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VMware Inc (NYSE:VMW)
Q2 2020 Earnings Call
Aug 22, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the VMware Second Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions]

And at this time, I'd like to turn the conference over to Mr. Paul Ziots, Vice President of Investor Relations. Please go ahead, sir.

Paul Ziots -- Vice President, Investor Relations

Thank you. Good afternoon, everyone, and welcome to VMware's second quarter fiscal 2020 earnings conference call. On the call we have Pat Gelsinger, our 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 as well as separate slide deck providing information on our proposed acquisitions of Pivotal Software and Carbon Black can be viewed in conjunction with live remarks and downloaded at the conclusion of the webcast from ir.VMware.com.

On this call today, we will make forward looking statements, that are subject to risks and uncertainties. These forward-looking statements include statements regarding VMware's proposed acquisitions of Carbon Black and Pivotal. Actual results may differ materially as a result of various risk factors, including risks related to our ability to consummate the acquisitions as planned, as well as additional risks 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 and 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 and employee stock transactions, acquisition, disposition and other 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 of the 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 2020 quite (ph) period begins at the close of business Thursday, October 17, 2019.

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

Patrick P. Gelsinger -- Chief Executive Officer

Thanks, Paul. As digital transformation accelerates in enterprises, we see three secular trends becoming stronger. First, multi-cloud is the new model for enterprise IT. Second, digital transformation is driving accelerated pace of cloud-native app development. Last but not least, as businesses move applications to the cloud and access it over distributed networks from a diversity of endpoints, security has become a significant challenge and priority. To address these trends, we are thrilled to announce our intent to acquire Pivotal and Carbon Black. It's an exciting day for VMware, as these acquisitions address critical priorities of CIOs and will meaningfully expand our ability to power our customer's digital transformation.

Next week at VMware, we will be announcing major expansions of our Kubernetes in modern apps portfolio and how Pivotal complete such strategy. Together with Heptio and Pivotal, VMware will offer a comprehensive Kubernetes space portfolio to build, run and manage modern applications on any cloud. Specifically, Pivotal has over 350 customers and it's used by many of the largest companies and governments worldwide including a third of the Fortune 100 today. Their customers have seen a significant acceleration in the delivery of modern applications. Many of our largest customers run Pivotal software at scale on VMware and have seen a significant acceleration in their delivery of modern applications.

Having jointly delivered multiple versions of PKS to our customers, their message is clear. They want to see the two companies come closer together as a single entity. By doing this, we can accelerate the benefits to existing Pivotal customers and with VMware's installed base, reach incredibility, we believe we can massively accelerate customer adoption. Pivotal is a platform leader offering a set of developer technologies and strategic services that is transforming how the world develop software. Pivotal's developer community has an estimated 3 plus million developers, Spring Boot is now downloaded over 75 million times per month, and is the most popular java developer framework today.

Pivotal Labs and Pivotal's platform led the market to containerized the application and has enabled developers to quickly and securely get code from development to production. Today, over 50,000 application instances run on Pivotal's platform across all customers.

Kubernetes is driving the biggest shift in enterprise architecture since Java, virtualization and cloud, and Pivotal has begun a major shift to Kubernetes. Developers are adopting Kubernetes, because they want to ship software faster and more frequently with the goal of better customer experiences and ultimately drive business growth. IDC estimates that over 500 million new apps will be built in the next 5 years using cloud-native methods and tools. The winners in multi-cloud Kubernetes will therefore be those that excel at meeting the needs of developers, as well as meeting the needs of enterprise IT. Pivotal is bringing their expertise and outstanding developer experiences to the Kubernetes platform.

VMware has increased its Kubernetes related investments over the past year with the acquisition of Heptio to become a top three contributor to Kubernetes. And at the VMware next week, we will describe a major R&D effort to evolve VMware vSphere into a native Kubernetes platform for VMs and containers. With VMware's enterprise, installed-base reach and credibility, we believe we can massively extend the customer potential. The opportunity is clear and significant. The transition to Kubernetes is under way and the time to move decisively is now. With the acquisition of Pivotal, VMware will go from the best infrastructure software company to the best infrastructure and developer software company.

We can now serve our customers from hypervisor to developer tooling, as they embark on the journey to cloud and undertake the biggest modernization in history. We are proud to bring this company into VMware.

Now, let's talk about Carbon Black. As enterprises increasingly become digital, cyber security and protection of enterprise apps data network endpoints and identity is a primary concern across the C-suite and boards. Yet, as I have said before, the current cyber security industry is simply broken and ineffective with a plethora of fragmented tools, bloatware, agents and no cohesive platform architecture. But today, we are taking a huge step forward in security by bringing Carbon Black into the VMware family to deliver an enterprise grade platform to protect workloads, applications and networks from device to cloud.

Carbon Black has created an innovative cloud-native security platform, leveraging and AI powered data lake, which today sees and stops approximately one million cyber attacks per day. Carbon Black's, smart lightweight agent provides comprehensive protection of endpoints and defense against the variety of threats and breaches. Carbon Black is rated at leader by industry analyst with more than 5600 customers. Carbon Black's assets are complementary and synergistic to existing VMware security products, AppDefense, Workspace ONE, NSX and SecureState.

Building on our existing partnership, the combination of these assets will create a highly differentiated intrinsic security cloud platform with extraordinary telemetry and network effects. We intend to create deep integrations. Agentless on the server workloads side, while also collapsing endpoint management and endpoint security into an industry first unified workspace solution. We also plan for integrations with NSX and SecureState leveraging our unrivaled position and workloads through our unique position in the network. And two, our extensive endpoint footprint, we can uniquely and radically reduce the attack surface, thereby intrinsically preventing many sophisticated attacks and automating threat response.

