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VMware (NYSE:VMW)
Q2 2019 Earnings Conference Call
Aug. 23, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to today's VMware second-quarter fiscal year 2019 earnings call. I'd like to remind everyone that this call is being recorded. And at this time, I'd like to turn the floor over to Paul Ziots, vice president investor relations.

Paul Ziots -- Vice President, Investor Relations

Thank you. Good afternoon, everyone, and welcome to VMware's second-quarter fiscal 2019 earnings conference call. On the call, we have Pat Gelsinger, chief executive officer; and Zane Rowe, executive vice president and chief financial officer. Following their prepared remarks, we will take questions.

Our press release was issued after the close of market and is posted on our website, where this call is being simultaneously webcast. Slides, which accompany this webcast, can be viewed in conjunction with live remarks and can also be downloaded at the conclusion of the webcast from ir.vmware.com. On this call today, we will make forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially as a result of various risk factors, including those described in the 10-Ks, 10-Qs, and 8-Ks VMware files with the SEC.

We assume no obligation to and do not currently intend to update any such forward-looking statements. In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for or an isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax and employee stock transactions, acquisition, divestiture, and other related items, including the gain on Pivotal Software and non-GAAP tax rate adjustments.

You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in the press release and on our Investor Relations website.The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our third-quarter fiscal 2019 quiet period begins at the close of business, Thursday, October 18, 2018. In addition, VMware adopted ASC 606 on a full retrospective basis effective February 3, 2018. Accordingly, the financial results for the second-quarter of fiscal 2019, presented in our press release and discussed on this call, have been prepared under ASC 606.

In order to provide meaningful comparisons to prior periods, VMware has included statements of income and cash flows for the three and six months ended August 4, 2017 adjusted for ASC 606 and the balance sheet as of the end of fiscal 2018 adjusted for ASC 606. All year-over-year comparisons discussed on this call, including second-quarter fiscal 2019 results and our forward-looking guidance, are comparisons to the corresponding periods of fiscal 2018 as adjusted for ASC 606.With that, I'll turn it over to Pat.

Pat Gelsinger -- Chief Executive Officer

Thank you, Paul. Q2 was another strong quarter for VMware, and we're pleased with our results, which continue to be driven by broad-based strength across our diverse product portfolio and in all three geographies, particularly EMEA. In Q2, total revenue increased 13% and non-GAAP earnings per share increased 14% year over year. Three primary factors remain central to our ongoing strength in the quarter.

Firstly, the positive market response to our strategy and innovation; secondly, strong and consistent go-to-market execution; and lastly, the continuing positive environment for well-positioned enterprise companies such as VMware. We believe no other enterprise software company is as well-positioned as VMware. Customers are increasingly turning to VMware to partner with them to accelerate their digital journeys. Our interoperable cloud, mobility, networking, and security solutions form a powerful digital foundation for delivering the apps that drive business innovation and business success.

Our multi-cloud strategy is resonating with customers as we continue to see momentum across our cloud offerings. The VMware Cloud Partner Program experienced robust growth this quarter. A good example of this momentum is the recently announced expansion of our decade-long partnership with NTT for a new enterprise cloud offering consisting of the full VMware SDDC stack. VMware Cloud on AWS is seeing consumer traction and momentum across North America and EMEA with affinity among our larger customers.

In June, VMware Cloud on AWS received its fourth major update, including bringing the service to Germany. In addition, we introduced VMware Cloud on AWS GovCloud, a forthcoming hybrid cloud service that will enable United States public sector agencies to deploy and run applications on VMware software on AWS GovCloud. With now hundreds of customers using the service, we are also seeing increased interest and traction across the VMware and AWS Partner ecosystem. We have seen over 150 competency partners join the VMware Cloud on AWS Partner Program.

In addition, over 50 of those partners are now transacting business directly with customers. A great example of a customer deployment is with a global food distributor. They are utilizing VMware Cloud on AWS to refresh their cloud strategy, extend their on-prem data center to the cloud, and protect those workloads with Site Recovery Manager. Our networking portfolio experienced healthy license bookings growth this past quarter with 82 companies of the Fortune 100 having now adopted NSX.

