaS revenue in excess of $4 billion up 26% on a year over year basis.
So that ratable revenue will be incorporated has been incorporated into our guide for FY '23, as well as the macro which aligns with the framework, we laid out last year as well as the commentary I had on our Q3 call. So we're very encouraged and excited by the opportunities ahead, even with FY '23 and beyond.
Thank you, Matt.
Next question, please.
And our next question will come from Raimo [inaudible] with Barclays.
Hey. Thank you, congrats from me as well.
Been asking this question is for a few quarters now and it is around what are you seeing in terms of customer behavior now as they're coming out of the pandemic in terms of looking at more bigger strategic decisions et cetera?
That will kind of help you also incorporate more and more and broader product sets. So what are you seeing an appetite of them coming out comfortable doing these bigger decisions again? What are you seeing there? Thank you.
That will kind of help you also incorporate more and more and broader product sets. So what are you seeing an appetite of them coming out comfortable doing these bigger decisions again? What are you seeing there? Thank you.
out comfortable doing these bigger decisions again? What are you seeing there? Thank you.
Thanks very much. I'll start.
So let's get out some from a customer perspective as well. So we are suddenly seeing customers.
Making significant strategic moves towards accelerating their digital transformation.
Significant strategic moves towards accelerating their digital transformation.
Accelerating the move of their enterprise obligations to the cloud.
Accelerating the move of their enterprise obligations to the cloud.
And of the curse, as a matter of cyber and making employees work better from a remote context and be more productive.
In delivering you know having a digital experience. So these are the three areas that we're primarily focused on as a company.
We're seeing customers make more strategic bets in every one of these areas with us as.
We're seeing customers make more strategic bets in every one of these areas with us as.
one of these areas with us as.
As well as in general in the industry. So that's what we are seeing coming out of the pandemic. We are seeing this being accelerated.
In Tanzu, we saw some pretty significant design wins pointed in that direction. With respect to the enterprise applications moving to the cloud, we see increasingly customers, becoming cloud smart. It's not just about cloud-first. They're looking at their application portfolio and deciding which set of applications they want to rewrite completely.
Which set of applications, they're going to write new on which cloud how they are going to use AI and so on.
And which set of applications they're going to deploy at the edge as well in addition to the data center. So we are seeing the obligation portfolio spread out and so there is a strong interest from customers in the so-called cloud smart approach.
And in having a portfolio approach that says look, given the sort of a distributed environment.
Which parts of these do I want to be specific to a particular cloud, which parts of it do I want it to be common, things like security are having a management control plane or having a developer experience.
Common things like security are having a management control plane or having a developer experience.
Are emerging as areas where they want it to be common. So this is where we see the strategic bets. One example I'll give you just before handing it to Smith.
There's a large publisher that initially used our VMWare cloud on AWS for having their enterprise applications.
And in the last quarter, they did a new set of business with us to bring cloud-native applications onto Tanzu on cloud-native portions of AWS. So that is one example, and so we are seeing more and more and we hope to see a lot more examples like this.
A new set of business with us too.
<unk> cloud native applications onto tons due on a cloud native portions of AWS. So that is one example, and so we are seeing more and more and we hope to see a lot more examples like this.
Yes, I think you touched on the cloud smart part, the only thing I would add is you know we are now involved with these large enterprises.
In industries that have been regulated who are interested in taking their core business and enterprise applications to cloud whether those are large manufacturers large global banks telcos big consulting firms, government agencies and when they're looking at.
There are sort of hardcore enterprise applications that had been running the, you know, the core business functions of their enterprise and they're not seeing any other viable pack besides using our solutions to adopt a cloud smart architectures like Raghu mentioned. So that's extremely encouraging. We saw a few wins of that in Q4.
And we're seeing again, great interest in demand going into FY '23.
Thank you, Raimo. Next question, please.
Thank you. Our next question will come from Mark Murphy with JPMorgan.
Yes. Thank you very much and I'll add my congrats.
Since Vmware is one of the very first software companies with the January quarter and to be a reporting its results. I'm just interested in whether you sense any kind of tangible effects from the omicron variant either maybe it perhaps it pulled some business into December.
Or push some out of January and Raghu, since you did mention the ramifications, are you embedding any kind of disruption into the guidance for the Ukraine conflict and uncertainties related to that?
Out of January and and Rockies. Since you did mention the ramifications are you embedding any kind of disruption into the guidance for the Ukraine conflict and uncertainties related to that.
