VMware Inc

XETRA:BZF1

Earnings Call Transcript 2022-Q2

[Operator]

Good day, everyone, and welcome to the VMware Second Quarter Fiscal Year 2022 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Paul Ziots, Vice President of Investor Relations. Please go ahead, sir.

[Paul Ziots, Vice President of Investor Relations]

Thank you. Good afternoon, everyone, and welcome to VMware's second quarter fiscal year 2021 (sic) [2022] earnings conference call. On the call, we have Raghu Raghuram, Chief Executive Officer; and Zane Rowe, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions.

Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. Slides which accompany this webcast can be viewed in conjunction with live remarks and downloaded at the conclusion of the webcast from ir.vmware.com.

On this call today, we will make forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially as a result of various risk factors described in 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 and employee stock transactions, acquisition, disposition, certain litigation matters and other items as well as discrete items impacting our GAAP tax rate. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in the press release and on our Investor Relations website.

The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our third quarter fiscal '22 quiet period begins at the close of business, Thursday, October 14, 2021.

With that, I'll turn it over to Raghu.

[Raghu Raghuram, CEO]

Thank you, Paul, and thank you to everyone joining us today. I'm pleased with our Q2 fiscal 2022 performance with revenue of $3.1 billion and non-GAAP earnings of $1.75 per share. I'm even more excited and energized today as I approach my 100th day as VMware's CEO. I've been spending a lot of concentrated time talking with customers and partners about the opportunities and challenges in the industry today and how we can help them navigate and innovate for the future.

Over the last few years and especially during the pandemic, enterprises have accelerated their adoption of the cloud. Customers are evolving their strategy from a cloud-first to a cloud smart philosophy where they are picking the right clouds and cloud services for the right workload, including private cloud and even on the edge. And that means most of our customers are using not just one cloud today, but multiple clouds.

Multi-cloud is emerging as the customers default strategy for these primary reasons: First, they need to deliver the best digital and app experiences by choosing the location of their services based on the technical capabilities and performance. Second, they need to achieve business flexibility, lower cost and better control, and as a result, avoid being locked into a single cloud. Third, they need sovereignty, which is about the ability to control where their data resides. These customer needs are addressed with our multi cloud portfolio.

Number one is application modernization and cloud management. This is where Tanzu and our Cloud Management portfolio are critical as customers build, run and manage cloud-native workloads across public clouds. Number 2 is cloud-agnostic hybrid infrastructure with VMware Cloud, which provides a comprehensive platform for running enterprise workloads in private clouds and migrating them to any of the major public clouds. Number 3 are solutions that enable our customers to innovate at the edge and empower a more secure distributed workforce with Workspace ONE. And across all of these multi-cloud services, we have built our software defined networking, and Carbon Black Cloud offering, which is a key component to provide zero trust security, flexibility and agility across all clouds.

Customers are using our Tanzu platform to drive a consistent developer and cloud operations experience across all of their clouds, including data centers. As an example, one of the world's largest tire manufacturers adopted the Tanzu portfolio to manage a large container run time across their data center, Azure cloud and a number of manufacturing locations at the edge.

We are also continuing to see customers who are building their application platform across hybrid clouds, adopting our complete stack for their private cloud environment that can extend to public cloud as needed. This full stack provides cost effectiveness and agility to run enterprise applications and build modern applications with our integrated Tanzu portfolio. For example, a Japanese automaker is building a next-generation open scalable private cloud platform to modernize their business using VMware Cloud Foundation as their infrastructure stack and Tanzu for modernizing their applications.

Customers are also seeing the value of VMware Cloud Universal as it provides them flexibility to move to the cloud at their own pace and gives them freedom to move applications based on business conditions. We continue to see momentum with our cloud partners providing more choice and flexibility for our customers. In Q2, VMware Cloud on AWS customers continued to expand their usage as we delivered key engineering capabilities and footprint expansion, including a new AWS Milan region. We continued to strengthen our go-to-market relationship with AWS, including the ability to offer additional products such as vRealize Cloud via the AWS resale channel.

In April, we unveiled VMware SASE, a cloud-native scalable solution that serves as the one-stop shop for security and network services at the edge. VMware SASE provides customers a unified edge and cloud service model with a single place to manage business policy, configuration and monitoring. It is also a key component of the VMware Anywhere Workspace Solution which also includes VMware Workspace ONE and VMware Carbon Black Cloud and is designed to help companies deliver better and more secure experiences to their employees, no matter where they are in the world.

We continued to work with Zoom Video communications during the quarter to drive interoperability between VMware Anywhere Workspace and the Zoom platform, enabling a better and more secure collaboration experience for hybrid work environments. We also added new innovations to VMware Horizon with new capabilities to make it easier for IT to manage deployments wherever they may be, on-premises or in the cloud.

