VMware Inc

XETRA:BZF1

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen and welcome to today’s VMware Second Quarter Fiscal Year 2019 Earnings Call. I would like to remind everyone that this call is being recorded. And at this time, I would like to turn the conference over to Paul Ziots, Vice President, Investor Relations.

[Paul Ziots, Vice President, Investor Relations]

Thank you. Good afternoon, everyone and welcome to VMware’s second quarter 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 the close of market and is posted on our website where this call is being simultaneously webcast. Slides which accompany this webcast can be viewed in conjunction with live remarks and can also be 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. We assume no obligation to and do not currently intend to update any such forward-looking statements. In addition, during today’s call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures which are used as measures of VMware’s performance should be considered in addition to not as a substitute for or in isolation from GAAP measures.

Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, acquisition, divestiture and other related items, including the gain on Pivotal Software and non-GAAP tax rate adjustments. 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 third quarter fiscal 2019 quiet period begins at the close of business Thursday, October 18, 2018. In addition, VMware adopted ASC 606 on a full retrospective basis effective February 3, 2018. Accordingly, the financial results for the second 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 income and cash flows for the 3 and 6 months ended August 4, 2017 adjusted for ASC 606 and the balance sheet as of the end of fiscal 2018 adjusted for ASC 606. All year-over-year comparisons discussed on this call, including second quarter fiscal 2019 results and our forward-looking guidance are comparisons to the corresponding periods of fiscal 2018 as adjusted for ASC 606.

With that, I will turn it over to Pat.

[Pat Gelsinger, Chief Executive Officer]

Thank you, Paul. Q2 was another strong quarter for VMware and we are pleased with our results, which continue to be driven by broad-based strength across our diverse product portfolio and in all three geographies, particularly EMEA. In Q2, total revenue increased 13% and non-GAAP earnings per share increased 14% year-over-year. Three primary factors remain central to our ongoing strength in the quarter. Firstly, the positive market response to our strategy and innovation, secondly, strong and consistent go-to-market execution, and lastly, the continuing positive environment for well-positioned enterprise company such as VMware. We believe no other enterprise software company is as well positioned as VMware. Customers are increasingly turning to VMware to partner with them to accelerate their digital journeys. Our interoperable cloud mobility, networking and security solutions form a powerful digital foundation for delivering the apps that drive business innovation and business success.

Our multi-cloud strategy is resonating with customers as we continue to see momentum across our cloud offerings. The VMware Cloud Partner Program experienced robust growth this quarter. A good example of this momentum is the recently announced expansion of our decade-long partnership with NTT for a new enterprise cloud offering consisting of the full VMware SDDC stack. VMware Cloud and AWS are seeing customer traction and momentum across North America and EMEA with affinity among our larger customers. In June, VMware Cloud and AWS received its fourth major update, including bringing the service to Germany. In addition, we introduced VMware Cloud on AWS GovCloud, a forthcoming hybrid cloud service that will enable United States public sector agencies to deploy and run applications of VMware software on AWS GovCloud.

With now hundreds of customers using the service, we are also seeing increased interest in the traction across the VMware and AWS partner ecosystem. We have seen over 150 competency partners join the VMware Cloud and AWS partner program. In addition over 50 of those partners are now transacting business directly with customers. A great example of a customer deployment is with a global food distributor. They are utilizing VMware Cloud and AWS to refresh their cloud strategy, extend their on-prem datacenter to the cloud and protect those workloads with Site Recovery Manager. Our networking portfolio experienced healthy license bookings growth this past quarter, with 82 companies of the Fortune 100 having now adopted NSX. We are seeing customers embrace the virtual cloud network strategy that we unveiled in Q1.

For example, in July, we announced T-Systems will leverage a virtual cloud network architecture enabled by VMware NSX datacenter. While we are seeing strength in enterprise and its service providers for VeloCloud, the collaboration with AT&T in particular, is expanding rapidly in many customer segments such as retail and financial services. We are seeing significant early adoption across all container frameworks for NSX. We also continue to integrate NSX technology across the VMware portfolio.

