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VMware, Inc. (NYSE:VMW)
Q4 2018 Earnings Conference Call
March 1, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Please stand by. We're about to begin. Good day, everyone, and welcome to the VMware Fourth Quarter Fiscal Year 2018 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Paul Ziots, Vice President, Investor Relations. Please go ahead.

Paul Ziots -- Vice President, Investor Relations

Thank you. Good afternoon, everyone and welcome to VMware's Fourth Quarter Fiscal 2018 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 can also be downloaded at the conclusion of the webcast from ir.vmware.com.

On this call today, we will make forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially as a result of various risk factors, including those described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC. We assume no obligation to and do not currently intend to update any such forward-looking statements.

In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures which are used as measures of VMware's performance should be considered in addition to, not as a substitute for or in isolation from, GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, acquisition, divestitures, and other related items, non-GAAP tax rate adjustments as well as the estimated net tax expense recognized in conjunction with the Tax Cuts and Jobs Act. 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 2018 quiet period begins at the close of business Thursday, April 19, 2018.

Year-over-year comparisons of quarterly financial results included on this call compare results for VMware's fiscal 2018 fourth quarter November 4, 2017 through February 2, 2018 to VMware's fiscal 2016 fourth quarter October 1 through December 31, 2016.

In addition, beginning in Q1 Fiscal 2019, VMware will adopt ASC 606 using the full retrospective method. Guidance for Q1 and Fiscal 2019 will be provided under ASC 606. Growth rates associated with our guidance are calculated under ASC 606 using preliminary adjusted historical data for Q1 2018 and Fiscal 2018 in order to provide comparisons on an apples-to-apples basis. Accordingly, we have included tables that present a preliminary view of selected financial information for Q1 2018 and Fiscal Year 2018 as adjusted under ASC 606 in the Q4 Earnings Press Release as well as in the appendix of the slide deck accompanying this call.

With that, I will turn it over to Pat.

Pat Gelsinger -- Chief Executive Officer

Thank you, Paul. Before we cover our Q4 and full-year results, I want to recognize that many of you have been following the recent new cycle about the Schedule 13D public filing by Dell on February 2nd. Our press release response to this filing, which outlines our sound governance practices including that the VMware board is committed to taking actions that are in the best interest of all stockholders, to be found on our website. We will not comment further on Dell's 13-D in these prepared remarks or in the Q&A.

Moving now to provide you with an update on our business, our Q4 Fiscal Year 2018 results demonstrate the power of our broad-based portfolio. We're pleased with performances around the world and, in particular, with EMEA, we saw very positive momentum with large deals. Q4 total revenue grew 14% with a non-GAAP earnings-per-share growth of 18% year-over-year to $1.68 per share. Key factors contributing to our strong Q4 and terrific Fiscal Year '18 results include our private hybrid public cloud and mobile strategy continues to resonate with customers, strong and consistent go-to-market execution globally, and a positive market environment for well-positioned enterprise companies.

During the quarter, we saw the power of our broad-based portfolio drive positive momentum, culminating a very good Fiscal Year '18 for VMware. It's been an incredible year for our networking portfolio. Our NSX Everywhere strategy provides seamless connectivity from data center to cloud to Edge while enabling developers with the tools that help them innovate and providing administrators with visibility automated controls and security. We recently completed the acquisition of VeloCloud Networks. This industry-leading, cloud-delivered SD-WAN solution extends our value in the enterprise and increases our relevance with service providers by offering end-to-end automation, application continuity, and security from data center to cloud edge.

With the recent expansion of SD-WAN, cloud, and container workloads, NSX is uniquely positioned to be a ubiquitous platform for the future of networking. A recent example of embedding NSX with almost every VMware solution is with Pivotal Container Service or PKS. VMware and Pivotal announced the availability of PKS. This offering is a Kubernetes-based container service designed to meet the needs of operators and developers and one of the unique and differentiating components of PKS is NSX. While just launched, several customers' NSX use case is being driven by container networking and security benefits provided by Pivotal Container Service and Pivotal Cloud Foundry. We're very pleased with customer enthusiasm for our cloud strategy. We believe we have the world's most complete and capable hybrid cloud architecture, uniquely offering customers freedom and control in their infrastructure decisions.

We continue to see customer interest and engagement with VMware Cloud on AWS. The service, designed to bring VMware software-defined, data-centered to the AWS cloud, allows customers to run applications across operationally consistent VMware vSphere private, public, and hybrid cloud environments with optimized access to AWS services. Customers across many industries are rapidly embracing VMware cloud on AWS to enable modern, efficient, and hybrid scalable infrastructure for a variety of use cases, including disaster recovery and datacenter extension.

We are also pleased with the traction the VMware cloud provider program continues to gain. The VMware provider program achieved an annual revenue growth rate of over 30% in Fiscal Year 2018. We are also experiencing great global customer momentum with our VMware Cloud for IBM, with customers such as Amdocs, Rico, and Vodaphone.

As we continue our journey toward the hybrid cloud, providing the best solutions to span the private and public clouds, I wanted to share an update on two acquisitions recently completed. We acquired Cloud Corio, which will help us extend our support of consistent operations across any cloud, as their technology proactively identifies public cloud risks at the time of deployment and prevents compliance violations before they occur. We also acquired CloudVelox, a pioneer in developing software to enable workload mobility from existing datacenters to modern private and public clouds. We expect the acquisition to become part of our hybrid cloud extension service and accelerate our roadmap to deliver cloud migration, mobility, and delivery services in a hybrid multi-cloud world.