Over the past few months, VMware garnered recognition from industry-leading analysts. VMware has been recognized as a leader in the August 2021 Gartner Magic Quadrant for unified endpoint management tools for the fourth consecutive year. Additionally, VMware is positioned as a leader in the Forrester Wave Endpoint Security Software as a Service Q2 2021. And IDC ranked VMware #1 in worldwide IT automation and configuration management 2020 market share, as well as ranking VMware #1 in software-defined compute for 2020 market share.

In Q2, we received recognition in support of our ESG efforts including ranking in the top 1% in emissions intensity versus industry peers on the ISS Climate Scorecard for the fiscal year 2020. VMware was also named to the Forbes 2021 List of Best Employers for Women and was recognized as the Best Place to Work for Disability Inclusion in 2021.

As we head into fall, SpringOne and VMworld are both on the horizon. These events are the epicenter of industry conversations and breakthrough technological innovations. SpringOne takes place September 1 and 2, and is optimized for developers, DevOps pros and software leaders looking to build scalable apps and learn more about the Spring framework, Kubernetes, app modernization and more. VMworld, which takes place October 4 through 7, will again be a virtual event where attendees will hear more about our multi-cloud strategy and offerings, while also engaging in over 600 educational and technical content sessions while networking and connecting with peers. I look forward to seeing you connecting with peers. I look forward to seeing you online at these 2 events.

We remain on track to spin off from Dell in early November of this year. As a standalone company, we will have increased strategic, operational and financial flexibility to drive VMware's growth strategy while also strengthening our longstanding strategic relationship with Dell, a partnership we expect will continue to benefit our customers and partners as well as both the Dell and VMware.

I'll now turn it over to Zane for more detail on our business performance.

[Zane Rowe, EVP & CFO]

Thank you, Raghu. We're pleased with our Q2 and first half of fiscal '22 financial performance. Total revenue for Q2 was $3.1 billion, with combined subscription and SaaS and license revenue growth of 12% year-over-year to $1.5 billion, which was above our expectations for the quarter. Subscription and SaaS revenue grew 23% year-over-year, with ARR up 26% to $3.2 billion. License revenue exceeded our expectations in Q2 with growth of nearly 3% year-over-year to $738 million.

We continue to focus on developing and accelerating our subscription and SaaS portfolio and made good progress in Q2 towards that goal. Our largest contributors to sub and SaaS were VCPP, modern applications, EUC, Carbon Black and VMware Cloud on AWS, which grew revenue nearly 80% year-over-year. We continue to prioritize flexibility and choice for customers as they adopt our offerings. And in Q2, we saw customers take a slightly larger-than-expected mix of perpetual licenses as well as term licenses in certain product areas such as EUC. We're also driving continued momentum with our VMware Cloud solutions and hyperscaler-led agreements are becoming an important channel for scaling our cloud offerings. With this route to market, the length of time from bookings to revenue can be slightly longer as compared with VMware Direct sales.

Our non-GAAP operating income for the quarter of $924 million was stronger than expected, driven by higher revenue and lower-than-expected expenses. Non-GAAP operating margin for the quarter was 29.4%, with non-GAAP earnings per share of $1.75 on a share count of 423 million diluted shares. We ended the quarter with $10.3 billion in unearned revenue and $5.9 billion in cash, cash equivalents and short-term investments.

Q2 cash flow from operations was $864 million, and free cash flow was $777 million. RPO was $11.2 billion, up 8% year-over-year, and current RPO was $6.2 billion, up 11% year-over-year. Total backlog was $66 million, substantially all of which consisted of orders received on the last day of the quarter that were not shipped and orders held due to our export control process. License backlog at quarter end was $19 million.

We're pleased with the overall bookings performance in Q2 as we continue to grow our subscription and SaaS offerings. We saw year-over-year product bookings growth in major product categories, including our multi-cloud and modern applications businesses as well as EUC. Core SDDC product bookings increased over 20% year-over-year, with Compute also increasing over 20% and Cloud Management up over 30%.

Compute growth was strong in both on-prem and cloud deployments, benefiting from an improved economic backdrop; strength in our commercial business, thanks in part to our partners; and continued growth in our multi-cloud subscription and SaaS offerings. Growth in our Cloud Management business was driven by vRealize Cloud Universal, a service that enables customers to manage their entire multi-cloud environment, including on-prem, edge and public clouds. Adoption of vRealize Cloud Universal is a great validation of our multi-cloud strategy, with more customers now embracing a unified cloud-based approach for managing their hybrid and multi-cloud environments.

EUC and NSX product bookings were both up in the strong double digits versus Q2 last year and vSAN product bookings grew in the low single digits year-over-year. Carbon Black Cloud and our Modern Applications business also had continued strong growth in the quarter. Subscription and SaaS ACV bookings for EUC grew in the strong double digits year-over-year, driven by both Horizon and Workspace ONE.

As employees continued working in hybrid environments, customers are leveraging VMware's Workspace offerings to support employees anywhere they work from knowledge workers back in the office or at home to essential employees and frontline workers.

