VMware, Inc.
Q2 2015 Earnings Call Transcript

Published: 22 Jul 2015

[Operator:]

Good day, and welcome to the VMware second quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Paul Ziots, Vice President, Investor Relations. Please go ahead, sir.

[Paul Ziots:]

Thank you. Good afternoon, everyone, and welcome to VMware's second quarter 2015 earnings conference call. On the call, we have Pat Gelsinger, Chief Executive Officer; Carl Eschenbach, President & Chief Operating Officer; and Jonathan Chadwick, Chief Financial Officer and Chief Operating 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 can also be downloaded at the conclusion of the webcast from ir.vmware.com. We've also included in our earnings release, and posted on our website, a reconciliation of GAAP to non-GAAP data for constant currency growth in revenues plus sequential change in unearned revenues for Q2 2015 and Q2 2014, excluding the reduction of revenues due to the GSA settlement in Q2 2015. 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. 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 and not a substitute for, or in isolation from, GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, the net effect of amortization and capitalization of software, certain litigation and other related items, acquisition-related items and realignment-related net gains and charges and, as mentioned, the reduction of revenues due to the GSA settlement in Q2 2015. You can find additional disclosures regarding these non-GAAP measures, including reconciliation 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 third quarter 2015 quiet period begins at the close of business September 15, 2015. Unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2014. With that, I'll turn it over to Pat.

[Patrick P. Gelsinger:]

Thank you, Paul, and good afternoon, everyone. Our second quarter results are solid, following a solid start to the year in Q1. Q2 non-GAAP revenue was at the top of our guidance range, representing growth of 13% year on year in constant currency. And we exceeded our non-GAAP EPS guidance for the quarter. Earlier this year, we outlined our One Cloud, Any Application, Any Device strategy and announced the industry's first unified platform of virtualized compute, network and storage for the hybrid cloud. This quarter, we outlined the next phase of this strategy with new solutions, services and partnerships for Business Mobility that enable organizations to transform their business processes. Some of the highlights included the introduction of VMware Identity Manager, the industry's first identity-as-a-service offering, integrated with our leading enterprise-class mobility management and security platform, which provides IT with a central place to manage end user provisioning, access and compliance. We also announced further commitment to Apple devices and the iOS platform, with plans to deliver application configuration templates and vertical solutions. In addition, we were delighted to welcome fifteen new partners, including DocuSign, and Dropbox and MicroStrategy to the ACE program, which provides a set of open and vendor-neutral standards for developing secure, mobile applications. Overall, our EUC business performed particularly well this quarter, including strong performance with our AirWatch offering. It was also been an exciting quarter in the area of cloud services, as we continue to expand our offerings around the world. Complementing VMware's vCloud Air Network of service providers, we announced general availability of a new VMware-operated location in Australia, which provides customers with a local, Asia-Pacific hybrid cloud service that helps address local compliance and data locality needs. This service was launched in partnership with Telstra, a great example of a customer strongly aligned with all members of the EMC Federation. Carl will talk about a number of the large wins we enjoyed this quarter which include some key Federation-level wins. We continue to see increased opportunities to deliver superior value to our joint customers. In April, we announced two new VMware open source projects designed to enable enterprise adoption of cloud-native applications, Project Lightwave, an enterprise identity and access management solution, which also enables scalable security for containers; and Project Photon, a lightweight Linux operating system focused on container and cloud-native applications. Together, these projects are already helping customers develop, run and manage secure cloud-native applications. Building on these announcements, we recently unveiled two new technology previews designed to streamline cloud-native application development and deployment. VMware AppCatalyst delivers an API-driven environment to developer laptops, and Project Bonneville will enable seamless integration of Docker containers into VMware vSphere. These innovations will help enterprises develop, run and manage secure cloud-native applications, from building them through a simple and easy to use development tool, to running Docker containers securely in production on VMware vSphere. This continues to deliver on our vision of containers without compromise, which you will hear more about during our upcoming VMworld conference. We also saw some very successful deployments of VMware Integrated OpenStack with a number of our major accounts integrating our OpenStack offering with their vSphere-based enterprise infrastructure. We made several key partnership announcements this past quarter and I wanted to take a moment to just mention a few. Intel Security and VMware announced an integrated solution based on the VMware NSX network virtualization platform to provide intelligent intrusion prevention services, IPS, for the protection of east-west traffic within the data center. Recently, Check Point Software and VMware announced an expanded collaboration to extend comprehensive best-in-class security to enterprise private cloud environments. We have continued to build on our support of network functions virtualization in the telco space, which I talked about last quarter. Ooredoo Kuwait has successfully deployed both NFV and IT applications on a single unified cloud based on vCloud for NFV. And last week, we announced that Internet Initiative Japan Inc. has selected the platform for a new Virtual CPE service they are launching later this year. Our technology leadership and customer momentum continues to be recognized by leading industry analysts. Some of the key reports published in Q2 included Gartner recognizing AirWatch by VMware as a leader with the highest ability to execute in its 2015 Magic Quadrant for Enterprise Mobility Management. VMware has been positioned as a visionary in their 2015 Magic Quadrant for Data Center Networking and in their Magic Quadrant for Cloud Infrastructure as a Service Worldwide. Last week Gartner published its latest x86 Server Virtualization MQ. For the sixth year in a row, VMware is placed as a leader, with both the highest ability to execute and highest completeness of vision. IDC also recognized VMware in a number of reports, including positioning us as a leader in their 2015 MarketScape for Worldwide Client Computing Software. We were particularly pleased that IDC recognized AirWatch by VMware as number one in both market share and revenue in their EMM market share report. Once again, we are expecting well over 20,000 attendees for VMworld in San Francisco, which kicks off on August 30th. With this year's theme