On the software-defined storage area, I am also excited to report that VMware has been positioned in the leader's quadrant of Gartner and Corporation's February 2018 Magic Quadrant for Hyperconversion Infrastructure. We believe this Magic Quadrant for Hyperconverged Infrastructure reflects the strong momentum behind long-term strategic HCI platforms and software-focused vendors like VMware. We further believe that VMware's placement in the leader's quadrant validates the impact our comprehensive vision strategy and VMware VSAN offerings are having in today's IT environments.

While we are experiencing broad momentum from our Dell partnership, our HCI VxRail offering showed particular strength as we finished a very strong year in this area. We were very pleased with the continued strength in our End User Computing offerings. This growth is driven from our digital workspace platform, Workspace ONE. Workspace ONE securely delivers any application to any device. Customers are replacing the siloes of end-user solutions, consolidating their mobile identity and desktop solutions into a single platform. Workspace ONE customer momentum is growing rapidly and will soon be the largest element of our End User Computing portfolio as we continue to expand our market leadership in this space.

We were also pleased with performance in computing management. We're seeing increasing momentum for our integrated cloud platform. The latest release of VMware Cloud Foundation introduces integrated cloud management platform capabilities that provides customers with a simplified path to building a hybrid cloud based on consistent infrastructure and operations. With Cloud Foundation and other offerings, we continue to help our customers navigate a multi-cloud automated future.

Building on our strength in compute in the datacenter, we continue to extend into additional growth areas including security, network function virtualization, and IoT. Globally, carriers are continuing their transformation of core networks with VMware NFV to increase their agility, reduce costs, and prepare for the imminent arrival of 5G. At Mobile World Congress 2018 earlier this week, we demonstrated several new and exciting capabilities for carriers, including the ability for CSPs to connect their virtualized core networks on VMware NFV by extending them to hyperscale public clouds such as VMware Cloud on AWS.

We are also pleased to mention some recent company awards, including ranking No. 7 on Fast Company's Most Innovative Company in Enterprise and placing No. 6 in the Leader's Category among the Top 50 Companies Best Positioned for Growth in the Fortune Future 50 ranking. I am also very proud of ranking in Fortune Magazine's 100 Best Companies to Work For list in the U.S. For the fourth time in a row, VMware has ranked on the list, landing in the 39th spot this year.

In closing, we believe the cloud mobile networking and security technologies we offer are central to the digital transformation happening across every industry. We continue to apply virtualization and software innovation to connect, secure, manage, and automate the world's increasingly complex digital infrastructure. I want to thank all of our VMware customers, partners, and of course Team VMware employees for a great quarter and terrific Fiscal Year 2018. I'll now turn it over to Zane to talk more about our business performance.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Thank you, Pat, and thanks to all of you for joining us today. Q4 closed out a very strong year for us, with broad-based growth across our diverse portfolio. As you'll see from our guidance for Fiscal 2019, we expect this momentum to continue. VMware achieved record results across a number of key metrics for the year, including license and total revenue, non-GAAP net income, and operating cash flow. Total revenue for Q4 grew 14% and license revenue increased 20% year-over-year. Hybrid cloud and SAAS represented over 8% of total Q4 revenue with our VMware Cloud Provider Program -- or VCCP -- growing over 30% year-over-year. Non-GAAP operating margin for the quarter was 37.3% and non-GAAP EPS was $1.68 per share, up 18% year-over-year on a share account of 410 million diluted shares. Cash and short-term investments totaled $11.7 billion, of which 26% was held domestically. Unearned revenue at quarter-end was $6.2 billion with $2.5 billion of this amount long-term. Total revenue plus the sequential change in total unearned revenue grew 14% and licensed revenue plus the sequential change in unearned licensed revenue grew 13% year-over-year in Q4. We continue to see high levels of customer satisfaction and renewal rates, which resulted in strong S&S bookings growth in Q4. We're also pleased with the collective business we've built with Dell Technologies and ended the year with approximately $400 million in synergies.

NSX licensed bookings grew 24% year-over-year in Q4 and over 50% for the full-year. NSX use cases continue to expand beyond microsegmentation, automation, and application continuity to cloud and container networking as well as branch transformation and security. NSX reached a $1.4 billion run rate based on Q4's annualized total bookings. VSAN continued its strong growth trajectory in Q4 with licensed bookings increasing 100% year-over-year and up over 130% for the full-year.

VSAN reached a $600 million run rate based on annualized Q4 total bookings. EUC licensed bookings were up over 30% for both the quarter and for the full-year. Throughout the year, Workspace ONE, our platform for securely delivering any application to any device, continued to be our primary growth driver in EUC. Q4 compute licensed bookings declined 4% year-over-year. As a reminder, our growth rate in Q4 of last year was a particularly strong 11%. For the full-year, compute licensed bookings increased in the low single digits. For the quarter, compute licensed bookings represented approximately 35% of total license bookings. Total compute bookings for Q4 increased in the low single digits year-over-year and increased in the mid-single digits for the full-year.

We had a strong quarter for management software. Management license bookings increased over 10% year-over-year and, for the full-year, management license bookings increased in the low single digits. Total management booking also increased over 10% year-over-year for both the quarter and for the full-year. Turning to stock repurchases, we bought $169 million of stock in the open market during Q4. We have approximately $900 million outstanding in our existing repurchase authorization. While we have suspended our buy-back program for the time being, we continue to see share repurchases as a key component of a well-balanced capital allocations program.