In Q2, we repurchased 2.2 million shares in the open market at an average price of $160 per share. Through the end of Q2, we have utilized $2.2 billion from our current repurchase authorization of $2.5 billion. We successfully completed a $6 billion bond offering in preparation for a special dividend payout to all stockholders associated with our planned spin-off from Dell Technologies in early November of this year. Our Q2 cash balance does not reflect the proceeds from this bond offering.

We will continue to invest in growing our business, both organically and inorganically and return excess capital to shareholders through share repurchases. We also remain committed to an investment-grade profile and credit rating. And we expect to use free cash flow primarily to delever following our planned spin-off from Dell.

Turning to guidance for fiscal '22. We are reiterating our expectation for total revenue of $12.80 billion, a growth rate of approximately 9% year-over-year. We expect to generate $6.27 billion from the combination of subscription and SaaS and license revenue or an increase of approximately 11.5%, with approximately 51.5% of this amount from subscription and SaaS.

We're increasing guidance for non-GAAP operating margin for the full year to 29% and non-GAAP earnings per share to $6.90 on a diluted share count of 423 million shares. We're maintaining our cash flow from operations guidance of $3.9 billion, which now includes nearly $100 million in debt issuance costs and estimated costs associated with the planned spin-off. And we're also maintaining free cash flow guidance of $3.52 billion.

Additional details for FY '22, such as other income and expense, are contained in the slide deck accompanying this call.

For Q3, we expect total revenue of $3.12 billion or a growth rate of approximately 9% year-over-year. We expect $1.47 billion from subscription and SaaS and license revenue in Q3 and or an increase of nearly 12% year-over-year, with approximately 56% of this amount from subscription and SaaS. We expect non-GAAP operating margin to be 27% for Q3, with non-GAAP earnings per share of $1.53 on a diluted share count of 422 million shares. Additional guidance details for Q3, such as other income and expense are contained in the slide deck accompanying this call.

In closing, I want to thank our customers, our partners and the entire VMware team for a good second quarter and first half of fiscal '22. As we head into our second half and the spin-off later this year, we're energized by the opportunities we see to help customers leverage our trusted software foundation for their multi-cloud environments. And we look forward to seeing many of you at our Analyst Meeting to be held in conjunction with Virtual VMworld in early October. We'll notify you of the day and time in the coming weeks.

I'll now turn it back to Paul for Q&A.

[Paul Ziots, Vice President of 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. Operator, let's get started.

[Operator]

[Operator Instructions]. And first, we'll go to Mark Murphy from JPMorgan.

[Mark Murphy, JPMorgan]

Raghu and Zane, so it's another quarter where the mix went slightly more to perpetual and term. But you have this strong SaaS ARR growth and strong CRPO growth. When you step back and think about that, do you think the imprint of the pandemic is kind of altering the equilibrium of cloud versus hybrid versus on-prem deployments and that's kind of this is how it's manifesting? Or do you think that it's more of a kind of a temporary bounce back in that perpetual and term piece?

[Zane Rowe, EVP & CFO]

Hey, Mark, this is Zane. I'll start and then let Raghu weigh in with his thoughts. As you point out, it was actually a good quarter for us with our sub and SaaS businesses growing 23% in revenue. And as you mentioned, we're quite pleased with the 26% ARR. I don't think fundamentally, it's driven by COVID or anything necessarily in the marketplace. For us, I pointed out 2 of the trends in my prepared remarks, one being around choice and candidly, as it related to, in particular, with our Horizon product, we were expecting a few more customers to lean into to the sub and SaaS part of that portfolio versus the term license. And for a variety of reasons, they chose term, which on the margin actually did impact our split between sub and SaaS and on-prem.

So we're actually pleased with what we're seeing with that product. I call that EUC performance this quarter, which was a remarkable performance year-over-year. It's just that the mix, if you will, within those products shifted a little bit more to term than we had expected originally. And then on top of that, we're very excited about the business we have with the hyperscalers, and that's become an important route-to-market for us. We have a lot of innovation and a lot of work going on with those. That go-to-market effort takes a little longer than just the direct sell as it relates to VMC-type products on multiple hyperscalers.

So that, I think, is another area where we're probably a little more opportunistic early and then what's coming to fruition here as we think about just timing and getting those customers on board. And then lastly, I pointed out, we've seen good strength across the portfolio. Our VCPP product were really tough compares. If you look at a year-over-year basis, VCPP started accelerating from the second quarter on, on a year-over-year basis. So if you look at that category, it's actually impacted by that VCPP, for instance, is about 1/3 of that category. So it's a significant size portion. And other than that, I'd say the trends are generally strong across all of our sub and SaaS categories. I'll turn it Raghu because I'm sure on the market side, there are a few elements I've missed.