[Carl M. Eschenbach:]

Thank you, Pat. We delivered a solid quarter in Q2 and our customer operations teams around the world did a good job closing large deals. We remain optimistic about our market opportunity around our three strategic businesses

[Paul Ziots:]

Thanks, Jonathan. 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.

[Operator:]

Thank you. And we'll take our first question from Heather Bellini with Goldman Sachs.

[Heather A. Bellini:]

Great. Thank you. I just wanted to ask a question about the ELA renewal cycle. Obviously, you always have one going on. You have a particularly large one coming up in calendar 2016. I was wondering if you could talk about the importance of these big cycles in terms of getting customers to broaden their product portfolio. How do you see it as an opportunity to expand the product footprint that your customers have? Thank you.

[Patrick P. Gelsinger:]

Thank you very much, Heather, for the question. It's always great to have you on the call. And maybe before we get started into the Q&A, as we said during our prepared remarks, our second quarter results are solid, following a solid start to the year in Q1 and we do see – I'm glad for you question, Heather, great progress in the newer products, with license bookings now beyond standalone vSphere over 60% of total license bookings, up from just 35% just two years ago. So overall, great progress overall. And, Carl, maybe you can comment a bit more on how we see the ELA cycle affecting the new products in the rest of the year?

[Carl M. Eschenbach:]

Yeah, sure. Thanks, Pat, and thanks, Heather, for the question. So as a quick reminder, Heather, it's important to note that greater than 50% of our enterprise agreements are actually new ones and our customers see enterprise agreements as a good buying vehicle to get frictionless access to our technologies for their future needs. Our enterprise agreement renewals are important to us, as you can imagine, and there are quarters when we have more opportunity to renew these deals versus others. And we have had a really good track record of renewing our EAs in the quarter that they expire. In some cases, we pull them in early. In other cases, they go from one quarter to the next. But overall, if you look at our ability to renew our enterprise agreements, it's very good. As far as getting our new products into enterprise agreements, I would say both net new enterprise agreements and the renewal of enterprise agreements are absolutely a key mechanism for us to get our newer technologies into our customers' hands. And a lot of our larger deals, as I had indicated in my prepared remarks, include some of our newer products. For example, nine of the top ten deals included end user computing; five of our top ten deals this quarter included NSX; and we had a number of deals that also included AirWatch, now that our sales teams are driving AirWatch into the market in conjunction with the rest of the VMware portfolio. And we're even seeing the inclusion of vCloud Air. So and we do see both net new and the renewal of EAs as a key mechanism of getting customers our newer technologies

[Paul Ziots:]

Thank you, Heather. The next question, please?

