VMware Inc. (VMW) Q2 2021 Earnings Call Transcript

VMware Inc. (NYSE: VMW) Q2 2021 earnings call dated Aug. 27, 2020

Corporate Participants:

Paul Ziots — Investor Relations

Patrick Gelsinger — Chief Executive Officer

Zane Rowe — Chief Financial Officer and Executive Vice President

Analysts:

Matt Hedberg — RBC Capital Markets — Analyst

Mark Murphy — JPMorgan — Analyst

Kash Rangan — Bank of America Merrill Lynch — Analyst

Mark Moerdler — Bernstein — Analyst

Walter Pritchard — Citi — Analyst

Raimo Lenschow — Barclays — Analyst

Phil Winslow — Wells Fargo — Analyst

Keith Bachman — BMO Capital Markets — Analyst

Sanjit Singh — Morgan Stanley — Analyst

Jason Ader — William Blair — Analyst

Brent Thill — Jefferies — Analyst

Ittai Kidron — Oppenheimer — Analyst

Alex Kurtz — KeyBanc — Analyst

Robert Majek — Raymond James — Analyst

Brad Zelnick — Credit Suisse — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to today’s VMware’s Q2 FY 2021 Earnings Call.

I would like to hand the conference over to your speaker today Mr. Paul Ziots. Thank you. Please go ahead, sir.

Paul Ziots — Investor Relations

Thank you. Good afternoon, everyone and welcome to VMware’s second quarter fiscal year 2021 earnings conference call. On the call, we have Pat Gelsinger, Chief Executive Officer; and Zane Rowe, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will take questions.

Our press release was issued after 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, amortization of acquired intangible assets, employer payroll tax on 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 our Investor Relations website.

Unless otherwise indicated, all financial metrics provided on this call are for the consolidated VMware entity, including Pivotal. Growth rates compare our Q2 FY ’21 results with the recast of prior period financial information to include Pivotal, due to the Pivotal acquisition, which was accounted for as a transaction by entities under common control in accordance with GAAP. 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 ’21 quiet period begins at the close of business, Thursday, October 15, 2020.

With that, I’ll turn it over to Pat.

Patrick Gelsinger — Chief Executive Officer

Thank you, Paul, and everyone who has joined our call today. In light of these uncertain times, I am pleased with VMware solid execution and financial performance in Q2, driven by strength in our subscription and SaaS product offerings. We experienced good sales execution in both the Asia Pacific and EMEA regions with some COVID-related challenges in the Americas.

Our any cloud, any application, any device strategy continues to resonate with customers and our five franchise platforms consisting of modern applications, multi-cloud, networking, digital workspace and security help form the digital foundation that addresses customers hardest technology challenges. As organizations everywhere navigate a world transformed by the pandemic, many of our customers accelerated their cloud plans, while some slowed their on-premises projects. The on-premises impact was overcome by continued strength in our subscription and SaaS offerings globally. We believe as the economy recovers, we will see resumption of on-premises projects.

Over 20% of VMware’s total revenue is now generated from our subscription and SaaS product offerings with a greater than 40% increase year-over-year, and we expect our momentum to continue. Stay tuned to hear more about SaaS announcements at VMworld in September. Now we’ll turn to updates across the businesses.

In the modern app space, we continue to see customers engaged with Tanzu, our comprehensive portfolio of products and services that help customers modernize their applications and infrastructure and build new modern apps. This past quarter we closed the acquisition of Octarine, which will help to further expand our intrinsic security strategy to containers and Kubernetes environments by embedding the Octarine technology into the VMware Carbon Black Cloud. As we continue to build relevance with the Tanzu platform in the Federal sector, the United States Space Force has recently committed to the Tanzu platform to help deliver continuous DevOps environment with increased velocity and agility. Next week, we are expecting thousands of enterprise developers to join us for our Virtual SpringOne Conference as we continue to increase mind share with this audience.

We continue to further our multi-cloud strategy, which includes our cloud platform, cloud services and cloud management offerings. We are helping customers with cloud monetization and cloud migration, while also innovating across the cloud platform and ecosystem. We have reached general availability status for new first party services offerings with Google Cloud and Oracle. In addition, Microsoft unveiled its next-generation Azure VMware solution earlier this quarter. We announced the availability of the second generation of VMware Cloud on Dell EMC, a Dell Technologies Cloud Service from VMware that delivers simple, more secure and scalable infrastructure as a service to customers on-premises data center and edge locations.

We also launched new capabilities for VMware Cloud on AWS for app modernization, business continuity and resiliency and cloud migration. We are further enhancing VMware cloud on AWS with our Datrium acquisition, which will expand the VMware Site Recovery offering with Datrium’s world-class cost optimized disaster recovery as a service solution. With VMware Cloud Foundation, we have continued to see major adoption at large firms like Daimler and have seen a number of large customers across financial services and service providers reaching production at scale in the past few months.

Additionally, Forrester positioned VMware as a leader in the Q3 2020, Forrester Wave for Infrastructure Automation Platforms and IDC has ranked VMware number one in the worldwide cloud system and service management software.

Our increasing focus on network security was reinforced this quarter with our acquisition of Lastline, a pioneer in anti-malware research and world leading AI powered network threat detection and response. Lastline is being integrated into NSX to provide a complete internal firewall capability, enabling NSX to address broader opportunities across data center and cloud and branch firewall sectors, while accelerating the customer journey towards intrinsic security. We are seeing good adoption of our load balancing offering as large customers at scale build out their cloud environments and replace legacy hardware appliances. As an example, a large financial institution has chosen NSX Advanced Load Balancer as their de facto next-generation load-balancing solution.

