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VMware Inc (NYSE:VMW)
Q3 2021 Earnings Call
Nov 24, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the VMware's Q3 FY 2021 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Paul Ziots, Vice President of Investor Relations. Please go ahead.

Paul Ziots -- Vice President, Investor Relations

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

Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. Slides which accompany this webcast can be viewed in conjunction with live remarks and downloaded at the conclusion of the webcast from ir.vmware.com.

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

In addition, during today's call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of VMware's performance should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of acquired intangible assets, employer payroll tax on employee stock transactions, acquisition, disposition, certain litigation matters and other items, as well as discrete items impacting our GAAP tax rate. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in the press release and on our Investor Relations website. Unless otherwise indicated, all financial metrics provided on this call are for the consolidated VMware entity, including Pivotal. Growth rates compare our Q3 FY'21 results with the recast of prior period financial information to include Pivotal due to the Pivotal acquisition, which was accounted for as a transaction by entities under common control in accordance with GAAP.

The webcast replay of this call will be available for the next 60 days on our Company website under the Investor Relations link. Our fourth quarter fiscal '21 quiet period begins at the close of business Thursday, January 14, 2021.

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

Patrick Gelsinger -- Chief Executive Officer

Thank you, Paul, and welcome, everyone. We are pleased with our Q3 financial performance as we continue to navigate through the global pandemic, our any cloud, any application, anywhere strategy continues to resonate with our customers as they manage through these unprecedented times. Our performance was again driven by revenue growth of 44% year-over-year in subscription and SaaS to $676 million surpassing on-premise license revenue for the first time.

As we anticipated, we saw continued COVID-19 impact on large transformational on-premises projects in Q3, even as our pipeline suggest some level of recovery in this area in Q4. We continue to expand our five franchise platform capabilities to work first and best in the cloud, enable a unique multi-cloud capability and also support customers who prefer to maintain some or all of their capacity on-premises. We are on track to make most of our major product offerings available as subscription and SaaS in the next calendar year, providing a broader set of consumption choices for our customers with the flexibility they need.

Now, I'll turn to updates across the business. We hosted our first all-digital VMworld in Q3, welcoming nearly 200,000 registrants, where we introduced new offerings and partnerships designed to help customers navigate their own transformation journeys. VMware Tanzu, a complete portfolio for modern applications is now supported across VMware Cloud on AWS, Azure VMware Solution and Oracle Cloud VMware Solution. We also recently announced the packaging of Tanzu products into four simple additions targeted directly at the most common application modernization challenges. We are seeing good customer momentum for our Tanzu offering. For example, Fiserv leveraged VMware Tanzu to build a solution to enable 18,000 small and medium businesses the ability to quickly apply for PPP funding. In an effort to bring Kubernetes to more IT administrators, we unveiled a new series of updates across VMware vSphere 7, VMware vSAN 7 and VMware Cloud Foundation that streamlined customer adoption of Kubernetes and support stateful applications with new developer-ready capabilities and enhanced scalability and operations.

We also showcased an expanded partnership with NVIDIA on stage at VMworld, designed to deliver a mainstream mission-critical and enterprise-grade AI platform that is virtualized and containerized. Together with NVIDIA we plan to deliver a consistent experience for developers and operations from datacenter to edge to cloud and telco cloud as we democratize AI for all enterprise customers.

On the security front, we unveiled VMware Carbon Black Cloud workload, delivering a breakthrough in protection with agent-less zero trust protection for better securing all workloads. The solution combines Carbon Black security expertise with VMware's massive installed base to reduce the attack surface and help customers strengthen their security posture.

As we see our customers continue to pivot to distributor workforce models, we are delivering solutions to help businesses enable their employees to work from anywhere. VMware is partnering with Zscaler and Menlo Security in the area of Secure Access Service Edge, or SASE, to provide end-to-end visibility and protection for distributed workforces. We are also developing Workforce Anywhere solutions that combine VMware NSX Secure Access Service Edge, Workspace ONE and Carbon Black Endpoint Security capabilities with intrinsic security to enable robust end user experiences and lower operational complexity.

On a related note, VMware was recently positioned as a leader in The Forrester Wave Infrastructure Automation Platforms, Q3 2020. Additionally, VMware has again been positioned as a leader in the Gartner 2020 Magic Quadrant for WAN Edge Infrastructure for the third consecutive year. At VMworld, we also unleashed new innovations that offer our customers a glimpse into the future. This year, we were excited to unveil Project Monterey, a major architectural evolution of the VMware platform into a fully distributed system for the datacenter, cloud and edge, while harnessing major silicon and hardware advances. The result will enable customers to address the changing requirements of next-generation applications, including AI, machine learning and 5G. We are collaborating with ecosystem partners to deliver solutions based on Project Monterey, including Intel, NVIDIA and Pensando Systems, Dell Technologies, Hewlett-Packard Enterprises and Lenovo. Elsewhere on the innovation front, we are now offering commercial availability of VMware Blockchain so that businesses such as the Australian Securities Exchange and Broadridge Financial Solutions are provided a trusted, scalable, decentralized and immutable platform for the next-generation transaction processing applications.