Mark. This is Zane. I'll start and then obviously if Raghu has anything to add. I'd say that we did not see any appreciable movement regarding omicron impacting our quarter or even the linearity within the quarter. Again, we're very pleased with the progress we're making throughout the quarters. Bookings were very strong.
And particularly the areas that we've been focusing on namely the subscription and SaaS parts of the business. So we're very pleased with that and obviously.
Exceeded our expectations internally and I'd say you know.
Regarding the macro obviously, we take all of it into account as we as we look at the year, I'll let Raghu weigh on sort of more broadly than that.
But again, obviously, we are we've taken I'd say the bulk of it into account, but you know things are very dynamic and we'll see how it would take it sort of day by day as it relates to the broader macro here.
Yes, just to add to that I think our planning clearly, it does every year done in December, November, December, January.
Our planning clearly like it does every year done in December November December January.
And it takes into account our view of the world during that point of time, and but having said that, every day is a new day.
And things will adjust but just to tie it back to Raimos' point.
<unk>.
We will adjust but just to tie it back to Ray most point Brian.
When customers are thinking about strategically what they want to do over the next couple of years. Those trends tend to be fairly secular and you all are written about it and we see it in our business and the trends around becoming more and more of a digital company transforming their application portfolio.
Those trends.
Tend to be fairly secular and you all are written about it and we see it in our business and the trends around.
Becoming more and more of a digital company transforming their application portfolio.
Taking better advantage of the cloud.
The capabilities where appropriate building out the edge.
Building out the edge.
Supporting our remote workforce cyber these themes have not changed in the last and of course, our machine learning and data.
These themes have not changed in the last two or three years on that.
Quite honestly I don't expect it to change over the next two or three years. If you look at CIO budgets. These are the teams that are getting more of their budget allocation. They all tend to be software. Software spend is outstripping overall, IT spend which in turn is outstripping GDP spend and these have been the trends regardless of macro.
Thank you, Mark. Next question, please.
And our next question will come from Mark Gordon with Bernstein Research.
Thank you and congratulations on the quarter and our thoughts are with those impacted in Ukraine in the region.
Zane, I have two related questions for you. How much of the subscription and cloud
That you're seeing now and going forward is coming from new sales versus existing maintenance and how do you expect this to change going forward and can you review how much of a revenue lift you expect as workloads move to subscription and separately when they move to cloud.
Sure. You know, there's obviously a piece that's coming out of our software maintenance side, if we were to annualize that impact.
In the fourth quarter, I'd say it was approximately $100 million obviously, that's the annual impact of what we call converts here, which is we take what would normally be the stream that I mentioned in my prepared remarks, and then convert them to two seven SaaS that comes at a good premium.
That we believe we're offering significant value to the customer through that conversion.
As well as seeing a lift ourselves so that was the the the number for the fourth quarter. It continues to be a very successful program as we look more broadly we see the opportunity with that entire install base to continue to think about growing.
Lift ourselves so that was the the the number for the fourth quarter. It continues to be a very successful program as we look more broadly we see the opportunity with that entire install base to continue to think about growing.
Our southern SaaS percentages, and we highlighted our bookings being 33%.
<unk>, 33%.
Of the total revenue for the quarter. So we're very pleased with at least for the year. It was a little higher for the quarter. So we're pleased with the opportunity not only with the installed base, but candidly with the value. We're driving rig you mentioned, even some of the cloud-native applications, where we're able to sell products.
Into cloud-native so I'd say, it's more broad than just that installed base. It's beyond that installed base and we see obviously a lot of benefit extending into FY '23 and beyond with the new and existing customers.
Thank you, Mark. Next question, please.
Moving on to Simon Leopold with Raymond James.
Thanks for taking the question.
I just wanted to see if maybe you could talk to the deceleration in bookings basically revenue plus the change in RPO.
Deceleration in bookings basically revenue plus the change in RPI.
It looks like you've got a really tough comparison.
So you had very good sequential growth but just wanted to see if maybe you could unpack that as well as the current bookings deceleration.
Help us understand whether this is a trend or you wouldn't extrapolate from a single data point. Thank you.
Sure, Simon. Yes, as you highlighted if you look purely at external bookings, there's a quarter to quarter phenomenon and in sort of the sequential part of that that is less relevant beyond the third quarter to fourth quarter.