The distribution and enterprise reach of VMware, Dell and Secureworks will further accelerate the adoption of Carbon Black in the enterprise, both through direct selling and through our vast partner networks. With this acquisition, VMware will be able to take a significant leadership position in security for the new age of multi-cloud modern apps and modern devices.

Now, let's recap Q2. In Q2, we demonstrate a solid performance across our diverse product portfolio and in all three geographies with good rebuilding a momentum in the Americas. Total revenue for the quarter increased 12% year-over-year with non-GAAP earnings of $1.60 per share.

On the hybrid cloud front, VMware Cloud on AWS is now present in 16 regions globally, with the addition of the Seoul and Sao Paulo AWS regions in the quarter. We are seeing customers who initially made smaller deployments on VMware Cloud on AWS grow those investments. Key wins this quarter include IHS Markit and Equinix, who is deploying VMware Cloud on AWS and is also building a number of compelling use cases to help customers operate in a hybrid and multi-cloud world.

Additionally, we are seeing early customer traction for Azure VMware Solutions, which is a comprehensive software defined data-center, leveraging VMware Cloud Foundation that is sold and supported by Microsoft on their Azure cloud. Within the first two months, 20 customers have been on board, including Gap and Dot Foods. In July, Google Cloud and VMware announced Google Cloud VMware Solution, a new service that will allow organizations to run VMware Cloud Foundation in Google Cloud platform.

VMware Cloud Foundation serves as the hybrid cloud infrastructure across multiple cloud models, including one, customer manage clouds on custom built and Hyper-converged solutions. Two, Partner Managed Cloud, such as IBM, Azure, and now Google Cloud along with our Cloud Verified partners. And three, VMware Managed Clouds with AWS and Dell EMC. Customers such as Comcast and FedEx are taking advantage of VMware Cloud Foundation to help build out their cloud infrastructure.

We also continue to help customers operate in a multi-cloud world. Earlier this month, we unveiled VMware HCX Enterprise, which accelerates large scale live migrations of VMware vSphere and now non-vSphere workloads to help customers operationalize multi-cloud and hybrid cloud transformations. We are also rapidly building out the CloudHealth Platform, including recent customer wins with Baird, Discovery Limited and Moody's.

In Q2, VMware Secure State was made available on CloudHealth by VMware. Secure State solves problems such as those recently seen in the industry, providing a security solution for DevOps-friendly cloud-native applications. CloudHealth is addressing the most pressing customer challenges around multi-cloud visibility, cost, security, automation, and governance.

The networking and security portfolio continues to demonstrate strong momentum. Our customers are leveraging NSX across the data center and cloud. VMware be realized for management and visibility and VMware SD-WAN by VeloCloud for their distributed business requirements.

This quarter, we also added Avi Networks, a leader in multi-cloud application delivery services. This natural addition to the NSX platform further enable VMware to bring a software-based solution to a multi-cloud world. In Q3, we also acquired Veriflow to augment our vRealize network and side platform. We saw accelerating momentum for our Workspace ONE platform this quarter, as we continue to help customers provide employees a great digital experience across all apps and devices, while maintaining the highest security standards.

Finally, in addition to the acquisitions we announced today. In Q3, we acquired Bitfusion, which enables VMware to make GPU an FPGA capabilities officially available for AI and machine learning workloads in the enterprise. We also acquired Uhana, which brings AI techniques into VMware software approach for the telecom industry, helping them accelerate their journey to 5G.

And with that, I'd like to hand it over to Zane.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Thank you, Pat. I'll begin discussing our Q2 results, and then follow-up with more detail on the financial impact acquiring Pivotal and Carbon Black will have on our business. We're pleased with our performance in Q2. We reported 12% year-over-year growth in total revenue and license revenue, driven by strength across our broad products and solutions portfolio in all three geographies. Our Cloud businesses once again performed very well with hybrid cloud subscription and SaaS revenue accelerating to over 40% year-over-year,

We expect Pivotal and Carbon Black to meaningfully accelerate future growth in this recurring revenue category, which comprised of 12.5% revenue in Q2.

Our second quarter non-GAAP operating margin of 32.9% was in line with guidance and reflected continued investments in our strategic cloud initiatives. Non-GAAP earnings per share for the quarter was $1.60 on a share count of 416 million diluted shares. Unearned revenue at quarter end was $7.5 billion and cash and short-term investments totaled $2.9 billion. Growth in total revenue, plus the sequential change in total unearned revenue for the quarter was 17%, driven in part by momentum in our hybrid cloud subscription and SaaS businesses.

License revenue, plus the sequential change in unearned license revenue grew 12% year-over-year. At quarter end, we had license backlog of $13 million and total backlog of one $117 million. Over time, one of the metrics that will better reflect the growth of our hybrid cloud subscription and SaaS businesses is RPO or Remaining Performance Obligations. RPO captures all of our committed and non-cancelable future revenue, both billed and unbilled, including future revenue related to our growing hybrid cloud subscription and SaaS businesses. RPO at quarter end was $8.05 billion.

Our broad product and solutions portfolio performed very well in Q2. Core SDDC license bookings grew in the high single-digits year-over-year with total core SDDC bookings up 11%. Compute license bookings grew in the mid single digits, with total compute bookings up 12% year-over-year, and management license bookings increased in the mid-teens with total management bookings up 10% year-over-year. NSX license bookings were up over 30% and vSAN license bookings grew over 45% year-over-year.