With the enactments of the Tax Cuts and Jobs Act, we're required to pay U.S. taxes on the international portion of our earnings. We expect to repatriate a substantial portion of our international cash over time. The estimated net costs on the international portion of our earnings is $800 million, which we expect to pay over eight years. This is included in our tax expense recognized during Q4. We also remeasured our deferred taxes at the end of the year using the lower U.S. tax rates, which resulted in an additional estimated tax expense of $167 million recognized in the fourth quarter.

Turning to guidance, as we've previously stated, beginning in Q1, we will adopt ASC 606 using the full retrospective method. Guidance for Q1 and for Fiscal 2019 will be provided under ASC 606. Growth rates associated with our guidance are calculated under ASC 606 using adjusted historical data in order to provide comparisons on an apples-to-apples basis. In aggregate, the 606 revenue impacts are not significant and adjusted historical P&L statement for Q1 '18 and Fiscal 2018 is included in the Q4 earnings press release, as well as in the appendix in the slide deck accompanying this call.

On our last earnings call, under ASC 605, we guided to revenue growth of approximately 10% and non-GAAP operating margin of 32.5% for Fiscal 2019. Excluding the impact of ASC 606, our 10% revenue guidance for FY '19 remains unchanged. After adjusting for the impact of ASC 606, we now expect a total revenue growth rate for '19 to be up 10.8% to approximately $8, 725,00.00. Turning to operating margin, we have increased our non-GAAP operating margin guidance for Fiscal '19 to 33.3%, primarily due to the reduction in sales commission expense under ASC 606.

For the full-year, we expect total licensed revenue to be approximately $3, 565,000.00, an increase of 11.3% year-over-year. With Q1, we expect total revenue to be approximately $1,955,000.00 and an increase of 10.1% year-over-year and licensed revenue to be approximately $730 million, an increase of 13.5% year-over-year. We exited Q4 '18 with nearly $100 million of licensed backlog, which is approximately $10 million higher than the Q3 ending level. Licensed backlog is the licensed portion of any unfulfilled orders at quarter end.

In Fiscal 2019, we expect non-GAAP earnings per share of $6.02 on the diluted share count of 409 million shares. Our non-GAAP tax rate for Fiscal 2019 and Q1 '19 is expected to be 16%, due to lower U.S. tax rates with the enactment of the Tax Cuts and Jobs Act. The lower U.S. tax rate on domestic earnings is expected to more than offset the increase in U.S. taxes on international earnings. In Q1, we expect non-GAAP operating margin to be 28.5% and non-GAAP earnings per share to be $1.14 on a diluted share count of 412 million shares. The benefit to margin from the transition to ASC 606 will be more prevalent in Q2 and Q4 due to commission expense seasonality.

Following stronger than expected cash flow from operations of $3.2 billion in Fiscal 2018, we expect Fiscal '19 cash flow from operations to grow approximately 11% to $3.55 billion. Capital expenditures for Fiscal 2019 will be approximately at $280 millions and we expect free cash flow of approximately $3.27 billion.

Before wrapping up, I'll highlight a couple of key ASC 606 impacts on the balance sheet. There is substantially less deferral of license revenue in connection with the treatment of on-premises license sales under ASC 606. Therefore, license revenue and license bookings will have a tighter correlation for on-premises software sales and deferred license revenue will substantially decline upon adoption of ASC 606 in Q1 '19.

Also, the treatment of commissions will change under ASC 606 and we will be deferring more commissions and amortizing the costs over a longer duration. As such, deferred commissions included on our balance sheet will increase significantly. Select balance sheet items for Fiscal '18 over 606 are provided as a supplemental chart on our financial statements this quarter, as well as in the appendix of the slide deck accompanying this call. Additional metrics for Q2, 3, and 4 of Fiscal '18, as well as Fiscal 2016 will be provided on our next earnings call.

In summary, we delivered a strong Q4 and Fiscal '18 with record performance in numerous financial metrics, while also earning broad-based recognition for our products, our innovation, our growth opportunities, and as a great place to work. This has been a terrific year for all stakeholders in VMware and we're excited about continuing this momentum in Fiscal 2019.

With that, I'll turn it back to Paul.

Paul Ziots -- Vice President, Investor Relations

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. In addition, I'll remind you we will not be commenting on Dell's 13D filing during Q&A.

Operator, let's get started.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please press *1 on your telephone keypad. If you are using a speakerphone, it may be necessary to lift your handset before pressing the corresponding digits. Once again, it's *1 if you would like to ask a question.

We'll take our first question from John DeFucci with Jefferies.

John DeFucci -- Jefferies -- Analyst

Thank you. Thanks. Zane, we appreciate the 606 details but, if I could, I'd really like to focus on the business fundamentals here. You guys set a really high bar for licenses this quarter and then you come out and you beat it, growing 20% -- I know there's some FX in there but it's, I guess, a really hard comp, the toughest comp of the year -- and, I don't know, even on the licensed billings, the growth wasn't quite like it was last quarter, just a little bit lower, but still, again, a tough, tough comp. I know you went through a lot of your businesses and what's happening in them and it all sounds good -- and that's great -- but can you talk maybe a little bit more... This acceleration, it looks almost like a step function up when you look at license, whatever metric you want to look at license over the last three quarters. And, again, there's a lot in there, but are we seeing right now is the biggest impact here the relative maturation -- and not to say that it's mature -- but the step up in the network virtualization market? Because we're hearing a lot about that in the field. Or is just as simple as everything's hitting right now? Maybe if you could give us a little bit of just how we can think about this going forward, too?

