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Good day, and welcome to the VMware Third Quarter Fiscal Year 2022 Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Mr. Paul Ziots, Vice President of Investor Relations. Please go ahead, sir.
Thank you. Good afternoon, everyone, and welcome to VMware's third quarter fiscal year 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 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, employer payroll tax and employee stock transactions, amortization of acquired intangible assets, realignment charges, 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 fourth quarter fiscal 2022 quiet period begins at the close of business, Thursday, January 13, 2022.
With that, I'll turn it over to Raghu.
Thanks, Paul. I am pleased with the continued strong performance in Q3 fiscal year 2022 with revenue of $3.2 billion and non-GAAP earnings of $1.72 per diluted share. Earlier this month, we successfully completed our spin-off from Dell Technologies. As a stand-alone company, we have more strategic and financial flexibility to deliver on our multi-cloud strategy. We are also able to partner even more deeply with all the cloud and on-premise infrastructure companies to create a better foundation that drives results for our customers.
Customers continue to choose VMware as their trusted digital foundation to accelerate their innovation, and we continue to expand and advance our portfolio to meet their needs in these three ways: One, deliver a cloud-native app platform for building modern applications in a public cloud-first world; two, migrate enterprise applications to a cloud-agnostic infrastructure; and three, build out the secure edge to optimize across our workspace and edge-native applications. These three focus areas are built on a horizontal set of offerings across networking, security and management.
It's clear that multi-cloud will be the model for digital business for the next 20 years and in this vibrant dynamic marketplace, the pace of innovation is relentless. VMware is at the center of it.
In the modern app space, we recently provided the Department of Education for one of America's largest cities with application resiliency as part of their business continuity project. Leveraging VMware Tanzu, the customer now has improved ability to respond to ever-changing needs of students, their families and faculty while protecting student information and creating an environment to accelerate their innovation and automation. One of our new beta offerings in the space is the Tanzu Application Platform, which will make it easier and simpler for developers to drive productivity and velocity in a more secure fashion on any cloud.
Our Tanzu portfolio is now one of the most comprehensive in the industry for both Kubernetes operations and developer experience. We also recently unveiled Tanzu Community Edition, a freely available, easy-to-manage Kubernetes platform for learners and users, and Tanzu Mission Control Starter, a multi-cloud, multi-cluster Kubernetes management solution available as a SaaS service.
We are pleased to share some customer stories in support of our VMware Cloud services across the hyperscalers. PennyMac, a leading financial services firm is leveraging VMware Horizon on VMware Cloud on AWS to provide loan officers and call center agents a more secure work-from-anywhere virtual desktop in a fully automated and scalable cloud environment. We also worked with the University of Miami, who looked to the Azure VMware solution to support their VMware workloads on their preferred public cloud provider.
Recently, we announced new advancements for VMware Cloud, the industry's first and only cloud-agnostic computing infrastructure. Newly unveiled Project Arctic will bring the power of cloud to customers running VMware vSphere on-premises. It will enable cloud-based management for hundreds of thousands of vSphere customers and vSphere deployments around the world.
Customers will be able to benefit from life cycle management, cloud disaster recovery and cloud burst capabilities as an extension of their vSphere deployments. We will bring Project Arctic to market next year as the next step in making our portfolio available in a subscription and SaaS form factor.
We also announced VMware Sovereign Cloud initiative, where we are partnering across our VMware Cloud providers to deliver cloud services on a sovereign digital infrastructure to customers in regulated industries.
Lastly, we introduced a tech preview of an exciting new management technology, Project Ensemble. It is designed to manage apps across multiple public clouds, bringing together a comprehensive set of costs, security, automation and performance capabilities for the public cloud environment.
VMware was once again ranked number one in the September 2021 IDC report titled Worldwide Cloud System and Service Management Software Market Shares, 2020: Growth Continues for the Top Vendors. In the area of Edge, we recently helped an international wholesaler with 800 stores across 30 countries to refresh its decade-old in-store platform. The VMware Edge Compute Stack is now serving as a single platform for both the customers existing and modern applications, offering a right-sized resilient solution that is providing ROI for their business.
As a continued commitment to helping our customers at the Edge, we recently introduced VMware Edge, a product portfolio that will enable organizations to run, manage and better secure edge-native applications across multiple clouds anywhere. Together, VMware Cloud, Tanzu, VMware Edge and Anywhere Workspace offer our customers a solution for all of their applications across their multi-cloud environment.
In the security space, VMware is delivering solutions built specifically for threats customers face today. We use the power of software, combined with a scaled-out distributed architecture, zero trust design principles and a cloud delivery model for better security that's easier to use. We are excited about our continuing innovation in SASE, Secure Access Services Edge, especially as many businesses are now working as a distributed workforce. We also announced the industry's first elastic application security edge, which enables the networking and security infrastructure at the data center or cloud edge to flex and adjust as app traffic changes.