We are seeing customers embrace the Virtual Cloud Network strategy that we unveiled in Q1. For example, in July we announced T-Systems will leverage a Virtual Cloud Network architecture, enabled by VMware NSX Data Center. While we are seeing strength in enterprise and in service providers for VeloCloud, the collaboration with AT&T in particular is expanding rapidly in many customer segments such as retail and financial services. We are seeing significant early adoption across all container frameworks for NSX.

We also continue to integrate NSX technology across the VMware portfolio. One recent example includes the new VMware vCloud NFV OpenStack Edition 3.0, which is the next generation of the company's production-proven network functions virtualization platform for communications service providers. We continue to see telcos and CSPs build out their global IT cloud and network platforms. As an example, VMware recently won another major EMEA telco customer building a cloud for their virtual network functions and IT workloads.

To help with telco customer transformation, we recently announced the intent to acquire the technology and team of Dell EMC Service Assurance Suite, software spanning network health, performance monitoring, and root-cause analysis for CSPs and our customers. Turning to vSAN. We experienced a strong quarter and completed one of the largest VxRail deals ever with a major tech-forward retailer, and where we are implementing a 1,200 retail store server refresh. It was another great team win across Dell and VMware, and another proof point of the Dell synergy we continue to experience across the portfolio.

Our HCI leadership was again validated by the June 2018 Q1 '18 IDC Worldwide Quarterly Converged Systems Tracker, which placed VMware in the No. 1 market share position for HCI software with an extended lead over our nearest competitor. We also saw another strong quarter with our compute offerings, and look forward to unveiling a major expansion of our vSphere offering at VMworld next week. And in our view, we received more industry validation for our cloud management business.

We were pleased to achieve the highest possible store in the cloud monitoring, product vision, market approach, and partner ecosystem criteria in The Forrester Wave: Hybrid Cloud Management, Q2 2018. The end-user computing business experienced another strong quarter and continues to see customer traction with Workspace ONE, which is comprised of integrated desktop, mobile, and identity management functionality. In May, VMware and Okta highlighted a partnership and integration between VMware Workspace ONE and the Okta Identity Cloud, enabling customers to easily and more securely move to the cloud. In industry recognition, VMware was positioned as a leader in the inaugural Gartner Magic Quadrant for Unified Endpoint Management Tools published in July 2018.

Finally, we were pleased with Dell's announcement on July 2 regarding the conclusion of their strategic review. Dell Technologies plans to offer a new class of publicly listed common stock following the completion of a proposed exchange of Dell Class V Tracking Stock for Dell Technologies Class C Common Stock or cash. This action will simplify Dell's capital structure and increase alignment with VMware while maintaining VMware's independence.In closing, we continue to be pleased with our performance with strong broad-based growth across our portfolio as our strategy resonates with our customers. We remain committed to delivering and advancing our customers' digital transformations through VMware's digital foundation.

We look forward to welcoming our customers, partners, and industry peers to VMworld next week, where we showcase our strategy and our plans yearly. We are excited to unveil new offerings and updates across the portfolio and ecosystem, including AWS partnership news and technology innovations to be unveiled in the general session keynote. I'll now turn it over to Zane to talk more about our business performance in Q2.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Thank you, Pat, and thanks to all of you for joining us today. We're pleased with Q2 results across our broad product and services portfolio. These results were driven by a strategy that resonates with customers and strong execution across the business, resulting in a quarter with double-digit license bookings growth year over year in all major product categories. Total revenue grew 13% and license revenue grew 15% year over year in Q2.

Hybrid cloud subscription and SaaS comprised 10% of total revenue in the quarter. This category continued to grow at a healthy rate year over year. Our VMware Cloud Provider Program, or VCPP, continued its strong performance with revenue growth of over 30% year over year. Q2 non-GAAP operating margin was 33.8%.

Non-GAAP EPS was $1.54, up 14% year over year on a share count of 413 million diluted shares. Unearned revenue at quarter end was $6 billion. Cash and short-term investments totaled $13.3 billion.In Q2, we once again had strong growth in total revenue plus the sequential change in total unearned revenue, up 13% year over year, as well as license revenue plus the sequential change in unearned license revenue, up 19% year over year. The high level of customer satisfaction across our product and services portfolio, including VeloCloud, grew 40% year over year in Q2.