One recent example includes the new VMware vCloud NFV-OpenStack Edition 3.0, which is the next generation of the company’s production proven network functions virtualization platform for communication service providers. We continue to see telcos and CSPs build out their global IT cloud and network platforms. As an example, VMware recently won another major EMEA telco customer building a cloud for their virtual network functions and IT workloads. To help with telco customer transformation, we recently announced the intent to acquire the technology and team of Dell EMC Service Assurance suite, software spanning network health, performance monitoring and root cause analysis for CSPs and their customers.

Turning to vSAN, we experienced a strong quarter and completed one of the largest VxRail deals ever with a major tech forward retailer, and where we are implementing a 1,200 retail store server refresh. It was another great team win across Dell and VMware and another proof point of the Dell synergies, we continued to experience across the portfolio. Our HCI leadership was again validated by the June 2018 Q1 ‘18 IDC Worldwide Quarterly Converged Systems Tracker, which placed VMware in the number one market share position for HCI Software, with an extended lead over our nearest competitor. We also saw another strong quarter with our compute offerings and look forward to unveiling a major expansion of our vSphere offering at VMworld next week. And in our view, we received more industry validation for our cloud management business we were pleased to achieve the highest possible score in the cloud monitoring, product vision, market approach and partner ecosystem criteria in The Forrester Wave: Hybrid Cloud Management Q2 2018.

The end user computing business experienced another strong quarter and continues to see customer traction with Workspace ONE, which is comprised of integrated desktop, mobile and identity management functionality. In May, VMware and Okta highlighted the partnership and integration between VMware, Workspace ONE and Okta Identity Cloud enabling customers to easily and more securely move to the cloud. In industry recognition, VMware was positioned as the leader in the inaugural Gartner Magic Quadrant for Unified Endpoint Management Tools published in July 2018.

Finally, we were pleased with Dell’s announcement on July 2 regarding the conclusion of their strategic review. Dell Technologies plans to offer a new class of publicly listed common stock following the completion of a proposed exchange of Dell Class B tracking stock for Dell Technologies Class C common stock or cash. This action will simplify Dell’s capital structure and increase alignment with VMware while maintaining VMware’s independence.

In closing, we continue to be pleased with our performance with strong broad-based growth across our portfolio as our strategy resonates with our customers. We remain committed to delivering and advancing our customers’ digital transformations through VMware’s digital foundation. We look forward to welcoming our customers, partners and industry peers to VMworld next week, where we showcase our strategy and our plans yearly. We are excited to unveil new offerings and updates across the portfolio and ecosystem, including AWS partnership news and technology innovations to be unveiled in the general session keynote.

I will now turn it over to Zane to talk more about our business performance in Q2.

[Zane Rowe]

Thank you, Pat and thanks to all of you for joining us today. We are pleased with Q2 results across our broad product and services portfolio. These results were driven by a strategy that resonates with customers and strong execution across the business resulting in a quarter with double-digit license bookings growth year-over-year in all major product categories.

Total revenue grew 13% and license revenue grew 15% year-over-year in Q2. Hybrid cloud subscription and SaaS comprised 10% of total revenue in the quarter. This category continued to grow at a healthy rate year-over-year. Our VMware Cloud Provider Program or VCPP continued its strong performance with revenue growth of over 30% year-over-year. Q2 non-GAAP operating margin was 33.8%. Non-GAAP EPS was $1.54, up 14% year-over-year on a share count of 413 million diluted shares. Unearned revenue at quarter end was $6 billion. Cash and short-term investments totaled $13.3 billion. In Q2, we once again had strong growth in total revenue plus the sequential change in total unearned revenue, up 13% year-over-year as well as license revenue plus the sequential change in unearned license revenue up 19% year-over-year. The high level of customer satisfaction across our products and services portfolio, including VeloCloud grew 40% year-over-year in Q2.

We saw broad-based adoption of our networking platform. 9 of the top 10 deals in Q2, included NSX and they represented a variety of expanded use cases, including micro-segmentation, network automation, cloud-native applications, multi-cloud networking, enterprise branch SD-WAN and network functions virtualization. vSAN license bookings, which include standalone vSAN software as well as the vSAN software components of the VxRail grew 70% year-over-year. We now have more than 60% of vSAN customers using vSAN to run business critical applications. For example, a large financial institution, which has purchased vSAN through multiple transactions to host production banking applications, now has over 80 petabytes of data running on vSAN. We also saw a significant milestone in Q2 with Dell’s VxRail, the largest hyperconverged appliance running vSAN, which surpassed $1 billion in cumulative and annual run-rate bookings. This product acceleration with vSAN technology is gaining momentum and performances exceeding our expectations.