We were pleased with the performance of our SaaS offerings in Q2, especially within our end-user computing business. License bookings for EUC accelerated to a growth rate of 20% year-over-year, primarily driven by growth of Workspace ONE. In Q2, we repurchased $446 million in stock and ended the quarter with approximately $1.3 billion remaining under our current repurchase authorization, which extends through the end of FY'21.

Turning to guidance. For the full year, we continue to expect total revenue growth of 11.8% year-over-year to $10.30 billion, excluding the Pivotal and Carbon Black acquisitions. While our full-year total revenue guidance remains unchanged. The increasing momentum in our hybrid cloud subscription and SaaS businesses, for which revenues recognized over time is driving a slight change in our license revenue mix. As a result, we now expect license revenue of $4.215 billion for FY '20 up 11.3% year-over-year. The strength of the overall business including services allocation of hybrid cloud subscription and SaaS, PSO and software maintenance is contributing to total bookings and total revenue strength, and offsetting the timing impact on license revenue for the full year.

We continue to expect a non-GAAP operating margin of 33% for FY '20 and expect a small increase in non-GAAP earnings per share to $6.54 on a diluted share count of 417 million shares. Cash flow from operations is expected to be $3.950 billion and free cash flow is expected to be $3.630 billion, unchanged from our prior guidance.

Moving to our Q3 guidance. As bookings from hybrid cloud subscription and SaaS generally convert to revenue over a longer period of time, as compared to our on-premises software sales. We expect license revenue mix to be impacted in Q3, as we do for the full year. License revenue in Q3 is expected to be $950 million, an increase of 7.5% year-over-year, and total revenues is expected to be $2.4 billion, up 9.3% year-over-year. Strength in overall bookings is expected to continue in Q3.

We are forecasting growth and total revenue, plus the sequential change in total unearned revenue to be approximately 13% year-over-year in the quarter and up about 2 percentage points versus Q3 FY '19. For Q3, we expect a non-GAAP operating margin of 30.3% and non-GAAP EPS of $1.42 per share on a diluted share count of 416 million shares. Detailed guidance for Q3 and the full year is contained in the slide deck on our website accompanying this call.

Turning to Pivotal and Carbon Black. We believe these acquisitions will help us accelerate delivery on our portfolio strategy in the areas of building and protecting any app, on any cloud and any device. These acquisitions will also accelerate the growth of our subscription and SaaS revenue. Adding both to our portfolio will be of mutual benefit. In particular, we will deepen Pivotal's and Carbon Black's penetration with enterprise customers by leveraging the VMware and Dell Technologies go to market capabilities and breadth of technology solutions. We expect Pivotal and Carbon Black together will add more than 2 points of revenue growth and over $1 billion in mostly hybrid cloud subscription and SaaS revenue to VMware's total revenue in year one, and meaningfully increase our total revenue in hybrid cloud subscription and SaaS to over $3 billion in year two.

We expect the combination of Pivotal and Carbon Black together to be operating income positive in year one, and both cash flow positive and EPS accretive in year two. The integration of these two businesses into the VMware franchise will both enable accelerated top line growth, as well as allow these businesses to grow globally and operate at scale.

With regards to Pivotal, VMware has agreed to acquire Pivotal at a blended price per share of $11.71, comprised of $15 per share in cash to public stockholders and VMware Class B common shares exchange for pivotal Class B common shares held by Dell Technologies at an exchange ratio of 0.055 VMware shares for each Pivotal share. The transaction has an enterprise value of $2.7 billion. Dell Technologies will receive approximately 7.2 million shares of VMware Class B common stock. In aggregate, this results in an expected net cash payout for VMware of $0.8 billion.

The impact of the equity issued to Dell Technologies would increase its ownership stake in VMware by approximately 0.34 percentage points to total of 81.09% based on the shares currently outstanding. VMware currently holds 15% of outstanding shares of Pivotal. Once closed, we will update VMware's historical financial statements to reflect the historical performance of Pivotal.

With regard to Carbon Black, VMware has agreed to offer $26 per share in cash to Carbon Black stockholders, which equates to an enterprise value of $2.1 billion. This results in an expected net cash payout for VMware of $1.9 billion. In total, we expect net cash outlay of $2.8 billion for both acquisitions and we're comfortable with the total funding requirements to close. We have the flexibility to fund the acquisition through cash on our balance sheet and access to short-term borrowing capacity. We anticipate both acquisitions will close in the second half of FY'20.

We expect to complete our existing buyback authorization of approximately $1.3 billion by the end of fiscal '21. Additional details on both acquisitions can be found in the press releases and Q2 earnings slide deck accompanying this call, as well as a separate slide deck for the proposed acquisitions.

In closing, we are pleased with our solid Q2 financial performance and the ongoing strength of the business. These acquisitions will drive incremental top line growth in our hybrid cloud subscription and SaaS businesses, as well as tightly integrate with and benefit our existing products and solutions. The combination of Pivotal and Carbon Black will contribute to our operating income in year one, and be accretive to EPS and free cash flow in year two, helping drive value for VMware, while addressing two of our customers most strategic priorities.

I'll turn it back to Pat, before we begin with the Q&A.

Patrick P. Gelsinger -- Chief Executive Officer

Thanks, Zane. The acquisitions announced today will advance our goal of offering more comprehensive and trusted cloud agnostic solutions. Pivotal strengthens our ability to help our customers build modern apps with velocity and efficiency and Carbon Black strengthens our ability to protect enterprise applications and workloads with an intrinsic security platform. With both companies, we will be the only vendor able to deliver software solutions that enable customers to build, run, manage, connect and protect any app on any cloud and any device.