Zane Rowe -- Executive Vice President and Chief Financial Officer

Sure, John. Yeah, thanks for the question and, obviously, as I highlighted earlier, it was a great quarter, not only across the geographies, but also across the products which, as you point out, we see in the licensed revenue as well as the bookings that we saw in the fourth quarter which puts us on a great trajectory for FY '19 and beyond, quite frankly. There are a number of things going on in the fourth quarter as you look at our growth products. Not only is the strategy working, but the growth products continue to grow nicely and you see the benefits of that in the fourth quarter on what's already our strongest quarter. And then, of course, we continued to develop the products that we continue to invest in the business, as well but, as you look at that revenue, there's a little bit of timing between the third quarter and the fourth quarter, so some of the bookings from the third quarter did show up in revenue in the fourth quarter. One of the examples was DXC that we gave in the last quarter. But, again, we couldn't be more pleased with the trajectory of the business and with the strengths we're seeing across all the product sets. Pat, I'll have you touch on the core.

Pat Gelsinger -- Chief Executive Officer

Sure. And, maybe to add a little bit, as Zane said, we see the power of the portfolio and that's really working now -- these numbers are getting bigger and they continue to show great growth rates so we see those adding up across the portfolio. Overall, as I've said before, John, that we think this is just a good time for well-positioned technology companies. The market is good for technology -- as I've described, that tech is breaking out of tech so every business is becoming a tech business and more areas of businesses are becoming influenced by tech and our strategy is resonating with that. We are executing well inside of that framework and the overall strategy really resonates with the customers and the shifts that we've made have really aligned ourselves very uniquely with our cloud strategies -- a tremendous quarter in mobility and End-User Computing and overall customer see us as a more critical role in their strategic future so it's just been a terrific year.

Paul Ziots -- Vice President, Investor Relations

Thank you, John. Next question, please.

Operator

We'll go next to Kash Rangan from Bank of America Merrill Lynch.

Kash Rangan -- Bank of America Merrill Lynch -- Managing Director

Hey, gentlemen. Congratulations to a wonderful finish to the fiscal year. I just wanted to hone in on the comment that, Pat, you made with regards to the increasing traction you're finding for the VMware-AWS partnership. Can you talk about the business implications of this partnership in the sense that, if more and more VMware customers are really increasingly looking to engage with AWS and want to expand the data center footprint with AWS, what are the implications for VMware's products and the business model implications? If you could chime in on that, that would be great. Thank you so much.

Pat Gelsinger -- Chief Executive Officer

Sure. Thanks, Kash. Always great to hear from you. And, overall, the VMware Cloud on AWS continues to get great resonance from our customers and customers really see this idea of the best of public and the best of private coming together as a very powerful force. In many cases, it's this, I'll say, unique way for them to accelerate their move to the cloud without disrupting their applications -- being able to do this in a seamless hybrid way to move into the public and back to the private cloud. We're getting great customer responses to that expanding number of use cases, data center extension, DR, etc. We continue to expand. Next week, we'll be launching in Europe the service so that's going to open up new markets for us and for many U.S. customers are also looking for that as a U.S. present feature function as on track as we do quarterly updates.

Ecosystem build is occurring and, overall, as I've said before, Kash, customers look at that and, even though it's still small and not material this year, they see it as this, "Well I can now bet more strategically on VMware because it is this unique pathway. From the business, as you said, it's not material this year and it's starting to build up. And, obviously, as we go through the year, you'll see that become a larger element of the business but not material this year. We also see that, given it's a subscription business, that will also delay the direct fiscal impact. As we've said before, it's a net business for us, so we're not carrying the cost of hosting through our PNL so that gives it a pure subscription license business to us. And, as we've said before, this is also, we wee it, as a step up because, in many cases, this will be the fastest way for customers to experience the full software-defined data center because it includes the full set of network and acute storage management, lifecycle management, so we really see it as a great business in uniquely positioning us in the marketplace.

Paul Ziots -- Vice President, Investor Relations

Thank you, Kash. Next question, please?

Operator

We'll go next to Raimo Lenschow with Barclays.

Raimo Lenschow -- Barclays -- Analyst

Hey, congrats from me as well. I wanted to hone in on your comments around compute end management. Zane and Pat, you said you were happy on the results there -- can you talk a little bit about drivers here at management up 10% with this, it was the best results for this year, compute down 4? Some people will ask me is there an end of an ELA cycle or how I have to think about it? Just honing in on that segment. Thank you.

Pat Gelsinger -- Chief Executive Officer

Yeah, I'll start and ask Zane to chime in. On the management side, if we start there, we had a very strong quarter. As we've indicated in the past, management has a high affinity to EA attach so we had very good EAs this year -- you see in our enterprise agreements had a very robust Q4 and a very good composite of management as part of that. As we've indicated in the past, we are coming into a better cycle as we've done recent upgrades to BRA and BR-Ops so the products are stronger as well. And we really are seeing that this cloud management portfolio, the ability to manage on-premise and public cloud workloads is gaining resonance with customers. And then some of the new products that we've put into that are vRealize Network Insights, Wavefront, some of those new acquisitions are really starting to be seen by customers as their ability to bet more on the VMware management suites. So, overall, it's been a good cycle on management and we're feeling that momentum as we go into the next year.