EUC license bookings were up in the mid-teens year-over-year, Workspace ONE once again the strongest driver of growth in Q2. This is one of the areas where we are seeing continued SaaS adoption from our customers with the majority of our Workspace ONE bookings this quarter sold as SaaS. Core SDDC license bookings which is the combination of compute and management grew in the low-teens year-over-year with compute growing over 10% and management up in the high-teens. Compute license bookings growth highlights customers’ confidence in our platform and ecosystem for both on-premises and cloud deployments.

Management license bookings growth was driven by adoption of our enhanced product offerings as well as increased attach of management to some of our largest deals in Q2. Total bookings for compute increased in the mid single-digits and total bookings for management grew in the high-teens year-over-year. As a result of our Q2 performance, we are increasing full year fiscal ‘19 guidance for total revenue, license revenue, non-GAAP operating margin, non-GAAP earnings per share, cash flow from operations and free cash flow. We now expect license revenue to be $3.675 billion, an increase of 14.8% year-over-year and total revenue to be $8.820 billion, up 12.2% year-over-year.

Non-GAAP operating margin for fiscal ‘19 is expected to increase to 33.8% with non-GAAP earnings per share increasing to $6.14 on a diluted share count of 413 million shares. Cash flow from operations for fiscal ‘19 is expected to increase from $3.550 billion to $3.575 billion and free cash flow is expected to increase to $3.295 billion. We continue to expect $700 million in synergies with Dell this fiscal year, up from the $400 million in synergies we achieved last year. For Q3, we expect license revenue to be $865 million, an increase of 14.1% year-over-year and total revenue to be $2.165 billion, an increase of 11.7% year-over-year. We exited Q2 with $141 million of license backlog compared with $122 million at the end of Q1. License backlog is the license portion of unfulfilled orders at quarter end.

For Q3, we expect non-GAAP operating margin to be 33% and non-GAAP earnings per share to be $1.50 on a diluted share count of 415 million shares. On July 2, VMware announced an $11 billion one-time conditional special dividend. Following the special dividend, we expect to return to our previous capital allocation policy. We will drive growth and shareholder value through investing organically in the business, continuing our successful M&A strategy and return capital to stockholders via share repurchases.

In summary, we are pleased to report another strong quarter for VMware. Q2 results are a reflection of the strategy that resonates with our customers. We continue to invest in the business driving growth today and opportunities across the portfolio in the future. I look forward to seeing many of you at VMworld next week and sharing our progress with you throughout the rest of the year.

With that, I will turn the call back to Paul.

[Paul Ziots, Vice President, Investor Relations]

Thanks, Zane. Before we begin the Q&A, I will ask you to limit yourselves to one question consisting of one part, so we can get to as many people as possible. Please note we will not be commenting on Dell's proposed exchange of Class B tracking stock. Operator, let’s get started.

[Operator]

[Operator Instructions] And we will first hear from Keith Weiss with Morgan Stanley.

[Keith Weiss, Morgan Stanley]

Excellent. Thank you guys for taking the question. Very nice quarter. It looks like the growth that you guys have seen, the good demand trends you guys have been seeing sustained well into this quarter. One question that I had and maybe this is a little bit more for Zane is when we look at kind of like the license billings trajectory, that sustained really well, you saw like the 19% growth, but you did see a falloff in total billings and more so more of a divergence between the license billings and the total billings. Anything in particular that caused that divergence in this quarter that can help explain why total billings fell off while license billings stayed up pretty high?