[Raghu Raghuram, CEO]

Yes. Thanks, Zane. So Mark, our approach is to provide, as Zane said, choice and flexibility in how customers consume our offerings. And we are very happy, whichever way they consume it. And it turns out that in certain geographies and in certain verticals, given the choice, customers prefer license software business model over subscription and SaaS business model. And that's what you saw in this quarter, especially with the Horizon that Zane referred to.

We also saw a little bit with the Cloud Universal which was off to a good start. With Cloud Universal, we provide -- if you recall, we provide customers with a choice and flexibility on their cloud journey, and many of them start their cloud journey on-premise. And at that time, they're using our term license. And as they move to the cloud, they use our subscription offerings.

But if you step back and if you actually look out over the next year or so, we are very bullish about our overall subscription and SaaS portfolio. This is a big focus of mine, as I've talked about before. And if you look at most of our recent products and innovations, they've all come to market with a subscription and SaaS business model, and that will continue.

In addition, we are taking all of our existing perpetual license software products and making them also available in a subscription and SaaS business model. And that work is underway, and that includes products like vSphere, our HCI product line as well as NSX. As we do that, we will be strengthening our subscription and SaaS go-to-market mechanisms even more with programs like Universal, et cetera. So over the next year, I actually expect our subscription and SaaS business to -- growth to accelerate.

[Operator]

Next, we'll go to Raimo Lenschow from Barclays.

[Raimo Lenschow, Barclays]

I wanted to ask about the transformational deals. Like in the last few quarters, you talked about that people were not doing it but you were hopeful that, that will pick up. And if I look at some of the product items that go into these type of deals like NSX Visa and et cetera, they all kind of accelerated. So can you talk a little bit about what you're seeing about some customers' appetite to start thinking about more bigger transformational deals again?

[Raghu Raghuram, CEO]

Yes. So I'll start and hand it back to Zane or Sumit as well to talk about what he's -- what we are seeing with the customers. So we are seeing a gradual economic environment improvement certainly compared to last year. And you saw the benefit of that with the NSX, for sure. In the case of NSX, the NSX, the additional exciting thing is we have talked in the past about our expanded networking and security portfolio, especially with our advanced security offerings that protect these east-west traffic and these days with ransomware, et cetera, et cetera. So protecting east-west traffic has become a big deal. And so we are seeing an increased pickup in our security products with some big wins this quarter.

Also with our software-based load balancing, there is a tremendous TCO advantage over handed capabilities over conventional load balancers. So we have seen all of that contributing to networking growth. In the case of storage, our vSAN product line, VxRail was pretty strong this past quarter, and our commercial business also grew. And so those are all some of the contributing factors. Sumit?

[Zane Rowe, EVP & CFO]

Raimo, I'll just jump in. This is Zane. On -- if you -- just to help you sort of think about the size, I called out the commercial part of the business that saw really good success in the second quarter. If anything, I think that was the surprise. If you take a step back and look at our enterprise agreement mix, as a rough proxy for some of those larger deals, we were at approximately 44%, which was actually consistent with last year. The mix within that wasn't quite as episodic, if you will, with some larger and some smaller. We actually had a good mix of customers that were over -- we usually use the $10 million mark as a proxy for sort of a large versus smaller deal, and we had the same number, 22 customers that were greater than $10 million, which was consistent with last year as well.

So we're pleased with that trend. We think as we have more sub and SaaS, we'll be seeing more moderation in our large, large deals, but we're pleased with that trend for the quarter.

[Sumit Dhawan, President]

Yes. I think -- this is Sumit. The only thing I would add to that would be that the engine that we have now, which is helping customers on transformation, is different than what you have traditionally thought of transformation. Now if you look at our top deals, many of them have our Tanzu solution, which is a significant transformation for our customers in enabling a brand-new application platform for them as well as how they are going to adopt multi-cloud. So we're very pleased with that trend. And then just like Zane mentioned, our investments in the commercial front is leading to great volume of deals, which is helping our business as well.

[Operator]

Next, we'll go to Mark Moerdler from Bernstein Research.

[Mark Moerdler, Sanford C. Bernstein]

Look, as the company is now focusing more and more on subscription and SaaS, I'd like to ask a couple of questions related to try to better understand the transition. First off, is this -- are we seeing more of existing license maintenance customers moving over to either term licenses or Saas? Or is this predominantly new workloads? The second part is, obviously, there's multiple things shifting and there's some new products in here. But how should we think about the revenue lift over time when comparing a traditional license maintenance deal versus what you would get with either term or Saas?

[Zane Rowe, EVP & CFO]

Sure. I'll start and then again, let Raghu jump in. I'd say it's a good mix of both. If you look at our renewal rates, they remain high, and we're quite pleased with what we're seeing on the S&S side and the maintenance side. I'd say, opportunistically, where we have products that offer our customers that flexibility, we're taking advantage of that with our customers to rethink their portfolio of our products and in some cases, we've mentioned it, in particular, on the Universal side and on the management side, and we have with EUC for a number of years now seen success in pivoting that over.