[Operator:]

We'll take our next question from Brent Thill with UBS.

[Brent J. Thill:]

Thank you. Just as it relates to the Government business. You're coming into an important period in the year. I'm just curious – there was obviously a lot of concern from investors around the Government contract, and you've been pretty clear that you're still doing a lot of business on a standalone basis with each division but how that's tracking and what your view is headed into the September fiscal yearend?

[Carl M. Eschenbach:]

Yeah, so thanks for the question, Brent. Let me take that. This is Carl. So before I talk in specifics about the Federal business, I think some late flashing news is the fact that today, actually today, the Government released a DoD virtualization RFI to the market that was very similar to the JLA (27

[Paul Ziots:]

Thank you, Brent. Next question, please?

[Operator:]

And we'll take our next question comes from Phil Winslow with Credit Suisse. Philip Alan Winslow - Credit Suisse Securities (USA) LLC (Broker) Hey, thanks, guys. And congrats on a good quarter. You talked about a lot of underlying metrics that are positive, obviously on the new businesses, NSX and VSAN, and then obviously Carl just commented on the ELA portfolio for the second half. But I guess the question for the whole team, when you look at your second half guidance, it does call for accelerating license growth. So when you do look through sort of your portfolio heading into the second half, what gives you the confidence in that accelerating license growth? Is it particular products, such as NSX or VSAN, or is it the renewal portfolio? Or just maybe help us kind of parse that through.

[Jonathan C. Chadwick:]

Phil, yeah, this is Jonathan. Let me just take that and I'll ask Carl to give a little bit more color. As we previously stated, not just actually this year, but frankly the last two years, the second half is shaping up to be stronger than the second half. We saw the similar performance in 2013 and 2014. Obviously we executed in both of those years. We are seeing somewhat increased seasonality. Some of the factors that are coming into this, as you'd expect, as we are transitioning from being a very singly product-focused company to a broader portfolio of products, we're seeing stronger growth from newer products, obviously, expect the dollar value of those to have an effect. The EA renewal cycle, as we approach the second half, also expected to have something of an impact. And as a reminder, currency is expected to have a bigger impact over the course of the year as well. So that acceleration, those three or four factors haven't really changed, consistent with what we have been saying and frankly, consistent with what we have been saying over the last couple of years and what we have seen, frankly. Do you want to add, Carl?

[Carl M. Eschenbach:]

Yeah. So let me give a little color around our newer products or what we call our growth or emerging products. When we look at in aggregate our newer products, we're very pleased with the growth rates we're seeing on a year-over-year basis. And as you could expect, some of them are actually growing faster than others. But as a whole, we're very pleased with the growth rate. If I were just to double click on that slightly further, in Q2, we were very pleased with our AirWatch business. It continues to grow very rapidly for us. And we also saw very good growth in vCloud Air, our hybrid cloud solution and solid growth around NSX, which now has more than 700 customers, and VSAN which has more than 2,000 customers. So in aggregate, we're very pleased. Again, some are growing faster than others, but we think we are going to see the impact of these in both the second half and beyond.

[Paul Ziots:]

Thank you, Phil. Next question, please?

[Operator:]

And we'll take our next question from Kash Rangan with Merrill Lynch.

[Kasthuri G. Rangan:]

Hi. Thank you, guys. I know some time back you talked about a target for ELA as a percentage of bookings. Can you just give us an update? I think some time back you said, 60%, 70% or so. And also what are your goals for non-vSphere billings or bookings as a percentage of total billings in the next few years? Thank you.