[Zane Rowe]

Hey, Keith, it’s Zane. Yes, thanks for the question. As you point out, it was a great quarter both on the license and total revenue and quite frankly on the license and total booking site as well. I would tell you there is nothing to read into on the divergence you saw since the first quarter we actually had a strong first quarter as you look at the year-over-year compare. One of the strengths that I highlighted in my prepared remarks earlier was the strength that we see in VCPP. And as you probably know that is attributed towards license and none of that goes to S&S. So we are very pleased with the strength we see in that area and expect that to continue through the year. I will point out that all of our rates are really strong. Our S&S rates are strong. Our renewal rates are strong. And as you can tell by the improvement in the guidance, we feel good about both total and license revenue for the rest of the year.

[Keith Weiss, Morgan Stanley]

Excellent. Thank you guys.

[Paul Ziots, Vice President, Investor Relations]

Thank you, Keith. Next question please.

[Operator]

Moving on from Bank of America/Merrill Lynch, we have Kash Rangan.

[Kash Rangan, Bank of America/Merrill Lynch]

Hi, thank you very much guys. Congrats on the quarter. Pat, I was curious as you talk to customers that are looking to put up new capacity, datacenter capacity on AWS with the help of VMware. Any changes with respect to your earlier anticipation when you first launched the service as to what kind of take up are you going to see for some of your core products such as CSX and EUC, NSX, vSAN whatnot delivered as a cloud-based service through Amazon. And then the implications of that for Zane, how do you think that changes the business model in terms of more predictable recurring subscription revenue, albeit this is something that is looking few years out? Thank you so much.

[Pat Gelsinger, Chief Executive Officer]

Thanks, Kash. As Zane said we are very happy with the great quarter. And let me just start maybe just by framing the momentum on VMC and then taking apart a little bit as you suggested Kash. Overall, we continued to see a great uptake for VMware cloud and AWS. First I would say is the pace and delivery of new features and functions on the cloud is really spectacular and we are to this quarterly release cycle and new feature function was part of it and that’s the full VMware cloud foundation being updated networking, compute storage management automation. And this quarter we rolled out innovations like elastic DRS, which gives us a seamless scalable capacity single node support. We are going to be announcing the next version next week at VMworld. I am thrilled to have Andy, Jesse there from AWS talking about the partnerships that we now have hundreds of paid customers on the platform. And as we indicated before a major new enterprise service, it just takes some big time for customers to see if they are comfortable. And particularly as we ended Q2 we really saw that momentum of customer uptake really start to pick up. We are seeing larger deals as part of that. And we are increasingly focused on now not just getting new customer logos, but driving the consumption of that platform. We are also very excited to see the partner momentum. And as we have now 150 a competency partners, over 50 of those have already started to transact business that they are driving on the platform. And as I indicated we expect to be – to be a great showcase of the momentum that we are seeing in this area. As we have indicated before when a customer buys VMware Cloud and AWS they get the whole stack. There is no sub composition of it where they buy storage or compute separately, it is the full service offering. And part of that we believe is this unique attribute where they get the full software defined data center on VMware Cloud. We also believe that in many cases that will be the fastest way that they start to use some of the newer product areas and likely drive them to have more on-premise use of those capabilities as well. It really is the unique hybrid cloud capability in the marketplace. And overall that affect is really we are starting to see some of those examples where customers really are becoming hybrid cloud customers of VMware. Zane, maybe you want to comment a bit more and some of the financial aspects of the VMC service.

[Zane Rowe]

Sure, yes. Kash as you highlighted not only to the VMC service but as we enter into more subscription and SaaS like products, we would expect a little more predictability along with those. I would point out we have got tremendous growth rates as I highlighted with VCPP growing 30% and it becomes sort of a recurring theme for us over the last number of quarters with the success we are seeing with that model which is more of the utility model as well. So we are really pleased with the products that that’s growing in that category. We think it will be more predictable, but again we are also pleased with both the SaaS type models as well as the perpetual model which is serving us very well as well.

[Pat Gelsinger, Chief Executive Officer]

Another example of that clearly is EUC which is now clearly the majority of our EUC and Workspace ONE business is as of service as well, so all of those continue to accelerate.

[Zane Rowe]

That’s right.

[Paul Ziots, Vice President, Investor Relations]

Thank you, Kash. Next question please.

[Operator]

Moving on we will have John DiFucci with Jefferies.

