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VMware Inc  (NYSE:VMW)
Q3 2019 Earnings Conference Call
Nov. 29, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the VMware Third Quarter Fiscal Year 2019 Earnings Conference Call. Today's conference is being recorded.

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

Paul Ziots -- Vice President, Investor Relations

Thank you. Good afternoon, everyone and welcome to VMware's third 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 in isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, acquisition, disposition and other related items, including the gains or losses on Pivotal Software and discrete items impacting our GAAP tax rate. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in the press release in 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 2019 quiet period begins at the close of business Thursday, January 17, 2019. In addition, VMware adopted ASC 606 on a full retrospective basis effective February 3, 2018. Accordingly, the financial results for the third 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 nine months ended November 3, 2017 adjusted for ASC 606 and the balance sheet as of the end of fiscal 2018 adjusted for ASC 606 in our press release. All year-over-year comparisons discussed on this call, including third quarter fiscal 2019 results and our forward-looking guidance fiscal 2019 are comparisons to the corresponding periods of fiscal 2018 as adjusted for ASC 606.

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

Patrick Gelsinger -- Chief Executive Officer

Thank you, Paul. Q3 was another strong quarter for VMware and we're pleased with our results, which continued to be driven by broadbased strength across our diverse product portfolio in all three geographies. In Q3, total revenue increased 14% year-over-year with non-GAAP earnings-per-share growth of 26% to $1.56 per share. Customers continue to turn to VMware to help them run, manage, secure and connect their applications in this multi-cloud multi-device world. The increasing importance of hybrid cloud and expectations for IT infrastructure to just work are expanding and driving core IT decisions toward VMware.

We hosted our Annual Industry Conference VMworld in Las Vegas and later in Barcelona. We had tremendous engagement with our customers and partners and unveiled key new product offerings, two acquisitions, expanded partnerships, as well as new innovative projects. This past quarter, VMware Cloud on AWS saw further momentum with data center expansion across multiple regions globally including the US, Europe and now Asia-Pacific including Sydney and Tokyo. I was pleased to have Andy Jassy join me on stage of VMworld 2018 to announce the new Amazon relational database service on VMware. Amazon RDS on VMware will make it easy for customers to setup, operate and scale databases and VMware-based software-defined datacenters and hybrid environments. This allows us to bring AWS services to hundreds of thousands of customers that use VMware as their private cloud infrastructure of choice.

This week, I was pleased to join Andy on stage at re:Invent where we announced two new offerings for AWS Outposts. AWS Outposts offers customers a seamless cloud experience for their on-premises environment. As an extension of the VMware Cloud on AWS, we will offer a variant which is specifically designed for AWS Outposts. Further, we announced VMware Cloud Foundation for EC2 that provides AWS native Outposts customers, a software-defined datacenter experience utilizing key VMware technologies such as NSX, vRealize Automation and Network Insight and AppDefense.

Our partnership with AWS is expanding rapidly and these offerings extend VMware's hybrid cloud vision with consistent infrastructure in operations for all VMware and AWS customers. We are excited about these new offerings as they build upon an innovative effort we began Beta for at VMworld called Project Dimension. Project Dimension from VMware enables customers to consume infrastructure that physically resides in datacenters branch or edge sites through a cloud managed as a service approach. It will extend the VMware Cloud to deliver a hyper-converged appliance as a service for a host of Edge data center and hybrid cloud use cases.

We also made a series of exciting joint announcements with IBM at VMworld Europe this year. Together, we announced the business agreement and major partnership expansion, including a new IBM services offering to help migrate and extend mission critical VMware workloads to the IBM Cloud and new integrations to help enterprises to modernize applications with Kubernetes and containers. IBM and VMware announced that VMware will use Watson to help improve customer services across VMware support portals. The two companies also outlined the formation of a joint innovation lab with dedicated engineers that will bring even more game-changing solutions and services to the market.

Our customers increasingly find themselves navigating a multi-cloud world which as well as significant business benefits can also create a unique set of operational challenges. To help address these, we announced the acquisition of CloudHealth Technologies. With over 3,000 global customers, CloudHealth Technologies delivers a cloud operations platform across AWS, Microsoft Azure, Google Cloud and VMware-based environment. With the addition of CloudHealth Technologies, we can deliver a consistent and actionable view into cost and resource management, security and performance for applications across multiple clouds.

