VMware's Management Presents at Citi 2013 Global Technology Conference (Transcript)

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VMware, Inc. (VMW) Citi 2013 Global Technology Conference Transcript September 3, 2013 4:35 PM ET

Executives

Jonathan Chadwick - Chief Financial Officer

Paul Ziots - Investor Relations

Analysts

Walter Pritchard - Citi

Walter Pritchard - Citi

Started here with the last session of the day. Very -- I'm Walter Pritchard, the Software Analyst here at Citi for those I haven't met. Very happy to have with us for the last session, Jonathan Chadwick, who is the CFO of VMware. We also have Paul Ziots from Investor Relations down in the front row.

So, I was just going to read a short Safe Harbor statement and then we'll dive into some questions and then we'll get some microphones circulating around for those that would like to participate.

So, statements made in this discussion which are not statements of historical fact are forward-looking statements based upon current expectations. Actual results could differ materially from those projected due to a number of factors, including those referenced in VMware's most recent SEC filings on Form 10-K, 10-Q and 8-K.

All right. Without further ado, just wanted to talk a bit about, first, VMworld was last week, I think, I was there, a lot of people were there. But maybe a lot of people were also out on Nantucket or not in attendance. So we’d love, Jonathan, if you just talk a bit about, what you think the most important key takeaway for investors from VMworld?

Jonathan Chadwick

Well, actually, it was my first VMworld as well. I was really enjoying, going down just watching what is now the world’s largest infrastructure software and cloud computing event. We had over 20, Carl rounds up to 23,000, but 22,000 platform that people attend which is just the phenomenal event.

Some of the key non-financial data that we were talking about or some of the key announcement. So the first I think, if I think about just about product was we announced NSX which is the integration of our network computing, our network virtualization back, now just probably the big announcement around that particular layer. We also announced general availability of our vCloud Hybrid Service which is a very differentiated also in the marketplace, I’m sure we talk about in a minute.

Walter Pritchard - Citi

Yeah.

Jonathan Chadwick

We also announced further extension of our vCloud suite, so 5.5 version also extension in just our core hypervisors platform to 5.5 as well. And we also announced the public beta of storage virtualization. So there was a raft of new product that see into what VMworld. It just really exciting to see the energy in the room that was really quite incredible.

Walter Pritchard - Citi

Okay. Could you help investors think about how to gauge the timing and potential size of some of this new product areas that you mentioned things like, NSX, service virtualization and vCloud Hybrid Service? Are these second half events, are this next events, are these beyond next year events and how large kind of the versus your core market.

Jonathan Chadwick

Well, that’s a great question, because I do still get questions from investors today about when in Q4 2013 does network virtualization take off? And reality is I view as being a 2015 sort of period of time, very, very early stages of something that’s to be feel very similar to what the VMware went through went through when it first introduced complete virtualization.

We were at very early innings 10 years ago and the questions we were getting then, well, what -- it brings me about this whole virtualization thing, plenty of those difference being logical and physical, and it feels to me like we are at the very early stage to begin with NSX and network virtualization, and the same thing, probably even slight later, but with storage virtualization as well.

And we can get into exactly what the technology does, et cetera, but the whole idea is that we see ourselves at the very early innings of something which takes the concept around virtualization and takes into next level over 2015 and beyond.

We do see revenue today from network virtualization but its relatively small. The more important thing to me as we think about the penetration in that particular market is proofs-of-concept wins, Lighthouse wins with key customer accounts including many of the Wall Street bank if we think about the opportunity ahead. So what’s driving growth today which is another way of asking question.

Walter Pritchard - Citi

Yeah.

Jonathan Chadwick

It’s really around core vSphere and compute. It also increasingly about our management platform. So our management tools and capabilities, and use a computing platform and in particular on compute and management integrated those in the suite which is part of our core strategy going forward.

Walter Pritchard - Citi

Got it. So talking about the core vSphere business I guess, I the time gets very hang up on penetrate in massive it’s…

Jonathan Chadwick

And we love to put.