In the third quarter, VMware was positioned as a leader in The Forrester New Wave: Zero Trust Network Access Q3 2021. On the telco front, Vodafone recently selected VMware to deliver a single platform to automate and orchestrate all workloads running on its core networks across Europe, starting with 5G stand-alone. This recent work builds on Vodafone's previous selection of VMware Telco Cloud Infrastructure as its network functions virtualization platform.
In the third quarter, VMware received additional recognition from leading industry analyst firms, once again being named as a leader in the August 2021 Gartner Magic Quadrant for Unified Endpoint Management Tools. Additionally, VMware was once again named a leader in the September 2021 Gartner Magic Quadrant for WAN Edge Infrastructure.
Our innovation engine is thriving as we bought many of these new offerings, features, beta programs and partnerships to the forefront during VMware 2021, which attracted approximately 116,000 registrants. We look forward to hosting VMware China and VMware Japan in the coming weeks.
Our environmental, social and governance agenda continues to be very important to us and core to our culture. VMware received recognition for our ESG leadership by being included in the Dow Jones Sustainability Indices, one of the world's leading ESG benchmarks for the second consecutive year.
In summary, we strive to serve our customers in three unique ways: By being the trusted foundation for their most critical business operations; by offering a best-of-breed, innovative portfolio of best-in-class solutions to fulfill their multi-cloud vision; and by having a broad set of strategic partnerships required to unlock the full potential of multi-cloud.
I'll now turn it over to Zane for more detail on our business performance as well as our forecast.
Thank you, Raghu. We are pleased with our Q3 financial performance, which exceeded our initial expectations and is a continuation of the good performance we have seen all year. We saw solid demand in the quarter and continued to execute on our multi-cloud strategy.
Total revenue for Q3 was $3.2 billion. Combined subscription and SaaS and license revenue grew 16% year-over-year totaling $1.5 billion, ahead of our guidance. Subscription and SaaS revenue of $820 million was up 21% year-over-year, in line with our expectations, representing 26% of total revenue for the quarter. Subscription and SaaS ARR was $3.3 billion, up 25% year-over-year in Q3. Our largest contributors to subscription and SaaS were VCPP, Tanzu, EUC, Carbon Black and VMware Cloud on AWS, which saw strong double-digit year-over-year growth in revenue and ARR. License revenue in Q3 grew 11% year-over-year to $710 million.
The strength we saw was due to good execution in the quarter and our broad installed base of customers that see us as the trusted ally for their mission-critical workloads. Our strategy is resonating with our customers who are confident that their investments can be leveraged over the longer term in multi-cloud environments.
Our non-GAAP operating income for the quarter of $935 million was driven by our revenue performance and lower-than-expected growth in expenses. Non-GAAP operating margin for the quarter was 29.3% with non-GAAP earnings per share of $1.72 on a share count of 422 million diluted shares. We ended the quarter with $10.2 billion in unearned revenue and $12.5 billion in cash, cash equivalents and short-term investments, which includes proceeds from our $6 billion bond issuance.
The bond issuance proceeds together with $4 billion of additional borrowings from term loan commitments as well as other available cash on hand was used to fund a special dividend of $11.5 billion. The special dividend was paid on November 1 to all stockholders of record on October 29 in conjunction with our spin-off from Dell Technologies.
Q3 cash flow from operations was $1,090 million and free cash flow was $984 million. RPO was $11.1 billion, up 9% year-over-year, and current RPO was $6.2 billion, up 11% year-over-year. Total backlog was $124 million, substantially all of which consisted of orders received on the last three days of the quarter that were not shipped and orders held due to our export control process. License backlog at quarter end was $34 million.
We are pleased with the overall bookings performance in Q3 as we continue to scale our subscription and SaaS offerings. We saw strong year-over-year product bookings growth in major product categories. Core SDDC product bookings increased over 20% year-over-year. Compute was up low double digits, and Cloud Management was up strong double digits year-over-year. Both of these were helped by our multi-cloud subscription and SaaS offerings.
We saw momentum in VMware Cloud, which includes hyperscalers such as Amazon, Microsoft, Google and Oracle. We also continue to drive innovation in new product offerings across our Carbon Black Cloud and Tanzu platforms. NSX increased in the low double digits versus Q3 last year, and vSAN grew in the high teens year-over-year. EUC product bookings as well as Sub and SaaS ACV bookings were up in the strong double digits year-over-year.
In Q3, we repurchased approximately 1 million shares in the open market at an average price of $150 per share. In early October, our Board of Directors authorized up to $2 billion of stock repurchases through FY2024, which replaced the relatively small balance remaining on our prior authorization.
As a part of our capital allocation framework, we plan to use our cash generation and balance sheet to invest in growing our business both organically and inorganically, paying down debt and returning excess capital to shareholders through share repurchases. In addition, we are committed to maintaining an investment-grade credit profile and rating.
Turning to guidance for fiscal 2022. We are increasing our expectation for total revenue to $12,830 million, a growth rate of approximately 9% year-over-year. We expect the combination of subscription and SaaS and license revenue to total $6,305 million, an increase of approximately 12% year-over-year. Approximately 50.5% of this amount is expected to be subscription and SaaS.