[Jonathan C. Chadwick:]

Kash, this is Jonathan. And Carl and Pat, obviously, weigh in as you see fit. But I think what we shared in the past is we wouldn't be surprised if we saw ELA as a percentage of revenue – percentage of bookings, excuse me, getting as high as 50%. That's as far as I think we said we would see. And again, I think there's a lot of space between 39 and 50. But again, the way we're seeing customers continue to engage deeply with us would suggest that's certainly a possibility. And then I think I shared as recently as – I think, Paul, it was last analyst day, we were talking about the potential for the mix, and our goal, coming from non-vSphere products, from a license billing perspective, getting north of 80%. Frankly, our goal ultimately is to get completely away from selling what we call naked vSphere. And that will show up as that number approaches 80% and goes frankly even beyond that. There's no reason why theoretically that shouldn't be ultimately 100%.

[Paul Ziots:]

Thank you, Kash. Next question, please?

[Operator:]

We'll take our next question from Walter Pritchard with Citi.

[Walter H. Pritchard:]

Hi, thanks. For Jonathan, it feels like in your forecast, you had very strong large deal activity. I think you mentioned seven deals greater than $10 million. And you were slightly ahead of your license guidance. I just want to get a sense as to how you're forecasting large deals as we go into the second half? Are you sort of forecasting this level of elevated large deals to be able to hit the guide, or do you have more of a margin for error, as you build the forecast for Q3 and Q4?

[Jonathan C. Chadwick:]

Well, it's a great question. Again, the way the process works is we'll take the overall forecast that we get from the field. Carl and I look at that overall. We're looking at that pipeline. We're looking at conversion ratios. We're looking at large deals, specifically. And as we talked about in the context, often, over the last few months, associated with the Federal deal, no one particular deal is something that's predicating or driving our guidance overall. We're looking at all of that as we've looked at our mix overall. As is typical, we're expecting a strong ELA cycle in the Q4 timeframe. Q3 we're expecting, as Carl has just talked about, a stronger Federal cycle. We take all of that into account as we lay out our flows over the course of each and every quarter that we're facing. So I wouldn't say that we're tied to any one particular deal cycle or any one particular deal. We're certainly expecting a strong ELA cycle as we approach our fiscal fourth quarter, but nothing particularly abnormal in that regard, I wouldn't say.

[Walter H. Pritchard:]

Great.

[Paul Ziots:]

Thank you, Walter. Thank you. Next question, please?

[Operator:]

We will take our next question come from John DiFucci with Jefferies.

[John Stephen DiFucci:]

Thank you. I'm going to skip the ELAs for a second. But I would like to talk a little bit about the Integrated OpenStack. And you guys have been talking about that and we're hearing a lot about OpenStack in the field. If it works, it makes a ton of sense. But when you work with OpenStack, because there's others that just talk about the pure open source, OpenStack, which is a really tough problem to solve, when you work with OpenStack, how much of the solution is VMware and other proprietary software versus open source technology? And I know that I'm not looking for an exact number, but it just seems like a very difficult problem to solve with pure open source technology. And I'm just curious as to how much you have to contribute to make it work?

[Patrick P. Gelsinger:]

Yeah. It's a great question, and thanks, John. This is Pat, and I will take that one. In general, what customers have found is taking all of the pure open source technologies, implementing OpenStack with that, they found it's just immature and very difficult to stand up and, particularly, quite labor-intensive for them, requiring fairly large numbers of high quality engineering folks. So it's just a hard thing to go build a parallel silo. Our strategy has been add the OpenStack components on top of the VMware ingredients, so taking all of those pieces that are part of it, like Neutron, adding the Nova management layer, adding the storage components, adding those APIs, but building it on the world-class NSX, vSphere technologies, et cetera. And that combination allows them to fully leverage everything that they're doing in that environment and not standing up a parallel environment. And the result is they get rock hard and they get all of these new APIs on top of it. So it enables CIOs to say yes to their developer communities very easily. And this quarter, we saw good momentum. We had one of the world's largest sportswear retailers stand up very effectively their OpenStack environment. Amadeus in Europe stood up their OpenStack environment. SunGard AS stood up their OpenStack environment. All of those building on top of their VMware installed base and having very rapid ability to get that operational in their environment. And that has just stood very starkly, right? This happens in days. That's taken, in some cases, years for people to stand up the alternative. And this is really enabling ITs with a powerful new set of capabilities and we're quite pleased with that momentum and a good pipeline of activities for the second half of the year.