Walter Pritchard - Citi

And I’m proud to build one of the original model around that, but I guess, what I’m trying to understand, we are trying to understand at this point is, it’s obviously an asset that have that platform that you’ve been build on top of which, we’ll talk about in the second.

But investors look at the potential to drive that 50 something percent higher overtime. Where should we think about that going over the next couple of years and what is the major workloads that are left that have not been virtualized.

Jonathan Chadwick

Well, you see up and whereas I was going answer to set up which is, I think, just looking at compute virtualization does makes the bigger opportunity that exists and we talked compute virtualization when the company first started, because it was very, very metric. We were zero percent penetration and 5% and 10% and we saw progression.

But now we are at is we estimate around the mid 60% penetrated today. I don't view that is being negative to that, I actually view as an incredible basis from which, a, still show growth in compute, because we do think, I mean, I’ll go frankly, and if Pat was here, (inaudible) stage and saying we expect to be 100% virtualized.

We see no reason why. We shouldn’t have 100% virtualization that is our goal around complete virtualization. Where we see ourselves going over the next two to four years as we think 80% is the very reasonable goal, if we look at now what’s left to be virtualized, areas like, just taking a geographical lens on this, the emerging market. We are very, very lowly penetrated, if you like penetrate to say low degree in areas like China for example.

Interestingly announced we actually classified Japan as an emerging market for us, people know it’s the third largest economy in the world because we are extremely thinly penetrated there as well.

And then areas that continue to provide opportunity for us, areas like mission critical, higher dependency at such as Oracle database, Middleware, et cetera, SAP, these are penetrated to a lower degree of virtualized, to a lower degree and they low 50s, mid 50 sort range. We are increasingly seeing those customers have those application deploying those and virtualizing those as well.

So there is a number of different areas that going to continue to drive growth in compute and that obviously we see workload increasing as well, workload means applications that require virtualization and we see those growing roughly a mid-teen, 15% sort of range. There was a number of different things in that, but compute as a platform and that will just drive other growth as well.

Walter Pritchard - Citi

Can you talk about the mid market, I think that’s an area that’s probably globally under penetrated as well. We do have a competitor Microsoft, who basically done very well in the mid market. Do you think you are getting your fair share in the mid market, you see have to be fair share in the mid market, want to do, how are you looking at that opportunity?

Jonathan Chadwick

Well, first of all, our share if you just think about compute today is pretty healthy. Right now we are not embraced if at all, very significantly large share in the compute market. Microsoft has been a competitor for a long-term since inception and we continue to believe and do you see the marketplace significant traction from ourselves in terms of the products we had and have in the marketplace.

And again, well, I think we are under penetrated potentially, it’s not necessarily on the compute, but around the opportunity to drive areas like management. One other things we introduce this last quarter was a SKU that we considered to be channel finally, which is where the mid market largely buys them.

SKU called vSom which is vSphere upgration management and this is because we saw very large degree of penetration and even on the standing awareness about what our management tools and offerings were in the middle market and the channel segment.

But by introducing a channel friendly SKU that wasn’t vCloud suite which is really independent at higher enterprise side. Channel-friendly intended for those customers with maybe VMs and above virtual machines and above we did see those only one quarter.

We saw it very, very significant uptick and slightly above our internal plan as we saw the penetration of that vSom SKU and that bring that up to this morning example of where we can continue to focus on the channel and make sure the channel which is a very significant distribution play for us really those drive growth.

Walter Pritchard - Citi

And we think about the management you eluded vSom and you had a vSom suite. So when you think about management, I spent a lot of time searching around for a press event of other examples of company who have come to market with the platform and then have added management on top, and there is really two out there that I can think of, there is IBM with the mainframe and there is Microsoft with windows? And it’s a little hard with IBM to segregate. The number is fun for us to look at Microsoft and I arrive at they’ve attached management on top of window server at 30% or 40% dollar rate, I mean, dollar window server attaches 30 or 40 sensors of management and that’s, that’s about 10 years in. Things are happening a little bit faster these days, internet, maybe the attached have been faster? But do you think that’s good precedent to think about management or how do you thought about in general the market opportunity that management represent on top of the platform.