We are increasing guidance for non-GAAP operating margin for the full-year to 30% and non-GAAP earnings per share to $7.19 on a diluted share count of 422 million shares. We are also increasing our cash flow from operations guidance to $4.1 billion and increasing free cash flow expectations to $3.7 billion. This reflects our performance in Q3 combined with our outlook for FY2022.
For Q4, we expect total revenue of $3,510 million or a growth rate of approximately 7% year-over-year. We expect $1,875 million from subscription and SaaS and license revenue in Q4 or an increase of nearly 9% year-over-year with approximately $860 million from subscription and SaaS, reflecting the current pace of adoption of our subscription and SaaS offerings.
We expect non-GAAP operating margin to be 30.4% for Q4 with non-GAAP earnings per share of $1.96 on a diluted share count of 422 million shares. Additional guidance details for Q4 and FY2022 are contained in the slide deck accompanying this call.
We typically provide some color on our upcoming fiscal year at this time. We are driving innovation across the portfolio, scaling our subscription and SaaS offerings and progressively making our products available as subscription and SaaS. Consistent with the outlook framework we presented at the Financial Analyst Meeting last month, we currently expect total FY2023 revenue to grow in the high-single digits while we continue to build out our subscription and SaaS portfolio.
We are planning on growing our sub and SaaS revenue to nearly 30% of total revenue with our FY2023 exiting ARR growth rate exceeding FY2022's. We expect non-GAAP operating margin of approximately 28%, which is similar to our initial outlook for FY2022, reflecting continued investments in subscription and SaaS and the resumption of more normalized level of T&E as we support our customers.
In closing, we are pleased with the progress we are making on our multi-cloud strategy as reflected in our performance this quarter and in our outlook for FY2022 and FY2023. As a stand-alone company, we are well positioned to enable our customers' multi-cloud journey and become the multi-cloud leader.
I'll now turn it back to Paul for Q&A.
Thanks, Zane. Before we begin the Q&A, I'll ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible. Operator, let's get started.
Thank you. [Operator Instructions] And we will take our first question from Matt Hedberg with RBC Capital Markets. Please go ahead.
Hey, guys. Thanks. Great. First, congrats on the results and completing the spin first of all. I don't know, maybe Zane for you. License revenue was a bit better than we thought. You sort of talked about that in your script, but subscription and SaaS was maybe a little lighter, just a tad lighter than we thought. I'm wondering, could you help us with a little bit more color on what drove that mix? And as we think about subscription and SaaS trends accelerating into fiscal 2023, are there things that you guys are doing, like sales incentives or partner incentives to drive subscription and SaaS?
Yes. Matt, thanks for the question. And I'll start and then obviously happy to hand over to Raghu to talk a little bit more about where we are looking into Q4 as well as next year. First off, I'd say, this was well within the framework that we discussed at the analyst meeting last month. So we're really pleased with the outperformance that we saw for the whole company in Q3. As you highlighted, license came in much stronger. We had a number of deals over $10 million that exceeded our expectation in the quarter. And our sub and SaaS performance came in, in line. So we're actually pleased with the increase that we've seen there.
We had, as I mentioned, a nice healthy increase on a year-over-year basis, ARR 25% year-over-year. So everything was going according to plan for both the third quarter and the full-year as it relates to the sub and SaaS. We just continue to develop those products. We've highlighted the improvements and increases we've made in some of those segments that Raghu will get into. But generally, we're pleased.
We're seeing some of the same trends that we highlighted in Q3 along the term of where we see the license in some of our products like Horizon, where customers are choosing the term license versus some of the sub and SaaS offerings, but nothing different from the trend that we saw in Q3 and our expectations heading into next year. Maybe, Raghu, if you want to touch on how we think about the product development over the course of Q4.
Yes. Definitely. We are very excited about the product portfolio as it is laying out for us. So as we have talked before that we look at our product portfolio on the SaaS and subscription side in three buckets. One is the pure SaaS and subscription offerings, 100% SaaS and subscription. We expect them to start to reach scale and start to impact our growth even in a much bigger fashion.
Secondly, we have a set of products that we call customer choice, basically meaning the customers can choose to get them in a perpetual or term license form factor or in a subscription form factor. And this includes products like our Cloud Management, which are growing really well for us.
And then thirdly, products today that are primarily licensed, our core SDDC offerings that we'll be progressively making available as a subscription and SaaS next year. And we announced the first of those with the Project Arctic, and we believe they will start to contribute in the coming years as well. So the combination of these three will drive the product portfolio even more to subscription and SaaS and drive its growth. And then last but not the least, we'll be tailoring our go-to-market programs, including our sales place and incentives and so on and so forth to drive all of these product shifts.
Thanks, Matt. Next question, please.
Thank you. We'll hear next from Mark Murphy with JPMorgan.