We look forward to welcoming our customers, partners and industry peers to VMware next week, where we will showcase our strategy and unveiled new offerings and updates across the portfolio and ecosystem.

Thank you. Over to Paul to manage the Q&A.

Paul Ziots -- Vice President, Investor Relations

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

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] We'll take our first question from Raimo Lenschow from Barclays. Please go ahead.

Raimo Lenschow -- Barclays Bank -- Analyst

Hey. Thanks for taking my question and interesting times at VMware. Can I ask on the Carbon Black, please. How do I have to think about the deal? Is that kind of -- is this kind of like an EUC extension. So we have like a more broader portfolio or is this VMware moving more into that security space and hence kind of over time, we think about the buildup of the security portfolio even further. Can you help me understand that please. Thank you.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. Thanks, Raimo. I'll start on this one. And you really want to think about as the latter. This is VMware building a security cloud platform and we expect that there is integrations across our portfolio that will be benefited by the Carbon Black technology. First, we're excited about Carbon Black. We see that the technology that they've built, the position that they have as a player in the security industry is a strong one. But in addition to that, we see that the opportunities for integrations on NSX, on AppDefense, an area that we were already working with Carbon Black to enhance our AppDefense technology and core vSphere. And of course in the light-powered agent becoming an integrated solution with the Workspace ONE offering.

Together, VMware and Carbon Black, we think will uniquely provide customers advanced threat detection in depth that behaviors, insight to prevent suffocated attacks and accelerate responses across that platform. And as I said in my prepared remarks, Raimo, we really think the security industry is broken, right? And the idea of individual products that are bolted on and patched on is just ineffective for customers. And today, we're launching a major step to deliver an end-to-end intrinsic security platform and we see the Carbon Black assets as a huge accelerant and complement to our offerings to do exactly that.

Raimo Lenschow -- Barclays Bank -- Analyst

Perfect. Very clear. Well done.

Paul Ziots -- Vice President, Investor Relations

Thank you. Raimo. Next question, please.

Operator

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

Karl Emil Keirstead -- Deutsche Bank -- Analyst

Thank you very much. Zane, on the decision to guide down on license revs for the second half. Do you mind just repeating the explanation so we're all clear. And then perhaps in a related question to Pat. Pat last quarter, you cited some macro uncertainty and you flagged the Americas sales reorg. I'm just wondering from your perspective, did either of those couple of issues perhaps play into the decision to revise your outlook on the license growth side in the second half. Thanks a lot.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Sure. Karl, I'll start. As I mentioned, we're very pleased with the bookings strength we've seen in our hybrid cloud subscription and SaaS portfolio. But with that, it does drive a slight mix shift in revenue, because as you know, in the subscription or SaaS business, you tend to recognize that revenue over a period of time. And with the third quarter and the strength we expect to see in the fourth quarter with some of the other attributes, be at PSO strength, as well as some of the renewal strength we're seeing. We do have a period in the third quarter where we don't have that growth as you've seen it before.

But we believe will make it up in the second half of the year. Given the strength we've seen in RPO, which as I mentioned, was about $8 billion at the end of the quarter, as well as the strength we continue to see in the bookings side. So it's really that hybrid cloud and SaaS timing. And when you recognize that, revenue that's driving this change in mix between license and total revenue.

Patrick P. Gelsinger -- Chief Executive Officer

And as we consider the overall economic outlook, we simply say no, this is really a mix item that as Zane has described for the third quarter and the license expectation as we see an increasing focus on our hybrid cloud and subscription products. We do believe that, as we see that second half outlook, that there is uncertainty in the macro environment and nobody is immune from that. We have seen -- continue to see good performance by our team. And as we noted in the formal remarks, we have seen a very nice reacceleration in our Americas business. They're performing very well and we expect that the reorganization that we did last quarter has already started to produce results and those will accelerate as we go through the year and into next with the productivity that we expect as a result.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Hey, Karl. Just to give you an example on the mix shift. I just wanted to add. If you just took a look at our EUC business, which has seen strength throughout the course of the year. If we had the same ratio of SaaS bookings as we had last year, we would have double-digit total revenue and double-digit license revenue growth in the third quarter year-over-year. So it's simply that mix shift. And of course, we're pleased with the growth we're seeing in that category, because you ultimately get that revenue, but it's just over a slightly longer period of time. But we think the bookings growth is incredibly strong in that category and then more broadly across the portfolio.

Karl Emil Keirstead -- Deutsche Bank -- Analyst

Thank you.

Paul Ziots -- Vice President, Investor Relations

Thank you, Karl. Next question please.

Operator

Thank you. We'll take our next question from Kash Rangan from the Bank of America Merrill Lynch.

Kasthuri Gopalan Rangan -- Bank of America Merrill Lynch, -- Analyst

Yes. I'll stick to one question with multiple parts, Paul. The question is that, with regards to Pivotal, what are the things that the VMware management -- congrats on the Carbon Black acquisition. But with Pivotal, what are the things that VMware can do to Pivotal either structurally from a technology perspective to position it better, given all of the disruptive trends that are happening in that space. Coupled with what could you do from a distribution standpoint, because VMware typically has been just infrastructure, you're getting into apps development, which is a completely a new buyer, new segment of the markets. How are you thinking about this transition? What are the things you're going to be doing differently? Thank you.