Jonathan Chadwick

Well, first of all, the two examples you have there, I just want to make note they are very, very large company.

Walter Pritchard - Citi

Yeah.

Jonathan Chadwick

And so when I think about what’s going on today and what we are seeing, we are seeing, I’ll just take ELA, our enterprise license agreement, what we are seeing greater degrees of interest in management, yes, there is an opportunity in the channel, but there is also great degrees of interest at the larger scale customers.

The attached rate we are seeing around vCloud suite and also that we see around some of our just penetration of management in general. We saw in Q2 for example around 50% attached rate all any form of management or vCloud suite to our ELA and by showing that itself, what I’m trying to indicate is we saw a high degree of interest even though this products only four quarters in the market.

And we also see having look some analysis, based on the number of CPUs that we have sold in the past, just looking at the existing install base, less than about 5% penetration rate are vCloud, the component that it include, or vSom in terms of the market opportunity we have.

So we are seeing momentum with management in particular as bundled with the suite and also sold individually and we are also seeing opportunity when I think about the installed base.

So, I think, you are point we are at the early innings, we do believe we are the number one share leader in cloud computing management or could management. It’s a relatively early market and market in general for management extremely fragmented but we are seeing some really good progression.

Walter Pritchard - Citi

Got it. And you sort of bridge to the next topic around ELA that I want to discuss. So I guess, I also have the feeling that we maybe underestimating the growth driver that ELA represents and you talked about this is into the second half of the year, given the sort of renewal cycle dynamic and yet you have cautioned us that in ’14 you don’t have that stronger renewal cycle and you have sort of the tough comps from ’13?

Can you talk about how we should think about modeling that business, because it very dynamic, yeah, you do have transactional business, almost being converted to ELA as customers become more strategic with you, you have a sales force that’s been very much primed around selling ELA and then there is more value been bundled in, so customers rather take that. How should it this business?

Jonathan Chadwick

So there’s a lot in that question.

Walter Pritchard - Citi

Yeah.

Jonathan Chadwick

So I’ll sort of pause…

Walter Pritchard - Citi

I just touch on the model…

Jonathan Chadwick

So, stop me if I start rambling too much. I would think of ELAs are increasingly more important to us as we go forward, we saw Q2 at about 36% to 37% of our overall bookings coming from ELAs as a contribution of overall dollar volume and also growing, and partly that’s driven going significantly and that’s partly driven by greater attached rate, as you talked about, greater sophistication of our enterprise customers, who tend to be the larger buyers of ELAs, buying more management, buying increasing levels of vCloud suite and so that’s all the good thing.

We also and you eluded to this as well. In 2013, we’ve been tracking a pretty significant renewal opportunity of ELA. In 2010 if you recall, 2010 was sort of recovery year, 2009 was fairly depressing year for all of us regardless industry you are in. 2010 that was something of recovery. ELA’s in particular for VMware saw a pretty significant uptick. We entered into a larger dollar volume of ELA’s and those because ELA’s generally have three years in length. Those came up for renewal or come up for renewal in 2013 and roughly about 60% to two-thirds come up in the back half of the year.

Given the fact that our product portfolio has really expanded since this time three years ago, we do see the ELA renewal cycle being one of the drivers of our growth in the back half and something we look pretty excited about. We get the opportunity to reengage with the customer, talking about new market opportunities and also in particular tell them story about the vCloud Suite and shift them on that journey to (inaudible) data center, which is why that attach rate was so important for us to see in Q2.

As I go into next year 2014, we continue to see the renewal rate of ELAs grow. In other words, the dollar volume of ELA goes up, going into 2014 for renewal. The rate is a little bit low because of the uptick we saw in 2013 -- sorry 2010 particularly big year. So the rate of growth is just a little bit softer but it’s growing and the dollar volume obviously is out as low.