With respect to compute, clearly as we've indicated in our guidance, we see this long-term view of flattish in terms of license bookings and low single digits for our overall and we're in-line with that over the year as you've seen. Some quarters will be better or stronger, respectively, but overall nicely in-line. We're also seeing more element of the compute license bookings coming from our strength in VCCP as we've indicated -- been another very strong quarter there -- but we are, in the VCCP program, starting to see more of our products being represented there and compute is a springboard, as we've called it, for the whole portfolio of our products and that benefit is clearly being seen in this power of the portfolio this quarter. And, as we've indicated, we've also started to see more presence in areas like NFE so it also is part of how we're reaching into these new segments and, even though small, starting to become a new market opportunity for us there. Zane?

Zane Rowe -- Executive Vice President and Chief Financial Officer

Sure, Pat, I would just add, as I pointed out in my prepared remarks, compute is now 35% of licensed bookings and it faced a tough compare of 11% growth a quarter a year ago so we still feel very strong about compute. And EA renewals are a great opportunity for us not only to see the strength in FY '18, but continue to see continued strength at a slightly higher growth rate for FY '19 so we're very pleased with the renewals part of the business as well.

Paul Ziots -- Vice President, Investor Relations

Next question, please?

Operator

We'll go next to Keith Weiss with Morgan Stanley.

Keith Weiss -- Morgan Stanley -- Equity Analyst

Excellent. Thank you, guys, for taking the question and very nice quarter. Pat, I know you were at that Mobile World Congress. I was hoping you could give us your view on the timing for NFV and how you see that ramping along with the 5G rollout -- that's supposed to be a really big catalyst for that?

Pat Gelsinger -- Chief Executive Officer

Yeah, and we had a great Mobile World Congress. We did quite a number of demonstrations, new announcements, new partnerships, so we're feeling very good about our strategy in that area. As I've indicated before, it's like the National Anthem is playing before the sports event gets under way because people are doing their trials, their first deployments of NFV, etc., and we really see it as becoming mainstream as they do their 5G buildouts, which we expect really start occurring at the end of this decade. So, I think we still have another year or two before it really starts to ramp as you start seeing spectrum allocations, new microcell deployment, etc., but we are starting to see very nice quarter-by-quarter increase of the number of new customers, number of new trials, etc.

We did have several major new telcodes that are starting to build on VMware NFV. One of the demos I really loved that we did at Mobile World Congress was showing the power of having a VMware-based NFV combining with the VMware-based cloud using our VMware cloud on AWS -- being able to show the two connecting and being able to run services from Amazon connecting over Vodafone's network and this is really showing the power of those two worlds coming together, which I think really startled a number of people at Mobile World Congress as they saw the real benefits of a common infrastructure across their cloud architecture and their telcode network architecture and this is really where, I think, VMware is quite uniquely positioned. And also, some of the new -- and this is very, very prevalent at Mobile World Congress -- of people getting quite excited about the IoT opportunity as a new service area for them to reach from their 5G network buildout. So, overall, it's going to be more and more of the conversation over the next year or two and I think right around 2020 is when it's going to really start hitting a big cadence of large capital investments.

Paul Ziots -- Vice President, Investor Relations

Thank you, Keith. Next question, please?

Operator

We'll go next to Mark Murphy with JP Morgan.

Mark Murphy -- JP Morgan -- Executive Director

Yeah, thank you and I will add my congratulations. Zane, I believe you mentioned $400 million of synergies from Dell from the year, if I heard that correctly? Could you just comment on that and is that a recognized revenue number for the year or is that more of a, what I would call, a forward-looking bookings run rate exiting the year?

Zane Rowe -- Executive Vice President and Chief Financial Officer

Sure, Mark. Yeah, obviously, as I mentioned, we've been very pleased with the business we've been doing with Dell Technologies. The $400 million was an increase from the prior guide that we gave you of $250, which was the annual booking synergy capture for FY '18. Now, it puts us on a great trajectory. We've talked about the success we've had on multiple fronts with our synergy capture and believe we're very well-positioned for FY '19. I'll let Pat talk a little bit more about the categories and what we're thinking about for FY '19.

Pat Gelsinger -- Chief Executive Officer

Yeah, and we're very happy with the performance from Dell. As we see VSAN, VxRail had a really tremendous Q4 and that's central to the Dell partnership wit us. You see compute attach, starting to see some momentum in networking and immersion geos as well. Just to, again, emphasize the $400 million, right, is a run rate. So, we had some initial synergies last year, so $100 million or so the prior year, $400 million as we complete this year, and we believe that we'll achieve $700 million in annualized synergies in this fiscal year that's just getting under way. So, overall, the momentum is good and, as I've indicated before, we're ahead of schedule toward our synergy capture objectives.

Paul Ziots -- Vice President, Investor Relations

Thank you, Mark. Next question, please?

Operator

We'll go next to Heather Bellini with Goldman Sachs.

Heather Bellini -- Goldman Sachs -- Managing Director

Great. Thank you and, Pat, I should say congratulations because I think you were the first one this time last year to call such a great IT spending environment so we'd love to get your thoughts on if you're thinking this year it's going to be even better. But my question was also related to the market growth that you guys are seeing in EUC. I think you said that business grew about 30% and I'm just wondering if you could share with us what's driving the growth in that market, overall? And how much of this is new deployments versus competitive switches? Thank you.

Pat Gelsinger -- Chief Executive Officer

Yeah, thanks. And I do feel good about the IT spend. As I said, I was a little bit earlier than most others and the analysts raised their forecasts pretty consistently -- the IT analysts for the year, they're projecting a more aggressive growth rate this year. I still think they may be undercalling it a bit. Not as dramatic a gap as last year, but still I think it's a very optimistic outlook for tech, overall. With regard to EUC, really -- and I just am hats-off to my EUC team and the sales team -- 30% year-on-year license growth in categories that people didn't think had that kind of growth potential in them so really great execution.