As we continue to broaden our offerings and enabling native cloud environments, we were excited to recently announce the intent to acquire Heptio, a leader in the open Kubernetes ecosystem. Kubernetes is emerging as an open framework for multi-cloud infrastructure that enables enterprise organizations to run modern applications. Heptio's products and expertise help organizations deploy an operationalized Kubernetes. This acquisition will reinforce and extend our efforts with VMware PKS to establish Kubernetes as the de facto standard for infrastructure across clouds with our customers. As our portfolio expands with the additions of an exciting multi-cloud management plane with the CloudHealth acquisition plus Project Dimension and VMware Cloud Automation, which joined VeloCloud, VMware Cloud on AWS, our VMware Cloud Provider partners and Workspace ONE, we are significantly expanding our portfolio as SaaS offerings in the both public cloud and on-premises infrastructure.

At both VMworld events, we announced new NSX features a momentum across the VMware NSX networking and security portfolio to enable consistent pervasive connectivity and intrinsic security for applications and data across any environment. These new advancements including VMware NSX-T Data Center 2.3, extend advanced multi-cloud networking and security capabilities to AWS in addition to Microsoft Azure, and on-premises environments. These advancements help customers implement a more secure end-to-end software-based network architecture, a virtual cloud network that can support their multi-cloud enterprises and advances security, a new and compelling ways.

VMware VeloCloud is experiencing exceptional customer demand and was recently recognized as a leader in the inaugural Gartner Magic Quadrant for WAN Edge Infrastructure. The report profiling 20 vendors recognize VMware as a leader in both ability to execute and completeness of vision. And another expansion of our strong partnership SAP has made significant new commitments to the key innovative technologies of VMware like NSX and Workspace ONE as it continues to accelerate its own innovation and cloud expansion.

On the security front, as both security threats and regulatory pressure to control risk increases, organizations are moving from point security tools to embedded infrastructure solutions. To help businesses address these threats, VMware introduced vSphere Platinum edition to deliver comprehensive intrinsic security to protect applications, infrastructure, data and access across customers digital foundation. This new addition combines vSphere's native security capabilities with VMware AppDefense resulting in the delivery of advanced application security features fully integrated into the hypervisor.

We also recently unveiled new innovations to our intelligence-driven digital workspace platform, Workspace ONE furthering our vision to accelerate how workspace services can be secured, delivered and consumed in the modern workforce. In addition, Dell and VMware announced that we will provide customers with access to factory configured solutions through Dell ProDeploy for Workspace ONE as customers continue to transition to Windows 10.

In industry recognition, VMware was positioned as a leader in the Forrester Wave for Endpoint Management tools published at the beginning of November 2018. In the 2018 Gartner Magic Quadrant for Unified Endpoint Management, VMware was positioned in the leader's Quadrant. Rounding out a number of innovative announcements at VMworld, we unveiled VMware blockchain, a beta service that will provide permission blockchain for enterprise consortiums which is intrinsically more secure than public blockchains. We believe our financial services customer would benefit from this offering as it will provide the foundation for decentralized trust while delivering enterprise-grade scalability, reliability, security and manageability.

We demonstrated our commitment to attack as a force for good throughout the quarter including highlighting key customer stories such as International Red Cross and Mercy ships. Earlier this month, we also announced that we have achieved carbon neutrality and global operations, two years ahead of the company's scheduled 2020 goal. Throughout VMware's 20-year history, the company has pioneered solutions to help build a low carbon economy.

Finally, we are pleased with Dell Technologies progress toward completing a proposed exchange of Dell Class V tracking stock for Dell Technologies' Class C common stock or cash. Assuming the transaction closes following the stockholder vote scheduled for next month, this would simplify Dell's capital structure and increase alignment with VMware while maintaining VMware's independence. We have aligned our development teams with Dell around six key innovative areas: compute, software-defined storage, software-defined networking, hyperconverged, cloud, and Workspace ONE and continue exploring further opportunities to collaborate on strategic initiatives.

In closing, we continue to invest in our strategy for the future through organic and inorganic approaches. And these investments illustrate opportunities for next year and beyond. We continue to be pleased with our strong performance as our strategy and solutions resonate with our customers. Thank you. Over to you, Zane.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Thank you, Pat, and thanks to all of you for joining us today. We had solid Q3 performance which compares well to a strong Q3 last year, highlighted by the success we're seeing with customers, executing on their hybrid cloud initiatives. We're especially pleased with the large strategic partnerships we expanded in the quarter. Total revenue grew 14% and license revenue grew 17% year-over-year in Q3. Hybrid cloud subscription and SaaS comprised of over 10% of total revenue for the quarter and grew 35% year-over-year. We continue to invest for future growth in our cloud portfolio with recent acquisitions and investments in the business and number of which were announced during the quarter.