[John DiFucci, Jefferies]

Thank you. So Pat and Zane when I think the VMware over the last several years, there has been a lot of update about a lot of things beyond the fundamentals, but for fundamentals there is really a couple of things, it’s like okay can this massively successful act one compute virtualization connect – what’s going to happen here, is that going to falloff and the conclusion not too long ago was it’s going to falloff dramatically and then it was looking do you have some act two, three, four whatever what’s going to happen there, I am going to stick with the first part because I know Paul has just one question. The last two quarters you have had compute including management tools, the license billings to be much better than I think even you would or a lot of people would have thought of a year ago and I am just curious of what’s happening there, is it really new workloads just coming on-board because we can do a lot more with technology now and actually there is just a lot – there is a proliferation of workloads and you are seeing a benefit of that as others are or is it some of these more mission critical workloads that have – they have a ton of infrastructure under them and you get paid depending upon that infrastructure, is that these are now being virtualized as management tools become more and more mature, so enterprises are more comfortable virtualizing them or is it a little bit of both because these numbers are I think surprising to a lot of people especially the compute stuff?

[Pat Gelsinger, Chief Executive Officer]

Yes. I think there is a couple of things in there, John that we would point to. One, is we clearly see this hybrid computing model right, as the right answer. And as customers are beginning to see the strength of VMware in the cloud, they are becoming more confident in the strategic commitment to us on-premise. And VMware is uniquely positioned to benefit from the workloads of both the cloud and on-premise really bringing that together in this hybrid model. Clearly some of our early VMC on AWS customers have demonstrated that. We have continued to see the momentum that we have in our VCPP business which is maybe one of the strongest proof points that we had yet another quarter of 30% plus growth in that business. Now we have 4000 plus VCPP partners. The bulk of the VCPP is vSphere. Alright, as Zane already commented, IBM we continue to have great momentum with IBM and not just that we are now 1,700 customers on IBM, but those customers are growing in size and consumption as well, so it’s clearly a testament to it that. We also see that some analysts have started to indicate that boy, this idea of workloads moving back from the cloud as well as seen by a recent IDC that forecasted many companies will expect to have a more balanced view of this hybrid world in the future and they are going to repatriate some of their public the cloud workloads. Overall, I would just say customers are strategically growing in their confidence of VMware and we see that in the renewal of the on-premise business ELA renewals refresh rates as well as increasingly consuming us in the cloud side of their business. All those taken together I think we will see the strength in that core computer platform and I will just emphasize every time we do core compute that’s opportunity for us to be selling the rest of the portfolio as well.

[Zane Rowe]

Hi John I will just add we have been pleasantly wrong in the short-term on our compute outlook. But as we look longer term we are still I would say conservative in just how we think about the compute growth rate. We think total compute will be up in the low single-digits sort of over the longer period. So we are very pleased with the performance that we haven’t changed our longer term outlook just for this category.

[John DiFucci, Jefferies]

Thank you, guys.

[Paul Ziots, Vice President, Investor Relations]

Thanks. Next question please.

[Operator]

Next question will come from Mark Murphy with JPMorgan.

[Mark Murphy, JPMorgan]

Thank you very much and I will add my congrats. Pat and Zane your multi-year projections back as of March were included in a recent Dell filing and they do show revenue growing about 10% and then free cash flow growing I think closer to 12% to 15% annually for the next several years and I think you are trending ahead on some elements of that, but I am just curious if you can provide any additional commentary for instance just your level of visibility going out several years into the future and maybe related to the prior questions just what you are seeing for cloud compute and whether those were ASC 606 or ASC 605 and I am not going to ask multi-part question, but just really anything you think maybe relevant in helping to frame-up that guidance?

[Zane Rowe]

Sure Mark, this is Zane. I will point out we don’t typically go further than the current year or towards the tail end of the year look 1 year ahead with our guidance. And we are not changing that practice the S-4 filing obviously had some projections that were specific projections for a specific purpose under a variety of assumptions that we wouldn’t go into on this call. So I think it’s a good question, obviously we are comfortable with how we look at the business and how we are thinking about the business strategically. But I wouldn’t touch on adding any more color to that particular forecast.