And I do think we really attribute it to two things. One is our products are delivering great value. In Workspace ONE, this idea of a complete sweep of mobility, desktop, identity, security, and management, that suite coming together, it is taking cost out and being able to capture benefit in other areas beyond what has traditionally been viewed as MDM or VDI so we are able to capture more dollar share in these because of this integration of value that we have in that Workspace ONE. Also, unquestionably, we're pulling away from the industry -- we're gaining share from all the competitors here -- so, unquestionably, we're picking up share from others. We do see competitive switch outs in both mobile and the desktop side and, if anything, that's accelerating.

Paul Ziots -- Vice President, Investor Relations

Thank you, Heather. Next question, please?

Operator

We'll go next to Matt Hedberg with RBC Capital Markets.

Matt Hedberg -- RBC Capital Markets -- Software Research

Hey, guys. Thanks for taking my question. VMC for AWS gets a lot of the attention and rightly so, but I wanted to ask about VCCP, which I think you said grew 30% this quarter. Pat, I'm wondering, could you help us size that business -- who's adopting it and how it really supports Act III of your strategy of really being a cross-cloud provider?

Pat Gelsinger -- Chief Executive Officer

Yeah, happy to. And, again, 30% year-over-year for the quarter and for the year, so very consistent growth rate or that. And, for us, it's a meaningful business now as we've been able to post that growth rate now for a number of years. Also, it portends that the customers of that product, they're getting much higher revenue from that as well. We're just a piece of what they're selling into the marketplace and so this view of all the rest of the infrastructure providers and hosting providers, this is a large business. It's companies like Rackspace, OBH, CenturyLink, Fujitsu, NTT, right, and 4,000 other partners, many of those system integrators, outsourcers, etc.

As we said in the formal remarks, the IBM partnership, in particular, is progressing extremely well with very big-name brands that are making major bets on the IBM-VMware cloud offering: Vodafone, Amdocs, Rico, the three that we talked about on the call. We'd also say that one of the things that I've been pushing the team most aggressively on is making this not just to vSphere, but the entire portfolio and more and more of those cloud providers now are NSX taking advantage of new hybrid services we've launched. In particular, IBM's been a huge partner of bringing our hybrid cloud extension to the customers for unique migration services as well as hybrid cloud offerings and we see no end to the growth of this business in sight. If anything, we're picking up the speed so very, very happy with our VMware cloud provider program broadly, right, IBM cloud partnership, in particular, and we continue to sign new partners, as well, into the program.

Paul Ziots -- Vice President, Investor Relations

Thank you, Matt. Next question, please?

Operator

We'll go next to Walter Pritchard with Citi.

Walter Pritchard -- Citi -- Managing Director, Global Software Analyst

Hi, thanks. I'm wondering, Pat, on NSX, that business has been really strong and you gave a run rate update. Can you talk about how the drivers are evolving? You mentioned NFV is pretty early still -- I know security's been a strong driver -- and anything else that's a driver in bundling? Just curious the drivers there?

Pat Gelsinger -- Chief Executive Officer

Yeah. And, clearly, the No. 1 use case continues to be security, but increasingly our NSX Everywhere strategy is broadening the use cases. And as we're now, it's an integrated part of VMware Cloud Foundation so it's our private club. It's an integrate part of the VMware Cloud and AWS so it's our public cloud. Our hybrid cloud services based on NSX, so the hybrid cloud capabilities. Going the two new ones that we announced this quarter were VeloCloud extension to the WAN and we see that as a very powerful use case, Walter, because everybody is looking for branch transformation -- how do they take costs from the WAN, how do they connect to SAAS services, how do they deliver new security models to the branch, how do they be able to enable that transformation of all of the remote offices, etc.? So, very, very excited about that and a lot of enthusiasm from our sellers that they're seeing from our customers in that area.

And the other area that we announced is the Pivotal Container Service -- sorry to be stumbling over that -- but now it's extending into container networking as a natural way to do container-to-container networking, security, policy management as well. So, overall, we see NSX Everywhere being very strong. We're now at $1.4 billion run rate as we said, compared to the $1 billion run rate a year ago -- over 3,500 paying customers as we end Q4. We had extraordinary Q3, robust pipeline for Q1, very strong compare year-on-year, and, overall, we're very happy about NSX and how strategic it is to our business for the long-term.

Paul Ziots -- Vice President, Investor Relations

Thank you, Walter. Next question, please?

Operator

We'll go next to Phillip Winslow with Wells Fargo.

Phillip Winslow -- Wells Fargo -- Managing Director

Hi. Thanks, guys, for taking my question. Most of your new products and services have been touched on, but really wanted to focus in on VSAN because that's, obviously, a smaller contributor than NSX but you doubled in run rate year-over-year. When you think about where the product is and, I guess, from just its maturity of its lifestyle, you've talked about moving it out in marketing, expanding its capabilities. Is this the inflection point where it's ready for primetime and this market is also ready for primetime just from an adoption perspective of hypervisor converged storage?