We acquired CloudHealth in Q3 as well as announced a definitive agreement to acquire Heptio which will further strengthen our cloud presence. These strategic investments will reinforce our efforts to help customers migrate to the hybrid cloud and add to our growing SaaS business and cloud platform. Our VMware Cloud Provider Program also continued its strong performance. Q3 non-GAAP operating margin was 33.7% and non-GAAP EPS was $1.56, up 26% year-over-year on a share count of 414 million diluted shares. Unearned revenue at quarter end was $6.2 billion. Cash and short-term investments totaled $13.5 billion.

In Q3, we once again had good growth in total revenue, plus the sequential change in total unearned revenue up 11% year-over-year as well as license revenue, plus the sequential change in unearned license revenue up 15% year-over-year. This follows a very strong Q3 for last year, which included our large multi-year deal with DXC. We exited Q3 with $144 million of license backlog compared with $141 million at the end of Q2. Included in this figure is one of our large strategic deals, which is effective in the fourth quarter. As we've mentioned, license backlog is the license portion of unfulfilled orders at quarter end. Our strong renewal rates and breadth of product performance in the quarter highlight the level of customer satisfaction we experienced across our products and services portfolio.

License bookings for our NSX portfolio including VeloCloud grew over 40% year-over-year in Q3. We saw a broad-based adoption of our NSX networking platform, which was included in nine of the top 10 deals this quarter. Also contributing to our success this quarter was the level of repeat purchases from customers. Our customers continued to embrace the expanding uses of NSX including automation, SD-WAN, and micro-segmentation for public cloud and containers. vSAN license bookings, which include stand-alone vSAN software as well as the vSAN software components of VxRail grew nearly 50% year-over-year with strong performance in both categories.

EUC license bookings were up in the high single digits year-over-year on top of over 40% year-over-year growth in Q3 of fiscal '18. Workspace ONE was once again the strongest driver of growth in EUC bookings in Q3 with the majority of Workspace ONE bookings this quarter sold as SaaS. Core SDDC, which is the combination of compute and management grew in the high single digits year-over-year for license bookings and in the mid-single digits for total bookings.

Management license bookings benefited from some of the larger strategic deals we signed during the quarter and were up in the high-teens with total management bookings up over 20% year-over-year. Compute license bookings grew in the low-single-digits and total compute bookings were flat year-over-year. Year-to-date fiscal '19, total compute bookings grew 4% and year-to-date fiscal '19 license compute bookings increased 9% year-over-year.

As we've mentioned before, large deals can create quarter-to-quarter variability in product performance and we expect to see continued variability depending on the contents of large deals with this quarter having an impact on compute, vSAN and EUC in year-over-year comparisons.

As a result of our Q3 performance, we are increasing full year fiscal '19 guidance for total revenue, license revenue, non-GAAP earnings per share, cash flow from operations, and free cash flow. We now expect fiscal '19 license revenue to be $3.708 billion an increase of 15.9% year-over-year and total revenue to be $8.882 billion, up 13% year-over-year. Non-GAAP operating margin for fiscal '19 is expected to be 33.9% with non-GAAP earnings per share increasing to $6.22 on the diluted share count of 413 million shares. Guidance for cash flow from operations for fiscal '19 is increasing to $3.600 billion, up from our prior guidance of $3.575 billion. Free cash flow is expected to be $3.350 billion, up from our prior guidance of $3.295 billion.

We're pleased with the synergies we're achieving with Dell this year and continue to expect $700 million in synergies for fiscal '19 up from the approximately $400 million in synergies we achieved last year. For Q4, we expect license revenue to be $1.150 billion, an increase of 12.9% year-over-year and total revenue to be $2.500 billion, an increase of 12.3% year-over-year. We expect non-GAAP operating margin to be 37.3% and non-GAAP earnings per share to be $1.87 on a diluted share count of 415 million shares.

I thought this would be a good time to give you a brief update on our outlook for FY '20. We expect the strength we're seeing in the business to continue next year and are currently planning on total revenue growth of approximately 12% for FY '20 which includes accelerating our growth in hybrid cloud subscription and SaaS. We're planning for non-GAAP operating margin of around 33% for fiscal '20, which is similar to the margin we guided to at the beginning of this year for FY '19. This incorporates ongoing investments to drive future revenue and earnings growth, including investments in our hybrid cloud subscription and SaaS portfolio. We are currently planning for the $11 billion one-time conditional special dividend to be paid toward the end of December. Following the special dividend, we expect to return to our previous capital allocation policy. We will drive growth in shareholder value through investing organically in the business, continuing our successful M&A strategy, and returning capital to shareholders via share repurchases.