We saw a broad-based adoption of our networking platform. Nine of the top 10 deals in Q2 included NSX, and they represented a variety of expanded use cases, including microsegmentation, network automation, cloud native applications, multi-cloud networking, and the price branch SD-WAN and network functions virtualization. vSAN license bookings, which includes stand-alone vSAN software as well as the vSAN software component of VxRail, grew 70% year over year. We now have more than 60% of vSAN customers using vSAN to run business-critical applications.

For example, a large financial institution, which has purchased vSAN through multiple transactions to host production banking applications, now has over 80 petabytes of data running on vSAN. We also saw a significant milestone in Q2 with Dell's VxRail, the largest hyperconverged appliance running vSAN, which surpassed $1 billion in cumulative and annual run rate bookings. This product acceleration with vSAN technology is gaining momentum and performance is exceeding our expectations. ESE license bookings were up in the mid-teens year over year.

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

Management license bookings growth was driven by adoption of our enhanced product offerings as well as increased attach of management to some of our largest deals in Q2. Total bookings for compute increased in the mid-single digits and total bookings for management grew in the high teens year over year. As a result of our Q2 performance, we are increasing full-year fiscal '19 guidance for total revenue, license revenue, non-GAAP operating margin, non-GAAP earnings per share, cash flow from operations, and free cash flow. We now expect license revenue to be $3,675,000,000, an increase of 14.8% year over year and total revenue to be $8,820,000,000, up 12.2% year over year.

Non-GAAP operating margin for fiscal '19 is expected to increase to 33.8%, with non-GAAP earnings per share increasing to $6.14 on a diluted share count of 413 million shares. Cash flow from operations for fiscal '19 is expected to increase from $3,550,000,000 to $3,575,000,000, and free cash flow is expected to increase to $3,295,000,000. We continue to expect $700 million in synergies with Dell this fiscal year, up from the $400 million in synergies we achieved last year. For Q3, we expect license revenue to be $865 million, an increase of 14.1% year over year and total revenue to be $2,165,000,000, an increase of 11.7% year over year.

We exited Q2 with $141 million of license backlog, compared with $122 million at the end of Q1. License backlog is the license portion of unfulfilled orders at quarter end. For Q3, we expect non-GAAP operating margin to be 33% and non-GAAP earnings per share to be $1.50 on a diluted share count of 415 million shares. On July 2, VMware announced an $11 billion, onetime conditional special dividend.

Following this special dividend, we expect to return to our previous capital allocation policy. We will drive growth and shareholder value through investing organically in the business, continuing our successful M&A strategy and returning capital to stockholders via share repurchases. In summary, we are pleased to report another strong quarter for VMware. Q2 results are reflection of a strategy that resonates with our customers.

We continue to invest in the business, driving growth today and opportunities across the portfolio in the future. I look forward to seeing many of you at VMworld next week and sharing our progress with you throughout the rest of the year. With that, I'll turn the call back to Paul.

Paul Ziots -- Vice President, Investor Relations

Thanks, Zane. [Operator instructions] Please note, we will not be commenting on Dell's proposed exchange of Class V Tracking Stock. Operator, let's get started. 

Questions and Answers:

Operator

[Operator instructions] And we'll first hear from Keith Weiss with Morgan Stanley.

Keith Weiss -- Morgan Stanley

Nice one. Thank you, guys, for taking the question. Very nice quarter. It looks like the growth that you guys have been seeing, the good demand trend that you guys have been seeing sustained well into this quarter.

One question that I had, and maybe this is a little bit more for Zane, is when we look at kind of the license billings trajectory, that sustained really well. You saw like a 19% growth, but you did see a falloff in total billings and more so more of a divergence between the license bookings and the total billings. Anything in particular that caused that divergence in this quarter that kind of help explains why total billings fell off while license billings stayed up pretty high?

Zane Rowe -- Executive Vice President and Chief Financial Officer

Hey, Keith. It's Zane. Yes, thanks for the question. As you point out, it was a great quarter both on the license and total revenue, and quite frankly, on the license and total bookings side as well.

I'd tell you, there's nothing to read into on the divergence you saw since the first quarter. We actually had a strong first quarter as you look at the year-over-year compare. One of the strengths that I highlighted in my prepared remarks earlier was the strength that we see in VCPP. And as you probably know, that is attributed toward license and none of that goes to SnS, so we're very pleased with the strength we see in that area and expect that to continue through the year.