So what we tend to navigate towards is more of the CRPO number which was 9% and we're quite pleased with that. It was a little bit under where we've been. As I mentioned, we saw acceleration on the bookings side in a number of various types of southern SaaS and even when you consider some of those categories and the tradeoffs between that that southern SaaS
booking versus an on-prem booking. It does have an impact even with RPO. Because you don't even know when some of our conversions that I just talked about with Mark's question whenever you convert to term or some of the other southern SaaS type bookings, you tend to have less deferred show up on the balance sheet because of that conversion.
We're still getting a nice premium on that but it doesn't necessarily show up in deferred if you were just to isolate the deferred sub in the SaaS portion of RPO. So you just take that part of the deferred account you'd see that up well over 30% on a year over year basis. So as we look at those trend lines, where we're very comfortable.
Well with them. I'd also point out we have products like VCPP and the like with the Hyperscale is outside of AWS. They had been growing tremendously.
On a year over year basis, and those typically don't have any deferred associated with them either so we're very comfortable with the bookings as I mentioned, which is why I called out the total booking numbers, we've as we looked at that over.
Over the total portfolio. So we're pleased with the trends we're seeing and you see that extend into FY '23 and beyond.
Thank you, Simon.
Thanks, Simon. Next question, please.
And next question will come from Keith Weiss with Morgan Stanley.
Hi. This is [Andrew] on for Keith.
My question would be given that we've seen the correction in the capital markets. Software valuations I was wondering how the how that sort of maybe changed the team's thinking on the types and sizes of potential M&A that you may or may not consider given.
Software valuations I was wondering how the how that sort of maybe changed the team's thinking on the types and sizes of potential M&A that you may or may not consider given.
Given that there's there's a lot of good assets that potentially are on sale and I just wanted to see how that how the drawdown and evaluations in last couple of months has changed with your thinking.
Yeah. So.
Our M&A strategy has been largely unchanged.
Unchanged. If you look at the history of our M&A, we tend to do.
What we would mostly categorized as tuck ins in the product categories that we have.
Already playing and then occasionally every so often we might move into a new category.
And it's always driven by what customers perceive us our gaps are logical address adjacencies, where we need to be also present and so that's what drives our thinking first and foremost as opposed to looking at valuations for someone deciding what we should buy.
You look at our strategy and our product evolution, and where we may need to buy.
Some external companies and then once we decide what is the best fit then we think about valuation. So so the shot so that's a long answer the short answer to your question is it the.
The reduction in the valuation as observed in the capital markets does not necessarily affect our planning around our portfolio.
Okay understood.
Thank you very much next question please.
And that question will come from Garik <unk> with Macquarie.
Hi.
Yeah.
Hi, everyone. Thank you so much for taking my call I would love to hear what you are.
What did you use case, you're most excited about as we enter more connectivity more ubiquitous connectivity and how do you and where it's going to help with that thank you. So much.
Oh, I'm, sorry, I couldn't hear the question.
Sorry, sorry, hi, everyone. Thank you so much for taking my question I would love to hear your five your favorite by G use case.
And how do you and where it's going to help enable that thank you so much.
Yeah. So our focus has been in five G in two parts.
If I were to elaborate the <unk>.
<unk> part is really.
Really helping.
Service providers build a modern <unk> network based on software number one and based on open standards number two right that is an industry standard called Orion or open radio access network.
What it is is it's a very disruptive idea that fundamentally those helps cuss, our service providers architect and build and operate.
Our <unk> network using software running on practically commodity hardware right delivering all of the capabilities that you need in <unk>. So that's really the first aspect of our focus and we've been very.
After a very successful start there we have previously announced that the dish.
Network, who just building the first nationwide <unk> network built entirely on software and using cloud Native technologies is building it using our technology and so that's that's really what we're doing we have since well since then one poc's and.
So on at a lots of other global customers as well and those things will turn into full production rollouts.
These companies.
Companies are very excited by five G is because they also have their enterprise and the enterprise use cases of <unk> are just beginning the first and foremost a common one is private five G, which in many cases as the potential even to replace.
Our wireless and Wi Fi in campus right. So that is an area that we are helping a lot of enterprise sorry, a lot of our service providers on and then the use of <unk>.
Revamping manufacturing and then concurrent in places where concurrent low latency access as needed on the edge. We are working a lot with the service providers there because that's another part of our portfolio.
Building, new applications like gaming and so on that need to operate in a low latency environment at the edge. Those are other examples where we are providing customers with not just the five service providers, but not just the <unk> network, but also the computer environment needed to build and deploy those applications. So it's a spread of.