In summary, our strategy is resonating with our customers and partners and the investments we're making in our portfolio are driving our success. Our Q3 results and increased guidance for FY '19 as well as our preliminary outlook for FY '20 reflect the strength we continue to see in the business.

With that, I'll turn the call 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. 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

Thank you. (Operator Instructions) We'll take our first question from Kash Rangan with Bank of America Merrill Lynch.

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

Hello, gentlemen and ladies in the room, congratulations on a spectacular finish here. And then before I get to happy holidays, I wanted to get Pat's insight on the AWS partnership, certainly, we were at AWS re:Invent earlier in the week and we continue to hear very positive things as it relates to the partnership and also the nature of demand for VMware products within AWS customers. Can you give us your perspective, how do you see this partnership playing out? And how does this potentially change the growth trajectory for VMware from a -- if you were to balance out the upward pressures versus the negative pressures, net-net, how do we think about this today versus the announcement a couple of years back? Thank you so much.

Patrick Gelsinger -- Chief Executive Officer

Hey, thanks, Kash, and happy holidays to you and the rest of the analysts on the call. Overall, I think yesterday's announcement at re:Invent just reinforced the momentum that we have in the partnership with Amazon. And clearly the VMware Cloud on AWS we've continued to see great customer uptake for that. We reinforced the expansion of that with the Relational Database Service, the RDS announcement that we did at VMworld and the yesterday's Outposts announcement, it just puts another pillar in that relationship. So now I'd say we're on chapter 3 of the partnership and overall here we just can see the continued momentum.

Obviously, the re:Invent conference that you're at was just spectacular and just the momentum that you saw there and clearly the VMware and we had many breakouts, participation, show floors, many of the activities. The VMware participation with them was very strong. We had good customer momentum on the VMware Cloud on AWS. This quarter the use cases are expanding. We're seeing customer acquisition accelerate on a few of those what I talked about yesterday, people like TEPCO, Whirlpool, JetBlue, IHS Markit all major new brands coming on the platform. And with VMware Cloud for Outposts and VMware Cloud Foundation for EC2, major new commitments and expansion of some market opportunity for VMware. And we see the VMware Cloud on Outposts as a opportunity to really expand the footprint for VMware Cloud. It's not only in the AWS environment, it's on-premise, we had announced that VMworld the role for Dimension.

We also believe that VMware Cloud for EC2, those are probably customers, we wouldn't have had opportunity with before and now right to the significant role for technologies like NSX that become heavily reinforced as the multi-cloud networking platform of choice. We just see that as reinforcing our strategic position. So overall, together with Amazon, we're seeing an enormous market opportunity in yesterday's activities just accelerated that even more.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Hey, Kash, this is Zane, I'll just add. I know you've always been a big proponent of the model changing. This will be a part of our FY '20 guidance and as you would expect the whole category becomes a bigger part of our FY '20 guidance and is incorporated in that. We expect bookings for FY '20 to exceed revenue in large part because of the growth we see in this category.

Paul Ziots -- Vice President, Investor Relations

Thank you, Kash. Next question, please.

Operator

Thank you. We'll now move onto our next question from John DiFucci with Jefferies.

John DiFucci -- Jefferies -- Analyst

Thank you. My question, my one question is for Zane and it has to do -- listen, you guys put up really good numbers here, Zane and one thing that there has been discussion around is your license billings at 15% growth is greater than your total billings, and it's not that this in the first quarter, I think it's happened every quarter this year. And I just want to make sure that we understand that, we meaning the entire investment community. I don't believe you have a ton of like term license or term like a subscription, a true lease license which with ASC 606 would have a big impact on the amount of license you'd recognize upfront and you'd recognize upfront here versus in the past?

And I don't think there's anything -- and this a question, is there any shifting of maintenance to sort of subscription happening or is this simply an indication of new business growing faster than the total business of VMware, which by the way, like I said, I think it happened every quarter this year. And frankly, that's just a good indication of future total revenue. I just want to make sure we understand what's happening here.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Hey, John. Sure. Yeah, I mean part of it, I think you touched on a number of aspects and many of them are true. A big chunk of that is the growth that we've seen in our hybrid cloud subscription and SaaS business is driving a lot of that license, that all gets categorized as license on the booking side. And we've seen significant increases obviously in that category. So we're comfortable with where the business is driving. There has been no change if you think about the dynamic with renewals, with SnS, we still have tremendous customer satisfaction. So there's no dynamic there.