I'll point out that our-- all of our rates are really strong. Our SnS rates are strong, our renewal rates are strong, and as you can tell by the improvement in the guidance, we feel good about both total and license revenue for the rest of the year.

Keith Weiss -- Morgan Stanley

Excellent. Thank you, guys.

Pat Gelsinger -- Chief Executive Officer

Thank you, Keith.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Thanks.

Paul Ziots -- Vice President, Investor Relations

Thank you, Keith. Next question, please.

Operator

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

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

Hi. Thank you very much, guys. Congratulations on the quarter. Pat, I was curious.

As you talked to customers that are looking to put up new capacity, data center capacity on AWS with the help of VMware, any changes with respect to your earlier anticipation when you first launched the service as to what kind of take-up are you going to see for some of your core products such as ESX and EUC, NSX, vSAN, whatnot, delivered as a cloud-based service through Amazon? And then implications of that for Zane. How do you think that changes the business model in terms of more predictable recurring subscription revenue, albeit this is something that is looking a few years out? Thank you so much.

Pat Gelsinger -- Chief Executive Officer

Thanks, Kash. And as Zane said, we're very happy with the great quarter. And let me just start maybe just by framing the momentum on BMC and taking it apart a little bit, as you suggested, Kash. Overall, we continue to see great uptake for VMware Cloud on AWS.

And first, I'd say is the pace and delivery of new features and functions on the cloud is really spectacular and we're-- to this quarterly release cycle and new feature function as part of it, and that's the full VMware Cloud Foundation being updated, networking, compute, storage, management, automation. And this quarter, we rolled out innovations like elastic DRS, which gives us a seamless scalable capacity, single-node support. We're going to be announcing the next version next week at VMworld. I'm thrilled to have Andy Jassy there from AWS talking about the partnership.

We now have hundreds of paid customers on the platform. And as we indicated before, a major new enterprise service. It just takes some bake time for our customers to POC it, get comfortable. And particularly, as we ended Q2, we really saw that momentum of customer uptake really start to pick up.

We're seeing larger deals as part of that and we're increasingly focus on now not just getting new customer logos but driving the consumption of that platform. We're also very excited to see the partner momentum. And as we now have 150 competency partners, over 50 of those have already started to transact business that they're driving on the platform. And as I indicated, we expect VMworld to be a great showcase of the momentum that we're seeing in this area.

As we have indicated before, when a customer buys VMware Cloud on AWS, they get the whole stack. There is no sub composition of it. Whether they storage or compute separately, it is a full service offering. And part of that, we believe, is this unique attribute where they get the full software-defined data center on VMware Cloud.

We also believe that in many cases that will be the fastest way that they start to use some of the newer product areas and will actually drive them to have more on-premise use of those capabilities as well. It really is a unique hybrid cloud capability in the marketplace. And overall, that effect is really-we're starting to see some of those examples where customers really are becoming hybrid cloud customers of VMware. Zane, maybe you want to comment a bit more on some of the financial aspects for the VMC service?

Zane Rowe -- Executive Vice President and Chief Financial Officer

Sure, yes. Kash, as you highlight, not only the VMC service, but as we enter into more subscription and SaaS-like products, we would expect a little more predictability along with those. I'd point out we've got tremendous growth rate, as I highlighted with VCPP growing 30% and it becomes sort of a recurring theme for us over the last number of quarters with the success we are seeing with that model, which is more of the utility model as well. So, we're really pleased with the product set that's growing in that category.

We think it will be more predictable, but again, we're also pleased with both the SaaS-type models as well as the perpetual model, which is serving us very well as well.

Pat Gelsinger -- Chief Executive Officer

Yes and another example of that clearly is EUC, which is now clearly the majority of our EUC and Workspace ONE business is as-a-Service as well, so all of those continue to accelerate.

Zane Rowe -- Executive Vice President and Chief Financial Officer

That's right.

Paul Ziots -- Vice President, Investor Relations

Thank you, Kash. Next question, please.

Operator

Moving on, we'll have John DiFucci with Jefferies.