<unk> applications across all the categories of manufacturing retail and of course telco applications as well as the horizontal connectivity.
Thank you Gary next question please.
And our next question will come from.
<unk> with Citi.
Hey, good afternoon, everyone. This is mark on for foot team congratulations on the quarter and thanks for taking our question. So maybe just wanted to delve a little bit deeper into the go to market strategy.
With fear in S.
P D C on tech to be fast or this year, what sort of sales comp and incentive changes should we expect at all I know you guys mentioned a lot on the sales capacity side, but anything.
In terms of comp.
Comp and incentive would be helpful. And then just a follow up on that one what mechanisms or card rails are in place to really limit disruption to our customers continued to opt for perpetual license form factors are consumption for these offerings.
Hi, Mark this is sumit.
So we're excited about what's coming in sort of stored for V sphere V. San in there too.
Sort of things that we have done firstly.
With our management and end user computing portfolio, we have.
Have through a universal programs determined a clear mechanism that includes appropriate guardrails at the time of transaction, but more importantly building consumption journey and consumption plant so that when customers adopt our southern SaaS offers they can.
They can when they purchased them they can adopt them and consume them in so far.
Results have been very encouraging with end user computing and cloud management portfolio.
Through a universal programs and we intend to leverage those with the rest of the portfolio as it becomes seven fast as well.
Secondly, we are Comping sales incentives models are designed for using two key mechanisms within Vmware.
Column rates and gates weights as in the percentage of the compensation that is dependent on <unk> fast and gates that determine the.
Our sellers accelerators and both of them, we continue to adjust as our portfolio becomes more and more subscription and SaaS to favor the growth of our <unk> SaaS business and we now know that those metrics worked quite well as we have done that in FY 'twenty, two and we will continue to and we are continuing to sort.
10 of them in turn the dial in the right direction for FY 'twenty. Three in addition to those two as Doug mentioned we.
In we are about to launch our partnered program that provides partners incentives to drive consumption of the offer of customers transitioning to <unk> SaaS those incentives.
<unk> already rolled some of those out and those will scale up through FY 'twenty three to get to catch the volume of customers that we anticipate.
Adopters have been SaaS offerings for V. C. N N V sand so that three legged strategy is how we will employ as a much broader.
Part of our portfolio becomes seven SaaS in FY 'twenty three.
Thank you next question please.
Thank you. Our next question will come from James Fish with Piper Sandler.
Hey, guys. Thanks for the question actually I just wanted to build off the last one a little bit it seems like it was another big increase in term license as Youre trying to also move towards more sass, especially with some of your tier one verticals like financial services and government as you've talked about I guess, what makes you confident these customers actually want to consume some of these <unk>.
<unk> SaaS, rather than term license and it's been a bit Zane since we've gotten an actual update on the booking sizes of some of the underlying business lines like end user NSX and <unk> are you willing to give that given at the fiscal year end.
Sure well, let's first tackle the the term piece of the business, which maybe submit if you want to touch on that I'll I'll say, Jim as we're thinking about the portfolio and laying out the broader view of the portfolio that <unk> mentioned earlier as we get into next quarter. We will highlight we believe that the way that we.
About the portfolio, having changed over the years is more relevant than in FY 'twenty. Three we will give you a broader view of the sizing of those elements. So we are actually migrating more towards how we think about both the southern SaaS parts of the business as well as the on Prem pieces as they roll into it and which is part of the reason why we see.
Term as a stepping stone in these new categories will be we believe more helpful and where the business is going so our intent is to update you on that and at the next quarter.
And Jim to answer your question on the term business term business is predominantly at horizon, VDI and end user computing and the compute part of the cloud suite, Okay, where customers are bringing up sort of their management in the cloud, but cloud suite being <unk>.
A portfolio that is percentage of the products that they're running on premise switches.
Ends up becoming.
You know from accounting perspective treated its Tim.
So in both cases, we see customers very much interested they're not like they are not interested in getting value from the cloud they're just they're.
They are interested in keeping their workload on premise because they have fought for multiple reasons, including just the capital investments that they have made in the infrastructure they want to leverage them. So across both of those are as we introduce SaaS capabilities that enable customers to keep the work.
Claude in the cloud and the on premise, but get additional capabilities for SaaS then as their term comes up for renewal, we have an opportunity to actually convert them to <unk> SaaS and so so that's our strategy and that's the predominant part of our Tam business at this point of time.
Thank you fish next question please.