Patrick P. Gelsinger -- Chief Executive Officer

Yes.Thanks, Kash. And overall, we believe that the developer space is going through a massive transition and we view Kubernetes as this important strategic shift. As I said in my formal remarks, significant at virtualization, cloud and Java. And with that, what we see is the opportunity to be this full stack provider and we believe we need to own and control an end-to-end Kubernetes platform that allows us to build, manage and run Kubernetes environment. And maybe somewhat analogous to compute. We have a full stack with VMware, vSphere and vCenter or networking with NSX, a full stack of capabilities. And we believe this ability to own that full stack is something that gives us great market opportunity.

Also, we've clearly heard from customers who are demanding this move. Pivotal, the 350 customers, their penetration in the Fortune 100 today, combined with the learning's that we've done with them in the 250 plus PKS customers, they are asking us to make this move to bring this together. And we also see as you suggest in your question, that the go to market synergies will allow us to go faster. And while we've sort of taken the Heptio technologies and we'll be describing acceleration of how we embed this in the core VMware platform at VMworld next week.

We believe we have the opportunity to bring these next-generation developer platform and infrastructure services all based around Kubernetes to a much, much larger market than was ever possible before. And that's where VMware's enterprise, credibility and reach will come to great benefit. And we believe this will be a great acquisition for us and for our customers and for our shareholders.

Paul Ziots -- Vice President, Investor Relations

Thank you, Kash. Next question please.

Operator

We'll take our next question from Mr. John DiFucci from Jefferies. Please go ahead.

John Stephen DiFucci -- Jefferies -- Analyst

Thank you. My question is for Pat. Pat, I sort of -- I get the Pivotal acquisition, but I'm having a hard time with the Carbon Black acquisition. I mean, you say the security industry is broken. And I get the Carbon Black is part of that next-gen player and its corporate endpoint. But it really -- it's -- I don't think it's considered the cream of the crop out there and that's kind of what you've done in the past when you do things like this. When you think of era, which became important to security. It wasn't at first, but it became and that was, that was transformative. This is something -- I'm just struggling with it, because it's a really competitive market and there are some players out there like CrowdStrike (ph) and others, and that one is-- Carbon Black has struggled at times. And I'm just wondering what all this means buying this asset now?

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. We believe that, the opportunity is a market and disruption. The security market is going through a massive transformation, legacy players are being disrupted. There is a major shift in the characteristics of the market and we also did a very in-depth analysis and diligence process with regard to the underlying technology of Carbon Black and we came away very satisfied as they are making their move to a cloud delivered service and capability or growing nicely in their cloud offerings.

We also saw the synergy benefits, and I'll remind you that we're working with Carbon Black for the last two years around AppDefense. So we've really been de-risking this acquisition for the last two years as we've been getting to know them and start building and shared go to market with them. And I'll also remind you, John, that when we acquired AirWatch, they were not number one, they became number one in the hands of VMware, as we improve their execution, their scale and distribution as a result, and that was clearly a case where it was -- who will emerge as the winner. And today, it's very clear that we emerged as the winner in taking that asset forward.

And we firmly believe that we can do that again with Carbon Black. I'd also emphasize that we are -- as I said in my earlier remarks, John. We're integrating it into NSX, into vSphere, into Workspace ONE. We have strong points of synergy. Collectively, we believe we'll have more telemetry, more visibility, more data across that spectrum than any other vendor in the industry. Finally, as we look at the enterprise distribution capacity of VMware is significant as an accelerant, but also with Dell. And this is an area where Dell and their endpoint to offerings is very substantial.

And as we've done in our partnership with Dell another regards, we believe that we have reached into market that no other vendor has. And we believe that fundamentally customers want a different answer in this space. The market is not being effective today. We need a platform approach, customers have been buying and spending way too much on security, getting way too little security as a result. And this is an opportunity to change that market entirely and we're thrilled to have the asset to make a bold move in this space.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Hey, John. I'll just point out, as you would expect, we've done a fairly thorough review on the financials and we believe strongly that adding both Carbon Black and Pivotal to the portfolio, not only helps the portfolio, but also helps the individual companies. And we think it will be well integrated, and these are two obviously strategic areas that we think will drive significant incremental growth and value to the enterprise. So we feel comfortable with it.

Paul Ziots -- Vice President, Investor Relations

Thank you, John. Next question please.

Operator

We'll take our next question from Mr. Walter Pritchard from Citi. Please go ahead.

Walter H Pritchard -- Citigroup -- Analyst

Hi, thanks. Zane, a question for you hybrid and SaaS piece. Understanding your guidance in the future will include the Carbon Black and Pivotal which will -- which will impact that. But if we just look at the core, I think it's 12.5% or so that's been -- that's accelerating now. I mean, how do you think about the progression of that sort of move to subscription? How much of that is cannibalistic to license? And how should we expect, I mean, we've seen a lot of companies kind of go through this over time. How should we expect that to suppress license growth as we look out the next several years?

Zane Rowe -- Chief Financial Officer and Executive Vice President

Yes. Walter, it's a great question. I mean, we've looked at it very carefully, and obviously, it is a balance. There aren't a tremendous amount of products today that we're selling other than the EUC portfolio, where you have those levers to pull in one versus the other. And obviously, I gave you the example of EUC, where we've consciously leaned heavily on SaaS. We believe it to generate incremental long-term value to that part of the portfolio. We continue to believe that we can grow both the perpetual side of the business as well as grow the SaaS side.