While companies, governments and organizations are slowly returning to the office of remote everything, work from anywhere environment is now the new normal. We recently introduced a suite of new Workspace Solutions and VMware Workspace ONE Intelligent Hub to help customers improve business resilience and prepare for the new distributed hybrid workforce of the future. We also unveiled VMware Horizon 8, our flagship VDI platform, bringing more secured delivery and management of virtual desktops and applications across the hybrid cloud. VMware has been recognized as a leader in the August 2020 Gartner Magic Quadrant for unified endpoint management for the third consecutive year.

Across the globe, the race is on to bring 5G from idea to wide deployment. Communication service provider have two options as they build out their 5G capabilities. The legacy vertically integrated hardware-reliant proprietary platform, or a cost-effective, open interoperable, software defined platform that can enable a large ecosystem to build innovative services. We view the VMware telco cloud as the software operating system for 5G and beyond. And our momentum in the last quarter shows the industry is agreeing. We are excited to be partnering with DISH to bring 5G speed and performance to the majority of the US population with the world’s first open radio access network offering. With VMware the new software defined cloud native 5G network will be equipped to deploy new services in a cost effective manner with great agility.

In addition, we announced the collaboration with Intel designed to develop an integrated software platform for virtualized RAN to accelerate the rollout of both existing LTE and future 5G networks.

Before I wrap up, I want to acknowledge the recent Dell Technologies 13D filing about their considerations of a potential VMware spinoff. As we stated previously, our Board has formed a special committee of Independent Directors, and we are in discussions with Dell. We have over a year to go as any potential spinoff would not occur prior to September 2021. While we believe that a spinoff may be value enhancing to VMware and its stockholders, we will continue a mutually beneficial partnership with Dell supporting our customers, regardless of any outcome. Meanwhile, we remain focused on enabling customer success. We do not plan to comment further on these discussions.

I’m excited to mention VMworld will be online September 29 through October 1. We expect over 100,000 attendees to join us for a completely digital experience, including general session keynotes, featuring customers and guest speakers, as well as hundreds of sessions and customer case studies. I’m particularly excited about the new innovations we’ll be announcing that span AI and ML modern apps, new security offerings, and key new partnerships with leading technology and services companies, make sure to join us.

In closing, we are honored and humbled to continue to work with our customers as they traverse these uncertain times, confident that as we help them develop and deploy their digital foundation, they will be better equipped to accelerate their business objectives. We are committed with our partners to deliver the trusted digital foundation that gives every customer an unconditional path to a better future.

With that, I’ll turn it over to Zane.

Zane Rowe — Chief Financial Officer and Executive Vice President

Thank you, Pat. We’re pleased with that financial performance in Q2, driven by growth in our subscription and SaaS offerings. The team continued to execute well, while operating virtually and Q2 results demonstrated the value of our diversified products and services portfolio. Despite anticipated COVID-19 related impacts to bookings, particularly in the Americas. We’re accelerating our efforts on subscription and SaaS product offerings in the current environment, which delivers value to customers, as well as increases recurring revenue for VMware.

In Q2, total revenue grew 9.2% year-over-year to $2,875 million. The combination of subscription and SaaS and licensed revenue grew 11.4% to $1,350 million with subscription and SaaS revenue up 44% year-over-year to $631 million. Subscription and SaaS revenue comprised 22% of total revenue in Q2, an increase of more than five percentage points versus Q2 of last year. Within subscription and SaaS, the largest revenue contributors include VCPP, modern applications, EUC and Carbon Black.

We’re also pleased with the performance of VMware Cloud on AWS, which once again grew revenue in triple digits year-over-year. In addition, the Amazon reseller channel performed very well in Q2. These contracts will be recognized as revenue in future quarters.

Our on-premises perpetual license revenue for the quarter was $719 million, down 7% year-over-year, and in line with our expectations at the beginning of the quarter.

Non-GAAP operating income increased 20% year-over-year in Q2 to $950 million. Operating income benefited from both higher than expected revenue performance and lower spending tied to the impact of COVID-19 on the business. Non-GAAP operating margin for the quarter was 33%, up nearly three percentage points year-over-year with non-GAAP earnings per share of $1.81 on a share count of 423 million diluted shares.

We ended the quarter with approximately $9.4 billion in unearned revenue and $4.7 billion in cash. Early in Q2, we redeemed $1,250 million of notes, which were originally due to mature in August of this year. Cash flow from operations in the quarter was $719 million and free cash flow was $643 million.

RPO, which includes our committed and non-cancelable future revenue was $10.3 billion, up 17% year-over-year, 54% of which is classified as current in line with historical levels.

Total backlog was $36 million, which consisted of orders received on the last day of the quarter that were not shipped that day and orders held due to our export control process. License backlog at quarter end was $8 million.

For Q2, growth in total revenue plus the sequential change in unearned revenue was 2% year-over-year. Growth in combined subscription and SaaS and licensed revenue plus the sequential change in unearned subscription and SaaS and licensed revenue was 12% year-over-year.

Turning to product bookings. In Q2, as Pat mentioned, a number of on-premises projects in Americas experienced a slowdown due to COVID-19. This had an impact on our core SDDC and vSAN product bookings, each down in the low single-digits year-over-year, as well as NSX product bookings, which declined in the mid single-digits.

Our go-to-market focus on annual contracts for EUC resulted in ACV growth of over 35% year-over-year for EUC SaaS bookings in Q2. While total EUC product bookings including on-premises license bookings and TCV SaaS bookings declined in the high single-digits. We’ve seen good demand from customers wanting to purchase our EUC portfolio as SaaS, which we believe will position us well into the future.

We’re also pleased with the progress we’re making with our two large acquisitions last year, Pivotal and Carbon Black. In Q2, Carbon Black had strong product bookings, as customer count increased to over 20,000. Total bookings for our modern applications BU exceeded our expectations with particular strength and services for the quarter. Pivotal and Carbon Black have also helped us make progress in building out our five franchise platforms of modern apps, multi-cloud, networking, digital workspace and security.