So we continue to see that -- a cycle that keeps on giving as get to 2014. The only reason why I guess, again I look at Microsoft business and not to Microsoft’s Enterprise businesses, there could be worse things out there in terms of a precedent. But in terms of our business, in businesses like server and tools in their business division, they’re running 55%, 60% of their business is on annuity.

And I understand it’s a little bit of a different annuity type contract. And the new guys have but they have condition wired to some degree to buy in that manner. And I’m wondering if this is a situation where today a third of your business is annuity and in five years, should we expect it to be north of 60% and two-thirds. What are you thinking about longer term as it relates to that style of buying?

Jonathan Chadwick

Well, I think about it in a slightly different way but I think the analogy is not a bad one. I kind of like being compared to very, very large software companies in that regard. Well, I think about the opportunity ahead. I certainly think for the back half of the year because I can see our ELA mix going up. I think it naturally follows the renewal opportunity.

The strategic importance though of an ELA and engagement we have with enterprise customers, continues to gather momentum. So I can see us getting above 40% without too much trouble over the coming years and I think -- I don’t have a specific goal around it but would I be troubled if we were 50% 50%, I wouldn’t.

I think that's actually a good indication of strategic penetration of accounts; customers actually having bought into us as a strategic vendor; and somebody they want to do business with over multiple years. I think that’s really a good thing.

Walter Pritchard - Citi

Got it. And then, we are asking everybody this question at the conference. We just love to hear about your pipeline and your visibility and compare that to where things were six and 12 months ago. Any commentary around that?

Jonathan Chadwick

Well, we’re obviously watching very carefully what’s happening in the market overall. It feels like it is general and I’ll talk specific for us. It does feel like a pretty mixed environment. We have actually -- obviously we announced our Q4 results in January and nobody interpreted the guidance according that we shared. I think we saw some of the trends little bit earlier potentially than others but from our perspective, we saw a very, very strong Asia-Pacific quarter.

We noticed a number of other companies did not see that. Australia was frankly -- it was a record Australian quarter for us which is interesting because Australia is actually probably the most penetrated country we have in terms of server virtualization for those with a little upsell of other -- our products. It’s been called out by many of your -- not your competitors but your peers as a weak spot which was interesting. So I think we did some budget flush there but again, I’m happy to pay budget flush. It’s a good thing generally.

We saw a good solid performance in Asia-Pacific in general. Europe tends -- still soft. Obviously, I’m tracking the overall Eurozone performance. It’s still in -- technically, I think in recession. Countries like the U.K., Germany, France, these countries are doing relatively okay for us. And then in U.S. we saw good penetration particular we saw some larger deals crop up that we weren’t expecting all of them to come in.

Overall, across the globe we saw about six ELA’s coming above $10 million making a record quarter for us. So for us, while we are cautious about the overall economy, I would say that we saw some more positive spending trends than perhaps others have reported. So I’m positively encouraged by that.

Walter Pritchard - Citi

Any thoughts on the U.S. Fed market, I know that market, I think early on the year, you mentioned that that was a tough market. I think you actually commented in the first half of the year that you expect that our business would return in the second half. What are your thoughts on that market?

Jonathan Chadwick

Well, we are obviously into federal Q3. It’s obviously period of time we’re looking at. Even with sequestration -- I'm not quite sure how you pronounced that. One of things we’ve continued to see is engagement by government bodies, I think partly because of relatively low levels of server virtualization, computer virtualization in certain segments but also because of payback. I mean ROI on the products we’ve been selling is extremely beneficial.

So even in a market -- even in an environment where budgets are pretty light and pretty tight, we are finding that we can bring a fairly quick payback in ROI. So our engagement with the federal government continues to be positive. We continue to believe we should see seasonal uptick in Q3. That is one of the growth drivers we’ll continue to track. We are now in about two months when we report Q3 whether we’ve seen that but so far our engagement remains positive still.