And with the acquisitions today, as you point out, we believe it's not only going to add top-line growth but meaningfully change the dynamic of the company into more of a SaaS subscription and SaaS franchise. And we're encouraged by what we've seen in the early uptake in that area. So I'd say today, we'll get into this a little bit more as we give you more guidance for future years. Obviously, this will take a large step-up in hybrid cloud subscription and SaaS as a category. I mentioned, that's growing over 40% of this quarter. We would expect to continue to see nice growth in this area, even as you consolidate the two acquisitions. And then we expect to achieve a blended growth rate of both parts of the portfolio for many years to come. And that's part of the reason behind both the Carbon Black and Pivotal acquisition you see today.

Patrick P. Gelsinger -- Chief Executive Officer

Yes. And as we said, we expect this to take us over $3 billion of hybrid cloud and SaaS revenue in year two, right in that, our estimate split places us firmly in the top 10 of -- as payers providers in the industry. This is becoming a very real portion of VMware's business, revenue and strategy going forward. And as you saw this quarter is growing very nicely before the acquisitions and the acquisitions will only accelerate that portion of our business.

Paul Ziots -- Vice President, Investor Relations

Thank you, Walter. Next question, please.

Operator

We'll take our next question from Mr. Matt Hedberg from the RBC Capital Markets. Please go ahead, sir.

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Hey, guys. Thanks for taking my question. Pat, in your prepared remarks, you noted additional AWS availability zones going live. I'm wondering though, could you could you step back and kind of sort of shed light on kind of the overall public cloud partners. Obviously, you guys just extended GCP this last quarter, but maybe a more holistic view of where we sit there and maybe help Pivotal feeds into that as well.

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. At the broadest brush, we now feel like, we've completed the portfolio of our multi-cloud partnerships and offerings. And obviously, VMware Cloud on AWS has been our referred offering. Now 16 regions globally, this is our broad footprint that we're now able to satisfy customers global requirements. Nice customer wins this quarter, lots of repeat sales now which is a key aspect of a cloud business, where you're seeing people start to use it and they build more use cases and expansion, so that's going very well.

Obviously, the Azure update was very positive. First customers on the platform, just launching the GCP alternatives. Now VMware can clearly say, we're uniquely positioned as the multi-cloud, hybrid cloud of choice. And customers are beginning to understand that, and we're going to describe that much more broadly and several major announcements in that area as part of VMworld next week. So this idea of being able to tell customers that we enable you to take advantage of these enormous rapidly evolving, globally available public cloud resources is a very powerful thing.

And the AWS partnership, our preferred hybrid cloud partnership has clearly, I'll say led the way, as we're building more and more of that market presence. And we see that customers really have resonated with this idea of being able to look at us and saying, we really do give them cloud choice into the future.

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Thanks.

Paul Ziots -- Vice President, Investor Relations

Thank you, Matt. Next question, please.

Operator

We'll take our next question from Mr. Michael Turits from Raymond James. Please go ahead.

Michael Turits -- Raymond James -- Analyst

Hey, guys. Thanks and congrats on the deals. Pat, can I continue along the security line and ask you somewhat about your strategy, again, you said, security is broken. So is you're --you've bought an endpoint company here, next-gen, but in a clearly defined category. Is your thought that, you buy in each of these major traditional categories. Are you thinking about redefining security in some way and what kind of an M&A acquisition strategy could that require?

Patrick P. Gelsinger -- Chief Executive Officer

Yeah. Let me -- let's make sure we define the endpoint in a broader sense, because we are already integrating the Carbon Black technology into vSphere, right? And this is a capability that we announced as part of AppDefense. So we have already taken that core technology and we're applying it to analyze application workloads in the server side, a unique position for VMware. Clearly on the Workspace ONE side, we have this ability to bring together and we described this unified agent, where customers -- today, they have bloatware that's -- they have this breadth of fat -- different products that sit on the clients and they are anxious to fix that. It's slowing down and needs to be patched and upgraded. We're going to resolve that by making all part of the Workspace ONE agent.

We've also been organically building the NSX security capabilities with our micro-segmentation for several years, and we're going to be -- embedded Carbon Black technology into that. So we see, we have it on the workload, we have it on the client, we have it in the network, but all of these produce telemetry, right? And we're going to have more access, more data that allows us to combine with the security cloud that Carbon black is already operating. Now with a torrent of higher data that allows them to analyze that scale as nobody else in the industry.

And this end-to-end characteristic, we think is something uniquely of combining Carbon Black's technology with VMware's footprint and some of our early technology to give us this end-to-end opportunity. And thus, we really see this complementariness of their technology position in the industry. And as I already commented, the distribution capacity of this brings us is unrivaled and combining that with Dell's reach, we really see this as very unique opportunity. And so there really isn't nothing like it in the industry of what we think as possible by bringing these two entities together and we're out to change security for the industry. It is broken. We're out to fix it in the fundamental way.

Paul Ziots -- Vice President, Investor Relations

Thank you, Michael. Next question, please.

Operator

We'll next take Mr. Mark Moerdler from Bernstein Research. Please go ahead.

Mark L. Moerdler -- Sanford C. Bernstein and Company -- Analyst

Thank you for taking my question. VMware already had a tight relationship with Pivotal given the prior ownership structure of Pivotal. Could you not have accomplished the same results via technology partnerships and resales. What's the secret sauce here? Is there more of a better go to market, is it cleaning up structures, is there are some key technology that you can leverage it couldn't gain full access to? Can you give me a help little more on understanding what the key drivers of that is going to be?