And our next question will come from Karl Keirstead with UBS.
Thanks, Dan I'd love to zero in on.
Fiscal 'twenty three free cash flow guide of $3 75 billion and that will be down for the second year in a row and by about $220 million. So I think it's important maybe to understand a little bit.
What's going on in the cash flow side, and perhaps its investment spending I'm sure. There's a little bit of interest expense increase as well, but I wanted to ask you about two issues in particular, one the extent to which you might be seeing wage inflation and could that be weighing on margins and hence cash flow and then second and maybe even more importantly, whether.
<unk> the model transition that you and the team have talked about on this call to sub SAS might that be accompanied by any compression in average invoicing duration that could be weighing on cash flow. Thanks.
Thanks, a lot Tim.
Sure Karl Yeah. So when you look at Ocs you know if we start at the operating cash flow side, we were very pleased with FY.
FY 'twenty twos.
The results and as I mentioned on my prepared remarks, not only the strength of the business and the bookings that we saw in <unk> in Q4.
But just the top line growth in the billings exceeded our expectation and we came out well ahead of what we expected with well over $4 $3 billion in Ocs for FY 'twenty to some of that was timing.
In a number of areas that does impact that transition from FY 'twenty two into our guide for FY 'twenty three so we actually think on an O CF basis, we see consistency there between the $4 three five if you will on FY 'twenty two heading into our guide of $4 two for FY 'twenty three so there's a lot of consistency there the difference.
And that in and free cash flow that you highlighted is an increase primarily driven by two areas. One is a lot of the back office.
Supporting systems that we need to drive this transformation and the growth that we're seeing in our sub and SaaS business is.
Is the is the increase that youre seeing there as well as some capitalization tied to the R&D efforts on some of the southern SaaS platforms. They get capitalized over a number of years. So the increase you see on our Capex. If you will from FY 'twenty two to FY 'twenty three are driven by those two factors that we believe are very positive on the business, but obviously.
As you pointed out do impact free cash flow at least in the short term.
Got it okay helpful. Thanks.
Thanks, Craig. Thank you Carl it looks like we have time for one more question. So this will be the last question. Please.
Thank you our last question will come from Anyhow, Chachi with Northland capital markets.
Yes. Thank you.
Are you guys, providing a metric on a subscription SaaS revenue.
Yeah, we did for for the past year at three six.
$3 $6 billion.
And what's that year over year growth.
26, 20, 24% year over year.
24%, Okay. So that's partially what underpins the.
Confidence in the further acceleration that you're guiding to here correct. Yeah. That's right I mean, that's a good call out you know as I mentioned earlier, we were very pleased with the southern SaaS focus from the entire company driven by the product side. The go to market side, we feel like we're well positioned heading into FY 'twenty three obviously.
The $3 6 billion and IRR.
Allows us to have that conviction for further growth I did point out that we would expect to see that increase.
At the end of FY 'twenty three as well so we're confident in that as well as the you know the focus in the guide on <unk> revenue for the year, which was over $4 billion.
Great. Thank you I have a different question real quickly.
These in year over year growth decelerate from mid teens to mid single digits this quarter.
Yeah. So.
If you think about visa.
Increasingly our bimodal.
Go to market if you will.
One part of it is suites visa is a part of a <unk> as part of our overall <unk>.
Vmware Cloud Foundation, Vmware cloud on AWS and V. C. P. P type solutions, which are full infrastructure stack solutions.
And then the second go to market for <unk>.
<unk> is through our converged hyper converged infrastructure appliance that we sell.
We do in partnership with Dell.
And.
<unk>.
The other Oems as well so both of these are what drives the growth of our VSAT business and VSAT as a standalone software category.
Something that we find customers want less often they really want the full HCI solution and the full appliance solution and that's what's driving our VSAT business going forward.
Okay, where we've hit our time I think that before we conclude drug do you had a final comment you wanted to make.
Thank you Paul and thank you everybody for joining the call today.
As we begin FY 'twenty three I'm very excited by the growth opportunities ahead of us.
Our strategy around multi cloud is clearly resonating with customers and I'm very happy with how the team is executing on the product innovation side on the business model transformation side and on the go to market side.
And collectively.
FY 'twenty three will be another year.
We make progress towards our long term goals that we laid out.
Financial Analyst meeting last September so thank you very much and I look forward to updating you next quarter.
Well, thank you and that does conclude today's conference. Thank you for your participation.
Excellent Dave.
Okay.
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