Walter Pritchard - Citi

Okay. And then you did update that or did reaffirm that -- at the VMworld talking about 2014 and sort of reaffirm that 15% growth that you mentioned passively at analyst forum in March and that would be the 15% would be an acceleration, I believe from what your (inaudible) this year. What gives you sort of the confidence in that sort of acceleration. I think it’s the license number (inaudible) what gives you the confidence in that looking at that far and even when you did that. What gives you the confidence noting that -- but I think you said that network virtualization piece is beyond 2014?

Jonathan Chadwick

Well, there is a couple of things in that. First of all, as I think many of you appreciate. We had a lot of different things that we’ve been undertaking this year. So it is an acceleration on a reported basis. But when you look at the apples-to-apples year of our business and you take out the effects of the pivotal joint venture we set up with EMC taking out year-over-year effect of that plus you take out the divestitures that we’ve really focused on with respect to cleaning of our portfolio of our products. That growth rate actually slightly lower than our apples-to-apples exit rate for FY'13. So the question I thought you’ve asked me why is you growth rate so low?

Walter Pritchard - Citi

Yeah.

Jonathan Chadwick

The realty is that we see a very, very significant market unfolding for us. We’ve estimated -- and TAM math is always challenging to nail down exactly but when we think about computer virtualization and we think about management products and we think about storage and we think about networking, it’s about $28 billion market opportunity for us to participate very significantly. And that’s just in software defined data center. We also exist in a market. We’ll participate very significantly in market which we estimate to be about $8 billion and then use a computer.

Firstly, we announced last week, a very significant entry into the hybrid cloud opportunity. That’s another $14 billion we estimate probably going best in all those markets. So when I think about that, it all sums up to $50 billion market opportunity. Is it all going to kick in ’14? No But we’re starting to see growth drivers coming from those markets. Yeah.

And as I think about the opportunity for ELA cycle and I think about the opportunity to sell up more beyond just core vSphere that we have been selling, so far it’s already happening. It’s already happening when I think about the penetration of management and I think about sweet strategy that we’ve been pursuing these old drivers of our growth in 2014.

And to answer the other, I do think that our networking is going to contribute to some degree next year. But I don’t think it’s going to be a significant growth driver for us. I think we’re at the very, very early innings of what I think will be a decade long evolution of the market.

Walter Pritchard - Citi

Got it. And then you mentioned vSphere hybrid cloud service?

Jonathan Chadwick

Yeah.

Walter Pritchard - Citi

And then that was a focus at VMworld. I guess as we think about first about that market. Can you help, I think that $14 billion TAM probably includes what Amazon is doing and other and it does (inaudible) you target any potentially a higher value customers and then sometimes Amazon is chasing? Can you talk a bit about what your target market is with vSphere hybrid cloud service and how that translates into positive TAM?

Jonathan Chadwick

So our strategy at this point is to confirm our strength which is the on-premise datacenter -- virtualized data center environment that we’ve created for our customer and to provide them a seamless extension to the cloud. And that will remain by hybrid cloud opportunity. We are trying to take the exact same environment that the customer enjoys -- the same security policies, same access policies et cetera and provisioning policies and extended to the cloud type capability.

And taking the extension of the on-premise enterprise environment, it’s different what Amazon is doing. Amazon is going off to the departmental level spend that they like. Almost at odds with the typical policy that the corporate enterprise would rather you are doing. So all our role, our belief, is that our customers are very, very interested in having a hybrid cloud opportunities that they can extend from our own on-premise environment to provide capabilities, social security policies such as disaster recovery et cetera.

Hybrid environment -- and also start to provide services, elastic capability for the internal customers and the way they cannot be today. So same policies, same environment extend till hybrid cloud and then we will take it beyond that. We told last week at (inaudible) conference about taking it beyond just hybrid cloud and extension but also that into department level spend and really taking it (inaudible) $14 billion.