We believe there's value there, both for ourselves as well as the customers. If you think about just the sub and SaaS nature of the business, there's an opportunity for upgrading, there's an opportunity to do more with our product set. And in many cases, we see more value to both them and ourselves. When we make that pivot, it's usually with a premium associated with it. So we do appreciate the fact that we would expect to see revenues increase over time, even if you were looking at just the existing installed base and moving that installed base over to more of a sub- and SaaS-centric portfolio versus where they are today with on-prem. So if you just looked at that.

But in addition to that, and more importantly, we believe is the opportunity with the solutions to enter into new opportunities and more greenfield opportunities there. So we see tremendous benefits in the long run here with both parts of the portfolio, but allowing for customers to work with us on their journey.

[Raghu Raghuram, CEO]

Yes. And just to add a little bit more, I think when customers convert to our subscription and SaaS offerings, especially the SaaS offerings, we also see the increased possibility of upselling and crossing -- cross-selling them a larger portion of our portfolio more easily because customer uptake of SaaS is easier than customer uptake of on-premise license where they would install software and deploy it, et cetera. And so not only is the individual lifetime value of a product when a customer goes to the SaaS equal and good, the possibilities of us selling and getting them to use more of our portfolio is also very good.

[Operator]

And next, we'll go to Matt Hedberg from RBC Capital Markets.

[Matthew Hedberg, RBC Capital Markets]

Great. Raghu, you mentioned you're 100 days in here. And I'm sort of curious, as you sit back and reflect, Pat used to say that COVID really is moving this IT market faster to the future. I'm wondering now, after you've been in the seat for a while, if you reflect back over the last year. And I think even more importantly, looking forward, I mean is that philosophical kind of underlying trend still play out in customer conversations? I mean, I'm just sort of curious if at that level of the conversation, people -- the IT executives think that way.

[Raghu Raghuram, CEO]

Yes. Suddenly, I think, as you mentioned, the pandemic suddenly accelerated things that the customers were already thinking about. As I’ve said in in my opening remarks, actually, over the last 90 days, I've probably spoken to nearly 200 customers and Sumit done his own set of 200 customers. And the feedback is overwhelmingly clear and consistent. And the feedback is that customers are evolving their cloud strategy on the one hand, and they're going from not just being cloud-first, but going to being cloud smart.

What we mean by that is customers are now looking at their IT application assets and deciding which cloud or -- whether it's private or public cloud, the individual applications to live on based upon a number of factors, technical factors being a big consideration, business factors, cost, the desire not to get locked into any particular cloud vendor and having sovereignty over where they put their applications and data. So what we are seeing as a result of the evolution from our customers, partly propelled by the pandemic, but also partly propelled by customers, which with the cloud is customers are becoming multi-cloud.

I often say we have gone from the age of mono-cloud to the age of multi-cloud. And certainly in these 200 conversations, the overwhelming feedback is this is the state of their future IT. And what we are doing is pivoting our portfolio or positioning our portfolio to become the multi-cloud platform for our customers.

We are doing that in 3 ways. One is enabling them to execute their application transformation on the cloud of their choice using our Tanzu portfolio. And Tanzu is getting increased momentum, especially in the public cloud to help them master the complexity of doing application modernization in the cloud. And of course, by putting our cloud infrastructure across all clouds, and we are the only one with the cloud infrastructure across all clouds and forming the strategic partnerships with all of the cloud vendors, we are helping them take their enterprise applications to the right cloud. And then last but not the least, the other aspect of the fundamental change caused by the pandemic, where we are all not going back to pre-pandemic state, is a remote workforce, right? We are firmly in an age of distributed workforce and this has given us the opportunity to pull our SASE -- bring our SASE solution to market, integrated with our Workspace ONE solution to deliver this Anywhere Workspace platform, which is also getting a lot of interest.

So what I would say, long-winded answer to your question is the pandemic accelerated some trends that were firmly underway, but it's also caused a corresponding maturity amongst customers to take a step back and look at how they want to run their IT over the next decade. And multi-cloud is one such pillar, the distributed workforce is another such pillar, the growth of the edge is the third pillar. And put all together, IT is becoming more distributed, and we are benefiting from that.

[Operator]

Next, we'll go to James Fish from Piper Sandler.

[James Fish, Piper Sandler]

Raghu, wanted to go back to your commentary on VMware SASE. What are you seeing in terms of the competitive environment, especially as it pertains to really those fully unified and consolidated solutions rather than VMware offers the SD-WAN side and partners on the security side? And any further color about how to think about the growth and adoption of Carbon Black at this point because it's been a bit since we got an update?

[Raghu Raghuram, CEO]

Yes. So you had 2 sub-parts of the question, and I'll break it up a little bit. So if you think about SASE, it's the fundamental aspect of a zero-trust architect security architecture that our customers are putting in place. And there are 2 aspects to the SASE momentum that we are seeing. One is, like you pointed out, as a pure extension of the wide area network re-architecture that's underway. We are the market leader here with our VeloCloud Solution for SD-WAN, and that continues to do very well for us. And all of those customers are now adopting SASE as a natural extension of our SD-WAN solution.