In Q2, we repurchased $130 million of stock in the open market at an average price of $141 per share. Through the end of Q2, we’ve utilized $810 million from our current authorization of $2.5 billion.

Turning to our outlook for Q3 and the remainder of the year, due to the impact of COVID-19 on the global economy and on our business, we continue to have limited visibility and a higher level of volatility than we’ve seen historically. With that in mind, we expect Q3 total revenue to be $2.8 billion, up 5.4% year-over-year. We expect combined subscription and SaaS and licensed revenue to be $1,265 million, up 5.6% year-over-year, with subscription and SaaS contributing just over half of this revenue.

We expect non-GAAP operating margin to be 27.5% for Q3 with non-GAAP earnings per share of $1.42 on the diluted share count of 423 million shares.

As we look at the full-year, we expect total revenue for fiscal ’21 to be incrementally better than what we indicated on our last call. We now expect total revenue for FY ’21 to be approximately $11.6 billion, up 7% versus fiscal ’20. Combined subscription and SaaS and licensed revenues forecast to be approximately $5.5 billion for fiscal ’21, up nearly 9% year-over-year, with over 45% of this total generated from subscription and SaaS.

We expect operating profit for the full-year to benefit from some of the short-term COVID-19 impacts on expenses that we’ve seen in the first half of the year, including variable costs such as T&E, employee related and facilities expenses.

Non-GAAP operating margin is expected to be 30.5% for fiscal ’21 and full-year non-GAAP EPS is expected to be $6.62 a share on a diluted share count of 423 million shares. Operating cash flow is expected to be approximately $3.7 billion and free cash flow is expected to be approximately $3.4 billion.

Overall, we’re pleased with our Q2 financial performance and our team’s ability to manage through immediate effects of COVID-19 on the business. As I mentioned earlier, we plan to accelerate certain product initiatives through the remainder of the year to further support our customers’ digital transformations and grow our subscription of SaaS product offerings. This pandemic has accentuated the need for companies to become more digitally enabled, and we believe the growth of our diversified portfolio will continue to provide value to our customers, partners and shareholders.

I’ll turn the call back to Paul for Q&A.

Paul Ziots — Investor Relations

Thanks, Zane. Before we begin the Q&A, I’ll ask you to limit yourself to one question consisting of one part, so we can get to as many people as possible. Operator let’s get started.

Questions and Answers:

Operator

[Operator Instructions] First question, sir, we have Matt Hedberg from RBC. Your line is open.

Matt Hedberg — RBC Capital Markets — Analyst

Hey, guys. Thanks for taking my questions. And congrats on the results, obviously difficult environment, the SaaS and subscription was particularly impressive. Pat, I guess my question is, you guys — you in particular have very strong visibility on global IT demand environment. And now that we’re through some of the initial aspects of COVID and based on your conversations with executives. Do you still think that Q2 was the low point for demand and how do you think about the return of spending in the US in particular? Thanks.

Patrick Gelsinger — Chief Executive Officer

Hey, thanks, Matt. And, yes, I was pleased with the performance overall and subscription and SaaS, in particular. It was good execution by your teams. And obviously, the Q2 results were emphasized by big customer commitments such as our 22, $10 plus million EAs, that’s greater than 40% in subscription and SaaS again was particularly nice, great momentum in VMC, VCPP, Horizon, VDI, APJ and EMEA, despite some of the weakness that we saw in Americas and some of the on-prem products.

We do think that the environment remains a pretty uncertain one. As we indicated, we’re in this Nike Swoosh kind of recovery cycle as we see it with Q2 and Q3 being the bottom quarters. So we expect Q3 to still be challenging with recovery in Q4 and Q1 and into next year, a lot of remaining uncertainties as countries start to go back into second waves and fits and starts certain segments of the industry being challenged, travel, entertainment, all of the aspects of the retail segments have been challenged, branch segments, so lots of uncertainty overall.

But as I’ve indicated in the past, Matt, we expect that, IT is comfortably better than the GDP, and that software and cloud are comfortably better than IT overall, when we see that continuing to be the case. But we still think it’s several quarters of recovery until we’re back to a more normal economic environment.

Zane Rowe — Chief Financial Officer and Executive Vice President

Hey, Matt, this is Zane. I’d just add. Well, I mentioned, we don’t have great visibility into the latter half of the year, it is that outperformance in the second quarter that had us raise our outlook for the remainder of the year to be — about 7%, up in total revenue, versus what I indicate on the last call, which is mid single-digit. So we felt incrementally better not only with our performance for the first half of the year, but generally our outlook for the remainder of the year as well.

Paul Ziots — Investor Relations

Thank you, Matt. Next question, please.

Operator

Next question, we have Mark Murphy from JPMorgan. Your line is open.

Mark Murphy — JPMorgan — Analyst

Thank you very much. And I’ll add my congrats. And to Zane’s point there, great to see the increase in the full-year guidance. Pat, I wanted to ask how you are thinking about VMware’s ability to generate new pipeline to be closing in future quarters in this kind of environment where you don’t have the face-to-face sales interactions? And just how your sales teams are overcoming that? And also what you expect for lead generation coming up in the VMworld online event?

Patrick Gelsinger — Chief Executive Officer

Yes. It’s a great question, Mark and thank you for that. Overall, when we comment on this last quarter that was one of the areas of uncertainty is how well we could do for generating new pipeline. And we do think with the increase in the second half guide, that Zane just referenced that we’re more comfortable incrementally that we have been able to generate pipeline, we do see that building, we particularly see it in segments like telco like financial services, like government, those areas, in particular, that we’re seeing more strength in the business. And we continue to build these new sales muscles as we’ve described that.