[Pat Gelsinger, Chief Executive Officer]

Yes. And I would just say you know as I said in my formal comments Mark that we believe we are in a strong cycle. Customers are resonating with the VMware strategy, our execution is good and the market for technology is strong and those are not this quarter statements, those are long-term statements where we think that the business performance, our growth rates, the ability of customers to invest in the strategic product portfolio that we have. These are long-term trends and we believe that we are in a very good cycle for the business for not just this quarter, but well into the future.

[Zane Rowe]

Thank you, Mark.

[Pat Gelsinger, Chief Executive Officer]

Next question please.

[Operator]

Next from RBC Capital Markets, we have Matt Hedberg.

[Matt Hedberg, RBC Capital Markets]

Hi, guys. I will offer my congrats as well. It was great to hear about the continued success in NSX and historically a lot of that has been with security micro-segmentation, but we continued to hear about a lot of other use cases, I think Zane you highlighted a number of them in your prepared remarks, can you talk, give us a little more color on how prevalent some of these non-micro segmentation use cases are and really who is adopting them. I assume that probably some of your larger customers, but any additional color there would be helpful?

[Pat Gelsinger, Chief Executive Officer]

Yes, thanks for the question, Matt. And overall we are just really excited 40% growth in NSX again this quarter and this idea of that we have called as the virtual cloud network, where it’s not just about data center networking and/or micro-segmentation, but there is much expanded view on the portfolio has gotten much broader, we have NSX data center, NSX telco and NSX for containers, SD-WAN with VeloCloud, these hybrid use cases are really benefiting from the multi-cloud capabilities that we have.

We now have 82 of the Fortune 100 customers have now embraced NSX. NSX has generally been a higher end enterprise product, but we are quickly seeing it become the standard for software defined networking. We are now at a total customer count of 7,500 customers for NSX. And as you suggest, the idea of these use cases, right, are becoming more profound, where we see multi-cloud container micro-segmentation, cloud migration, cloud native and now moving NSX to the branch with SD-WAN. SD-WAN in particular was hot in the first half of the year, while from a much smaller base, it’s rapidly exceeding our expectations seeing both strength of customers adopting it for enterprise use cases and that might be like for branches, for stores, all these remote configurations. We are seeing that both from an enterprise channel as well service provider for partners like AT&T are particularly strong and leaning very aggressively into the VeloCloud aspect of the NSX family. So overall, virtual cloud network, clearly this strategy and this broadening of our NSX has really captured the interest of the industry, very, very solid position with customers and as I said 82 of the Fortune 100 it is now being seen as the standard for software defined networking.

[Matt Hedberg, RBC Capital Markets]

Thanks guys.

[Paul Ziots, Vice President, Investor Relations]

Thank you, Matt. Next question please.

[Operator]

Next from Cowen & Company we have Gregg Moskowitz.

[Unidentified Analyst]

Hi, this is Matt [indiscernible] on for Gregg. What are you hearing and seeing around PKS so far?

[Pat Gelsinger, Chief Executive Officer]

Yes, thank you. This is Pat. And overall we are seeing that the idea of containers and Kubernetes is a very hot topic for enterprise customers, how did they take advantage of these new modern development trends. And as a result there is tremendous interest in how do I do that in an enterprise grade way? And as part of that you know, we are clearly embracing this and making it, I will say, a standard element of the VMware sales engagement. We do believe that this idea of containers plus VMs is a very powerful idea, right and for the vast majority of containers are run in virtual machines, it really is the best of both worlds, containers giving the acceleration of many of the app development challenges such as deployments, configuration, patch and update, where the virtual machine is really about networking, security, management, automation, infrastructure optimization, so really our strategy is to bring those two things together. And PKS is by far the best way to do that. We exceeded our customer count goals that we had for the quarter. So we are seeing the early logo counts accelerating. So we are quite excited about that and even though it’s only a couple of quarters old already ahead of our customer goals is very exciting to see. And clearly, PKS, the combination of Pivotal’s technology with Google Kubernetes and VMware SDDC and NSX in particular right is very exciting rights offering that enables customers to have an enterprise grade Kubernetes container offerings and that is clearly hitting the mark for customers today.

[Unidentified Analyst]

Thank you very much.