Pat Gelsinger -- Chief Executive Officer

Yeah, I believe that we hit primetime a few quarters ago, Phil, and we're now seeing very large customers that are essentially betting on software-defined storage in ACI in very large ways. And now we've reached a $600 million run rate -- that's a very real business, iHardware drag associated with that, so it's very large, the VxRail element for that was very strong, 130% bookings growth rate year-on-year. So, overall, this is very substantial business for us and, while the growth rates will temper a bit just based on the size of the business, this is still a very rapidly growing business and we have a very robust ecosystem, 15 different hardware vendors with us, obviously, the VxRail appliance with Dell is growing extremely rapidly, the Gartner Magic Quadrant on the HCI putting us in the leaders' quadrant. So, we really feel like this has tremendous tailwind into the future and we're making a very unique market opportunity for VMware with this hypervisor attached storage simplification into a very big market for us and our partners.

Paul Ziots -- Vice President, Investor Relations

Thank you, Phil. Next question, please?

Operator

We'll go next to Mark Moerdler with Bernstein Research.

Mark Moerdler -- Bernstein Research -- Managing Director, Senior Analyst

Thank you very much for taking questions and congrats on the quarter. So, we've seen that, a couple of the companies, FX has a large impact on revenue growth -- a couple hundred basis points. Can you give us some more color on the FX and the key metrics as well as what you're including within your guidance for next year? Thanks.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Sure, Mark, happy to. As you look at the quarter, we did see a benefit in FX, I would say, it's more predominant in license, just when you think about the dynamic between how we defer revenue on the S&S side. So, for the quarter, it was roughly 2% on license and about a point in total. And then, as we look at the year, it's included in our guidance and I'd say, as you look more broadly year-over-year, it's actually about the same trend. Obviously, the curves have been moving around a little bit on us, but generally speaking, I'd say it's probably giving us roughly a point of a tailwind as we head into FY '19.

Paul Ziots -- Vice President, Investor Relations

Thank you, Mark. Next question, please?

Operator

We'll go next to Kirk Materne with Evercore ISI.

Kirk Materne -- Evercore ISI Partners -- Managing Director

Yes, thanks very much. Pat, I actually want to follow-up on your comment, just around your partnership with Pivotal and the container service they have. There's obviously a lot of discussion and dollars being, I think, pivoted toward DevOps and containers, in general. I was just curious about your broader feel on VMware's positioning heading into 2018 and your ability to be able to tap into what seems to be some nice growing budgets in that area? Thanks.

Pat Gelsinger -- Chief Executive Officer

Yeah, thank you. And, overall, the container trend, if I could just call it that, is clearly gaining momentum inside of enterprise customers and, sometimes, they're taking containers and, I'll say, wrapping their existing applications in the container as a way to accelerate its migration. In other cases, it really is embracing the new container rise -- microservices, the scale outs, type of architectural model for new apps -- so, overall, we're definitely feeling that interest on the part of the market overall.

Obviously, the two key technologies that we've partnered with are Pivotal Cloud Foundry with our Pivotal partners and Kubernetes with Google and combining that with NSX and a number of other VMware technologies, they'll have brought forward this PKS offering into the marketplace and we're already getting customers that are in deployments on this. Pivotal is now selling it, we're selling it, so we feel extremely good about that offering. And, obviously, Pivotal as a company has been working hard over several years now to build their position in the marketplace and this a very natural extension of a lot of the hard work that they've done. And we've described them as developer-ready infrastructure, making it easy to embrace the new stuff, but still having a robust infrastructure that customers know well and uniquely connects to their existing application world so bringing those two together is getting great resonance from the customer base.

And since we just went GA a couple of weeks ago, it's real early to give any other indications but, as I also indicated, we have several of the initial NSX deployments for customers are results of the PKS offering so it's going to be a nice complement to many of the other areas of our portfolio as well.

Paul Ziots -- Vice President, Investor Relations

Thank you, Kirk. Next question, please?

Operator

We'll go next to Gregg Moskowitz with Cowen and Company.

Gregg Moskowitz -- Cowen and Company -- Senior Software Analyst

Okay. Thank you very much and good afternoon, guys. Most of my questions have been asked but, Pat, curious if you've seen any impact from Meltdown and Spectre on compute demand in the near to medium term? In other words, are there increased server utilization and capacity requirements that might help your business or is it a non-event in that respect?

Pat Gelsinger -- Chief Executive Officer

Yeah, I'd say, at this point, no impact yet. I think everybody is still a little bit, I'll say, in triage mode on Spectre and Meltdown because they're largely trying to figure out... rollout patches, make sure we've dealt with the implications, etc. I do think that there is some potential here over time that people will say, "Hey, I have to expand my capacity a bit in the footprint." There will be, I think, need for people looking hard at some of their security architectures and I think we're able to feed into that very nicely over time.

Many of the things that we've done like AppDefense, I think are going to become more and more interesting to customers in this regard because they're going to say, "It's burger and fries. If I'm running a VM, of course I'm turning on the natural native security mechanisms associated with it," so I think that's going to just reinforce many of the messages that we're delivering as we talk about infrastructure base security -- the infrastructure, itself, must secure itself -- and that aspect, we think, will be a strong element for us long-term. But I think everybody, at this point, it's still early to really tell the direct implications of Spectre, Meltdown, and we're all working very closely with each other as well as with Intel to make sure that we've made any of these security implications immediately resolved and then understanding the longer-term implications.

Paul Ziots -- Vice President, Investor Relations

Thank you, Gregg. Next question, please?

Operator

We'll go next to Michael Turits with Raymond James.

Michael Turits -- Raymond James -- Equity Research

Hey, guys. Question on margins and investment. Forgive me, if it's been covered it already, but flat and arguably down slightly with 606. Can you just review some of the places that you're making incremental investments in Fiscal '19?