John DiFucci -- Jefferies -- Analyst

Thank you. So Pat and Zane, when I think about VMware over the last several years, there's been a lot of debate about a lot of things beyond the fundamentals. But for fundamentals is really a couple of things. It's like, OK , can this massively successful Act One compute virtualization connect-- what's going to happen here? Is that going to fall off? And the conclusion not too long ago was it's going to fall off dramatically.

And then it was a look and you have some Act Two, Three, Four, whatever, what's going to happen there? I'm going to stick with the first part because I know Paul wants me to ask this one question. The last few quarters you've had compute, including management tools, the license billings should be much better than I think even you would or a lot of people would have thought of a year ago. And I'm just curious of what's happening there. Is it really new workloads just coming on board because we can do a lot more with technology now and actually there's just a lot-- there's a proliferation of workloads and you're seeing a benefit of that as others are? Or is it some of these more mission-critical workloads that have-- they have a ton of infrastructure under them and you get paid depending upon that infrastructure.

Is that these are now being virtualized as management tools become more and more mature so enterprises are more comfortable virtualizing them? Or is it a little bit of both because of these numbers are, I think, surprising to a lot of people, especially the compute stuff.

Pat Gelsinger -- Chief Executive Officer

Yes, and I think there's a couple of things in there, John, that we'd point to. One is we clearly see this hybrid computing model, right, as the right answer. And as customers are beginning to see the strength of VMware in the cloud, they're becoming more confident in the strategic commitment to us on-premise. And VMware is uniquely positioned to benefit from the workloads on both the cloud and on-premise, and really bring that together in this hybrid model.

Clearly, some of our early VMC on AWS customers have demonstrated that. We've continued to see the momentum that we have in our VCPP business, which is maybe one of the strongest proof points that we had, yet another quarter of 30-plus percent growth in that business. Now we have 4,000-plus VCPP partners. The bulk of VCPP is vSphere, right, as Zane already commented.

IBM, we continue to have great momentum with IBM and not just that we're now at 1,700 customers on IBM, but those customers are growing in size and consumption as well. So, that's really a testament to it. We also see that some analysts have started to indicate that, "Boy, this idea of workloads moving back from the cloud as well as seen by a recent IDC, that forecast many companies will expect to have a more balanced view of this hybrid world in the future and they're going to repatriate some of their public cloud workloads." And overall, as I said, customers are strategically growing in their confidence of VMware and we see that in the renewal of the on-premise business, yearly renewals, refresh rates as well as increasingly consuming us on the cloud side of their business. All of those taken together, I think we see the strength in that core compute platform.

And I'll just emphasize, every time we do core compute, that's an opportunity for us to be selling the rest of the portfolio as well.

Zane Rowe -- Executive Vice President and Chief Financial Officer

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

John DiFucci -- Jefferies -- Analyst

Thank you, guys.

Pat Gelsinger -- Chief Executive Officer

Thanks.

Paul Ziots -- Vice President, Investor Relations

Next question, please.

Operator

Next question will come from Mark Murphy with JPMorgan.

Mark Murphy -- JPMorgan -- Analyst

Thank you very much and I'll add my congrats. Pat and Zane, your multiyear projections back as of March were included in a recent Dell filing, and they do show revenue growing about 10% and free cash flow growing, I think, closer to 12% to 15% annually for the next several years, and I think you're trending ahead on some elements of that. But I'm just curious, if you can provide any additional commentary, for instance, just your level of disability going out several years into the future. And maybe related to the prior question, just what you're seeing for core compute, and one of those were ASC 606 or 605.

And I'm not trying to ask a multipart question, but just really anything you think may be relevant in helping to frame up that guidance.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Sure, Mark. This is Zane. I'll point out, we don't typically go further than the current year or toward the tail end of the year, look ahead with our guidance, and we're not changing that practice. The S4 filing obviously had some projections that were specific projections for a specific purpose under a variety of assumptions that we wouldn't go into on this call.

So, I think it's a good question. Obviously, we're comfortable with how we look at the business and how we're thinking about the business strategically, but I wouldn't touch on adding any more color to that particular forecast.

Pat Gelsinger -- Chief Executive Officer

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

Pat Gelsinger -- Chief Executive Officer

Thank you, Mark.

Paul Ziots -- Vice President, Investor Relations

Next question, please.

Operator

Next from RBC Capital Markets, we have Matt Hedberg.