Patrick P. Gelsinger -- Chief Executive Officer

Yes. And there's a couple of aspects to that, that I'd like to just reemphasize a bit. One is this analogy that says, this is a complete stack and there's going to be a build, run, manage stack associated with Kubernetes. And VMware with what we have in the run-area, we're already uniquely position with what we acquired in Heptio. We are well positioned in the manage, but we really did not have build assets. And that's where Pivotal and their capabilities was uniquely positioned in the industry to finish that stack. So we can now go to customers and say, we can help you build it. We've done all the integration, validation, testing and scale to be able to run it and we're able to manage across multiple cloud.

So this build, run, manage is the core of our strategic thesis. We've been derisking that with our PKS relationship that we've been working with Pivotal over the last couple of years. Heptio has given us a deep insights into the evolution and the influence of how that community will evolve. So we're now in a position that we feel very confident making this next step of bringing all of these assets together. We're also clearly heard from customers, we want one place to come together for this technology pool and we believe that VMware can respond to that by owning and controlling a complete Kubernetes these platform.

We also believe that customers are looking for in this very significant and massive transition. They want somebody who has enterprise credibility enterprise scale, enterprise reach and that's something VMware can really accelerate dramatically for Pivotal. And while we can help when they're in the family, as we've been doing, now, we are responsible. And we're going to bring this together in a very aggressive way to bring that reach, scale and credibility and we believe it's timely. We understand that well with Heptio. We've heard from customers clearly and Pivotal is making their transition to Kubernetes already and they're not well under way on that transition.

And now we believe is the time to bring this together, accelerate the growth, leverage the VMware position and you're going to hear more from us at VMworld next week, where we're making several very specific announcements about our vSphere extensions for Kubernetes. The first offerings from our Heptio acquisition, the story that you're here next week we'll be a complete, robust and exciting one for the industry.

Paul Ziots -- Vice President, Investor Relations

Thank you, Mark.

Mark L. Moerdler -- Sanford C. Bernstein and Company -- Analyst

Okay. Thank you very much.

Paul Ziots -- Vice President, Investor Relations

Next question, please.

Operator

We're taking our next question from Mr. Keith Bachman from the Bank of Montreal. Please go ahead.

Keith Frances Bachman -- Bank of Montreal -- Analyst

Hi. Thank you very much for taking the question. I wanted to come back to the M&A for a second. Pat, you had mentioned that the security market is broken and Carbon black, I think it's a very small part. But just to finish the thought, is this the start of your venture into security. In other words over the next 5 years, would you intend to be a larger participant in the security market. Because, candidly, Carbon Black is a very small piece of it. And then if I could just sneak in a clarification. Zane, could you give us the RPO year-over-year?

Zane Rowe -- Chief Financial Officer and Executive Vice President

Let me -- let's try to draw the curtain back a little bit more broadly on the security market as a whole. And VMware with our NSX offering, we would claim that we are already an active participant in the security market at scale and we've indicated that maybe a 30% or 40% of NSX's revenue was associated with security use cases. So this is already very substantive. We've already launched our AppDefense and the integration of that in to vSphere. So now some of our vSphere revenue is associated with security. Workspace ONE is sold in many cases based on a security benefit. So we believe that a narrow definition of the security market around specific and bespoke products actually misunderstands the buying behaviors associated with it and how people are spending budget to accomplish security.

We also believe that there needs to be a dramatic shift. That today, Gartner would estimate that 80% of security spend is on detect, respond and that protect investments are 4 times to 5 times more effective than detect, respond investments. This is about flipping that over and moving the investment profile into a much more efficient model of preventing the accident from ever occurring. At my RSA keynote this year, I describe the security industry like bad attorneys, right? They chase around, find the accident and get more security spend justified after the accident. What it's terrible business model. Prevent the accident from occurring.

So this to us is a very fundamental disruptive change that's under way. We do believe that we're going to build a security business unit and that's exactly what we're announcing. And Carbon Black and their team and people will be central to that. We'll also combine that was the number of resources from the VMware teams that we already have under way. This will become a lot much larger revenue area for us in the future. But our objectives are not to build the new business, it's to change the industry, because the industry we know today is not working.

And as more and more if humanity puts their lives, their financials, their health on the tech platform, they are expecting a much higher return and a much better protection of their data and lives than the tech industry is giving. So to us, there's is a much bigger and just building a business unit or starting a new revenue line. We're out to change the security industry.

Hey, Keith. Maybe not quite as enthusiastic as Pat with my response to your part B. But the RPO on a year-over-year basis was 25% up. There're different ways will be talking about it. One of the ways of thinking about revenue, plus the sequential change. And if you were to look at it that way, it would be closer to 13%. There's some normalization that would drive it higher, but the answer to your question on my side is 25%.

Keith Frances Bachman -- Bank of Montreal -- Analyst

Thank you, guys.

Paul Ziots -- Vice President, Investor Relations

Thank you. Next question, please.

Operator

We'll take our next question from Mr. Brad Zelnick from Credit Suisse. Please go ahead. We'll take our next question from Mr. Alex Kurtz from KeyBanc. Please go ahead.

Alexander Kurtz -- KeyBanc Capital Markets -- Analyst

Yes. Thanks for taking the question. Pat, I think earlier in your prepared remarks, you talked about bringing Kubernetes deeper into the vSphere, which would be a very unique and differentiated approach relative to other offerings in the market. So I know next week is going to be a lot more about that. But, could you maybe offer up some high level thoughts around what that might look like and how that could help VMware in the Kubernetes marketplace?

Patrick P. Gelsinger -- Chief Executive Officer

Yes. And obviously, my first answer is come to VMworld, we'll fill you with great detail. But the second answer is, if you think about Kubernetes, we see this dramatic shift and how people build and run their applications. And this abstraction, this API set. It was a new technology space that we believe is significantly changing how people are able to access and run infrastructure. But also how they deploy and operate and accelerate their software development, and that's why we say it's build, run and managed.