Walter Pritchard - Citi

so I think Pat Gelsinger, in your Partner Summit in February or March, sort of made a comment to the partners about it. If virtuals go to the commodity public cloud there, they are never coming back and something, I can’t remember the exact quote, sort of suggesting that it’s us against Amazon. And I know Raghu was quoted at an event, I was actually at talking about we might be able to figure out. The way we work with Amazon, there is sort of this little bit of uncertainty as to how you and Amazon potentially work or don’t work together in the future. Any clarification there that you'd put out there in terms of how we should think about that relationship?

Jonathan Chadwick

Well -- some of -- number of comments or quotes into context. Again when one is writing an application today, it’s far more beneficial in our view. If you can write an application but is written for your own premise environment as well as cloud-based environment or cloud environment which is why we’ve launched the hybrid cloud.

Our view is that a work load with Amazon is not necessarily provisioned to the corporate policies. There are existing finance. In fact, some companies are obviously pursuing it reactively but we see a natural extension from the on-premise environment being a very necessary part of the strategy. We see management solution such as vCAC, vCEnter and automation center as being a key heterogenous capabilities that manages across multiple different technologies including AWS.

So we’re not trying to lock people into VMware far from it. We actually trying to enable every potential environment we managed within customers self provisioning sort of network and enable them to leverage technologies whether they are vSphere or AWS et cetera. This is where our management capabilities, that aren't just around proprietary solutions but around broader technology and the (inaudible) really critical. So, the whole goal there is to manage and have a control layer above the whole thing.

Walter Pritchard - Citi

And then you also talked about the go-to-market strategy in the cloud service area that would be your own hybrid car service. There was a franchise site model but I think you (inaudible) some of the (inaudible) partner there and then you have continued to have this VSPP program which has thousand of partners that use your technology to build their business and I guess the feedback we heard from Emerald in meeting with half a dozens of VSPP partners, they are using high (inaudible). I think when I met with them three years ago they would say all the (inaudible) commodity and you know we will using something else and they are all using it and they all I think at this point say these fears about (inaudible) out there it gives us great performance. We take the (inaudible) and gives us great performance it’s -- we are there. But they are not using much that’s up the stats and that vision around sort of extending the platform up is not very (inaudible) and I know you are using your entire (inaudible) tools in your own service, how do you present those partners to sort of come on board with the entire technology stats, is that an (inaudible)?

Jonathan Chadwick

I think the main thing here is customer choice. So the customers are going to chose, and you are quite rightly (inaudible) obviously go to markets that urgently have, one is our own vCloud hybrid service which we also offer as a part of our distribution channel base players (inaudible) for selling this skew where they offer if you like through our existing channel. The second is the VSPP program the, VMware service provider as you just talked about which we have had in place for a number of years and then third is the franchise model. (inaudible) don’t care, which way the customer comes out as provided -- we are providing the choice to the customer ultimately to make for themselves best suiting what their environment is. The reason why we started to hybrid class service in the third place is customers were telling us directly that they wanted VMware just get in the game but also to be extending what was going on today and providing a further degree of presence in market place. And part of the benefit of that is (inaudible) extension what they have on print to hybrid cloud environment, but it also brings us a lot more closer to the customer with respect to the roadmap divisions. One of the key applications or use cases we see coming up is rather (inaudible). They are built to have a disaster recovery capability between on-prem and off-prem in hybrid class environment we consider to be as closed to be a killer app. It is one of those core basis (inaudible) that is really important and we announced so that’s going to be coming out in Q4. It gives an example of getting close to the customer provisioning well and compensation and the customer ultimately is (inaudible) or all their franchise partners whether this could be the VSPP program or whether it is directly through a (inaudible).

And in terms of its hybrid nature, I mean there is some notion of a work load could run anywhere from on-prem to the [VHCF] to this hybrid to the franchise customer all the way up to the VSPP but it’s one thing we also did hear from the partners is simply a major challenge to kind of have all those services really (inaudible) and at running the same version of everything all the time, I mean is, and there are a lot of precedents actually companies out there, who is selling (inaudible) platform to build the service on as well as actually providing the service themselves and they are getting to sort of the nitty-gritty into the details or it is actually something that is pretty hard -- like something pretty hard to actually be bold and do (inaudible) all these models and I am wondering if you try to be (inaudible) all things to all people in that sense.