Clearly, there’s been a rebalancing of IT budgets in areas they’ve just been extremely successful with work from home and how quickly we were able to adjust some of the on-prem projects were pushed a bit down and access to data center, so a bit more challenging. But overall, we feel good about the pipeline generation that we’ve seen in our, laying clear that we can see momentum build in the second half and into next year.

Mark Murphy — JPMorgan — Analyst

Thank you.

Paul Ziots — Investor Relations

Thank you, Mark. Next question, please.

Operator

Next question, we have Kash Rangan from Bank of America. Your line is open.

Kash Rangan — Bank of America Merrill Lynch — Analyst

Hi. Thank you very much. Congratulations on the quarter. The subscription and SaaS product offerings growth of 44% looks very solid, it’s increasing as a percentage of revenue. I’m curious, if you can elaborate your thoughts on how you plan to accelerate certain product initiatives. It looks like you certainly want to make this a bigger profile as far as your business is concerned. I’m curious, we can connect that the product initiative with digital transformation to help connect those dots and help us see how this could be made possible. Thank you so much, once again.

Patrick Gelsinger — Chief Executive Officer

Yes. Thanks, Kash. And overall, it was another good quarter in the subscription and SaaS area for us. And obviously, offerings like VMC on AWS, triple-digit growth again, and really good momentum from the Amazon sales channel. We also saw VCPP be incrementally stronger in Q2, which was nice to see also, then the new areas like security and Pivotal, as we bring those into the company and we start having success of making those part of our bigger sales and bigger deals we expect that’s going to be an area of acceleration and those are subscription of SaaS, as you know and then areas like EUC and the VDI offering.

So overall, a good set of offerings now, we are really getting the scale and maturity in the offerings. We are going to be making more announcements at VMworld around additional subscription and SaaS solutions and programs to accelerate those offerings. We expect that — it will be a bit more modest than the growth rate next quarter year-over-year as we start to lap some of the Carbon Black acquisition that we are been able to uniquely benefit from. But overall, we continue to see this being a strong area of growth, one that we’re putting more focus on, and obviously one that our customers have been very pleased with. And in this COVID environment, where there just has been an acceleration of cloud and SaaS offerings overall, we’re leaning into that, I think at a very good time and where the markets are overall.

Paul Ziots — Investor Relations

Thank you, Kash. Next question, please.

Operator

Next question, we have Mark Moerdler from Bernstein. Your line is open.

Mark Moerdler — Bernstein — Analyst

Thank you very much. And also congrats on the quarter, it’s nice to see. Subscription and SaaS was strong, but license was down as you expected year-over-year. Could you give a bit more color on exactly how licenses acting? Are you seeing the trade off between the same solutions driving what would have been a licensed revenue to a cloud revenue? Or you just — are you seeing more of a shift between specific products occurring that’s negatively impacting the licenses. And specifically on the products themselves, hasn’t been acting as you expected?

Zane Rowe — Chief Financial Officer and Executive Vice President

Sure, Mark, I’ll start and then I know Pat will have a few comments as well. I mean, generally speaking, yes, it is. And as we pointed out, we were clearly impacted by COVID, and most particularly in the Americas. It has been acting in line with our expectations. We talked about pre-COVID as we set up the year that this would be a year, we would be focusing more on our subscription and SaaS businesses. So while it’s off, and we actually expect to be off, if you look at our Q3 guide, we expect it to come off further. Part of that was planned for as we laid out the year even pre-COVID. But there’s no doubt that license has been more impacted with COVID than, say, our subscription and SaaS products.

Patrick Gelsinger — Chief Executive Officer

Yes. And a few points to add on the license. Clearly, we were expecting sub-SaaS to be faster and licensed to be less so. Some of that was uniquely impacted by the Americas and the on-premise offerings that we’ve already indicated. So that was a little bit weaker than we were initially forecasting for the year, but it’s somewhat offset by the strength in the subscription and SaaS. We do believe as the year goes on and as the economy accelerates, that we do expect to see recovery in that area and some of the specific products inside of that.

And I would also emphasize, again, examples like 22 ELAs over $10 million, right? It’s — compared to 13 last year, we are still seeing this large strategic commitment to VMware and those 22 ELAs are largely license-based offerings, even though increasingly, we’re seeing it in those large ELA subscription of SaaS as well. So overall, the strategic commitment is high to VMware, acceleration of subscription and SaaS and the segments that we saw that weakness were largely what you’d expect, things like travel, entertainment, health care and such for the ones that were more uniquely impacted as overall IT budgets were reprioritized.

Mark Moerdler — Bernstein — Analyst

Perfect. Thank you.

Paul Ziots — Investor Relations

Thank you, Mark. Next question, please.

Operator

Next question, we have Walter Pritchard from Citi. Your line is open.

Walter Pritchard — Citi — Analyst

Hi, thanks. Question on Pivotal and Tanzu and the container strategy. And I’m just wondering, you’ve had now going on seven, eight months here, with Pivotal. And I know you had some caution early in the year around how that might play out. And I’m just wondering how you’re feeling about the contribution from Pivotal and the momentum of that business now, seven or eight months in and with the Tanzu launch and so forth?

Patrick Gelsinger — Chief Executive Officer

Yes. Thanks, Walter. And overall, we’ll just say the integration, the execution is on track. We’re starting to see some good co-selling momentum. And one of our largest deals this quarter was Daimler, right, which was both a foundation deal VCF plus Tanzu. So these integrated deals of both the RAN environment, as well as the build and manage environment are really coming together for us, and we’re quite excited about that. We had successful Tanzu launches of vSphere 7, Tanzu, Kubernetes Grid, the base Kubernetes offering, the management Tanzu — management’s offering, TMC, as we call it, all of those are now starting to gain momentum. We did exceed our overall bookings for Tanzu in the quarter. So we’re starting to see the momentum emerge.