[John Stephen DiFucci:]

But Pat, how much is the...

[Carl M. Eschenbach:]

The one thing I'd add – Pat covered most everything, but, John, the one thing I would add is we see a lot of customers who go out and attempt to stand up an OpenStack cloud themselves. And it's quite often, if not very often, they come back and ask for our help, either to build out an entire VMware stack or build out an entire VMware stack with our VMware Integrated OpenStack solution, because they underestimated the complexity of building it themselves. So oftentimes, it boomerangs back to us and we have those conversations quite frequently.

[Patrick P. Gelsinger:]

And maybe, John, I think you're trying to probe on just how much of code and those pieces. Off the top of my head I don't have a good answer to that. But maybe we'll follow up with you and give you a more precise understanding of that. But these are substantial pieces from OpenStack, combined with the very substantial pieces that are in place with the VMware stack today. And we will give you more clarity in that as a follow-up.

[John Stephen DiFucci:]

Great. Thank you.

[Paul Ziots:]

Okay. Thank you, John. Next question, please?

[Operator:]

We'll take our next question from Raimo Lenschow with Barclays.

[Raimo Lenschow:]

Hey, thanks for taking my question. The first one is, if you look at the pipeline growing on the ELA side and if I look at where the strong performance was this quarter, can you talk a little bit what you see in customer conversations in terms of cycle? Do people feel better and hence spending looks a little bit better? That's the feeling I got from you guys from SAP earlier on this morning. And then maybe a quick one for Jonathan. If I look at cash, cash flow this year, there's a lot f factors that will impact you negatively. How do I think about it in 2016? Is that all going to be a tailwind? Or maybe just quickly walk us through to make sure that we model this correctly. Thank you.

[Paul Ziots:]

That is two questions, Raimo. Could you please pick one? I hate to be the bad guy here.

[Raimo Lenschow:]

Oh, sorry. Take the second one, maybe I'll follow up.

[Paul Ziots:]

Thank you.

[Jonathan C. Chadwick:]

Okay. Cash flow, is that right?

[Raimo Lenschow:]

Yeah.

[Jonathan C. Chadwick:]

All right. So we obviously identified another item this year

[Raimo Lenschow:]

Even me as a German got that. (41

[Paul Ziots:]

Thank you, Raimo.

[Raimo Lenschow:]

Thank you.

[Jonathan C. Chadwick:]

Yeah, no, thank you. Sometimes I have to translate for the Americans.

[Paul Ziots:]

And thank you for that. And thank you for understanding on the one question. The next question, please?

[Operator:]

We'll take our next question from Matt Hedberg with RBC Capital Markets.

[Matthew Hedberg:]

Thanks for taking my question, guys. Your hybrid cloud service seems to be doing really well, yet you're taking your CapEx expectations down by $50 million. I'm wondering what's driving that. And how should we think about your CapEx build as your infrastructure continues to expand with some of these additional services?

[Jonathan C. Chadwick:]

Yeah, Matt, I'll take that and Pat, maybe if you want to add as well. But we started out the year with a number of capital projects not just around our hybrid cloud business buildout occurring. Obviously, as I think you probably have seen or are aware, we had a large campus buildout over the last few years. We also were building out a number of other office locations, including our Bangalore facilities. And as we've managed our budgets over the course of the year, and as we've managed the flow, those have enabled us to tighten our CapEx outlook for the year. We have invested very heavily in the first half with respect to the hybrid cloud buildout, so I wouldn't read anything into it in terms of a slowdown. Again, our model is one of taking pods, getting those deployed in a fairly deterministic manner as we're deploying just ahead of demand. And that model, I think, is moving ahead quite well. We invested heavily in the first half, as we were expanding geographically around the world, in places like Australia and Japan, in particular. We're largely embedded in those territories right now and now we're on to the expansion as we think about matching the growth rate of the business, overall. So I feel very comfortable with that $350 million CapEx forecast, as opposed to the $400 million we talked about just a quarter ago.