Yes. Thank you. And I will add my congrats on a very nice performance. Raghu and Zane, so we've shown that your partner ecosystem is clearly positive and upbeat regarding the spin-off from Dell. I'm wondering, how is that excitement manifesting at this stage? And understanding it's very early stage, but can you sense partners perhaps mobilizing to staff up or bulk up on VMware-certified personnel? Maybe they're planning to lean in on co-marketing, co-selling next fiscal year. Just curious if there's any leading indicators that give you a sense of a tailwind that might be developing sometime during next fiscal year.
Yes. So as you pointed out, it's pretty early. We're still in month one of the spin and being a stand-alone company. Having said that, a lot of what you have said is exactly what we are seeing from the partners. We are seeing a sense of excitement and possibility from the partners. There are partners that are already planning to or starting to staff up on their VMware expertise. We are talking to other partners about what we could do to help them further in the markets where we could have joint solutions.
So all these conversations have started happening, and these all have different time line depending upon whether they are purely go-to-market or they involve technical collaboration and joint solutions, et cetera, et cetera. So I do expect that you will start to see some results over the course of the next year. Like I tell our internal employees, day one for us post-spin may not look very different, but day 365, you'll certainly start to see the benefits of it. And so that's where we are.
Thank you, Mark. Next question, please.
Thank you. We'll hear next from Raimo Lenschow with Barclays.
Hey. Thanks for taking my question, and congrats from me as well. Can I go back to Matt's question a little bit in terms of pragmatics? As you talk with your clients, but as you also think about the sales and incentives, the change in incentives next year a little bit, what do you see in terms of clients' understanding appreciation of your subscription SaaS offering versus taking the choice around more of the license part? Because that's the one thing that everyone is focusing on, and it feels like you don't getting as much credit for the license part. So where are clients is coming out of the pandemic kind of their focus more to do more license again? Or how do we have to think about it? How can you influence that as well? Thank you.
Yes. Thanks, Raimo. I'll start and then Sumit can add additional color as well. So what I would say from our customers' point of view, it depends on a couple of factors. One is the product category that we are talking about. For example, if you think about Cloud Management, there is definite decided industry shift towards consuming management as a SaaS service. So we are seeing – that's part of the reason why we are seeing our SaaS offerings and subscription offerings for management grow very nicely.
If you think about our core universal offering, which is for the infrastructure, that is designed to help customers on their journey to the cloud. So very often, they are starting on-premise with licensed software. And then over a period of time, they intend to shift to the cloud. And then in terms of the third big bucket, which is the end-user computing, it depends on the customer segment. And let me give it over to Sumit to add more color.
Yes. Hi, Raimo. How are you?
Hey, Sumit.
Hey. First of all, I would say that Q3 in addition to the results that Zane and Raghu talked about was a great quarter for us in terms of engaging with customers through our VMworld event, introducing all of our new offerings. And the momentum on that front with customer front is great because it's clear for customers as they're looking at their own strategies for cloud and multi-cloud, VMware becomes their key partner going forward.
And on that, many of their – how they build their multi-cloud control plane, whether it's through our Cloud Management software, Tanzu solutions as well as cloud infrastructure to be served from multi-cloud, VMware gives them the right platform to do so. So now to arrive at that solution, our universal programs gives them the best choice and flexibility to adopt subscription and SaaS and adopt cloud at their own pace. And we are continuing to see very, very strong interest and pull from customers and going towards multi-cloud using our universal offers, where they can start adopting our cloud solutions gradually as they're ready and they're not sort of having to spend double costs, if you may, where they have to run both on-premise and cloud and double pay. They can just transition to the cloud solutions and our subscription SaaS offerings using our universal offers at their own pace and speed.
Thank you.
Thank you, Raimo. Next question, please.
Thank you. We'll take our next question from Mark Moerdler with Bernstein Research.
Thank you very much, and congrats on both the spin-out in the quarter. As we've discussed before, VMware is using term licenses as a bridge to the cloud, but you're not including that revenue in subscription or SaaS. To help us better understand the impact, can you give us some breakdown of how much of the revenue we're seeing in the quarter is from license and the maintenance is coming from those term licenses that could convert over to subscription and SaaS? Thank you.
Yes. Mark, I'm happy to start with that. As you alluded to, we see the term licenses, in particular with our Horizon offering to be that step for many, if not all of our customers to sub and SaaS. So we're very pleased with the performance we've seen there in offering our customers flexibility and allowing them with that transition.
If you were to think about quantifying the term license amount, it's roughly 13.5% of our license for the quarter. So it's just under $100 million in total that is sort of qualified as term. And as you point out, unlike a number of others, we included in our license bucket. We don't necessarily expect this to increase significantly over the years, at least as we've outlined our strategy today. So we think it will moderate around this number. And then ultimately, as we highlighted in many, if not all of our products, will rotate to more sub and SaaS. And we see this as a natural step for our customers in their sub and SaaS journey as well. Hopefully, that adds some color for you, Mark.
Yes, it does. And I really do appreciate. Thank you very much and have a happy, healthy Thanksgiving and holidays to everyone.
Of course, thank you. You too.
Thank you, Mark. Next question, please.
Thank you. We'll hear next from Phil Winslow with Credit Suisse.