And we’ll say, overall, there’s a marked increase from customers’ interest in app modernization. And as they move their Kubernetes projects sort of from this original phase of developers playing around with it and moving into the enterprise production phase, the value proposition of VMware is starting to really materialize. Also, some of our largest deals in Q2 included it, such as our DISH deal, some very large government agencies, such as Space Force with an eight-figure commitment to the Tanzu platform, all a testament of the network effects and synergies that being part of VMworld. Also paid advertisement, SpringOne, our feature developer conference is coming up in September as well. So that’s a pretty important event for us to further accelerate developer momentum around the Tanzu portfolio.

Paul Ziots — Investor Relations

Thank you, Walter. Next question, please.

Operator

Next question, we have Raimo Lenschow from Barclays. Your line is open.

Raimo Lenschow — Barclays — Analyst

I have a quick on some of the product bookings for some of the key products like vSAN, NSX. Can you just kind of help us understand a little bit some of the drivers there? Thank you.

Patrick Gelsinger — Chief Executive Officer

Yes. Thank you, Raimo. And obviously, we’d say both vSAN and NSX were just impacted, and we had the year-on-year decline, largely because of the overall COVID in Americas comments on on-premises project delays that we referenced earlier. Overall, if I just dig into vSAN first and then a little bit more on NSX. On vSAN, we continue to see that we’re gaining share in the marketplace, our HCI offerings. We saw again from IDC that VMware gained share last quarter. Our HCI offerings, we’re now getting more and more solutioning with our full VMware Cloud Foundation. We’re twice as large as number two in the marketplace. And the vSAN and NSX components play critical roles as part of both VCF, VMC and our VCPP solution. So it’s becoming a piece of our bigger cloud offerings.

When we look at NSX, obviously, the same sort of effect with regard to Americas on-premises projects. But I’d also point out that we saw particularly good performance in EMEA and APJ with greater than 30% year-on-year growth in the product bookings area. So overall, we’re starting to see some global strength to some of those economies. Also for NSX, a very good quarter for Avi, our load balancing solution with Lastline. We’re expanding our market to address more of the firewall and security capabilities. We’d also say that we had a little bit of unique issue that a lot of our pipeline for VeloCloud was associated with retail, hospitality, travel, solutions where a lot of branch projects and a lot of those, for obvious reasons, were delayed or put on hold. So we had a little bit of unique issue on VeloCloud. But overall, we’re very confident in our vSAN and NSX strategy. The portfolio was strong, and we’re seeing more and more market opportunities in front of us. And we do expect that we’ll see good momentum in those areas as we go forward.

Raimo Lenschow — Barclays — Analyst

Thank you.

Paul Ziots — Investor Relations

Thank you, Raimo. Next question, please.

Operator

Next question, we have Phil Winslow from Wells Fargo. Your line is open.

Phil Winslow — Wells Fargo — Analyst

Hey, thanks guys for taking my question and congrats on a strong quarter, especially in this environment. I have a question about an accelerated shift to cloud, which a lot of people are thinking is going to be the result of the COVID-19 pandemic. Kind of two parts here. How do you view sort of VMware as a position to help your customers accelerate that shift with things like Cloud Foundation, obviously, the cloud partnerships that you have. But also, can you talk through sort of the monetization? I mean, if we think about sort of lift and shifting an on-premise workload to the cloud. What is the monetization opportunity for you?

Patrick Gelsinger — Chief Executive Officer

Yes. And maybe I’ll start with a high level, and I’ll ask Zane to comment a bit more on the monetization aspects. At the highest level, as you said, this was a — in the COVID period, we’ve seen an acceleration of cloud overall. And as customers — it’s not like they’re starting new projects. Largely, it’s accelerating existing projects, existing plans that they had are being accelerated. And for us, it was a tremendous quarter. We definitely saw that momentum with VMC, their cloud migration projects. And as we have the full range of our hyperscale solutions, where the VMC offerings, the VMware Cloud offerings are 60% cheaper from a TCO perspective. We’re able to do cloud migrations 4 times faster than replatforming to native services. It really is a much better way to accelerate to a multi-cloud hybrid cloud future. Good road map execution by Amazon. Very happy to see the next version of Azure being announced and becoming GA in the second half of the year. Google announced their first production GA versions of their offering. We’re starting to see hybrid customers emerge.

And I’ll say, we had a major European financial company taking advantage of the VMware Cloud Solutions now, including the Google offering. Oracle announced the GA of the VMware Solution and all of their availability zones across the globe. So that was a very powerful announcement. Also, IBM had their biggest ever deal on the VMware Cloud platform. So a lot of momentum as we think about it globally. And I think as I already commented, our VCPP, the 4,300 total VCPP partners, we saw a bit of acceleration in that area of the business this quarter as well. So overall, the VMware position of accelerating cloud monetization and cloud migration is now being well accepted in the industry as a very unique position and capability that we offer.

Zane Rowe — Chief Financial Officer and Executive Vice President

Yes. So I wouldn’t have much more to add on the monetization. I think it’s mostly caught up in our subscription and SaaS revenue, which was up nicely on a year-over-year basis. As we pointed out, VCPP also had a very strong quarter, both sequentially and year-over-year. So we’re very pleased as that captures much of that. And as we turn more to solution selling, we end up selling more and more of that stack in different forms. So as you think about our franchises, that’s been the broader part of the shift to cloud and each of those franchises have its own opportunities and avenues as our customers are shifting to the cloud. So we believe it helps across the board, both on subscription and SaaS, and in some cases, quite frankly, has a carryover effect on-prem as well. So we feel like we’re well positioned there.