[Patrick P. Gelsinger:]

Yeah, and maybe just to add a little bit. As Jonathan said, we've planted flags geographically. Now we're growing the capabilities in those geographies and filling those infrastructure and now they become more run rate buildouts. The service itself is growing very nicely. Key things this quarter and things like launching DR version 2, write database as a service, the integration of NSX for hybrid networking capabilities is a huge differentiator, and now some of our largest customers on vCloud Air are uniquely taking advantage of that. And as we mentioned on the overall financials, hybrid cloud and SaaS, 6% of total revenue and growing at over 80% per year. So these are really starting to become capabilities at the market, our customers, and will start incrementally influencing our financials.

[Matthew Hedberg:]

Great, thank you.

[Paul Ziots:]

Thank you, Matt. Next question, please?

[Operator:]

We'll take our next question from Keith Weiss with Morgan Stanley.

[Sanjit K. Singh:]

Hi, this is Sanjit Singh for Keith Weiss. Jonathan, I wanted to step back and get your take on the levels of investment that will be needed, call it, over the medium term. You talked a couple of quarters ago about trying to figure out the right level of investment as you ramp up your hybrid cloud and SaaS offerings from a professional services standpoint as well as from a CapEx standpoint. Given that we're a couple quarters into your buildouts, do you have a view of what professional services look like? I'm really getting to what we should think about in terms of longer-term operating margins?

[Jonathan C. Chadwick:]

Yes, Sanjit, thanks for the question. We have, over the last two years or so, and Carl can comment as well on this in even more detail, but we've invested very heavily in PSO. We have over 1,700 people now, professionals in our global PSO organization. And as you'd appreciate, PSO in general, compared to a software margin business is a lower margin. All of that is encompassed in our gross and operating margin results, and the operating margin outlook we've shared. I do see the opportunity for operating margin expansion as we get into 2016. But we are balancing all the investments as we think about the newer growth areas, newer product areas that we are investing in. So I think we're going to continue to manage that. Some of the other areas of investment that you've seen. AirWatch, one of the biggest areas of investment that we have had over the course of the last two years, obviously, dampened operating margin performance but really doing a nice job as we're tracking right to strategy. In fact, as you heard on the call, slightly above in Q2. We are still on track for EPS neutrality in Q4 2015, with the view of bringing AirWatch to being profit generating as we get into 2016. It will still be below our corporate average, in terms of overall operating margin. When I look at all of those things – PSO, AirWatch, the other emerging businesses, the balance we are striking here, and I think we're doing a pretty good job of it, is managing operating returns to the bottom line with the need to invest in growth businesses that are going to be around for many, many years.

[Carl M. Eschenbach:]

And specific to the PSO, as Jonathan said, over the last couple of years, we have invested quite heavily in our PSO go-to-market strategy and brought a lot of consultants and solution architects on board. One of the reasons for that, as you all know, we brought a number of new technologies to market. And when you introduce a new technology, there are times when you need to make sure that you're investing ahead of the curve to have the service capabilities to implement them for the customers. As time goes on, though, we expect to leverage all the IP that we built around our professional services engagement and leverage it by giving it to our channel and our partners. And as we do that, and they become more skilled to implement our newer solutions, in return, we should get better operating margin lift as a company, as we kind of outsource a lot of that service delivery to our partner community.

[Paul Ziots:]

Thank you, Sanjit. Next question, please?

[Operator:]

And we'll take our next question from Michael Turits with Raymond James.

[Michael Turits:]

Hey, guys. Fantastic to see, not only the quarter, but the reiteration for the full year. The billings growth is still lagging the revenue growth. And I understand there are tough comps. But is there any impact at all from duration on ELAs and ELA renewals? Are they, perhaps, shortening? And is that affecting billings? Or is duration okay and it's just the tough comps?

[Carl M. Eschenbach:]

Yeah, Michael, this is Carl. I'll take that. When we look at the duration of both our ELAs as well as our maintenance and our renewals of our support and subscription business, we've seen no material change whatsoever here in Q2. It's been very consistent to what we've seen over the last many quarters. So we're very pleased with how customers continue to renew their agreements with us, both on the maintenance side as well as enterprise agreements. And there has been really no change at all in our durations of the contracts with our customers.