But the more strategic and the more interesting thing that's happening in the marketplace, is I'll refer you to what I just said a few minutes ago, about remote work becoming a standard part of the enterprise workforce -- call it, enterprise workforce as a structure. And so customers are increasingly looking to see how would we secure and manage their remote workforce?

And in that context, SASE is an important component of the solution, but not the only component of the solution. If you think of you and I working from home, what is the things that we need? The first thing we need is fantastic network experience because we are on Zoom or Team calls all day long. And so the VeloCloud solution provides that. Then of course, we might be accessing it from an untrusted network from home, accessing the corporate network. So SASE becomes super important. But at the same time, things like Carbon Black becomes super important.

And then how do we -- how does IT provision and manage users at their homes, our Workspace ONE solution becomes super important. So we see SASE as part of our larger Anywhere Workspace solution, and we are very, very differentiated there. And we think that is the platform sale as time goes on in this industry. From SASE, will have -- there are 2 components to it. One is there will always be a point selling motion, but also platform selling motion as part of the Anywhere Workspace Solution. So that's part one of what you asked us.

Part 2 of what you asked me is about Carbon Black. And Paul Ziots is looking at me to cut my answer short, so I'll keep it short here. Carbon Black also had a good quarter, Carbon Black Cloud did well. And we are executing on 2 access there. One is strengthening the Carbon Black Cloud solution. We added things like device control for Mac and many of the new features.

But the more interesting thing with Carbon Black is integration and the leverage we are getting from the rest of the portfolio, this is what we've been talking about for the last year or so, where, for example, we're now integrating Carbon Black Workload -- sorry, Carbon Black Cloud endpoint protection with our VDI solution. We are introducing Carbon Black Workload by integrating it with our vSphere solution. So what you are able -- customers are able to get with Carbon Black now is integration across network security, our endpoint security, our workload security and our cloud security. So that's the strategy there.

[Paul Ziots, Vice President of Investor Relations]

Thank you, Fish. Great questions. I just wanted to be sure we try to keep to 1 question per person because we do have a good amount of people in queue.

[Operator]

Next, we'll go to Simon Leopold from Raymond James.

[Simon Leopold, Raymond James]

I wanted to see if you could maybe compare and contrast your competitive position in multi-cloud for your customers versus your position when virtualization was the big wave of on-prem. It seems like you're in a much more competitive environment than you were in that prior phase of the company's evolution. And I just want to see how you'd frame sort of a compare and contrast in your positioning today versus that earlier phase of the company's life?

[Raghu Raghuram, CEO]

Yes. So if you think about the evolution of VMware as a company, right, so chapter 1 for us, like you pointed out, was as a server virtualization company. And we did that really well. And today, we are trusted by hundreds of thousands of customers as the core compute environment of their data center, running all of their mission-critical applications.

Chapter 2 was to expand from that into the private cloud or the software-defined data center, which has also gone very well for us. And the combination of chapter 1 and 2 is that we are indeed the trusted foundation, number 1, for our customers; and number 2, all of our customers' technology teams, IT teams use VMware technologies and tools and processes to run all of their applications and infrastructure.

Now chapter 3 for us is the multi-cloud and application chapter. And here, I would say we are very well positioned, in fact, very, very differentiated for the following reason: one is we have the trust of the customer and the presence in the customer base and the customers' familiarity with all of our tools and technologies that we've been delivering to them over the last 2 decades. That's point #1. Point #2 is we are the only large vendor that has a very strategic position and strategic partnerships with all of the major hyperscalers as well as a presence with all of the sovereign clouds around the world. And then, point #3, is our multi-cloud portfolio is very comprehensive and broader than anybody else. So it starts with application modernization. It goes on into multi-cloud infrastructure. We are able to manage our customers' portfolio regardless of whether they're using VMS or containers or serverless or AWS or Azure or Google or you name it, right?

And then we are able to connect it all together with our networking portfolio, and we are building out our security portfolio. On top of it, we can help them on the edge of the network as well. So there is no other vendor really, if you think about it, that has all of these portfolio elements that are needed in multi-cloud.

And then finally, if you think about our position, we are industry-neutral. We are not -- we have a great set of cloud partners, but what customers want to select cloud when they want to be cloud smart, they want an industry neutral player to look at -- to help them figure out which applications go where, and we are uniquely set up to do that. And with our spin, that position also gets strengthened as we become the Switzerland of the industry. So for all of these reasons, we think our competitive position is really, really good, the trust of the customers, the portfolio, the partnerships and our industry position.

[Operator]

Next, we go to Tyler Radke from Citi Bank.

[Unidentified Analyst]

This is Kim on for Tyler Radke. With the spin-off of close to consummating, how should we think about the OpEx and margin implications of the commercial R&D and go-to-market agreements that you have in place with Dell?