Patrick Gelsinger — Chief Executive Officer

Yes. And as we’ve commented before, the VMC solution, also the hyperscalers, all of those are the full stack, management, life cycle, compute, network storage. So it’s a very rich VMware offering as customers migrate to that solution.

Paul Ziots — Investor Relations

Thank you, Phil. Next question, please.

Operator

Next question, we have Keith Bachman from BMO. Your line is open.

Keith Bachman — BMO Capital Markets — Analyst

Okay, thank you very much. A good segue from Phil. Pat, I wanted to ask you, you made a comment that you thought the — as the economy improves, on-prem spending will likewise improve. And I want to try to understand your reason behind that. Is it because the most impacted entity, travel leisure, you think, come back? Or is there something broader? Because I think many investors view this transition to the cloud is — certainly has a lot of momentum and question whether the economy will actually turn that around. And if I could just sneak in one clarification. Zane, is there any way you could give us the organic rev growth for the quarter? Thanks very much.

Patrick Gelsinger — Chief Executive Officer

Yes. And let’s just pull that apart a little bit more, Keith, good question. And we see the, I’ll say, the recovery in on-premise, if I can phrase it that way, driven by three or four factors. One is just that as the economy recovers, we expect overall business to improve. Second as COVID lockdowns are lifted, people start getting back into the data centers. Also, many of these projects have very powerful economics associated with them, right, where boy, my on-premise environment, 30%, 40% cheaper than a cloud-only — a public cloud-only environment. Powerful economics to be unleashed. And we’ve also seen that many of those projects now of the industry leaders, as we’ve talked about before, customers like FedEx and Comcast and JPMorgan, customers who’ve gone big on this strategy, Bank of America, all of these have now demonstrated at scale, economic value in an on-premise and hybrid environment.

Also, as customers look at that on a global basis, they’re clearly seeing that certain segments, SMB, travel, entertainment, those areas, as you suggest, many of those projects, we expect as COVID starts to moderate, economies start to recover, SMB starts to recover, but those will be more on-premise environments.

Finally, I’d say, many of the things that we’ve talked about, and we’ve talked about our great momentum in 5G and telco, those will start to usher in edge projects as well, which will largely be on-premises-based projects. So overall, we see lots of those signals are out there, and we think that it will be a recovery. Even though, as you say, there’s a lot of momentum on cloud subscription and SaaS, and that’s represented in our numbers. But I think as we look at our pipeline, we’re pretty comfortable that our comments are backed by good solid data as measured inside of the pipeline that we’re seeing for the rest of the year and into next year.

Zane Rowe — Chief Financial Officer and Executive Vice President

Hey, Keith, and I’ll just add with your second part on organic growth. We don’t typically break that out. But as you well know, Pivotal is included both in this year and in last year as we recast our results to include Pivotal, which is actually a slight headwind on a year-over-year basis, if you think about that growth rate. So that’s a headwind. Carbon Black is a smaller number. We clearly got a tailwind, I’d say just over 10 points if you were to look at that subscription and SaaS element with and without. But beyond that, we don’t typically break them out as they are now so integrated within the rest of the company already.

Keith Bachman — BMO Capital Markets — Analyst

Thank you, Zane.

Paul Ziots — Investor Relations

Thank you, Keith.

Zane Rowe — Chief Financial Officer and Executive Vice President

Sure.

Paul Ziots — Investor Relations

Next question, please.

Operator

Next question, we have Keith Weiss from Morgan Stanley. Your line is open.

Sanjit Singh — Morgan Stanley — Analyst

Hi. This is Sanjit Singh. And thank you for taking the question. Pat, you mentioned on the call that the Board is looking at the potential spin and evaluating those opportunities. I know you don’t want to address it directly, but maybe if I take it from a different angle. Has there been — have you — has the company felt constrained in terms of pursuing strategic options, strategic partnerships? Because on the face, it doesn’t seem like you have — you have major partnerships with all the three major cloud providers. So I’m trying to understand, historically, has there been any sort of limiting of the opportunity that could potentially open up with the different structure?

Patrick Gelsinger — Chief Executive Officer

Yes. And overall, our ability to pursue our strategies, strategic partnerships have clearly been well supported by the current capital structure. So we’re very happy with that. We have been able to also be aggressive with M&A considerations. So clearly, we’ve had good support and our capital structures, Dell has very much supported that as well. You’d say some things being able to use equity for acquisitions. This may be an area that we hadn’t been able to pursue before. So those kind of opportunities might be opened up, should a spinout occur.

And overall, we do think that it could be positive for equity and debt market holders in the future, as we’ve indicated. Overall, though, we say we’ve had good support by Dell. This has worked well. We’ve seen good acceleration from Dell in their VMware business, and we feel good about today’s structure, as well as what might happen in the future. And per the earlier comments, the special committee has been formed. They’re evaluating and discussing with Dell, and we won’t have anything else to say on this topic at this time.

Paul Ziots — Investor Relations

Thank you, Sanjit. Next question, please.

Operator

Next question, we have Jason Ader from William Blair. Your line is open.

Jason Ader — William Blair — Analyst

Yes, thank you. I want to ask Keith’s question somewhat differently, Pat. Do you think COVID is actually growing the structural headwinds to on-prem? And if so, what are the puts and takes on your business from that?

Patrick Gelsinger — Chief Executive Officer

Well, I do think, as we’ve indicated that COVID has been a bit of a headwind for on-premise growth, and that affected us in Q2, and we clearly saw that, particularly in the Americas. Also in some segments uniquely. As you said, travel, entertainment, health care, SMB have been more affected. That said, right, as we saw — as we indicated, in APJ and EMEA, where we did see a bit more strength. Clearly, we’re seeing the pipeline building for on-premises projects and why we’re indicating the guidance that we’re giving in those areas.