Hi. Thanks guys for taking my question, and congrats on a strong quarter. Just wanted to focus in on core vSphere and in particular, vSphere 7 with Tanzu. Obviously, with that release, vSphere 7, you had a native support within vSphere, Kubernetes and containers. Kind of two questions here together. Could you give us sort of an update of adoption of vSphere 7 with Tanzu? And what are you hearing from customers about why they're using VMware?
Yes. So I'll start and Sumit, perhaps you can add more. Yes. So vSphere 7 has been in the market for a while, and we have seen very successful adoption of it. And besides the customers moving to the latest and greatest, the ability to run containers through Tanzu is a key reason why they adopt it. What we are seeing, on-premise especially, is that as customers tend to build out their private cloud and make it as compelling as a public cloud in terms of developer agility and so on and so forth, containers become a necessary part of the core infrastructure platform offering or Infrastructure-as-a-Code offering. So that's what we are seeing happen with our customers. And a lot of the workloads that traditionally were running on VMs that are these mission-critical workloads are now being converted into containers and run on vSphere.
The other thing that you might have noticed as we published on our benchmark sites as well is that customers are finding they can get 6x the density of running containers on vSphere as compared to running it on bare metal using alternative products. So not only the manageability benefits are appealing to them, because we are now supporting containers natively on vSphere 7, you're getting a tremendous density benefit, which obviously results in significant cost savings as well. So these are some of the reasons why customers are excited about it. And in terms of some customer adoption patterns, let me hand it over to Sumit.
Yes. Hey, Phil. Customers as they're looking at Kubernetes, first of all, high interest and containers high interest, but they're in the journey of kind of early innings of expanding the adoption. And they're excited about using vSphere 7 as this platform where they can manage both VMs and containers holistically. So I would say, from a customer adoption perspective, huge interest, still early stage. But vSphere 7 adoption and how customers are using those two technologies, both containers and VMs together, really good.
In addition, we introduced Tanzu Community Edition at VMworld, which also complements really well our entire stack and works also with customers wanting to use Tanzu full-stack solution with public cloud Kubernetes distribution. And the adoption of our Tanzu Kubernetes Edition that we introduced at VMworld has been stellar over the course of last six to eight weeks. So I'd say customer adoption, even though early stage, tons of interest in both vSphere 7 as well as Tanzu Community Edition, which gives us great promise for potential growth in the Tanzu portfolio over time.
Thank you, Phil. Next question, please.
Thank you. We'll hear next from Simon Leopold with Raymond James.
Thank you for taking my question. This is Mauricio in for Simon. Can you please talk about the – some of these industry supply shortages and how could this impact in VMware sales? I'm a bit curious about – on the potential headwind from customers that are perhaps unable to get the systems that VMware runs on. So with the understanding that you sell software, are you seeing any impact from these hardware shortages that could be limiting your sales? Thank you.
Yes. So as you note, there are chip shortages that are impacting significant portions of the economy. We have not seen – like you point out, we are in the software business, and we have not seen it significantly impact our business so far. And a lot of the customers run our software on their existing infrastructure. And even in the cases where they're – as well as in the cloud, and this is, in fact, one of the benefits of our solution being available across all the clouds. And then even in those cases where they're putting our software on to new hardware, they have not reported on new shortages.
Thank you, Maurice. Next question, please.
Thank you. We'll take our next question from Brad Reback with Stifel.
Great. Thanks very much. Zane, I think last quarter, you talked about some of the hyperscaler-led business leading to longer rev rec. And I would assume that would be in the subscription and SaaS line. Did you see any of that this quarter?
Hey, Brad. Yes, this is Zane. We continue to see great growth in that area, not only on the bookings side, but now you're starting to see the traction. I mentioned in my prepared remarks, across all the hyperscalers, we're really pleased with the traction we're seeing. To your point, that does create a little bit of the delay between the bookings growth that we see and then ultimately when we see that consumption and recognize the revenue. So I'd say, generally speaking, it's been consistent, but we're impressed with the demand we're seeing. And the interest, back to the earlier question on partnerships, that's another area where we see continued interest on partnerships and tremendous opportunity for us with our multi-cloud opportunities. So all good on that front. Thanks for the question, Brad.
Thanks.
Thanks, Brad. Next question, please.
So we'll take our next question from Tyler Radke with Citi.
Hey, good afternoon. Thanks for taking my question. I wanted to ask you about the Q4 guidance. It looked like on the license side, the upside didn't fully flow through. Just curious if there was any type of kind of unusual activity you saw in Q3, whether pull-forward? And then just some comments overall, what you're expecting for fiscal year-end, just with budget flush and typical Q4 activity? Thank you.
Yes. Sure, Tyler. It's a good question. As you point out, we increased the total guide, but we didn't obviously pull in – take all of what we saw in Q3 into Q4. We're really pleased with our view of the second half of the year. And obviously, as you heard in our prepared remarks as well as the commentary here, I mean the macro is clearly supporting good growth across the company, and we're quite encouraged with the momentum we're building across the portfolio.
