VMware (VMW) Q4 2019 Earnings Conference Call Transcript

VMware (NYSE: VMW) Q4 2019 Earnings Conference CallFeb. 28, 2019 5:00 p.m. ET


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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to today's VMware fourth-quarter fiscal-year 2019 earnings call. I'd like to remind everyone that this conference is being recorded. And at this time, I'd like to turn the floor over to Paul Ziots, vice president, investor relations.

Paul ZiotsVice President, Investor Relations


Thank you. Good afternoon everyone, and welcome to VMware's fourth-quarter and fiscal 2019 earnings conference call. On the call we have Pat Gelsinger, chief executive officer; and Zane Rowe, executive vice president and chief financial officer. Following their prepared remarks, we will take questions.

Our press release was issued after close of market and 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, including those described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC.

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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 to stock-based compensation; amortization of acquired intangible assets; employer payroll tax and employee stock transactions; acquisition, disposition and other related items, including the gains or losses on Pivotal Software; and discrete items impacting our GAAP tax rate.

You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in the press release 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 2019 quiet period begins at the close of business, Thursday, April 18, 2019. In addition, VMware adopted ASC 606 on a full retrospective basis effective February 3, 2018.

Accordingly, the financial results for the fourth-quarter of fiscal 2019 presented in our press release and discussed on this call have been prepared under ASC 606. In order to provide meaningful comparisons to prior periods, VMware has included statements of incoming cash flows for the three and 12 months ended February 2, 2018, adjusted for ASC 606, and the balance sheet as of the end of fiscal 2018 adjusted for ASC 606 in our press release. All year-over-year comparisons discussed on this call for fourth-quarter fiscal 2019 results are comparisons to the corresponding periods of fiscal 2018 as adjusted for ASC 606. With that, I'll turn it over to Pat.

Pat GelsingerChief Executive Officer

Thanks, Paul. Q4 was a terrific ending to a strong fiscal '19, with total revenue up 16% year over year in Q4 and 14% for fiscal '19, driven by broad-based strength across our diverse product portfolio and in all three geographies, with particular strength in our Asia Pacific region. Non-GAAP earnings per share increased 23% year over year to $1.98 in Q4 and rose 21% to $6.33 per share for fiscal '19. VMware software continues to connect, manage and automate the world's complex digital infrastructure.

Our software forms a digital foundation that powers the apps, services and experiences that are transforming the way we live and work. Customers look to VMware for solutions across hybrid cloud, multi-cloud, modern apps, networking, and security and digital workspace to help enable their digital transformations. We demonstrated good Q4 results across our hybrid cloud and SaaS portfolio as we strategically focused on expanding that offering. We remain committed to growing this business as customers continue to turn to us for the best solutions to span private and public clouds.

VMware Cloud on AWS continues to experience industry momentum across all three geos, including closing our largest deal ever at approximately $20 million. We were pleased to add significant customers such as: the Federal Home Loan Mortgage Corporation known as Freddie Mac, a public government sponsored enterprise; Nant Media Holdings which includes the LA Times, as well as the United States Air Force Hill enterprise data center. Additionally, VMware announced the initial availability of VMware Cloud and AWS GovCloud in November, with the first government customers adopting the service. We also see exciting momentum with CloudHealth technology's offerings.

VMware is enabling customers to manage, secure and operate in an increasingly multi-cloud world. With CloudHealth by VMware, we have a data and collaboration platform that helps customers make business decisions related to cost management, security, governance, and application health. We are expanding the value of the CloudHealth platform through our best-of-breed cloud services. And in Q4, we announced general availability of integration with Wavefront.

In December, we closed the acquisition of Heptio, a leader in the open Kubernetes ecosystem, making us well positioned to enable customers in modern application environments. We will accelerate efforts to make Kubernetes the standard for customers building and running their applications across clouds and continue to drive the open source community's development of this critical platform. We also announced the general availability of VMware PKS 1.3, which delivers support for Microsoft Azure, further enhancing the solution's multi-cloud capabilities. We're seeing a nice ramp of customer acquisitions across PKS and Heptio with over 150 customers as we continue to build out our Kubernetes offerings.

And continuing to build upon our vision for the virtual cloud network, we announced VMware NSX Service Mesh to help solve some of the most pressing issues developers are facing building applications based on containers and Kubernetes. The solution is built on the foundation of the SDO open source project to which VMware is an active contributing member. Our networking and security family, including NSX and VeloCloud, experienced a strong quarter, with over 50% growth in license bookings year over year and now over 10,000 customers. Customers like Swisscom are embracing NSX as their networking and security platform to connect and protect multi-cloud application deployments and meet increasing customer demand for automation and cloud-native workloads.

A leading financial services customer is working with VMware and Dell Technologies to fully automate its infrastructure as a service environment. The customer has made a major investment in VMware NSX, which is delivering critical networking and security automation. The customer is also utilizing VMware vSAN, vSphere cloud management as they drive this IT transformation and using our end-user computing products to drive workplace transformation. We're also seeing strong adoption of our NSX-T offering for multi-platform network and security use cases as customers move through their digital transformation initiatives, including automation, multi-cloud adoption and containers.

VMware SD-WAN by VeloCloud continues to exhibit exciting growth in both bookings and customer adoptions with companies like USAA and NCR. We are also seeing strong traction across retail, financial and manufacturing verticals. The need to improve end customer experience, network refresh, MPLS augmentation and displacement and cloud connectivity continue to drive enterprise adoption of VMware SD-WAN. We were pleased to receive further industry recognition this past quarter.