But when you get down to it, a multi-cloud, hybrid cloud solution set simply has compelling economics. And we’ve seen that from a number of customers now at scale and economics always matter. And the on-premise environment clearly also has some governance benefits associated with it for data management and data privacy. Also, there are certain highly sensitive security-related segments of the market.

So overall, clearly, it has been a headwind, and we expect that it will be somewhat as we continue to work through the swoosh, as we’ve called it, of recovery. And there as you’ve seen in our numbers and others, there’s a lot of excitement around some of the subscription and SaaS offerings. And clearly, that’s becoming a bigger benefit for our business as well.

Paul Ziots — Investor Relations

Thank you, Jason. Next question, please.

Operator

Next question, we have Brent Thill from Jefferies. Your line is open.

Brent Thill — Jefferies — Analyst

Thanks, good afternoon. Pat, is there anything in the license component that you couldn’t subscriptionized or put into a recurring cloud package? So meaning, could you take any of the on-prem services? Is there anything prohibiting architecturally you doing that? Or is this — or is there some other concern over that?

Patrick Gelsinger — Chief Executive Officer

Well, for something to be considered subscription and SaaS, you have to have cloud-delivered value associated with that offering. And a number of the products were not architected that way. It’s not that they couldn’t be architected that way as we’re seeing in many cases, as we’ve done, for instance, with the VDI authorizing solution. It’s essentially the same bits now that over a couple of years, we’ve rearchitected it to become a cloud-based solution. We see a number of those capabilities across the product portfolio. We’re now offering that, for instance, with the V-realized products. Where we’ve built the products now as a cloud-based product, even managing on-premise environment.

So we’re one by one going through the portfolio and bringing more cloud and subscription value into those offerings. And as those become fully available, that becomes also an element of our subscription and SaaS business as we deliver more of that as a cloud-delivered offering.

Clearly, the move of VMware Cloud Foundation to VMC is a great example of that, where we’ve taken the same on-premises bits, now delivering it as a cloud-based offering. Dimension is another good example of that, which is essentially an on-premise infrastructure solution being managed as a cloud-delivered offerings. So all of these are examples of that. All of those are gaining momentum and really portend the overall movement of VMware to be much more of a subscription and SaaS-based company as we go forward.

Paul Ziots — Investor Relations

Thank you, Brent. Next question, please.

Operator

Next question, we have Ittai Kidron from Oppenheimer. Your line is open.

Ittai Kidron — Oppenheimer — Analyst

Thanks. Pat, maybe I wanted to kind of drill into EUC. I mean, last quarter clearly was a very nice source of upside as remote work, kind of, kicked in. Can you talk about the pattern quarter-over-quarter? How did that business operate? And is the low-hanging fruit work-from-home already done over there? What else is there to do on that front?

Patrick Gelsinger — Chief Executive Officer

Yes. And overall, EUC continues to play a critical role, enabling organizations to work-from-home, to distributed workforce, to business continuity. And we do expect that those are multi-quarter trends. This isn’t just a near-term blip. We do see this as shifting the water line overall for the category. We did see Q2 saw the same kind of benefits, particularly in the Horizon VDI solution that we saw in Q1. The Q2 mix, though, was more weighted toward the SaaS solution versus license in Q1. So customer largely, if they needed more license in this triage phase, they acquired them in Q1. We saw that now it’s much more deploying the scalable Horizon cloud-based solutions.

Consistent with the COVID impact in Americas, though, we did see some impact on our transformative Workspace ONE deals in Q2 of the year. Overall, IDC continues to recognize us as a leader as they did this quarter. Also, I’d point out that this is a very nice aspect of our Azure and Microsoft relationship as our Horizon Azure solution is seeing good momentum as well. So we see this very much as a long-term trend, because essentially, everybody is now gearing up for a long-term view of a distributed workforce at scale.

Zane Rowe — Chief Financial Officer and Executive Vice President

Ittai, I’d just add, our EUC product bookings are primarily SaaS. And within that, the sales teams have been focusing on the annual contracts, which helped drive our ACV up over 35% year-over-year. So a lot of dynamics within that Q2 number, but we were pleased with the ACV increase on a year-over-year basis.

Paul Ziots — Investor Relations

Thank you, Ittai. Next question, please.

Operator

Next question, we have Alex Kurtz from KeyBanc. Your line is open.

Alex Kurtz — KeyBanc — Analyst

Yes. Thanks for taking the question, I hope all is well. Just on the second half of the year and what you’re expecting as far as close rates — implied close rates from what you saw in the quarter versus what you expect in the next couple of quarters? And then opex, just — it’s just been a challenge this quarter, next quarter as far as bringing new people in and hitting head count targets. So kind of what the implied views are on close rates and opex?

Patrick Gelsinger — Chief Executive Officer

Yes. I’ll take the first part of that and let Zane talk about opex. Overall, we feel good about our pipeline for the second half of the year. We’ve got quite a thorough analysis of what that looks like. Based on that pipeline is the increased guidance that Zane commented on earlier. Those close rates are, I’ll say, our typical close rates. And we do feel quite comfortable with that.

Clearly, we’ve taken a more conservative view of that given the turbulence that we have in the marketplace overall. It’s a very unpredictable environment. Given all of the different dynamics across the industries. But we’ve done a pretty thorough scrubbing of that pipeline field at this Nike swoosh, as we’ve called it, as it takes place over several more quarters leads everybody to be a bit more careful with how we manage it. So a lot more scrutiny on the pipeline. And as I commented on earlier to one of the questions that we’re developing the muscles to build that pipeline virtually as well. So we do feel comfortable that the deals are real, the business is there. And we’ve shown in Q1 and Q2 that we can execute it.