When we talk about run, we will be integrating Kubernetes constructs directly into vSphere. And you could also think about it, that we're going to rebuild vCenter and vSphere onto Kubernetes. So it's a very fundamental view of how we integrate Kubernetes into the core vSphere much more API driven, service driven as clouds are. And making that part of core vSphere. This I'll say, this was the most aggressive step we could take to embrace vSphere into or Kubernetes into the core of the VMware and we'll give you a lot more details on that next week. But we see this as a major move of our organic core vSphere engine into the space.

And obviously, in doing that, we're going to have the most powerful community of operations and infrastructure people are going to become Kubernetes capable. And that's where we're going to be able to scale this across the industry in a fundamental way as it goes into the core product line that hundreds of thousands of companies build and operate their applications and infrastructure services around today. This is a big move.

Paul Ziots -- Vice President, Investor Relations

Thank you, Alex. Next question, please.

Operator

We'll take our next question from Heather Bellini from Goldman Sachs. Please go ahead.

Caroline Heller -- Goldman Sachs -- Analyst

Hi. This is Caroline on for Heather. So I wanted to go back to VMC on AWS and what you're seeing in terms of the pace of deployments? And does this impact the ELA renewal cycle as customers are migrating over. And in the future as the mix shift progresses, are you planning to disclose current RPO?

Patrick P. Gelsinger -- Chief Executive Officer

So I'll just say a few more words on the first part of that and then turn it over to Zane for the second part. Overall, as we mentioned, we're seeing nice customer traction, customers are coming on for the second and third purchase. Often those purchases in the second and third cycle actually part of ELAs, right? Where, they are now looking at that as this broader portfolio of capabilities, products and services that they're acquiring from VMware. So as part of our normal business cycle in many of those second and third purchases as they are looking for how do I structure my infrastructure investments over time. And BMC is now becoming one of the staple ingredients as part of that menu of offerings. Zane?

Zane Rowe -- Chief Financial Officer and Executive Vice President

Yes. Caroline, I'll just add to Pat's point on the EA's. I mean, you saw this quarter, our EA mix actually moved up from 44% to 47%. So nice strength in the EAs and the strategy throughout the portfolio. So we're very pleased there. On the RPO, we don't currently plan on getting into detail on the current portion. Over the next number of calls, we'll get more and more into RPO and the importance of RPO as we think about our bookings trends and give you a sense of the unearned capability of the business. So not at this point in time.

Paul Ziots -- Vice President, Investor Relations

Thank you, Caroline. Next question, please. And this next question I think is the last person in queue. So this will be the last question.

Thank you. We will take our next question from Mr. Nehal Chokshi from the Maxim Group. Please go ahead.

Nehal Sushil Chokshi -- Maxim Group -- Analyst

Yes. Thank you. You guys noted that the compute license bookings grew with single digits, which I think it's pretty strong considering data points out there that service spending had a

material further weakened July quarter. So if you talk about what was the driver of this, what I would call, a relatively robust compute license bookings?

Patrick P. Gelsinger -- Chief Executive Officer

Yes. Let me start on that. And overall, we just continuing to see strength in VMware's infrastructure purchase decisions. And people look at that, the continued momentum there. As we've noted in the past, we continue to see strength in that from a VMware Cloud Partner Program or VCPP program as well. That's a major contributor and continues to be a major contributor to it. Another aspect of this is that, we are increasingly selling the VMware Cloud Foundation, right? And that is a composite of compute network storage and management and it's the full solution. And increasingly, we're seeing major customers say I'm going to build my full data center on the VMware offering and that's the Cloud Foundation.

So in summary, we see it and top 10 of our largest deals in the quarter. We're pleased with the breadth and strength of the offering. And no one did sight to this being foundational to the VMware portfolio, even as we saw more and more of the complete solutions on both the cloud and on-premise.

Nehal Sushil Chokshi -- Maxim Group -- Analyst

Thank you.

Paul Ziots -- Vice President, Investor Relations

Thanks very much, Nehal. Before we wrap up, Pat will have a final statement to make.

Patrick P. Gelsinger -- Chief Executive Officer

Yes. Thank you, Paul. And as we said, Q2 was another strong quarter for VMware, I'm very proud of our team for these results and with the meaningful expansion of the VMware portfolio with the acquisitions of Pivotal and Carbon Black, I'm even more excited than ever as we look into the future. And we look forward to sharing our exciting new announcements of technology innovations that we're going to be unveiling as part of VMworld next week, and I hope to see you all there. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Paul Ziots -- Vice President, Investor Relations

Patrick P. Gelsinger -- Chief Executive Officer

Zane Rowe -- Chief Financial Officer and Executive Vice President

Raimo Lenschow -- Barclays Bank -- Analyst

Karl Emil Keirstead -- Deutsche Bank -- Analyst

Kasthuri Gopalan Rangan -- Bank of America Merrill Lynch, -- Analyst

John Stephen DiFucci -- Jefferies -- Analyst

Walter H Pritchard -- Citigroup -- Analyst

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Michael Turits -- Raymond James -- Analyst

Mark L. Moerdler -- Sanford C. Bernstein and Company -- Analyst

Keith Frances Bachman -- Bank of Montreal -- Analyst

Alexander Kurtz -- KeyBanc Capital Markets -- Analyst

Caroline Heller -- Goldman Sachs -- Analyst

Nehal Sushil Chokshi -- Maxim Group -- Analyst

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