[Jonathan C. Chadwick:]

And on the billings side, you probably saw long-term deferred revenue grow at a slightly slower pace than overall deferred. When we've unpacked that number inside the overall deferred revenue, you do see an element of PSO in there as well. And even though we've been investing in this particular quarter, we actually saw a slightly lower attach rate of long-term PSO deferred revenue to ELAs. So that was basically the driver there, Michael.

[Paul Ziots:]

Thank you, Michael.

[Michael Turits:]

Okay.

[Paul Ziots:]

Next question, please.

[Operator:]

And we'll take our next question from Abhey Lamba with Mizuho Securities.

[Abhey R. Lamba:]

Yeah. Thank you. Carl or Pat, upon looking at emerging initiatives that you have in place currently, we look at NSX, VSAN, and vCloud Air, which one do you expect to be more impactful to your revenues and bookings in the next 12 months to 18 months? And how does that change if we think about the next three to five years? It would be helpful if you can stack rank them in terms of their ability to move the needle for you. Thanks.

[Jonathan C. Chadwick:]

So I will give you the CFO's view, and then I'll ask the CEO to comment as well, more strategically. Abhey, we're not going to stack rank them. I get this question periodically as well. As I know you appreciate, these are earlier stage and therefore subject to significant variability as we think about what can actually occur. What we're really excited about, if I picked the top three right now, I'd say VCA as you've seen is starting to really fire nicely. NSX continues to show very, very solid growth. We saw over 700 customers now cumulatively. And AirWatch on mobility solutions really just had a phenomenal quarter. As we track into 2016, I think all three of those, I would expect to be significant growth drivers as we go forward. But I don't want to take that away from the rest of our product portfolios as well. But those three do jump to top of my mind.

[Patrick P. Gelsinger:]

Yeah. And I think nothing would be surprising. These are early market products. The longer they've been in market, the more we've matured the selling motion and started to build customer base, they're getting bigger respectively. AirWatch already had a reasonable run rate when we acquired it, and we've seen phenomenal success at accelerating that. Jonathan commented on NSX and on vCloud Air. VSAN is clearly trailing NSX be it's just a year less mature in the marketplace. And I'd also add to that list the success and management. And the management product line is the most mature of those. It has become a very standard element of our product offerings through vSOM, vCloud Suites, standalone management sales. We've continued and, again, we were recognized by IDC this last quarter as number one in cloud management, with a substantial market share lead over number two and three. So of them, clearly management is the largest and the most mature, but as we've discussed, these others are starting to contribute, and we expect that to continue to enhance the overall financial picture in 2016 and beyond.

[Abhey R. Lamba:]

Thank you.

[Paul Ziots:]

Thank you, Abhey. Next question, please?

[Operator:]

We'll take our next question from Gregg Moskowitz with Cowen.

[Gregg S. Moskowitz:]

Okay, thank you very much. Your U.S. reported revenues were dragged down obviously by the GSA settlement. But excluding that, you grew U.S. revenues by 20% year-over-year, and that's even with Federal not having a great quarter and Brazil being weak. So this question is probably for Carl, but just kind of wondering if you can elaborate on what drove most of the strength in U.S. Enterprise this quarter. Thanks.

[Carl M. Eschenbach:]

Yes, so to your point, we were very pleased with our results in the Americas. We had a solid performance in our Enterprise segment, which is our largest account, which is where, as you could imagine, a lot of the enterprise agreements come from. And we just did a very good job of renewing enterprise agreements in the quarter that came up for renewal, as well as continue to drive our newer products into that, if you will, bigger segment of customers. At the same time when we went down market, if I look at the Americas business, if I look at our mid-market, or our commercial business as we like to call it here internally, Gregg, we saw very good growth in that business. And I'd say the other area of success is we saw good growth specifically in the vertical of financial services. So when I look at the Americas, another solid performance, highlighted and driven by our enterprise agreements across the board and a particularly good quarter in financial services for us out of the Americas.