So as we looked at it, we think our second half looks good. We were encouraged by our ability to execute in Q3. So there may have been a few deals that may have either landed in Q3 or Q4 that we saw in Q3, but we believe the demand is there. We're pleased with the execution across the Board and correspondingly with the guide. So I'll leave it at that, but obviously, we're encouraged by what we're seeing heading into Q4. And obviously, with some of the high-level comments I provided for FY2023, we see that momentum continuing into the new fiscal year for us.
Thank you, Tyler. Next question, please.
Thank you. We’ll hear next from Keith Weiss with Morgan Stanley.
Excellent. Thank you, guys for taking the question and nice quarter. I was wondering if you could go back to the Project Arctic. And can you give us any guidelines in terms of how to think about the relative pricing for some of these SDDC solutions of what you're garnering from the customer in an on-premise environment and how that changes in a cloud environment when they start making that shift towards subscription and maybe not a cloud environment, but as they start making that transition to subscription? And relatedly, is that going to have any longer-term impacts on gross margins that we should be aware of when we're kind of forecasting out a couple of years?
Yes. So overall, with the Project Arctic, we are still in the very early days, and we don't have any pricing nor anything of that nature to disclose because we are not shipping the product yet – shipping the cloud service yet. In general, because this is a cloud-delivered and cloud-managed service, usually, when we deliver something from the cloud managing some piece of software on-premise, there is a management premium that we had, and I would expect that to be present.
The important aspect of Arctic is it also allows us to weave in things like disaster recovery and better security and so on and so forth. And those are additional capabilities that today are priced offerings that we would be able to as part of this upsell, as part of Project Arctic. So net-net, we expect this to be a win-win solution for the customer, helping them lower their management costs, also give them capabilities that they did not have before, lower their cost of insuring security, et cetera. And from a VMware perspective, it will allow us to deliver more value to these existing customers.
And then the second aspect of your question around gross margin, again, we don't have operating – actual operating experience because Arctic is not out yet, but we expect this to be a healthy gross margin business.
Thank you, Keith. Next question, please.
Thank you. We'll hear next from James Fish with Piper Sandler.
Hey, guys. This is Quinton on for Jim. Thanks for taking our question. Maybe just for us, could we get an update on the team's appetite for acquisitions at this point? Are there opportunities to look at something a little bit larger, a little more transformational? Or do valuations today still push the team to more of a tech tuck-in type deal? Thank you.
Yes. So I'll start and Zane can add more. So from a VMware perspective, we've always had a fairly consistent philosophy with respect to acquisitions. By and large, the vast majority of what we do would be classified as tuck-ins or product-level acquisitions. And then occasionally, we do what we call platform level acquisitions, which we do when we enter into a new product segment, product category or expand significantly into a new adjacency.
In fact, over the last, whatever, 15, 17 years of – that we've been doing acquisitions, we have done only about four that were of that nature, over $1 billion. So I expect that pattern to continue. As you well know, we did two major acquisitions of that nature a couple of years ago, and we are still bringing them into the mainstream of our business and driving those product growth areas for us. So I expect the current pattern to continue going forward as well. So let me...
Yes. I would just add, as part of our capital allocation, obviously, we look at growing both organically and inorganically. And even with the debt that we've taken on and the special dividend, we believe we've got tremendous flexibility on the M&A front and continue to operate as we have in the past, as Raghu alluded to. So we're very comfortable with our positioning there.
Thank you, Quinton. Next question, please.
Thank you. We'll hear next from Brad Sills with Bank of America Securities.
Great. Thanks guys for taking the question here. I wanted to ask a question on some of the deliverables you outlined the launches at the Analyst Day for Tanzu Community Edition, application platform and Service Mesh Advanced Edition. I guess, in particular, there's a lot of innovation there. I guess the Community Edition, should we think of that as a potential for driving some bottoms-up adoption here, where you see a real community develop here, open-source users that you could see some upgrade activity from over time? Thank you.
Yes, for sure. A big goal for Tanzu Community Edition is for people that are coming new to Kubernetes as well as developers that want to build on top of it. And in fact, over the first four to five weeks that we have had it available, we have had over 10,000 downloads. We've seen a nice community farming. And so we are very encouraged by that as well as the Tanzu Mission Control Starter Edition, which provides management capabilities at an entry level. So one aspect of VMware that is – one aspect of our business that is critical when we get more and more developer and platform operator focus is product-led growth, and this would be the start of those initiatives.
Thank you, Brad. Next question, please.
Thank you. We'll hear next from Brad Zelnick with Deutsche Bank.
Great. Thank you so much for fitting me in. My question is for Sumit. Sumit, it's now two quarters in a row where you've had more customers within EUC opt for term licenses versus subscription and SaaS. Is there something specific happening within VMware or within that particular product line that would explain for this? Or is there any reason to perhaps believe that customers are recommitting to self-managed infrastructure?