There is an opportunity supposed of the arms (inaudible) to all of these various route demand and I believe that again I come back to say that the customer is going to choose the ultimate point on the CFO and not the -- question. But I do appreciate the vote of confident. Exactly the key thing of the technology old (inaudible) part of the strategy is part of the reason why we are going to market as we are (inaudible) making sure that all of our customers are enjoying the service that they are and as part of the solution with both market.

Walter Pritchard - Citi

Got it. Okay. Then just (inaudible) you are competing to wrap the (inaudible) question you have talked about in the last couple of quarters that this has been an (inaudible) meaningful contributor to your growth and yet I think the broader notion in that market is it still maybe not -- the market overall is not growing as it should or maybe there is some hope, what’s your perspective on what’s (inaudible) the market in general (inaudible).

Jonathan Chadwick

I think there has been a number of different things and one of the basic things is around costs, what’s the cost to deploy a desktop today and what’s it been in the past? It has come down significantly from over a $1,000 just a few years ago per desktop compared to say provisioning a non-virtual machine to something down -- now down to the sub $500 level and arguably below $300. So cost is a very, very significant piece of this. Virtualization technology has played a big role in that. There are more consolidation as you think about consolidation ratio whilst virtual machine helped to reduce costs overall. And for us, one of the things we can seeing is with our product portfolio has been (inaudible) significantly over the last twelve months and in addition we haven’t had a dedicated go-to-market. So when you think about the behavior or average shelf business, the VMware and 90+ percent of that quota comes from retiring or selling (inaudible) and associated products today, getting their attention around areas like end-user computing has not been hard but has been harder than the average. So we put in place a few hundred -- a number of hundreds of people of dedicated sales personnel and we are seeing the first results of that really play out. The presence of a product portfolio (inaudible) go-to-market team. We have seen now two quarters in a row where we have grown significantly faster than the market (inaudible) and we have seen a mid teens lightness growth in the both of the last two quarters and we are pleased by the progress per se. So the combination of cost is a combination of what we are doing for ourselves and I also think it is a combination how the market is going to unfold. One of the things we announced this last quarter -- the VMworld was debt (inaudible) the service. It is fairly obvious also when you think about any (inaudible) was doing it very effectively and we have -- we announced a death (inaudible) offer with the intention of bringing not to the market the VDI market in particular over the coming few months. So we are excited about that. We are excited about some of the consumption models changes that are coming up.

Walter Pritchard - Citi

Got it.

Jonathan Chadwick

We are going to -- we can go ahead and if anybody in the audience has a question, go ahead and raise your hand, we can microphone over to you. There is one (inaudible)

Walter Pritchard - Citi

Thank you. I just wanted to touch on something that (inaudible) brought up earlier which is if you look a the upselling in vCloud suite and even on vSom could you just tell us a little bit more about what type of a bump in ASPs that brings you where the new customer (inaudible) are?

Jonathan Chadwick

So for the question on a fee adoption or as the (inaudible) I will hold (inaudible). Please (inaudible) financial and monetary terms to increase revenue by [soccer] and one of the things we -- I think done a really nice job over the four quarters is seeing the results of this tragic (inaudible) around the vCloud suite and the stat that we have shared in that regard is that we still are 3x and we continue to see a 3x ASP on average or vCloud suite purchases compared to the average for vSphere purchases. So that’s an example how you take core computing and you bundle in additional offer (inaudible) management in particular being a very significant offer that’s the (inaudible) lift we have seen. On the vSom side which is a far simpler product offer, far simpler combination of compute and management intended for the channel we have seen something like a 1.3x uplift on ASPs just in this last quarter, definitely (inaudible) just one quarter would be in the markets, so it’s early days. We are seeing a similar concept really play out there as well.