[Jonathan C. Chadwick:]

And don't forget, Gregg, obviously the impact of foreign exchange is going to show up most in the international segment. So to the extent anything's coming from Europe, in particular, you've got a significant downdraft there. So all the impact's going to be in that category.

[Gregg S. Moskowitz:]

Got it. Yeah, it's a good point.

[Jonathan C. Chadwick:]

Of course, Gregg. Thank you.

[Paul Ziots:]

Thank you. Next question, please?

[Operator:]

We'll take our next question from Nehal Chokshi with Maxim Group.

[Nehal Sushil Chokshi:]

Thank you. On the infrastructure automation opportunity landscape, can you help size up the competitive landscape that you're seeing, especially in the context of why you think VMware will win given Microsoft has the Azure asset, the complete software stack to leverage. And Nutanix has recently shown up albeit still almost nominal but seems to have this hyper-conversion infrastructure opportunity that does truly converge all three layers together. I know you have EVO

[Patrick P. Gelsinger:]

Yeah, maybe a couple of aspects and Carl, maybe you can add to this. From a cloud management perspective, obviously, as I've already noted, right, IDC sees us as number one. So we have a high market share. We also have very strong growth rates as measured by IDC. Their estimate was 36% year-on-year growth rate. So high market share, high growth rate. And what we find is that given the vSphere installed base and the presence that we have in enterprise customers, our ability to then sell them or up sell or add to and manage the environments that they already have with us in that environment is a very natural selling motion and a very natural value proposition for our customers, as we are progressing. Furthermore, we've committed ourselves to a heterogeneous management strategy, which allows us to be managing in multi-cloud environments, both on and off premise, including AWS and Microsoft Du Jour. We manage those environments and given the strong initial installed base we have, that's been very warmly received by our customers as well, as they are buying into that management stack. So simply put, the presence that we have, the installed base, leveraging that into this new area of management is a very natural for our customers and for our sellers. Furthermore, the leadership position that we have is building on itself as more and more of the ecosystem is now partnering with us to support that management offering, building on it, building SI momentum, solutions on top of that, VCE Vblocks building on top of that, plug-ins for vSOM, all of those are reinforcing that momentum that we are seeing in the marketplace in a very positive way.

[Carl M. Eschenbach:]

Yeah, the only thing I would add, Pat, as relates to competition, the competition for our infrastructure automation and orchestration tools is really against the traditional enterprise systems management platforms out there and those platforms are big, homogeneous infrastructure software packages, not built for the cloud era. So I think we're effectively competing, Pat, and that's why we're the number one player in cloud management. And the key thing, I think, Pat, that you said, which just kind of underscores why our customers are adopting this platform so aggressively is the fact that we do support and manage heterogeneous cloud environments. So I think you covered it really well, Pat.

[Paul Ziots:]

Thank you, Nehal.

[Nehal Sushil Chokshi:]

Thank you for the answer.

[Paul Ziots:]

Thank you. Time for one last question. So the last question, please?

[Operator:]

We'll take our next question come from Rajesh Ghai with Macquarie Capital. Rajesh Ghai - Macquarie Capital (USA), Inc. Thanks. A number of tier one telcos around the world have announced plans to replace a lot of their legacy carrier infrastructure with virtualized x86-based infrastructure running virtual network functions. I'm curious what sort of traction you're seeing from this? And what sort of pipeline you have at this point in time from what I believe could be some very significant spend?

[Patrick P. Gelsinger:]

Yeah, we're quite excited. And generally this category is called NFV, is how the industry's referring to it

[Paul Ziots:]

Thank you, Rajesh. And I think before we conclude, Pat was going to make a final statement.

[Patrick P. Gelsinger:]

Yeah, thank you very much, Paul, and for all the good questions in the conversation today. And in closing, our Q2 performance was a solid follow-on to a solid Q1. We look forward to seeing you at VMworld and at the financial analyst meeting that we'll be conducting at VMworld on August 31. Thank you very much.

[Operator:]

That does conclude today's conference. We thank you for your participation.