Hi. Yes. I think this is a little bit of a reflection of both timing as well as choice. As with Horizon, we have given customers choice and flexibility for adopting the subscription and SaaS – sorry, cloud products and cloud-based virtual desktops at their own timing and their own when they're ready. And they oftentimes start with term. And I think I've stated that in the past that each of these customers as we are signing them up with term-based license, they all have plans and intent to move their desktops to the cloud. And as the terms that they are signing up for come up for renewal is usually the time window when we get the opportunity to get them over to the cloud. And the window of the time when they sign up for term is just the duration it takes for them to plan moving their desktop to the cloud. So that's the best way for you to think about the business. There's really not sort of lack of intent or desire by customers to take their desktops to the cloud.
Thank you, Brad. Next question, please.
Thank you.
Thank you. We'll hear next from Brent Thill with Jefferies.
Hey, guys. This is Bill on for Brent. Thanks for taking our question. Just going off the previous question, given some of the noise recently around Citrix, just wanted to get a sense of what you're seeing on EUC and just in terms of win rates and if there's been any change at the margin there? Thanks.
Yes. I'll start and Raghu, you can add. First of all, we see tremendous interest in customers for our virtual desktop solution, and that's really the only category that we compete with Citrix. Our end-user computing portfolio, first of all, is much broader than what Citrix offers. But oftentimes, customers who have had Citrix implementations and VMware's implementations for broader end-user computing portfolio, not including virtual desktops. We are certainly seeing customers who, when they are looking at cloud-based desktop deployments, interest in standardizing on their broader workspace and end-user computing portfolio with VMware. So we do see larger enterprises now looking at innovation from VMware and end-user computing to be much stronger and more powerful. And we continue to see customers who have in the past used Citrix now looking at VMware Horizon solutions.
Thank you. Go ahead, Raghu.
I have a couple of – especially in this post-pandemic world that we live in, remote work has become a pretty significant part of the consideration when choosing these solutions. And we introduced an Anywhere Workspace solution that combines obviously the ability to run the desktops either in the data center or in the cloud, but also the ability to get network access and secure them through our SASE solutions, and of course, manage and provision applications. So it's a much more fuller solution with the cloud option that Sumit talked about. So that's very differentiated from Citrix.
Next question, please.
Thank you. We'll take our next question from Kash Rangan with Goldman Sachs.
Hi. Thank you very much. I'll add my congratulations as well. I wanted to just ask your perspective on the subscription and SaaS, and in particular, there are two important drivers strategically for the company. One is the cloud provider partnership in particular. Wanted you to expand your comments, if you could. On AWS, what do you see in terms of the pipeline going ahead? Obviously, with Reinvent coming up the next week or so, how is that partnership with AWS progressing as far as the pipeline visibility is concerned? And also, if you could touch upon Tanzu, any big pivotal deals – not pivotal, but pivotal Tanzu deals that are truly transformative that give you conviction that Tanzu is certainly headed strategically in the right path? Thank you so much and congrats.
Yes. So let me start and Sumit can talk about the pipeline. So with AWS, as you know Kash, they are our preferred partner, and we do some deep engineering collaboration with them. And we continue to do that, and we've got a number of items planned in our roadmap. Over the next months or so, that will further expand the addressable set of workloads that can be served using our joint solution. So the partnership is going very well, and the two teams have been working very well.
And before I turn it over to Sumit for the pipeline, let me briefly touch upon the Tanzu question. Yes, if you think about what we are trying to do with Tanzu, we're trying to do two sets of things. One is we are trying to provide a modern application operations team that's in the public cloud or in the private cloud with a comprehensive set of solutions that help them manage their modern application environment, their cloud-native environment, secure them and connect them. So our products like Tanzu Service Mesh, Tanzu Observability, of course, Tanzu Mission Control, all of them put together serve as a very comprehensive portfolio. And we have seen customers buy into it. One of the key reasons they buy into it is this breadth of portfolio.
The second reason they buy into it is the fact that this is available to them regardless of where their network cloud data application is running. And we have got a number of wins on Azure. We've got a number of wins on AWS. Of course, we've got wins on top of vSphere as well. And then the second part of the portfolio is the Tanzu Application Platform, which accelerates developer productivity on the public cloud of their choice. That is still on beta, so we don't have transformative wins to announce there as yet. But we are super excited about the reception to both. Sumit?
Kash, I'd add on – I'll start off with cloud providers. First of all, I'm excited about the portfolio expansion that we did on the VMware Cloud front during last quarter. Certifications to expand us to target larger sort of federal customer base sort of expansion of services and sort of zones where the service is available across all hyperscalers, newer services that we have introduced on VMware Cloud on AWS such as Tanzu now integrated as well as VMware Cloud on AWS Outposts. So tremendous opportunity and all of that leads to new use cases that we are able to serve.
Now in terms of wins that give you – a win that gives you a picture of how we are winning with cloud services, the best sort of story that I would provide is our financial services firm where they're now looking at our cloud to provide all their loan officers, call center agents, a full sort of service that is fully automated and scaled out through our cloud environment. And now trying to do that modernization in their own infrastructure would have required them to have talent and time, neither of which were possible without our solution. And that's what we are seeing as a predominant reason why customers are looking at our cloud infrastructure across all of our – all the cloud providers as a predominant use of going to VMware Cloud solution.