Walter Pritchard - Citi

Okay, Jonathan talking about your relationship with Pivotal. So the assets went from the combined assets from VMware that we see into this Pivotal joint venture. Can you talk about the go-to-market strategy or the -- what you're doing in your business to try to benefit from the sort of higher levels set of services that Pivotal -- so Pivotal for all that don't know, brings a platform as a service or kind of a developer oriented solution that enables customers to build sort of cloud-like applications. What you're doing to leverage that sort of technology that's above you, that ultimately you could benefit from in driving consumption of the vSphere platform?

Jonathan Chadwick

Yeah. So, I mean, in that, we are not intending out of VMware alone to offer platform of service. We already have infrastructure with service layer and one of the big benefits of being part of the federation of VMC is the ability to set up a joint venture and combined assets from both VMC and VMware in this case to set up Pivotal or to go Pivotal entity. Really with a view of taking platform as a service to the market.

So we are filling up with Pivotal to bring together a number of technology offers that already intended to be open in the marketplace that are intended to enable developers to develop a software application for that particular marketplace and the way that this will come in and also allows them to leverage their on premise data center instantiation.

So we think that’s a very significant differentiation from other platform as a service operators are doing and we think that will allow over the course of the next few quarters really play out to our advantage. So again not locking them in and also making sure they are able to offer, we are at on-premise in a way that others can’t.

Walter Pritchard - Citi

Got it. How would you rank that as a growth driver, obviously you're not benefiting really from the Pivotal revenue but in the consumption…

Jonathan Chadwick

Right.

Walter Pritchard - Citi

… on the vSphere side, as you look at other things like management and network virtualization that you've mentioned?

Jonathan Chadwick

I think it’s a driver. I don’t think it is not one of the biggest single drivers for us. I think a factor but not I mean the biggest.

Walter Pritchard - Citi

Okay. Okay. Any questions out there? Okay. You talked about, actually, I’ll hit this one and then the last one? So, you're not the CTO, so I'm not going to get too technical on you. But there is sort of groundswell of open source technology in the cloud space and I think most would point out that a lot of the -- the majority of the non-VSPP clouds are in fact opened up in source, including I'm not sure if Amazon built on open source?

As customers, either enterprise customers or some of these cloud service providers, look to open source technology with OpenStack probably being the proxy for that? How does VMware look to monetize that adoption of open source in those customers?

Jonathan Chadwick

Well, I think an OpenStack and open source that’s the case. I am one key thing to understand here is that OpenStack is a -- it’s a open framework for assembling clouds and much as we have our own proprietary offer around that. We also believe that OpenStack as a place as well.

Well, it’s relatively early in the marketplace. One of the things that we do believe is a customers’ also one-off choice. Given it’s a framework for assembling cloud assets specially like if you are assembling I think by my analogy a car for example, you are going to want to probably put the best products on your car and the best engine in your car, you are assembling a car from scratch, I think my analogy just broke down that.

Walter Pritchard - Citi

Okay.

Jonathan Chadwick

The point I am getting to is taking a component-based approach as we are, as to how we approach OpenStack is really important. We think it’s a market extension for us because those companies that do on those partners of ours that want to assemble an OpenStack environment, by the way that’s not trivial. To do that actually require some level of infrastructure capability internally and will enable them to choose different types of software and different types of capability to plug, whether they are picking hypervisor or whether they are picking storage or networking et cetera.

So the fact that OpenStack is out there, something we have decided to embrace. We announced that we are in the latest directly release, where we have announced vSphere interoperability with OpenStack and that’s important because it says you want to assemble your cloud with the best hypervisor that you can and it interoperate with them – with OpenStack.

It reminds us that not every single aspect of VMware cloud stack is replicated in OpenStack, cloud stack continues to be relatively early in the marketplace. There is no equivalent of what we do for example on security in OpenStack today. So, again, we believe we offer most complicate -- most comprehensive solution plus interoperability to them and our roadmap to continue to do that. So and I view as -- I view as an opportunity for us et cetera.

Walter Pritchard - Citi

There is a question there in the front.

Earnings Call Part 2:

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