VMware was named the leader in the recent Gartner Magic Quadrant for Hyperconverged Infrastructure, which recognized VMware for both ability to execute and completeness of vision, which was published in January. Additionally, in Gartner's January 25 2019 report solution comparison for four hyperconverged and software defined infrastructure solutions, VMware received high readings in 17 of the 23 categories and zero low or none ratings. VMware is the only vendor in this report which features an every category: software-defined storage, network platform, hypervisor, container platform, management and hybrid cloud. We're thrilled to receive what we believe is external validation of our hyperconverged infrastructure approach.

VMware/Dell VxRail solution also continues to experience momentum. On the broader Dell Technologies front, we have now achieved our synergy goal. We see continued opportunity across our collective portfolios, including Workspace ONE on Dell clients where we are seeing considerable customer interest in Dell Workspace ONE factory provision devices. With Dell Technologies now public and economic interests even more aligned with VMware, we're focused on our joint opportunities in fiscal 2020.

We continue to see customer momentum for our digital workspace platform, Workspace ONE, as we continue to help customers improve their employee engagement and experience. We recently acquired AetherPal, a remote support solution provider, reinforcing our commitment to provide customers with a single platform approach that simplifies digital workspace management. VMware was also recognized from The Forrester Wave for Unified Endpoint Management released in November 2018. VMware was cited as a leader, and it also achieved the highest possible score in the product vision and roadmap execution criteria, which appear in the strategy category.

Earlier this week, I attended Mobile World Congress in Barcelona where the buzz about 5G was at an all-time high. I was thrilled to see the interest from communication service provider and enterprise customers and partners in VMware and the role they see us playing in accelerating their transition to 5G. We're helping communication service providers like Vodafone globally to build their telco clouds to run their network and IT workloads, enabling to address the costs associated with 5G, optimally use the public cloud and capture operational agility and cost efficiency at scale. VMware is Vodafone's primary strategic partner for telco cloud infrastructure services.

VMware solutions are used across Vodafone's operating markets around the world. They are live in 15 countries and more than 50 sites, carrying increasing amounts of subscriber traffic on more than 300 core network functions. We were also pleased to announce expanded collaboration with AT&T, Ericsson and TI Systems to support enterprise and consumer customers using technology such as SD-WAN, NSv, as well as VMware Cloud on AWS. Overall, we were very pleased with our momentum in the telco space as we are now working with more than 70 operators, more than 120 production implementations and over 100 certified virtual network functions.

In closing, we were very pleased with this terrific quarter and fiscal '19. At VMware, we believe that software has the power to transform business and humanity. We understand that our products, operations and people collectively have an impact on the world, and we strive to generate positive global impact through all that we do. Our VMinclusion Taara project, a joint effort with Women Who Code India, upskills women returning to the workplace and has already engaged 2,000 women since its launch just two months ago, well on its way to the goal of upskilling 15,000 Indian women.

Another proud moment this quarter was being recognized in the Forbes and JUST Capital annual ranking of America's most just companies. VMware ranked number seven overall of the companies that work to make the world a more just place. I want to thank all our VMware customers, partners and of course Team VMware employees for a great quarter and a terrific fiscal year 2019. I'll now turn it over to Zane to talk more about our business performance.

Zane RoweExecutive Vice President and Chief Financial Officer

Thank you, Pat; and thanks to all of you for joining us today. We're pleased with our solid performance in Q4 and for the full year. With our broad-based strength across the business, and thanks to the efforts of the VMware team, we achieved record results in both Q4 and fiscal '19 for license revenue, total revenue and non-GAAP net income, as well as our annual operating cash flow and free cash flow. We continue to drive deeper engagement with our customers and partners who leverage the VMware portfolio for their business transformation initiative.

This is reflected in our record number of 23 deals over $10 million in the quarter. In Q4, total revenue grew 16% and license revenue increased 21% year over year. Hybrid cloud subscription and SaaS comprised approximately 10% of total revenue and grew over 35% year over year. Q4 non-GAAP operating margin was 37.3% as we continue to invest in key initiatives to support our growth strategy.

Non-GAAP earnings per share for Q4 was $1.98 on a share count of 416 million diluted shares. Unearned revenue at quarter end was $7 billion. Cash and short-term investments totaled $2.8 billion, following our $11 billion special dividend which was distributed in late December. Q4 growth and revenue plus the sequential change in unearned revenue was 17%, and license revenue plus the sequential change in unearned license revenue increased 20% year over year.

We exited Q4 with $147 million of licensed backlog, compared to $144 million at the end of Q3. As Pat mentioned, our networking and security portfolio had a strong Q4. Customers are embracing NSX to meet demand for automation and cloud-native workloads, for SD-WAN and for their network and security platform to connect multi-cloud applications. We've been pleased with the pace of NSX adoption and expansion within the existing customer base as repeat sales have been significantly higher than the size of the initial purchase value.

In Q4, total bookings for NSX surpassed $500 million, with full-year bookings for this portfolio reaching approximately $1.3 billion. vSAN also had a great quarter with license bookings growth of over 60% year over year. In particular, VxRail and VMware Cloud Foundation were strong this quarter. We closed our biggest vSAN deal ever in Q4 with a large financial institution that continued to build on their vSAN deployments, helping increase performance while reducing expenses.

EUC license bookings for the quarter were up in the mid-single digits year over year and approximately 10% for fiscal '19. I would highlight this is on top of a strong 30% growth in both Q4 fiscal '18 and for the full year of fiscal '18. EC total bookings were over $1.6 billion for the year. Workspace ONE once again was an important contributor to both our EUC bookings growth, as well as our hybrid cloud and SaaS growth.

Core SDDC performed exceptionally well in Q4, with license bookings up over 20% and total bookings growth in the mid teens year over year. For cloud management, both license and total bookings grew in the strong double digits in Q4, and nearly all of our largest deals included management. Customers are realizing increased value in hybrid cloud management solutions, driven by our capabilities from both organic and inorganic investments in this category. We're pleased with the innovation and trends that we see in this part of the business.