[Zane Rowe, EVP & CFO]

Yes, I'd think about it in the same way. I mean, we've been operating as 2 separate entities for some time now. We have a CFA that is signed, and we look forward to continuing the partnership with Dell. If anything, I think there are more incentives in the new relationship. But we've been working on this for 5-plus years. Together, I think we've established good arm's length agreements and have a terrific partnership with them.

So while we expect to expand our ecosystem, we will continue to have that partnership and expect to grow that partnership with Dell. I don't expect to see significant changes. If you just think about the P&L related to the spin-off, as I mentioned, we've been arm's length already, and I don't expect any significant changes on that part. If anything, I think we've codified the strengths of the agreement and would expect to see continued growth with our partners.

[Operator]

Next, we go to Brad Sills from Bank of America.

[Unidentified Analyst]

It's Adam on for Brad. So you guys mentioned that multi-cloud is kind of just a big chunk right now. And I kind of wanted to dig in a little deeper. You guys mentioned that NSX has been a bright spot in addressing multi-cloud. But I wanted to know what else within the more specific product segments are kind of -- there's a lot of customer conversations being driven there. And then just as a quick follow-up, like what else are you guys investing in R&D wise and trying to address this opportunity?

[Raghu Raghuram, CEO]

Yes. So unfortunately, your question did not come across clearly. I'm going to paraphrase and make sure that -- if I missed something, let me know. The question was, which aspects of portfolio are we investing in for multi-cloud? And secondly, where our customer is interested in. So if that is the right question, let me answer it, and if not, correct me. So...

[Unidentified Analyst]

Yes, that's perfect.

[Raghu Raghuram, CEO]

Okay. Yes. So if you think about the multi-cloud phenomenon for customers and in the context of what they're trying to do, customers are trying to modernize their applications, execute their digital transformation at scale, right? And then ensure that they're able to manage it, control the cost. So in other words, while on the one hand, they want to provide developers the freedom, they want to get enterprises -- they want to have full control over the environment end-to-end.

So given that context, the investments that we are making that are resonating with customers pretty heavily. The first one is application modernization with our Tanzu portfolio. So the value proposition of Tanzu is it helps accelerate the modernization of applications in the cloud of their customers' choice. And as we spoke in our prepared remarks, Tanzu is seeing growing momentum and for the value proposition that it delivers and the fact that they delivers it across not only any single public cloud, but across all public clouds and on-premise and in the edge.

We talked about the global tire manufacturer deploying Tanzu across their numerous edge locations in their data centers and on Azure. So that's one example. The second is the cloud-agnostic infrastructure which we started with VMware Cloud Foundation on-premise, which is the basis of the majority of the private clouds that the enterprises are deploying. We extended that to VMware Cloud on AWS and then subsequently partnered with Microsoft and with Google, to create a multi-cloud infrastructure that's present across all clouds.

Customers are using that to move to the cloud because it turns out that if you use VMware Cloud, you can move to the cloud in half the time or half -- and half the cost with any other mechanism. So that's another one. And at the same time, access all of the innovation in the clouds. So that's the second core pillar of our multi-cloud strategy.

The third pillar of our multi-cloud strategy is management because when customers start to deploy applications across all of these clouds, the cost is a big factor. Compliance is a big factor. Control is a big factor. Governance is a big factor, and our management portfolio helps. And the last, I would say, is networking and security. So these are all the areas where our portfolio is very relevant to customers.

[Operator]

Next, we'll go to Keith Bachman from BMO.

[Keith Bachman, BMO Capital Markets]

Raghu, I think this is for you. In the quarter you just reported, you indicated that 25% of total revenues were SaaS and subscription. If I look at your guidance for Q3, suggest that, that will move up to 26% of total revenues. And on the last call on this call, you've reiterated your perspective that you want to accelerate the pace of movement to SaaS and subscription. And I was hoping if you could just define that or how you should think about it. So in other words, if we look at the next calendar year, does that move up 5 points? Just any kind of calibration on A, the way you go -- the way you try to accelerate that? Is it through pricing? Is it through features and functions? And B, any quantification on how we should be thinking about next fiscal year in terms of that percentage of SaaS and subscription versus total?

[Raghu Raghuram, CEO]

Yes. So I'll start with how we are accelerating it. And then I'll have Zane comment on the quantification, if any. So in terms of how we are accelerating it, this is an area that I'm very focused on, and I'm very excited by because fundamentally, we think this is a model that allows us to innovate faster on behalf of the customer and customers want this. And we think about our portfolio in 2 ways. One is products that we have cloud products or cloud services that we are bringing to market from the get-go that are SaaS and subscription-oriented. The most -- some of the recent examples are VMware Cloud, Tanzu, et cetera, et cetera.