I did highlight in my prepared remarks, a little bit on the DXC on the year-over-year basis, at times we'll execute a large ELA which will in-turn have a slight shift in dynamics between total and license bookings just because of the duration and significance of those bookings on the total pie. But we are very comfortable if you take it all in aggregate, we're comfortable with that mix, we're comfortable with the SaaS mix and the hybrid cloud mix that we are growing here at VMware. It's obviously highlighted in the guide for Q4 as well as in the guide for FY '20.

So nothing there I would call out other than the fact that the business is performing well and we feel very confident heading into next year.

John DiFucci -- Jefferies -- Analyst

Thank you. Thanks, Zane.

Paul Ziots -- Vice President, Investor Relations

Next question, please.

Operator

Thank you. We'll take our next question from Karl Keirstead with Deutsche Bank.

Karl Keirstead -- Deutsche Bank -- Analyst

Thanks very much. To me, the highlight of this call is the preliminary fiscal '20 revenue guidance of 12% that was frankly appreciably above at least what I was modeling. So maybe a two-part or Pat I just wanted to ask you what broader demand and macro assumptions you're embedding in that outlook? And then for Zane, what acquired revenues cloud help and others are you embedding in that 12% guidance? And are there any other variables that might explain that good number that you'd care to highlight? Thanks a lot.

Patrick Gelsinger -- Chief Executive Officer

Great. Thank you, Karl, sounds like you need to update your model. So we are well under way in the planning for next year, Karl. And with that, we're building detailed models for across all of the product lines, business investments, et cetera. And as indicated we felt it was the appropriate time to give some direction of where we expect to land next year. Overall, we are not expecting anything else say dramatic right with the economic view we continue to believe that technology is well positioned in the broader economic. So we expect that we're well outgrowing the overall economy as tech spend has the last couple of years. And as I've described that as tech breaking out of tech and what I'll describe there is a superpowers, mobility, cloud, IoT and AI that these continue to be powerful trends that make technology more important and more areas of the business.

But it adjusts those broader views, you really is that we are supporting that by the detailed planning that we are well under way with as we build our plan for next year and the product opportunities and Zane will describe a little bit more of the pieces inside of that as you're calling out in particularly with some of these new areas of revenue, hybrid cloud, SaaS opportunities, the new acquisitions contributing to that as well.

Zane Rowe -- Executive Vice President and Chief Financial Officer

Yeah, Karl, I would just add, as Pat mentioned, the SaaS portfolio has a far bigger impact on our bookings profile than it does the revenue profile. So if you look at the inorganic opportunities there for next year, I would say it's less than 1% of that increase would be attributed to the inorganic part of the portfolio. We are very pleased with the growth as you well know with all of the emerging parts of the portfolio that we would expect to see continued growth in next year.

Karl Keirstead -- Deutsche Bank -- Analyst

Got it. Thank you.

Paul Ziots -- Vice President, Investor Relations

Thank you, Karl. Next question, please.

Operator

Thank you. We'll take our next question from Matt Hedberg with RBC Capital Markets.

Matt Hedberg -- RBC Capital Markets -- Analyst

Hi guys, congrats on the results. I'll echo the comment on your initial FY '20 guide, that was -- it looks like a great starting spot. I wanted to ask about vSphere Platinum. I know it's early, but any feedback there would be helpful. And I'm wondering if that, in fact, could aid, your refresh -- could aid the refresh cycle and perhaps your growth next year as well. Just kind of wondering how that plays into your outlook.

Patrick Gelsinger -- Chief Executive Officer

Thanks, Matt. It was great running into your re:Invent yesterday. Overall, we think of vSphere Platinum as just a great platform to really, I'll say you'll have more enthusiasm for the opportunity that vSphere offered, vSphere refresh presents to our customers. So exactly like you suggest, we think this is a very compelling product, customers are quite excited about this intrinsic security aspect that this brings to the platform because we're really solving security problems that can't be solved any other way. And that's a very powerful new opportunity and while the product literally is just launched just to aid, the early response from customers is very exciting.