Our compute business was also strong in Q4, with license bookings growth in the mid teens and total compute bookings up in the high-single digits year over year. Compute was attached to nearly all of our largest deals in the quarter. It is also a key component in our VMware Cloud Provider program, as well as a number of emerging solutions such as VMware Cloud on AWS and VMware Cloud Foundation. In addition, more of our customers are incorporating vSphere as a foundational component of their hybrid cloud strategy.

For full-year fiscal '19, compute license bookings grew over 10%, and total compute bookings increased in the mid-single digits year over year. In Q4, we repurchased $42 million in stock. We have approximately $834 million remaining on our repurchase authorization, which extends through the end of August 2019. We remain committed to a balanced capital allocation plan, delivering on our desire to grow the business, maintain flexibility for M&A, as well as return capital to shareholders.

For fiscal '20, guidance for total revenue is $10.030 billion, ahead of the initial guidance we provided last quarter and up 11.8% year over year when taking into account our outperformance in fiscal '19. Fiscal '20 license revenue is expected to increase 12.8% to $4.275 billion. We continue to expect non-GAAP operating margin for the year to be 33%. Our non-GAAP EPS for fiscal '20 is expected to be $6.49 on a diluted share count of 418 million shares.

The distribution of our $11-billion special dividend in December impacts our fiscal '20 non-GAAP EPS guidance by approximately $0.40, driven by lower interest income as a result of the lower cash balance. For the full year, we expect cash flow from operations to be $3.950 billion, up 8% versus the prior year. And we expect free cash flow of $3.630 billion. Our $11-billion special dividend also impacts our cash flow due to lower interest income year over year.

For Q1 FY '20, total revenue is expected to be $2.456 billion, up 11.8%, with license revenue of $865 million, an increase of 11.7% year over year. We expect non-GAAP operating margin of 29.2% and non-GAAP EPS of $1.27 per share on a diluted share count of 418 million shares. Interest income on our lower cash balance this year versus last year impacts non-GAAP EPS for Q1 by approximately $0.10 per share. Remaining guidance for Q1 and the full year is contained in the slide deck on our website accompanying this call.

In summary, we're pleased with our performance in Q4 and for the year. It's an exciting time at VMware with increasing customer adoption of our broad products and services portfolio, expansion in areas such as hybrid cloud and SaaS and a dedicated team of partners and employees committed to making VMware the foundation for our customers' digital transformations. We look forward to updating you on our progress throughout the year. With that, I'll turn it back to Paul.

Paul ZiotsVice President, Investor Relations

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.

Questions and Answers:


Thank you very much, sir. [Operator instructions] And first from Deutsche Bank, we have Karl Keirstead.

Karl KeirsteadDeutsche Bank — Analyst

Thanks very much, and congratulations on the good end to the fiscal year. Pat, maybe I'll start by asking you a question about the overall market demand. But rather than asking a general question about IT spend, I'd like to ask it in a slightly different way. It felt to me like in 2018, every single tech supplier exposed to infrastructure IT had a terrific year.

But in the last month or so, we've seen weakness from Intel, NVIDIA, NetApp, HP, and now Nutanix tonight; and yet you just posted one of your strongest revenue growth quarters in years. And I'm wondering if you could just explain that apparent divergence. Is it a function of the emerging products becoming a larger portion of the mix? Is it enterprise demand maybe transitioning from hardware to more software defined? Your thoughts would be welcome. Thanks.

Pat GelsingerChief Executive Officer

Hey, thanks, Karl. And yes, we are very happy with the quarter's performance. And we do continue to see that it will be a good IT market into the future overall. And as you've heard me talk about in the past, I see it as sort of tech breaking out of tech.

More areas consuming technology, more areas of every business differentiating, and it's no longer IT, it's buying technology, it's now every aspect of the business. So overall, we continue to see a good tech market. Now inside of that, hey I think there's some turbulence. There's going to be winners and losers.

We continue to see lots of questions on cloud or private and public cloud and how hybrid cloud transitions. You're clearly going to see these normal cycles of over and undersupply as people are building up rapidly in different geos. Clearly, there's a whole lot of those other effects that are going to play out where I think we are going to see some winners and losers. When we look at that against our business, we've just positioned ourself, we believe, extremely well in many of these growth sectors.

And we're no longer dependent on any geo or any individual product. But the real breadth of our portfolio is nicely rewarding us across the broad landscape of, we believe, a good tech market that's going to continue well into the future. And there will be winners and losers inside of that because there is so much change going on in the marketplace with these powerful trends. And you might remember I talked about the four superpowers: cloud, mobility, A.I.

and edge and IoT. And all of those will have different effects of who's going to be the winners and losers inside of it. But it's a good market and really happy with our performance. Thank you, Karl.

Karl KeirsteadDeutsche Bank — Analyst

OK, thank you.

Paul ZiotsVice President, Investor Relations

Next question, please.


Next we have Kash Rangan with Bank of America.

Kash RanganBank of America Merrill Lynch — Analyst

Hi. Hello? Can you hear me OK?

Pat GelsingerChief Executive Officer

Yes, we can hear you just fine, Kash.

Kash RanganBank of America Merrill Lynch — Analyst

Perfect. Awesome. Well, congratulations on showing acceleration at scale, truly stupendous. And my question for you, Pat, is an AWS question.

Dig a little bit deeper into how, give us a state of the union on the AWS partnership. What kind of customers and verticals and types of products are likely to make that migration to AWS? And as it relates to that, if you have the time to get into, Zane, but implications for VMware's long-term business model if the AWS partnership progresses into the next phase. That's it. Thank you so much.