And then that will continue on some of our recent acquisitions like Carbon Black Cloud. So these are all examples. And we continue to innovate to bring about new products and new cloud services in this model as well. So that's one category by which this category will grow. The second is we have got an extensive portfolio of products today that are sold a software license model. And we are making available all those products, the majority of those products over time in a subscription and SaaS business model, including standouts of our on-premise portfolio like vSphere, our HCI and NSX over time.

As this happens, then pretty much all of our major aspects of our portfolio will be available to a customer in whichever form they want to consume, whether it's a license -- using a license business model or a subscription and SaaS business model. And as this happens, we will be able to also strengthen our go-to-market mechanisms and have programs like Universal really be how we drive the growth of this, both directly and through our channel partners and other resellers.

So when you put all of that together, I expect to see our SaaS and subscription percentages, the growth percentages increase in SaaS and subscription as a percentage of total also become more sizable. And for that, let me turn it over to Zane to add some more.

[Zane Rowe, EVP & CFO]

Yes, Keith. I think as you pointed out, we would expect for this year, that number to just exceed 25%, which is a nice increase on a year-over-year basis. I would caution somewhat as you look at it quarter-by-quarter, it is impacted by the seasonal dynamic that you see in the perpetual business, which obviously has a strong fourth quarter. So the 25-point -- just over 25% will be the average.

As you saw with this quarter, you see a nice bump up when you start to look at things like ARR, which I think helps give you some sense of the momentum you're seeing in this part of the portfolio. Undoubtedly, it will be higher. We'll be giving more updates in that area on our next call as we've typically done in the past, where we'll give you a little bit deeper sense into what to expect for FY '23, both in the sub and SaaS area as well as the total revenue area.

But without a doubt, we have tremendous focus on this area. As Raghu mentioned, not only is the portfolio enhancing significantly in this area, but we're also providing our customers with a significant amount of choice. So part of it will actually be ultimately how customers decide to consume our product set, but we're very encouraged by the trends we're seeing across that whole portfolio.

[Operator]

Next, we'll go to Nehal Chokshi from Northland Capital Markets.

[Nehal Chokshi, Northland Capital Markets]

Yes. And I'm going to beat a dead horse here. But can we dig a little bit deeper into what are the certain geos and verticals of customers that you thought would go subscription SaaS or staying perpetual?

[Raghu Raghuram, CEO]

Yes. So let me actually have Sumit talk to that.

[Sumit Dhawan, President]

Yes. I think our subscription and SaaS portfolio is largely available in what you would consider the top 10 countries and starting with the U.S. and the UK and Europe and Australia and New Zealand. And typically, our business of subscription, SaaS is growing where you would expect the -- just in general, cloud adoption in the countries where the cloud adoption is higher. So there's no significant differences. It's pretty consistent. And obviously, the North American countries typically take the lead in our subscription SaaS business.

[Paul Ziots, Vice President of Investor Relations]

Thank you, Nehal. I think we'll have time for one more question. So let's make this the last question.

[Operator]

We'll go to Gregg Moskowitz from Mizuho.

[Gregg Moskowitz, Mizuho Securities]

Okay. I have one for Zane, just on the guidance. Zane, while you reiterated your total revenue outlook for fiscal '22, if I'm not mistaken, you lowered your assumptions for both subscription SaaS and license as well as for subscription and SaaS, specifically, whereas presumably your maintenance revenue expectations have risen. Can you maybe put a finer point on any changes that you've made to your assumptions for Q3 and Q4?

[Zane Rowe, EVP & CFO]

Yes. Sure, Greg. As you point out, we have a slight change in mix as it relates to our full year guide. Now we've held the guide at $12.8 billion. And for the reasons that we've touched on earlier, the mix with customer choice and then, as I mentioned on the hyperscaler side, that's the biggest impact that you're seeing for the remainder of the year. We're still very encouraged by the trends we're seeing on that sub and SaaS business, and it's actually -- we're seeing good growth there as there's obviously, as it is more driven by consumption and the timing elements that I mentioned as well as customer choice. That's a little bit of the mix shift you're seeing.

We have actually increased our license guide as you look at just the pure license element of the forecast to reflect that. And then, of course, maintenance, we've also had some good strength in PSO throughout the year. So we think the combination still warrants the $12.8 billion guide that we've put out there. We're encouraged by it. We think it's still a good growth year-on-year and nothing beyond the trends we've already talked about on this call, I think is worth highlighting as we think about the components of that guide. So just a couple of tweaks to the model that gets you to the same place.

[Paul Ziots, Vice President of Investor Relations]

Thank you, Gregg. I think before we conclude, Raghu has a final comment.

[Raghu Raghuram, CEO]

Thanks, Paul. In closing, VMware is well positioned to deliver the multi-cloud platform for all applications, enabling digital innovation and enterprise control that our customers need to accelerate their business. I look forward to seeing all online for SpringOne and VMworld, where you will hear about the new innovations and offerings for this multi-cloud world. Thank you.

[Operator]

And that does conclude our call for today. Thank you for your participation. You may now disconnect.