Zane Rowe — Chief Financial Officer and Executive Vice President

Yes. And just touching on opex, I think we lost you on some of the question there. But generally speaking, hiring has been strong. We feel good about growth rate with our teams through the course of the year. I would bracket some of the opex into COVID-related. And obviously, that we hope will be short-lived. We actually want to have teams out there selling more, and we want to actually be spending on marketing and sales programs, because we believe strongly that it drives top line growth.

All that being said, as you see, we’re exceeding our expectations on the amount of spend tied to some of the savings we’re seeing with the COVID atmosphere that we’re in. And you see that dropped down to the bottom line. But some of that we expect we will start increasing through the course of the year.

Patrick Gelsinger — Chief Executive Officer

Yes. And maybe I’ll just pile on. We never stopped hiring.

Zane Rowe — Chief Financial Officer and Executive Vice President

Yes.

Patrick Gelsinger — Chief Executive Officer

Right, and that also gives us a maturity to, particularly our sales teams to go execute. So we’ve continued to build those sales teams through the year. Getting them on the new product areas, bringing them in, getting them up to speed. We’re continuing to hire in Q3 and Q4 as well. So we have the teams, the capacity, particularly in the sales area to go execute the business that we’ve laid out.

Alex Kurtz — KeyBanc — Analyst

Thanks.

Paul Ziots — Investor Relations

Thank you, Alex. Next question, please.

Operator

Next question, we have Robert Majek from Raymond James. Your line is open.

Robert Majek — Raymond James — Analyst

Thanks. It’s been close to a year since you acquired Carbon Black. Can you elaborate on how you’re feeling about the acquisition at this point? And where you stand in terms of integrating it with the existing portfolio?

Patrick Gelsinger — Chief Executive Officer

Yes. Thank you. And overall, we’re very happy with the acquisition, the team. It just feels like it’s always been part of VMware, a great cultural fit. We had strong bookings growth in Q2. We’re at 20,000 customers now. ARR grew almost triple-digits for our cloud-based offerings. In June, we added Lastline to the portfolio. We closed Octarine. So we’re beefing up our overall security portfolio of products.

Also, this aspect of the synergies of bringing this intrinsic security and integrating it with our Dell Unified Workspace, our Workspace ONE, our NSX, our vSphere offerings, all of those integrations are well underway. And you can expect to see some exciting announcements on this at VMworld coming up in late September. We had some great wins. Conduit, was a great win. Octa, Zoom, a major federal agency. So we’re starting to get much more of the VMware effect where we’re able to make them part of bigger deals, bring them into more enterprise portions of the market where before the Carbon Black was part of VMware, they were much more of a low-end enterprise commercial play, and we’re now starting to bring them into the large enterprise customers as well.

And if anything, COVID is driving a bigger footprint of protecting remote workforces. Customers now went from 100 sites to 10,000 sites. And that broadening security footprint is putting more of a premium on how we manage our remote workforce. So we’re seeing an increased amount of interest for both the VMware offerings overall and for Carbon Black in particular.

Paul Ziots — Investor Relations

Thank you, Robert. Looks like we have time for one more question. So the next question been a last question, please.

Operator

Last question, we have Brad Zelnick from Credit Suisse. Your line is open.

Brad Zelnick — Credit Suisse — Analyst

Thank you so much, guys. Really appreciate you taking my question. Zane, the upside in margins for both the quarter and the full-year guide was great to see, especially given the upside in SaaS and subscription. Obviously, you’re benefiting from COVID-related savings, but have synergies from Pivotal and/or Carbon Black contributed here? And if so, how should we think about the contribution to margins on a go-forward basis?

Zane Rowe — Chief Financial Officer and Executive Vice President

Yes. I’d say it’s a great question, Brad. I’d say not initially. Obviously, we’re very pleased, as Pat pointed out, and I mentioned in my prepared remarks, with the performance of both Pivotal and Carbon Black as they get integrated into VMware, I wouldn’t say that they’re contributing on the margin side at this point. It’s more some of the COVID-related short-term impacts that we’re seeing as far as significant margin improvement. We did outperform on revenue, which helped us with margin profile in the second quarter. But we do look over a period of time to see contributions from Pivotal and Carbon Black as they begin to grow within the company. So that’s — as we think about long-term margin expansion, that’s part of the portfolio that will be driving that.

Brad Zelnick — Credit Suisse — Analyst

Thanks, so much, Zane. And if I could squeeze one in just for Pat real quick. Pat, on the last question about Carbon Black. That’s just one example of really successful M&A. That you guys have been doing. Just given that you’ve demonstrated such an ability to flex that muscle. How are you thinking about that as a lever? And when you come across build-versus-buy decisions within the business, how should we think about that going forward?

Patrick Gelsinger — Chief Executive Officer

Yes, we’re going to continue to exercise the same kind of perspective that we’ve had where we’re not bashful about our organic R&D. We’ve continued to invest, and we keep that as a very high investment level for us as a company. But we’ve been unhesitant to use our balance sheet, and we’ve done more acquisitions so far this year than I expected at the beginning of the year. And it’s been a good buyer’s market for a number. So we’ve taken advantage of that, as you’ve seen and we’ve talked about today with Lastline and Octarine as two examples.

So overall, we’re going to continue to do that, as we look forward. And we’re uniquely good, I think, at making those acquisitions effective. And we have a tremendously good track record for doing that, and we’ll be highlighting some of those innovations as part of VMworld.

Maybe then just wrapping up, very much appreciate you all joining our call today. Proud of the VMware team for our solid execution and financial performance this quarter. Particularly excited about some of the new partnerships and new innovations that we’ll be talking about and announcing at our virtual VMworld that begins on September 29, and I hope to see every one of you there, bring your friends, it’s going to be a great party. Thank you.

Operator

[Operator Closing Remarks]