Pat GelsingerChief Executive Officer

Yes. Hey, thank you, Kash. And we're very happy with the VMware Cloud on AWS in Q4. Let me just remind you that this is the result, the VMware Cloud offering is a result of a strong, preferred and unique partnership that we have with AWS to create this highly differentiated VMware Cloud offering.

And the results of that are that we really are seeing a broadening of the use cases. We've talked in the past about datacenter migration, datacenter extension and DR. We've started to see the VDI use case start to emerge as well, so we now have four very solid use cases. We now have it available across all three geos that we see in place, where we have large deals being now executed across all three geos.

We also now launched with GovCloud, which you can almost think about that sort of as a fourth geo, it's a unique offering that we have there as well. And as we noted in our formal comments, we now have our first $20-million deal. So the deals are starting to get larger as well. And really, like one of my favorite quotes from one of our customers, when the VMware Cloud on AWS pilot was successful, it was like manna from heaven, right? And really, this idea that I can now move to the cloud, create a unique hybrid cloud experience that doesn't require me to change my applications.

I mean, this is just game-changing for customers. And overall, that and the continued partnership with Amazon, obviously we announced that reinvent the AWS Outposts, we'll soon be going GA on the RDS offering. We continue to innovate together. So overall, just a great execution this quarter and we're quite happy with the potential that this has.

And our customers are really clamoring for its potential.

Zane RoweExecutive Vice President and Chief Financial Officer

Kash, I'd just add that it was a contributor in the growth that we saw in our hybrid cloud and SaaS portion of our business. And as you know, it'll be a growing contributor more generally in our cloud business. So we couldn't be more pleased with the logo acquisitions we had through the course of last year and the workloads we're expected to come online through the course of this year and will become a more meaningful part of the business as the year progresses. So all in, we're very pleased with the results here.

Paul ZiotsVice President, Investor Relations

Thank you, Kash. Next question please.


Next from Citi we have Walter Pritchard.

Walter PritchardCiti — Analyst

Hi, thanks. I'm wondering, maybe Zane, if you could give us some color on when you get into some of the large customer relationships for their buy in, storage and networking from you, any sense — I know you've talked about long term, the size of those markets are potentially the size of the compute market. But could you talk about how much the spend is on these customers who've really discovered the value of those products and how that stacks up in storage and network relative to compute? Thanks.

Zane RoweExecutive Vice President and Chief Financial Officer

Sure, I'll start with that and let Pat talk more broadly about the category. I mean, we couldn't be more pleased, Walter, with the significant opportunities we've had with our larger customers, and particularly in the fourth quarter I called out 23 customers with over $10 million in deal size, which is well up from the 16 that we had over the same period last year. The EAs contributed in the fourth quarter 51% of our total product bookings. So it's a nice component.

And as we get more and more into the stack, it becomes just a broader talking point and selling point with our solutions selling with these customers. Pat, if you want to talk a bit more about that relationship with compute?

Pat GelsingerChief Executive Officer

Yes, and one of the things, Walter, that we've been talking about, and you're going to see us talk about this more, is that increasingly customers are buying the solution. And you're going to see us just focus more and more on the core cloud, transform their datacenter? We'll take them to the hybrid cloud with offerings like VMC, enable the multi-cloud capabilities with CloudHealth, the complete solution that we're offering for networking with NSX and our complete Workspace ONE to transform the workplace. And those solutions, right, really are the core of how we're taking our customers in the future. And when you click inside of those, yes, they are the composite of compute, networks, storage and management.

We call it the four ingredients of baking a cake. They're all together. So as customers are buying that complete solution, it really is, as I've called it, the four X. We have somebody going from compute to the complete solution of all four, and all four of them have a similar kind of market opportunities associated with it.

And as a result, the deal size as we get customers moving to the full VMware Cloud Foundation or the full VMware Cloud on AWS offering, those deals become much larger as a result, and more strategic. Because really, they are now buying the full datacenter capabilities from us. And we comment on a couple of our largest deals this quarter, demonstrated that exact capability. And as we've talked about our largest deals, eight of 10 with vSAN, nine of 10 with NSX, 10 of 10 with compute, 10 of 10 with management.

It's demonstrating that large behavior of customers relying on us as their strategic partner for the entirety of their datacenter and/or their hybrid cloud.

Paul ZiotsVice President, Investor Relations

Thank you, Walter. Next question please.


Absolutely. Next we'll hear from Mark Murphy with J.P. Morgan.

Mark MurphyJ.P. Morgan — Analyst

Yes, thank you, and I will add my congrats. Now I understand why people are pausing when they pick up the phone in Q&A here. Pat you stated that you've now achieved your Dell synergy goal. So just to clarify, you're referring to the $1-billion incremental revenue run rate contribution to the Dell channel.

It wasn't clear to me if that's what you're referring to. And just if so, did you see some kind of unusual strength there in Q4 to cause that achievement so soon?

Pat GelsingerChief Executive Officer

Yes. And we've been citing that we've been running ahead of our synergy goals over the last year. And we've been commenting on that. And yes, we're referring specifically to the $1-billion synergy goal that we've put out when the merger was initially announced.

And as we said, it was approximately a three-year goal and we achieved it under that time. So we really do see the momentum of that relationship. And we're also seeing that with Dell, the strength there really is across the portfolio. Compute, software-defined storage, networking, hyperconverged cloud, Workspace ONE.

All of those are performing. And the two that we've put the most unique emphasis on, obviously VxRail, right? The integrated hardware/software appliance for converged infrastructure. And now with Workspace ONE and integration into Dell clients, going forward we just see that they're becoming this powerful partner across our geos, across different market segments. And our focus going forward is to create more unique value while with them in these integrated offering.