Zane Rowe -- Executive Vice President and Chief Financial Officer

Sure, Michael. Yeah, I'll start and then happy to let Pat add to it. As we mentioned on the last call, we've seen great opportunity for further investments in a lot of the products we're talking about right now that have tremendous growth rates so, whether it's on the R&D front or otherwise the go-to-market side, we see tremendous opportunity in investing a little bit more in VSAN, NFV as Pat's mentioned, including NSX and some of the ancillary products that are associated with that. So, a lot of investments being made in the products that we're selling today. We're also spending more dollars on R&D than we've ever spent for products in the future so a lot of the products like you'd see in AWS and a lot of the products that we're still developing are taking a significant amount of our spend but we're very excited, as you see, with our growth rates. We think of margins in light of a balance between the revenue opportunities you would expect with the return and the expense that are driving those opportunities so we're very pleased with that balance right now.

Pat Gelsinger -- Chief Executive Officer

Yeah, and I would just add, if you think about the growth factors that we've been building up -- VSAN and NSX and EUC mobile -- these are still in high growth cycles so we're still feeding those investment cycles out of an aggressive rate, but we've also planted the next flags. Right? What we've done with AppDefense and PKS as we've already talked about on the call, NFV and IoT, and those are the new investments that we're starting to pour into. So, we really see ourselves in a wonderful position where we're feeding growth engines that are showing great success. We're planning the next flags and, in some areas like VMC, boy, how big can we make the VMC business over time? And we're learning new cloud muscles, new cloud sales motions for that, rapidly expanding the geographic footprint. So, we have many deserving mouths to feed inside the company these days and we're trying to be very thoughtful with regard to the operating margin leverage that we see over the longer term, as well as maximizing our growth rate and really continuing to invest in those opportunities.

Zane Rowe -- Executive Vice President and Chief Financial Officer

And I'll just add one last point -- we're coming off a quarter where we had 37.3% operating margin, the strongest operating margin I think we've had in the history of the company, so we're very pleased with that balance.

Paul Ziots -- Vice President, Investor Relations

Thank you, Michael. We have time for one more question so we'll take the last question, please?

Operator

And that question will come from Brad Zelnick with Credit Suisse.

Brad Zelnick -- Credit Suisse -- Managing Director

Fantastic. Thanks so much for fitting me in and congrats on a great finish to a great year. Most of the questions have been asked, but I'm going to follow-up and ask another question, perhaps, a little differently. If we look at NSX license bookings decelerating a bit in Q4 and, obviously, the numbers we're talking about now are quite large, but just wondering if, as the mix shifts to more multi-cloud environments with NSX, are there perhaps any duration effects that we should be mindful of? And, as well, can you just remind us and perhaps give some context for how we should think about the size and scope of the overall opportunity, especially as you go more cloud? Thank you.

Pat Gelsinger -- Chief Executive Officer

Yeah. And, overall, as we said, if you think about Q4 in context in extraordinary Q3, a very big compare from last year and as we've indicated, we feel very robust about the growth into the next year. So, overall, in terms of growth rate, a bit smaller but, in terms of growth and size of the business, very robust and very healthy. As I've indicated before, Brad, we think that the networking opportunity is as large or larger than the vSphere opportunity for VMware. Why is that? Well, networking's a very large business.

You start seeing these new areas like SDWAN opening up -- entire new available markets that we've yet to touch on -- multi-cloud capabilities where we see that those are going to be quite large opportunities and nobody's better positioned than us to go monetize those capabilities, the launch of container networking reaching into this next generation space. But, also, if you think about our No. 1 use case within NSX, it's been around security and, to some degree, we're reaching into the security budget, as well, as the networking budget to deliver NSX and we see that continuing as well into the future. So, overall, a very large market, our NSX Everywhere strategy resonating, uniquely positioned in the marketplace, and you'll see us expanding more just like we've done with VeloCloud and PKS into more use cases, as well, in the longer-term.

Paul Ziots -- Vice President, Investor Relations

Thank you, Brad. Before we conclude the call, Pat will have a few final remarks.

Pat Gelsinger -- Chief Executive Officer

Yeah, and thank you all for joining us today and we're always pleased to have you join us in the call and our opportunity to share with you our terrific Fiscal Year '18 results and look forward to continuing this momentum into Fiscal Year '19. Thank you all very much.

Operator

This does conclude today's conference. We thank you for your participation. You may now disconnect.

Duration: 59 minutes

Call participants:

Paul Ziots -- Vice President, Investor Relations

Pat Gelsinger -- Chief Executive Officer

Zane Rowe -- Executive Vice President and Chief Financial Officer

John DeFucci -- Jefferies -- Analyst

Kash Rangan -- Bank of America Merrill Lynch -- Managing Director

Raimo Lenschow -- Barclays -- Analyst

Keith Weiss -- Morgan Stanley -- Equity Analyst

Mark Murphy -- JP Morgan -- Executive Director

Heather Bellini -- Goldman Sachs -- Managing Director

Walter Pritchard -- Citi -- Managing Director, Global Software Analyst

Phillip Winslow -- Wells Fargo -- Managing Director

Mark Moerdler -- Bernstein Research -- Managing Director, Senior Analyst

Kirk Materne -- Evercore ISI Partners -- Managing Director

Gregg Moskowitz -- Cowen and Company -- Senior Software Analyst

Michael Turits -- Raymond James -- Equity Research

Brad Zelnick -- Credit Suisse -- Managing Director

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