Matt Hedberg -- RBC Capital Markets

Hey, guys. I'll offer my congrats as well. It was great to hear about the continued success in NSX. And historically, a lot of that has been with security and micro-segmentation, but we continue to your a lot of other use cases.

I think, Zane, you highlighted a number of them in your prepared remarks. Can you talk, give us a little bit more color on how prevalent some of these micro-segmentation use cases are? And really, who's adapting them? I assume they're probably some of your larger customers but any additional color there would be helpful.

Pat Gelsinger -- Chief Executive Officer

Yes. Thanks for the question, Mark-- Matt. And overall, we are just really excited, 40% growth in NSX, again, this quarter. And this idea that we've called us the Virtual Cloud Network, where it's not just about data center networking and/or micro-segmentation, but this much expanded view.

And the portfolio has gotten much broader, we have NSX Data Center, NSX telco, NSX for containers, SD-WAN with VeloCloud, this hybrid use cases of-- are really benefiting from the multi-cloud capabilities that we have. We now have 82 of the Fortune 100 customers have now embraced NSX. NSX has generally been a higher-end enterprise product, but we're quickly seeing it become the standard for software-defined networking. We're now at a total customer count of 7,500 customers for NSX.

And as you suggest, the idea of these use cases, right, are becoming more profound where we see multi-cloud container, micro-segmentation, cloud migration, cloud native and now moving NSX to the branch with SD-WAN. SD-WAN, in particular, was hot in the first half of the year. While from a much smaller base, it's rapidly exceeding our expectations. Seeing both strength of customers adapting it for enterprise use cases, and that might be like for branches, for stores, all these remote configurations.

And we're seeing that both from an enterprise channel as well as service provider for partners like AT&T are particularly strong and leaning very aggressively into the VeloCloud aspect of the NSX family. So overall, Virtual Cloud Network, clearly this strategy and this broadening of our NSX has really captured the interest of the industry. Very, very solid position with customers. And as I said, 82 of the Fortune 100, it is now being seen as a standard for software-defined networking.

Matt Hedberg -- RBC Capital Markets

Thanks, guys.

Paul Ziots -- Vice President, Investor Relations

Thank you, Matt. Thank you, Matt. Next question, please.

Operator

Next from Cowen and Company, we have Gregg Moskowitz.

Matt Broome -- Cowen & Co. -- Analyst

Hi. This is Matt Broome on for Greg. What are you hearing and seeing around PKS so far?

Pat Gelsinger -- Chief Executive Officer

Yes, thank you. This is Pat. Overall, we re seeing that the idea of containers and Kubernetes is a very hot topic for enterprise customers. How do they take advantage of these new, modern development trends? And as a result, there's tremendous interest on how do I do that in an enterprise-grade way? And as part of that, we're clearly embracing this and making it, I'll say, a standard element of the VMware sales engagement.

We do believe that this idea of containers plus VMs is a very powerful idea, right? And for the vast majority of containers are run in virtual machines, it really is the best of both worlds. Containers giving the acceleration of many of the app development challenges such as deployment, configuration, patch, and update, where the virtual machine is really about networking, security management, automation, infrastructure optimization. So really, our strategy is to bring those two things together. And PKS is, by far, the best way to do that.

We exceeded our customer count goals that we had for the quarter. So, we're seeing the early logo counts accelerating. So, we're quite excited about that. Even though it's only a couple of quarters old, already ahead of our customer goals.

It's very exciting to see. And clearly, PKS, the combination of Pivotal's technology with Google Kubernetes and VMware SDDC, and NSX, in particular, right, is a very exciting, right, offering that enables customers to have an enterprise-grade Kubernetes container offerings. And that is clearly hitting the mark for customers today.

Matt Hedberg -- RBC Capital Markets

Thanks very much.

Pat Gelsinger -- Chief Executive Officer

Thank you, Greg.

Paul Ziots -- Vice President, Investor Relations

Thank you, Greg. Next-- sorry, Matt. Next question, please.

Operator

Next question will come from Jason Ader with William Blair.