So very good and very happy to have this milestone behind us.

Paul ZiotsVice President, Investor Relations

Thank you, Mark. Next question please.


Next we have John DiFucci with Jefferies.

John DiFucciJefferies — Analyst

Thank you. I think my question is for Pat, but also Zane. This strategy, Pat, has always been to go out and sell the software-defined strategy, the software-defined datacenter. That's been the vision of VMware.

But we, really this quarter, sort of noticed from field work that it actually seems to be happening more. Like customers, and the numbers show too, right? I mean, customers seem to have gone all in on VMware, which is something more so than we've seen. So I guess I have two parts, Paul, sorry. Is that true? Did you notice an inflection this quarter? And then secondly, do you think that's sustainable at this point? Or was it you just had some unique customers that really said hey, I'm going to buy all four Xs this quarter and the pipeline doesn't necessarily look that same going forward? Thanks.

Pat GelsingerChief Executive Officer

Yes. Thanks, thanks, John. And this idea of customers going all in on us, we'd say yes. Probably the most demonstrable points, maybe the VMware Cloud Foundation offering, which is the full integration of compute, network, storag and management, we well exceeded our goals for that in Q4.

And the other example of that would be the complete VMC, the cloud offering, which again is the full solution. And we comfortably exceeded our customer goal for that and really started to see the acceleration. So with those two proof points, we'd say boy we're really starting to see that effect where customers are saying, boy, you're putting the pieces together, you're validating and we're taking full responsibility to make sure it all works together. That allows me to take my people and, instead of having them look down the stack, I get to take my resources and have them look up at applications and business-differentiating value.

Wow. And that really is what we talk about when we say the VMware vision is to be the essential ubiquitous infrastructure for our customers' digital transformation. The more of that that we do for them, the more of their resources can be aimed on creating business value. And that's the path we're on.

And we really felt that in Q4, and we believe it's quite sustainable into the future.

Zane RoweExecutive Vice President and Chief Financial Officer

Hey, John, I would just add it was a strong quarter across the board. What was impressive is, across the product portfolio, we see that strength, which I think aligns with your thesis. And also impressive for the teams around the globe. We saw great business growth across the globe as well.

So it was a truly balanced quarter on many fronts and becoming more and more strategic with these customers.

Paul ZiotsVice President, Investor Relations

Thank you, John. Next question please.


Next question will be from Matt Hedberg with RBC Capital Markets.

Matt HedbergRBC Capital Markets — Analyst

Hey guys, thanks for taking my question. Congrats again from me. You guys have clearly a lot of good growth drivers that are I think becoming much more sizable today and sort of bending the overall growth profile higher. But to me, I think compute continues to surprise.

I think a lot of folks that we talk to, and obviously, Pat, you've talked about it being foundational to really everything you do, but wondering if you could talk a little bit more about the sustainability of compute growth? I continue to hear more about vSphere Platinum out in the field. Wondering how important that is as a catalyst to continued compute growth.

Zane RoweExecutive Vice President and Chief Financial Officer

Sure, yes. I'll start, Matt. Compute, as you point out, has had a good number of years. We've seen, in aggregate, compute mid-single digit growth across the last number of years.

Now we're not changing our forecast necessarily as we look as out sort of mid to long term on compute. But it's clearly becoming a bigger and bigger part of the number of products in our portfolio and solutions in the portfolio.

Pat GelsingerChief Executive Officer

And as you suggest, we do see this foundational element where we're more about selling the solutions, like I described in my answer to John on the last question. And we have now launched vSphere Platinum, and Platinum for us is potentially a driver in the future. But it's way early in its lifetime to really measure that or attribute unique value to it. But this idea that we're selling a premium SKU that includes security, that we believe is going to be an elegant differentiator to leverage that unique position that VMware has.

Because the VM has full visibility of the running application. And people in the networking world will talk about oh, we have app visibility because we see different protocols. That's not app visibility. That's seeing protocols that are going across the wire, added agents.

Again, we sit in this unique position where we see the entirety of the data flow, the storage flow, the operations of the VM, and we get to build security on top of that. So we're super excited about vSphere Platinum, but it's very early in its life. So we do think that gives us great potential over time. I'll be at the RSA Conference next week talking more about some of the unique capabilities we're bringing to market there.

Paul ZiotsVice President, Investor Relations

Thank you, Matt. Next question please.


Next from Barclays, we have Raimo Lenschow.

Raimo LenschowBarclays — Analyst

Thanks for taking my question. Congrats from me as well. A quick, more deeper technical question. Can you, Pat, remind us how do we have to think about Heptio, especially as you work with PCS as well, because one is kind of open for everyone, one is obviously the Pivotal one specifically.

Like, how's that playing out? It seems like a conflict of interest. Thank you.

Pat GelsingerChief Executive Officer

Yes, and let me just — we really now have three offerings. We just announced PKS Essentials, which complements PKS, which complements PCF for the complete Pivotal PaaS. And you can think about it as PKS Essentials is essentially open source Kubernetes now supported and delivered by VMware. Second is the integration of that with the other value-added components, in particular NSX, which is PKS.

And then the complete PaaS layer, which is combining with the full platform as a service capabilities that Pivotal offers. So think about it as a three-layer cake. And customers, everybody, we believe will be taking PKS Essentials as that base capability for Kubernetes. Obviously we're integrating more value when we bring the networking, the registry, the other capabilities inside of that.

And if you want a more opinionated development environment, which is exactly where Pivotal has built its core franchise, then you would go with the complete PaaS offering from them. And our commitment to customers is that we'll be bringing all three of those into a common technology stack where they can grow up into a more complete solution and have this available broadly across their portfolio. So we feel very good about that. We had a good quarter on PKS, and we're starting to see the customer counts ramp very nicely in that space.