And you know as we've described, there's really two elements of our security strategy, making it intrinsic, right, and ensuring good. And this is really about flipping the entire security industry on its head from where it has been and we see that as a multi-year journey for us, but as we've done with NSX and micro-segmentation intrinsic encryption as part of vSAN intrinsic identity as part of Workspace ONE, we are out to change the security industry in a pretty fundamental way and we think vSphere Platinum is going to be a very effective proposition to go do that. And as you suggest, it reinforces the position of our compute opportunity.

Now overall, I'd also say that our compute opportunity for us is becoming embedded into the solutions that we sell, right. And here is one where we're sell them selling compute, right, we're almost always selling a platform, we're selling the complete VMware cloud foundation for SDDC, we're selling the full VMC opportunity for cloud, we're selling the full VMware cloud foundation for our VCPP partners, we're selling the full HCI solution and we're selling our vSAN hyper-converged and VxRail opportunities.

And with Platinum, we're selling security and compute. So almost everything we're doing is aligning against hybrid cloud multi and native cloud, network and security and digital workspace as the solutions that we're selling and that's what we're going to sell, that's how we're going to be talking about our business going forward to really deliver a higher value proposition to our customers across the board, much of which has compute as a foundation but it's increasingly about that overall solution that aligns to our customers' priorities.

Matt Hedberg -- RBC Capital Markets -- Analyst

Super. Helpful. Thanks, Pat.

Paul Ziots -- Vice President, Investor Relations

Thank you, Matt. Next question, please.

Operator

Thank you. We will take our next question from Jason Ader with William Blair.

Jason Ader -- William Blair -- Analyst

Thank you. The delta between compute license and compute total, I'm just trying to figure out here, it implies that maintenance is down and usually for mature business like this, the license will be below the maintenance, growth. So could you talk about that?

Zane Rowe -- Executive Vice President and Chief Financial Officer

This is Zane. As Pat mentioned, we're selling more solutions and one of the components of that is the success we've seen with VCPP which grew 30% in revenue on a year-over-year basis. And if you think about the dynamics there, that is allocated all toward the license and none of that has an SnS component to it. So that's the largest driver in that year-over-year mix that you're probably calling out. So, the business is going well. If you look at the standard sort of metrics by which we looked at the maintenance and SnS curves, we're very comfortable with that. This is just a dynamic between the VCPP and the allocated compute.

Patrick Gelsinger -- Chief Executive Officer

Yeah, and maybe just to pile on to that a little bit making sure VMware Cloud Provider Program, what we call VCPP is when our cloud partners, which are now over 4,200, basically are selling our solution as a service, right. And that business for us, we'd now -- I don't know how many quarters in a row we've posted plus 30% growth and a lot of that is the compute aspects that carries no maintenance revenue, right, it's all a subscription service revenue that goes through, so it does change the nature of that compute portion of the business. And this quarter VCPP, we had a couple of great announcements this quarter again in that space, the IBM partnership expansion, they're one of our leading VCPP partners and we significantly expanded that relationship.

We also announced the Alibaba partnership, which is another major VCPP addition to the program. And overall, we are selling more and more of our solutions through that. Rackspace just announced their expansion right of that partnership for VMware Cloud yesterday at re:Invent. So overall, we are seeing great momentum in that business. So, you're going to continue to see a bit of that shift in the vSphere license total mix.

Jason Ader -- William Blair -- Analyst

Very helpful. Thanks.

Paul Ziots -- Vice President, Investor Relations

Thank you, Jason. Next question please.

Operator

Thank you. We will take our next question from Michael Turits with Raymond James.

Michael Turits -- Raymond James -- Analyst

Good evening guys. Good quarter. Can you talk a little bit about investment into next year, very strong revenue growth guide, but in a flattish to down, we're actually, I believe down year-over-year on margins. So what is the incremental investment?

Zane Rowe -- Executive Vice President and Chief Financial Officer

Sure. Yeah, I'll start and then let Pat jump in on some of those opportunities. As I pointed out in my prepared remarks, 33% was similar to where we started out this fiscal year. So we see that investment level continuing. We've been very encouraged by the significant growth opportunities in the business, not only in the emerging buckets or investment buckets that we've talked you about historically with NSX and vSAN but also in other areas of the business. The biggest shift here is in the cloud business and what you're seeing both with what we plan on spending with Heptio and what we've seen in that general category has been a nice increase in investment spend and these are SaaS businesses. So you would expect to see revenue recognition over time, albeit improved bookings over the FY '20 period. Pat, if you want to touch on it --