And then for Tanzu, I think Raghu already touched. For modern applications using Kubernetes across multi-cloud, we are seeing customers start with either one module or adopt our full platforms that Raghu talked about in a very, very easy-to-adopt fashion at this point of time from Tanzu.
Thank you, Kash. Next question, please.
Thank you, Raghu and Sumit. Thanks so much.
Thank you. We'll hear next from Karl Keirstead with UBS.
Great. Zane, I wouldn't mind pressing a little bit on your guide for high single-digit revenue growth for fiscal 2023. That's impressive, a little bit higher than I was modeling. It's actually an acceleration from your exit growth rate of 7% in 4Q this year despite larger scale, despite what I'm sure are some pressures as you transition from upfront license maintenance to subscription. So I just wanted to see if you might unpack a little bit where that confidence comes from and ask two secondary questions, whether it might be more second half weighted and whether if you could confirm that it's entirely organic? Thank you.
Sure, Karl. I'll tell you, first off, we obviously give it at a high level, so I appreciate the commentary on it. So I'm not going to get into detail on first or second half. I will tell you, as we look at next year, to your point, it is a balance of us continuing to drive that growth not only on the product side, but the go-to-market side and the operating side of our sub and SaaS portfolio. And then in conjunction with that, continue to deliver on the license portion and the on-prem portion of the portfolio, which as you saw in the third quarter, had really strong performance. And it's a combination of that – our message resonating in the marketplace, the confidence our sales teams, and as you've heard here across the portfolio that we have – with the products we have, and in particular, the multi-cloud message that's resonating with our customers and the momentum we're seeing for the year.
I mentioned sort of the second half. And then, obviously, heading into FY2023, we're confident that we can continue to see that growth on the mix between the on-prem and then continue to drive the sub and SaaS growth at an ARR that we believe will be stronger than the ARR we expect to see this year for all the reasons that Raghu mentioned. When we breakout each element of that portfolio and we look at the bookings performance and the pipeline performance that we're already seeing, a lot of the deals that Sumit's team are negotiating right now will be recognized as revenue into the new year. So a lot of that gives us the backdrop to the outlook that we believe we'll execute against for the next fiscal year, and obviously, more to come on our next call. But thanks for the question.
Okay. Thank you, Zane.
Thank you, Karl. We have time for one more question. So this would be the last question, please.
Thank you. We'll take our next question from Keith Bachman with BMO.
Thank you very much. Good evening. Raghu, I wanted to see if I could direct this to you. In the past management, VMware management has talked about 80% of apps are running on the cloud – running on-premise, 20% on cloud and over time that would invert. And I wanted to try to get a feedback on some of that growth is transitioning existing applications to the cloud, but a lot of it is the growth of new applications. And I want to hear your characterization of VMware's attach rates, ARR contribution and/or growth rates of new applications versus existing applications. What does that look like in terms of your ability to win for the new applications today in particular? And how would you think about that changing over the next year or two as Tanzu begins to – or not begins to, but continues to mature?
Yes. So as I've spoken about in the Financial Analyst Meeting, we are in an age of explosive growth with respect to applications. And we see applications growing, obviously, in the public cloud, in the data centers and private clouds and increasingly at the edge as well. I think by some industry analyst estimates, two out of three applications – new applications are in the public cloud are a little higher, depending on which analysts to believe in. So for the applications that are going into the data center, given our preponderance in the data center and private cloud, they tend to invariably land on top of our platform – the applications on top of our infrastructure platform. And then as we build out our Tanzu portfolio, they start to use Tanzu as well.
Similarly, as applications go into the edge, we've got a pretty significant presence at the edge, and those applications tend to align on our platform as well. The applications on the public cloud, clearly, there's a large set of those applications landing on the cloud providers' infrastructure. But as Tanzu gains more maturity and as we introduce new capabilities like Tanzu Application Platform, et cetera, we are seeing customers start to use that as well to make the task of building new applications on public clouds easier.
And then last, but not the least, with the VMware Cloud offerings on the public cloud providers, we are starting to see new applications land there as well because we just recently added Kubernetes capability to the VMware cloud offerings. So as we build those out, we expect to see getting a good share of new applications on the public cloud as well. So on the whole, if you look at public cloud data center edge, we are well positioned to capture a good chunk of the new applications.
Thank you, Keith. Before we conclude, Raghu, I think you had a concluding comment to make.
Absolutely. Thanks, Paul. So thanks for the Q&A, and thanks for spending the hour with us. What I wanted to say in summary, VMware is committed to providing an ubiquitous software platform for our customers as they navigate to the multi-cloud and distributed era. We have a fantastic team, and we have a great portfolio that serves our critical customer requirements. And last but not the least, especially post-spin, we have a strong and growing ecosystem. So we are really well positioned to succeed. Thanks for joining us today, and have a great Thanksgiving.
Thank you. And that does conclude today's conference. We do thank you all for your participation and you may now disconnect.