And overall, as we said, we are out to be the Kubernetes dial tone for the enterprise. We're going to make this very standard and capable. We believe that we have a unique position now with the Heptio founders, two of the three founders of Kubernetes. And we're deeply committed to drive this as a key standard in the industry through the open source community of CNCF to accomplish that.

Paul ZiotsVice President, Investor Relations

Thank you, Raimo. Next question please.


Next we have Heather Bellini with Goldman Sachs.

Heather BelliniGoldman Sachs — Analyst

Great. Thank you. Thanks for taking the question. Pat, I heard you mentioned that you were at Mobile World Congress this week.

I know that's a usual stomping ground for you. I was wondering where we are in having telcos really start. To see momentum in upgrading their networks to SDDC. And what key messages were kind of the telco customers that you're meeting with, what were they sharing with you, and how do you see it playing out? Thank you.

Pat GelsingerChief Executive Officer

Yes. Thank you, Heather. Yes, it was a great few days at Barcelona in Mobile World Congress this week. At the industry level, we think that 5G is a 2020 phenomena, where it really starts.

And spending time there, the handsets are there, the spectrum is being allocated, the core infrastructure solutions are starting to be available. And if you might remember, I've been sort of predicting that 2020 is the year where it really starts to build out. I came away from Barcelona believing that even more so. Second, inside of that, we said hey, we are the way that you can build the telco cloud.

And instead of having these bespoke vertical infrastructure solutions, like you have for 3G, 4G, LTE, we can build a horizontal solution just like we've built datacenters now that support a broad range of applications and a broad range of services that aren't tied to 4G or LTE or 5G but allow you to have efficiency, allow you to have common operational models and a much more rapid deployment of new services. And this idea of the telco cloud was a core message that VMware was there delivering. Now with that, we were also thrilled to have Vodafone as a partner, and they are now at scale. And Vodafone now has VMware running in 15 countries of their 22, rapidly growing their footprint.

And really, everybody sort of when they saw the momentum that we have and the rate of innovation that Vodafone is able to bring to the marketplace, I think everybody was a bit astonished by how well that partnership is going for both companies. But we also announced two other key relationships. A partnership with Ericsson. Their solution is being validated with VMware.

And a major expansion of our AT&T relationship, primarily around VeloCloud where we're integrating VeloCloud with the 5G capability. So taken together, those three relationships were very significant for us. We think next year we're really going to start to see 5G deploy. And VMware now, with over 70 operators, 120 production implementations, over 100 validated VNFs or applications that run on it, we're now, we believe, quite uniquely positioned to benefit from this buildout of 5G.

Paul ZiotsVice President, Investor Relations

Thank you, Heather. Next question please.


Next we have Michael Turits with Raymond James.

Michael TuritsRaymond James — Analyst

Hey guys, good evening. You made some comments in the prepared remarks about the relationship with Dell now that Dell is public, and also commented that you hit the last synergy goal. So can you talk about anything about where that synergy goal might be going forward? And any more drill down on what you expect to be doing with Dell now that they are public?

Zane RoweExecutive Vice President and Chief Financial Officer

Sure, Michael. Yes, I'll start and let Pat add to that. I mean, our intention isn't to continue to update in the specificity that we laid out upon completion of the transaction. That was initially set up just to highlight the opportunity.

And as Pat mentioned earlier, we couldn't be more pleased with the success we've had, both on the R&D side, as well as the go-to-market efforts and the relationship we have with Dell. So it's been a terrific journey over the last number of years, and we see that continuing. And we continue to see tremendous growth, but we're not going to be giving any more specifics on beyond the $1 billion that we achieved.

Pat GelsingerChief Executive Officer

Yes. And clearly, as I commented a little bit on earlier, we see these broad areas of cooperation with them. Against that, we're going to focus more and more on creating the unique value propositions together with them, like the VxRail and the Dell client solutions. So bringing unique value together as the R&D and the go-to-market capabilities come together.

Dell has, particularly post the go public, they're just very aligned with us in terms of driving a joint value proposition into the industry. And we've been able to really build a cadence to that partnership that is starting to demonstrate great persistent results.

Paul ZiotsVice President, Investor Relations

Thank you, Michael. Next question please.


Next we have Kirk Materne with Evercore ISI.

Kirk MaterneEvercore ISI — Analyst

Yes, thanks very much. And I'll add my congrats on the quarter. Pat, I was wondering if you can just comment on this idea that not only I think the common view is going to be that it's going to be a hybrid world but a multi-cloud world. And obviously there seemed to be a pretty big opportunity for a vendor, maybe two, to emerge as sort of the key management layers within that world.

Can you just talk about sort of how your customer conversations are going along those lines, meaning you're side of the relationship with AWS, but that's just one cloud. I was just kind of curious how you think about yourselves being positioned as it relates to being that sort of single pane of glass to help customers manage this hybrid and multi-cloud world. Thanks.

Pat GelsingerChief Executive Officer

Yes. No, that's a great question. And first, when we talk to customers about cloud, we really position three things. One is build a common infrastructure, and that's really what the hybrid cloud is, and we're uniquely now doing that with VMware Cloud Foundation, with VMC, this ability to move to and from the cloud without changing the application in any way.

Wow, that's powerful. The second is exactly what you're asking about, but I'm gonna have native services on Amazon or Azure or Google. I have data here, I'm using SaaS providers, I have my on-premise datacenters. How do I manage this multi-cloud world? And recent data from IDC has indicated that customers today have five clouds on average of enterprise customers.