Patrick Gelsinger -- Chief Executive Officer

I'll just, few points to add. Our long-term view here hasn't changed in any way. We continue to say that we're balancing leverage with investment and growth focus and we feel like we're picking a pathway through that, that really is maximizing the investment opportunities around us, in a balanced and prudent way. Clearly, this position of hybrid cloud is one that's very unique now for VMware and I think yesterday's announcement with Amazon just reinforce that even further the IBM positioning around the Red Hat acquisition. The world is aligning to the view that we've been taking for the last five or six years around this hybrid opportunity and we are really uniquely positioned in the middle of that to represent this hybrid cloud opportunity which accentuates our on-premise gives us a leadership position as customers move to as a service subscription model and hybrid multi-cloud environments or something that VMware is going to be uniquely positioned to present to the marketplace as a solution that we think everybody in the industry is going to need.

Paul Ziots -- Vice President, Investor Relations

Thank you, Michael. Next question please.

Operator

Thank you. We'll take our next question from Alex Kurtz with KeyBanc Capital Markets.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Thanks guys for taking a quick question here. Just back to the fiscal '20 guide in this roughly $400 million revenue delta where consensus is today. And I look at the core compute business and then I look at the stand-alone opportunities in NSX, vSAN. And Zane you talked about the hybrid cloud being a big part of the driver for next year. Just as we think about our models and think about sort of the core products that are driving the upside to the outlook, how should we kind of wake them as we look into next year, sort of where the big impacts are?

Zane Rowe -- Executive Vice President and Chief Financial Officer

Yeah, I mean, I would say we've taken pretty granular look here at our products and use, I'd say pretty solid assumptions on each of the elements. I think as you look at the growth that we've seen this year in areas in particular the NSX portfolio which is continuing to grow and continue to build momentum. As you look at -- as we touched on the cloud business in general and the SaaS business that we expect to continue its trajectory into next year. And then we've given you our mid-term view on compute. None of those assumptions have changed dramatically as we look into FY '20 and beyond. It's more just the product portfolio continuing to grow similar to how it has in the past and as you continue to build on that growth parts of the portfolio actually getting larger and continuing to build momentum.

So we are very pleased with the outlook that we have and obviously pleased with the '20 guide. Albeit the fact that we continue to invest in these areas and we are very excited about the areas that we are investing in. So there is nothing there that I'd call out. There is nothing inorganic that we haven't already announced and nothing, no sort of change in practice at all, as you think about updating your models.

Patrick Gelsinger -- Chief Executive Officer

Yeah, maybe if we go around the portfolio a little bit, just a bit, no real change in our view of compute management, plus compute continues to be the core offering, but increasingly as I said, we are going to be focused on delivering the solution, the full VMware Cloud Foundation, right, becomes the center point of it. As we said, the hybrid cloud offerings are really in hyper-growth mode, right, early but growing extremely rapidly, great quarter for NSX and that family, and as I've indicated the right, VeloCloud continues to be a super hot product. vSAN continue to have very solid growth rates for it and we point out for vSAN this quarter that we had a very unique compare. We had an extraordinary growth rate last year, so that will come toward that. But we continue to see a very, very solid growth in that piece of the business, a solid result for EUC as well. So every piece of the portfolio is performing very nicely for us and I think continuing that kind of outlook for the coming year is really where we've built our business plan around.

Paul Ziots -- Vice President, Investor Relations

Thank you, Alex. Next question please.

Operator

Thank you. We'll hear now from Heather Bellini with Goldman Sachs.

Heather Bellini -- Goldman Sachs -- Analyst

Great, thank you guys. Pat, I just wanted to get you probably been the most proficient in terms of your expectations for IT spending as we look ahead. So as you kind of look into your crystal ball for the upcoming calendar year, how do you feel customers are thinking about IT budget growth versus say the budget growth that you're experiencing this year? And I was actually also wondering if this year's budget growth is surpassing kind of the 6% that you laid out earlier in the calendar year? Thank you.

Patrick Gelsinger -- Chief Executive Officer

Thank you, Heather. And I appreciate the kind crystal ball comments. I'll say, we continue to believe that IT spend will be substantially above economic growth rate, right. And obviously some are suggesting there could be some economic turbulence, but we think even in spite of that, right, is this idea of tech breaking out of tech that you're going to see IT spend the comfortable four, five points above the economic growth outlooks. And we believe that will be the case on a sustained basis going forward. We believe this year, as I indicated, most of the analysts have taken the growth rates into the 5%, 6% range, I believe they're under-calling it a bit. So I do think it'll be in the upper 6s for overall IT growth rate when all of said and done for the year.