Jason Ader -- William Blair and Company -- Analyst

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

Pat Gelsinger -- Chief Executive Officer

Yes, and overall, as I indicated, we really saw the momentum picking up at the end of the quarter. We're focused in the near term on customer count, right, and bringing customers on to the platform as we get to, I'll say, this robustness of customer, right, use, global reach, filling out the product feature capability. Then we'll really focus on consumption and really moving larger customers, right? Larger workloads, who have done this POC, this testing cycle, putting some test and dev workloads there. And then it really goes into saying, "Hmm, how do I expand then my data center with this? How do I replace my data centers with this? How do I turn on all of my DR done in a cloud-capacity way? How do I start to really exercise this hybrid compute capability in a unique and powerful way?" As we've indicated, some of the early customer examples for that, as we've talked about, MIT brings this quarter, we had another major customer come on to the platform in the food warehouse and supply distribution area.

And so we're seeing those early customers start to take advantage of it. For broad use of that, we do think that's not this year, right? We expect that to really ramp next year. And we'll have a lot more to say about the platform, the capability, the global rollout at VMworld next week.

Jason Ader -- William Blair and Company -- Analyst

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

Zane Rowe -- Executive Vice President and Chief Financial Officer

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

Jason Ader -- William Blair and Company -- Analyst

Thank you.

Paul Ziots -- Vice President, Investor Relations

Thank you, Jason. It's summer time. A lot of people are out and there are a lot of calls on today simultaneously, so we have one more question in queue. This would be the last question.

Operator

All right. Final question will be from Michael Turits with Raymond James.

Michael Turits -- Raymond James -- Analyst

Hey, guys. Thanks very much for getting me in. And sorry to be boring here, but I want to understand VMCA and speak specifically about the use cases. Are we seeing most of the lift and shifts [Inaudible] what we'd say traditional type architectural deployment of applications? Or are these more modern types of applications that are being built from scratch in Amazon?

Pat Gelsinger -- Chief Executive Officer

For the most part, these are existing VMware customers with existing workloads, and that's sort of the, I would say, the unique easy button of VMware Cloud on AWS, is that ability to seamlessly take advantage of this cloud capability. And that's exactly what we expected in Phase 1, right? Phase 2 of this, we absolutely see this that people will start to rethink their data center strategy. They will start to repatriate workloads. They will start to shift their view of what's on-premise and then the cloud.

And as a result, this is exactly where we would have expected it to be. We are largely selling into existing installed base VMware customers as a starting point, but we clearly expect as we go to Phase 2 and beyond that this service becomes a fundamental way of how people rethink how they deploy their hybrid cloud computing capacity. Never before have they had the ability to take advantage of a seamless hybrid cloud capability from the private cloud to the public and back again. And that, to us, is something that nobody but VMware can do.

Customers are getting excited about it. We're proving the early use cases in Phase 1, but we believe it's going to be much, much bigger than that. I'd also emphasize that at next world-- next week's VMworld, we'll clearly be showing a few examples that will really emphasize what we'll see say this hybrid nature, both being able to take lift and shift to the cloud but also from the cloud. And as that starts to occur, we think people will start to see this capability of the VMware Cloud in a much more strategic, comprehensive, and long-term strategic value way.

Michael Turits -- Raymond James -- Analyst

OK. Great. Thanks, guys.

Paul Ziots -- Vice President, Investor Relations

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

Pat Gelsinger -- Chief Executive Officer

Thank you. And as we said, Q2, another strong quarter for VMware. I'm very proud of our team. We continue to see broad-based strength across our diverse portfolio.

As we've indicated on our questions, we look forward seeing you, seeing the exciting announcements in technology innovations that we're going to unveil at VMworld next week, and we look forward to our Q3 call, where we'll update you again on our progress. Thank you very much.

Operator

[Operator signoff]

Duration: 40 minutes

Call Participants:

Paul Ziots -- Vice President, Investor Relations

Pat Gelsinger -- Chief Executive Officer

Zane Rowe -- Executive Vice President and Chief Financial Officer

Keith Weiss -- Morgan Stanley -- Analyst

Kash Rangan -- Bank of America Merrill Lynch -- Analyst

John DiFucci -- Jefferies -- Analyst

Mark Murphy -- JPMorgan -- Analyst

Matt Hedberg -- RBC Capital Markets

Matt Broome -- Cowen & Co. -- Analyst

Jason Ader -- William Blair and Company -- Analyst

Michael Turits -- Raymond James -- Analyst

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