How do I manage in that world? And for us, that's exactly what CloudHealth is about, right? And we're really building CloudHealth out as a multi-cloud platform. We've had great — before we acquired them, they were clearly the leaders with Amazon, managing Amazon spend and services. We are now rapidly expanding that to include all of VMware clouds. VMware on-premise.

We've just launched the complete portfolio of Azure services as well, and we'll be continuing to expand that with more integrations of VMware work capabilities into the CloudHealth platform, like we just announced with Wavefront for instance for performance management across multiple clouds. And then the third conversation with customers is around cloud native development. And that's where Heptio, PKS, and if I refer back to the earlier part of the conversation in the Q&As comes into. And we believe every customer needs to have a strategy for all three.

How you have a hybrid cloud environment for consistent infrastructure, a multi-cloud environment for consistent operations and then a developer environment for the future, which is around cloud native and Kubernetes. And we really see that VMware is uniquely positioned to do all three. And there really isn't any other company we see in that middle one, that multi-cloud space, that has anywhere near the assets that we have, as well as the natural position of being able to partner and deliver that value across a multi-cloud future. So we're quite excited about that possibility.

CloudHealth, as part of the VMware family, is going extremely well. They're highly motivated, they had a good Q4, and we expect that to ramp rapidly as we go through this year.

Paul ZiotsVice President, Investor Relations

Thank you, Kirk. Next question please.


Next from Wells Fargo we have Philip Winslow.

Philip WinslowWells Fargo — Analyst

Hi, thanks guys for taking my question and congrats on a great quarter. I just wanted to double click on software-defined storage and vSAN. Pat, I believe you mentioned that you signed the biggest vSAN deal in the company's history this quarter. It was eight out of 10 large deals attached vSAN.

I guess kind of two parts to this question. One, how much of this is just sort of the inflection and the hyperconverged, or in your case, like sort of hypervisor converged storage market versus that plus maybe some increase in win rates you're seeing versus competition. Just any more color on that would be great.

Pat GelsingerChief Executive Officer

Yes. Overall we are very pleased with our vSAN performance. And vSAN has just become very nicely positioned as this leading hyperconverged infrastructure ingredient, core to our VxRail offering, which had a great quarter. And our view of it though is it's one of the ingredients where we need to bring that full solution together, and that's what Cloud Foundation is about.

Of our top 10 deals, eight of 10 included vSAN this quarter. I referenced a major deal in financial, but we saw this across a variety of different verticals where we're really seeing larger deals and strength and a very compelling TCO. Great industry recognition from Gartner and others. So we do believe that it's a secular trend.

But we're also very confident that we're gaining share inside of that trend as well, as people go to more of an integrated solution or more of a software-defined solution. And it's also core to our cloud offerings as well, such as the VMware Cloud on AWS, has that's sitting right in the middle of it. We're seeing increasing momentum from our VMware Cloud Partner program and our broader cloud partners such as IBM where that is a key piece of the ingredient solution as well. So overall, super happy with its performance, and I think it's going to be continuing to grow as an element of our portfolio for years to come.

Paul ZiotsVice President, Investor Relations

Thank you, Phil. Next question please.


Next is Keith Weiss with Morgan Stanley.

Sanjit SinghMorgan Stanley — Analyst

Hi, this is Sanjit Singh for Keith Weiss, and congrats to the team on a really strong year. Pat, I wanted to revisit your thoughts on NSX and get your view on the durability of growth. I think Velo has been a strong contributor this year. But on sort of an organic basis, looking out to fiscal year '20 and maybe even beyond, how do you feel about sustaining NSX growth at or near the level that you posted this fiscal year? Thank you.

Pat GelsingerChief Executive Officer

Yes. Thank you. We're super pleased with Q4, our 50% plus growth rate was really spectacular and seeing acceleration of that growth rate. And NSX just continues to be a disruptor of the networking and security space.

Total bookings for Q4 surpassed $500 million. We're seeing NSX-T now really have great adoption as well. Networking and security, but also reaching into the container space. So it's becoming a major differentiator for PKS and our container and Kubernetes strategy.

Nine of 10 deals of our largest deals included NSX, VeloCloud's super hot product. We reached 10,000 customers in Q4, so just a huge amount of accolades for that product area in the fourth quarter. Now as we look into the future, we're still tiny, right, relative to the size of the overall networking opportunity. So we see that there's a tremendous market for us to be expanding into over time.

We also believe that some of these areas like VeloCloud and SD-WAN are just getting started, there's a huge amount of WAN marketplace to go. And also, if you think about relationships like Heather's question around Mobile World Congress and telco, another key ingredient for an adjacent market. So we see tremendous opportunity for the long term.

Paul ZiotsVice President, Investor Relations

Thank you, Sanjit. Next question please.


Next we have Ittai Kidron with Oppenheimer.

Ittai KidronOppenheimer and Company — Analyst

Thanks. Got in. Pretty clean quarter, but I do want to ask you, Zane, about hybrid cloud subscription and SaaS, which I think you've called it 10% of revenue. That business has been growing in the mid-30s for quite some time, yet this percent of revenue is not moving that much.

Can you give us a little bit more composition kind of coloring inside? Can you be a little bit more granular as to what is VMware Cloud on AWS' revenue wise? Right now, how many customers are there? Are you seeing a deceleration in VCPP? Just a little bit more breakdown of that will be greatly appreciated.

Zane RoweExecutive Vice President and Chief Financial Officer

Sure, Ittai. Yes, we're very pleased with the performance in that category. Recognize in the fourth quarter, you're into a seasonally strong quarter with ELAs. So the base is fairly large.

And if you look at that 35% growth, if you recall this time last year, I think we were hovering around 8% as a percent of revenue. And this quarter, we're at 10% as a percent of revenue and growing. So we couldn't be more pleased with the category and the growth. Recognize, a lot of the cloud opportunities are SaaS products.