Part of that is driven that IT spend is no longer a CIO spend, but it's increasingly becoming a business spend, right, where you're seeing every aspect of business and more and more areas are contributing their budgets into the technology spend because it's becoming mission critical for every aspect of the business for how you run the factory, for how you run real estate, for how you do finance, for how you do marketing, every piece and that to us is why this broad-based tech spend is going to be very sustainable for years to come. So independent of the economic view, right. We comfortably see IT spend on a multi-year basis as well ahead of the overall economic growth and tech spend, we think will be a driver for that for several years to come. The next year shows to be no different than that as we're talking to customers pretty broadly across the industry.

Heather Bellini -- Goldman Sachs -- Analyst

Great. Thank you.

Paul Ziots -- Vice President, Investor Relations

We know it's a busy night for all of you. So we're going to let you get along with the rest of the things you have going. We'll take one last question.

Operator

Thank you. We'll hear now from Daniel Ives with Wedbush.

Daniel Ives -- Wedbush -- Analyst

Yeah, thanks for getting me in. My question is for Pat. I mean, I think there is no one better in better understanding of the cloud mark and hybrid cloud and the types of workloads moving to the cloud and yourself in the team. Can you maybe talk about what you're seeing from an inflection point in terms of just your conversations with enterprises on the move to cloud especially more complex AI really and workloads. Thanks.

Patrick Gelsinger -- Chief Executive Officer

Sure. And, I think more broadly as we think about cloud, five years ago, (inaudible) right to the cloud. All that's hard and not going to happen. We have to rebuild our on-premise environment. Now over the last year you've seen everybody say the hybrid cloud model is the model, right. As I've described it, the three laws, the laws of physics, the laws of economics and the laws of the WAN, where the laws of physics say, latency matters, right. And I can't do 500 millisecond round trip if I need a 100 millisecond response time, right, laws of economics. You're not going to send every surveillance image to the cloud, right. You need to process things locally and maybe I do learning in the cloud but imprints is going to be largely on-premise and laws of the land, right where you're going to see people say, hey, we're in X, Y, Z country, my data in computing is going to be in my country for anything that's related to running of our government infrastructure, national resources. So those effects we think are going to keep this hybrid cloud view firmly in place.

With yesterday's announcement, you say, now everybody right has come forward in a very meaningful way right from the major mega cloud providers with some form of their hybrid cloud strategy. And we believe as edge use cases become more prominent that's going to become even more pronounced. Because you're going to have enormous demands for data and community computing that'll be closer to the points of telephony or the source of the data over time.

As IT and businesses are grappling with us now they really are saying, wow this is a new form of software, I must become skilled in software. I need a hybrid cloud infrastructure and I need to be effectively delivering business value, right. And against that we're seeing a lot of interest right across the industry of how to go accomplish that. And maybe the fourth point underneath that is it got to be secure, right. There is just a constancy I need to build a more secure environment as I'm putting more and more of my business and more and more of my data onto that environment. So those would be some of the broader trends that we're seeing.

I think re:Invent yesterday while just the energy associated with that just reinforced many of those points in the industry. Very solid growth rates for well-positioned companies and we are very delighted by the benefits and the reactions we are getting from our customers, right. As they see our strategy really uniquely positioning them in this hybrid multi-cloud world.

Paul Ziots -- Vice President, Investor Relations

Thank you, Dan. And before we conclude, I think Pat, you may have a final comment.

Patrick Gelsinger -- Chief Executive Officer

Yeah, and I'll just say, thanks again for everybody on the call. Q3 was another good strong quarter for us. We continue to be very pleased with the strong performance of our strategy, solutions as they resonate with customers. We're also pleased to give you our preliminary outlook on fiscal 2020 and it really reflects the strength we continue to see in the business and our strategy, and we look forward to talking to you on our next conference call. And happy holidays to all of you and thanks for giving us a little bit of your time today.

Operator

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.

Duration: 48 minutes

Call participants:

Paul Ziots -- Vice President, Investor Relations

Patrick Gelsinger -- Chief Executive Officer

Zane Rowe -- Executive Vice President and Chief Financial Officer

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

John DiFucci -- Jefferies -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Jason Ader -- William Blair -- Analyst

Michael Turits -- Raymond James -- Analyst

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Heather Bellini -- Goldman Sachs -- Analyst

Daniel Ives -- Wedbush -- Analyst

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