[Pat Gelsinger, Chief Executive Officer]

Thank you, Gregg.

[Paul Ziots, Vice President, Investor Relations]

Thank you, Matt. Next question please.

[Operator]

Next question will come from Jason Ader with William Blair.

[Jason Ader, William Blair]

Yes, thank you. When you think VMC on AWS will be material to the business and what metrics should we be looking at that will show evidence of your ramp there?

[Pat Gelsinger, Chief Executive Officer]

Yes. And overall as I indicated we really saw the momentum picking up at the end of the quarter. We are focused in the near-term on customer count and bringing customers on to the platform as we get to, I will say this robustness of customer, right, use, global reach, filling out the product feature capability, then we will really focus on consumption and really moving larger customers right, larger workloads, they will have done this POC this testing cycle putting some test and dev workloads there and then it really goes into saying, how do I extend my data center with this? How do I replace my data centers with this? How do I turn on all of my DR done in a cloud capacity way? How do I start to really exercise this hybrid compute capability in a unique and powerful way? As we have indicated, some of the early customer examples for that as we have talked about MIT, Brink’s this quarter, we had another major customer come on to the platform in the food warehouse and supply distribution area. So we are seeing those early customers start to take advantage of it. For broad use of that, we do think that’s not this year. Right, we expect that to really ramp next year and we will have a lot more to say about the platform, the capability the global rollouts at VMworld next week.

[Jason Ader, William Blair]

And is that in billings or an off balance sheet backlog in terms of when we see the metrics?

[Zane Rowe]

Ultimately, it will be in our bookings and billings and then into revenue. I mean, obviously, it’s a SaaS product, so we would expect that ramp to materialize as the products used, but we are excited about the opportunity and you should hear more from us later on this year.

[Paul Ziots, Vice President, Investor Relations]

Thank you, Jason. It’s summertime. A lot of people are out and there are a lot of calls on today simultaneously. So, we have one more question in queue and this will be the last question.

[Operator]

Alright. Final question will be from Michael Turits with Raymond James.

[Michael Turits, Raymond James]

Hey, guys. Thank you very much for getting me in. And sorry to be boring here, but I want to stay in VMCA and speak specifically about the use cases. Are we seeing mostly lift-and-shift of [workloads] what we would say traditional type of architectural deployment of applications or are these more modern types of applications that are being built from scratch in Amazon?

[Pat Gelsinger, Chief Executive Officer]

For the most part, these are existing VMware customers with existing workloads and that’s sort of the others say the unique easy button of VMware Cloud on AWS is that ability to seamlessly take advantage of this cloud capability and that’s exactly what we expected in Phase 1. Phase 2 of this, we absolutely see this that people will start to rethink their data center strategy. They will start to repatriate workloads. They will start to shift their view of what’s on-premise and in the cloud. And as a result this is exactly where we would have expected to be. We are largely selling into existing installed base VMware customers as the starting point, but we clearly expect as we go to Phase 2 and beyond, this service becomes a fundamental way of how people rethink, how they deploy their hybrid cloud computing capacity. Never before have they had the ability to take advantage of a seamless hybrid cloud capability from the private cloud to the public and back again. And that to us is something that nobody but VMware can do. Customers are getting excited about it. We're proving the early use cases in Phase 1, but we believe it’s going to be much, much bigger than that. I would also emphasize that at next world, next week’s VMworld, we will clearly be showing a few examples that will really emphasize what will say this hybrid nature of both being able to take lift and shift to the cloud, but also from the cloud. And as that starts to occur, we think people will start to see this capability of the VMware Cloud in a much more strategic, comprehensive and long-term strategic value way.

[Paul Ziots, Vice President, Investor Relations]

Thank you, Michael. Before we conclude, Pat has final remarks.

[Pat Gelsinger, Chief Executive Officer]

Thank you. And as we said Q2, another strong quarter for VMware, I am very proud of our team. We continue to see broad-based strength across our diverse product portfolio. And as we have indicated in our questions, we look forward to seeing you – seeing the exciting announcements in technology innovations that we are going to unveil at VMworld next week and I look forward to our Q3 call, where we will update you again on our progress. Thank you very much.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thanks for joining us. You may now disconnect.