So they're correlated with consumption. And a lot of them are new to the portfolio and growing and emerging. So we track them all very carefully. We're not at a point yet where we'll offer a lot more granularity as far as the breakout within that broader category, but we're very pleased with the SaaS products, with the cloud products.

And then the VCPP program continues to grow nicely as well. That was a little more susceptible to some of the FX changes on a year-over-year basis. So it slowed down a little bit tied to FX. But as you can see, in the grand scheme of things, and as you look at that whole category, it didn't have an impact on the overall growth of the category, which, as I pointed out earlier, was over 35%.

Pat GelsingerChief Executive Officer

Yes, and Ittai, let me just pile on a little bit that we see the growth of that category for us, the hybrid cloud, the SaaS products; that while many of these products are still small, right, against the bigger number, we have extraordinary focus on growing those areas. CloudHealth is subscription, VMC is subscription. There's a large portion of VeloCloud that's subscription. PKS is subscription.

So many of our new product areas that we've really just started to gain traction on are focused on building that hybrid cloud and subscription component of the revenue that we do have. As Zane said, it's a trailing, right, given it's a subscription service. But we couldn't be happier with the momentum that we're getting, and we couldn't be more committed to driving this growth rate into our future.

Paul ZiotsVice President, Investor Relations

Thank you, Ittai. It looks like we have time for two more questions. So let's take the next question please.


Sure. Next we have Brad Zelnick with Credit Suisse.

Brad ZelnickCredit Suisse — Analyst

Great. Thanks for fitting me in, guys. And nice job on the quarter. So now, more than two years since you announced VMC on AWS, how should we think about your plans and depth of integration with other public clouds? Or is your relationship with AWS very unique and not easily replicated with other providers?

Pat GelsingerChief Executive Officer

Yes. As I said in the earlier comments, we do see the Amazon relationship as unique. As we've described, that's a preferred relationship, the number one public with the number one private. And the momentum that we're seeing as we invest and partner with each other is getting great benefit for us mutually in the marketplace.

We do have the VCPP program, which enables us to have a much broader set of cloud partners. Over 4,000 cloud partners are enabled through that program. And as Zane just commented, we had another good quarter of growth in that area. And we do expect that we'll continue to grow the offerings with other VCPP partners.

But our preferred relationship with Amazon is giving us great results, and we'll be continuing to focus on that into the future.

Paul ZiotsVice President, Investor Relations

Thank you, Brad. We'll take the last question please.


And the final question is from Ben Bollin with Cleveland Research.

Ben BollinCleveland Research — Analyst

Good afternoon. Thanks for getting me in here at the end. Could you talk a little bit more about the enterprise agreements? What's the average duration of those agreements? How is that changing? And as they become bigger across more stacks, what types of investments are you making to accelerate and improve understanding of those offerings so that you mitigate any shelfware concerns? Thank you.

Zane RoweExecutive Vice President and Chief Financial Officer

Sure, Ben, I'll start and then let Pat finish. I mean, we couldn't be more pleased with the growth we're seeing. As I touched on earlier with our enterprise agreements, I mean, fourth quarter I think was the largest ever with 26 over 10 million are agreements sort of becoming more strategic. They're covering far more products than ever before, and we're focused on adoption and focused on consumption in all of the areas, in particular in the cloud areas as we integrate those into those agreements.

We don't typically get into too much detail on the average duration, but what I can tell you is that duration is increasing as the size is increasing. So we're very pleased with these relationships, the partnerships and how strategic they've become for both ourselves and our customers.

Pat GelsingerChief Executive Officer

Yes, and just maybe to just add on two little points. We did build an organization a year and a half, two years ago, called our Customer Success organization. That is a non-pay for essentially professional services group that just focuses on adoption, right? And we use that really strategically to go to any place that we see that there's shelfware. We just target that team to go attack it and help customers get enabled.

Because a customer with shelfware is not a happy customer. And we view this as very much that part of the reason we're seeing the great success and renewal rates, increased size of EAs, increased duration of EAs as a result that we are very focused on making sure customers are getting value from their investments that they've made in VMware products. So overall, that team is doing extremely well for us and showing great strategic relevance for our customers overall. Maybe with that then, just to conclude, again, thank you all for joining us.

We appreciate your time and interest in VMware. And in closing, I'll just reiterate what I think you've already heard on this call. We are very pleased with a terrific Q4 and fiscal '19 results. We're seeing this broad-based strength across the business as we provide the essential, ubiquitous software foundation for our customers' digital transformation.

They're investing in us, we're partnering with them. It was a great year, and I thank everybody on the team and on the call for great results.


[Operator signoff]

Duration: 60 minutes

Call Participants:

Paul Ziots — Vice President, Investor Relations

Pat Gelsinger — Chief Executive Officer

Zane Rowe — Executive Vice President and Chief Financial Officer

Karl Keirstead — Deutsche Bank — Analyst

Kash Rangan — Bank of America Merrill Lynch — Analyst

Walter Pritchard — Citi — Analyst

Mark Murphy — J.P. Morgan — Analyst

John DiFucci — Jefferies — Analyst

Matt Hedberg — RBC Capital Markets — Analyst

Raimo Lenschow — Barclays — Analyst

Heather Bellini — Goldman Sachs — Analyst

Michael Turits — Raymond James — Analyst

Kirk Materne — Evercore ISI — Analyst

Philip Winslow — Wells Fargo — Analyst

Sanjit Singh — Morgan Stanley — Analyst

Ittai Kidron — Oppenheimer and Company — Analyst

Brad Zelnick — Credit Suisse — Analyst

Ben Bollin — Cleveland Research — Analyst

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