Our multi-cloud strategy has taken major strides forward with our cloud ARR approximating $1 billion. VMware Cloud on AWS continues to grow revenue over 100% year-over-year. All hyperscale offerings are now available and transacting VMware Cloud, including Microsoft, Google, Alibaba, IBM and Oracle, as well as the VMware Cloud on Dell EMC. Our unique solution is increasingly being viewed as the most effective path for customers, such as Deutsche's Boerse Group to execute a multi-cloud strategy and Chevron, which is leveraging Azure VMware solution to advance and scale its cloud journey.

At VMworld, we also announced the new set of cloud management offerings to enable organizations to consistently deploy, operate and govern applications, infrastructure and platform services across a multi-cloud environment. VMware vRealize Cloud Universal combined SaaS and on-premises management software into a single subscription giving customers flexibility on their cloud journey. Additionally, we acquired SaltStack, a pioneer in building intelligent, event-driven automation software. SaltStack will enable VMware to significantly broaden its software configuration management and infrastructure and network automation capabilities.

We launched the 5G Telco Cloud platform, a consistent cloud first network architecture to accelerate 5G and edge innovation powered by a field-proven, carrier-grade and high-performance cloud-native infrastructure with intelligent orchestration and automation. This new platform includes Tanzu, Kubernetes Grid, an embedded Kubernetes distribution that will allow communication services providers to reliably build, manage and run containerized workloads across private, telco, edge and public clouds. We continue to see momentum with key communication service providers, including NTT DOCOMO, Rogers, and Singtel turn to VMware Telco Cloud solutions. And with our foundational technology partners, including Intel and Qualcomm, we remain well positioned to help our customers create, monetize and deliver an array of new applications and services for both consumer and enterprise markets through 5G. We are also collaborating with Samsung Electronics to further our mutual offerings in 5G.

With our evolution to SaaS and subscription, helping our customers with consumption is critical. We recently launched VMware Success 360, a comprehensive customer lifecycle offering that provides our customers a unified and simplified way of realizing value continuously from VMware solutions. The offering helps customers achieve outcomes faster through ongoing success planning, adoption guidance and design workshops with dedicated and proactive support.

In closing, Q3 was another good quarter for VMware, with our focus on delivering the digital foundation for an unpredictable world, the Company is shaping the future in strategic areas that are top priority for every business from app dev to multi-cloud and from networking and security to digital workspaces. Thank you to our customers, partners and team VMware for their focus and execution.

Over to you, Zane.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Thank you, Pat. In light of the current environment, we are pleased with our Q3 financial performance, highlighted by 44% year-over-year growth in subscription and SaaS revenue. The expanded breadth and depth of our portfolio enabled VMware to deliver good growth in the quarter, even as a number of our customers' business plans were impacted by COVID-19. While the timing of certain projects, particularly those focused on-prem had an impact on bookings in Q3, the value that VMware's digital foundation brings to customers is driving the continuity of customer demand that we see extending into the fourth quarter.

In Q3, total revenue grew 8% year-over-year to $2,864 million, while the combination of subscription and SaaS and license revenue grew 10% to $1,315 million. Subscription and SaaS revenue comprised 24% of total revenue in Q3 with better-than-expected growth in VCPP, Modern Apps and VMC on AWS. VMC on AWS continue to show great traction in Q3 with triple-digit year-over-year revenue growth highlighted by continued expansion of the Amazon channel and workload expansion from large VMC customers. In line with guidance and our expectations, on-prem perpetual license revenue for the quarter declined 12% year-over-year to $639 million with a large transformational project slowing due to the impact of COVID.

Non-GAAP operating income increased 17% year-over-year in Q3 to $888 million, once again benefiting from better-than-expected revenue performance and lower spending tied to the impact of COVID on the business. Non-GAAP operating margin for the quarter was 31% with non-GAAP earnings per share of $1.66 on a share count of 423 million shares.

We ended the quarter with over $9.2 billion in unearned revenue and $3.9 billion in cash. Cash flow from operations in the quarter was $992 million and free cash flow was $908 million.

Total backlog was $33 million, substantially all of which consisted of orders received on the last day of the quarter that were not shipped that day and orders held due to our export control process. License backlog at quarter end was $9 million.

RPO, which consist of committed and non-cancelable future revenue was $10.2 billion, up 10% year-over-year. 55% of this amount is current and in line with historical levels.

The Q3 growth rate for revenue plus sequential change in unearned revenue was impacted by the addition of unearned revenue from the Carbon Black acquisition in Q3 of last year, as well as the continued increase in mix of our subscription and SaaS offerings. Adjusting for the acquired unearned revenue for Carbon Black in Q3 last year, total revenue plus the sequential change in unearned revenue declined 4% year-over-year and subscription and SaaS and license revenue plus the sequential change in unearned subscription and SaaS and license revenue increased 1% year-over-year in Q3.

Turning to product bookings in the quarter, our core SDDC products were flat year-over-year, which was slightly better than we expected. Given the delay in the large transformative on-prem projects that we discussed last quarter, we saw product bookings declined for vSAN, NSX and EUC in the low- to mid-teens year-over-year. EUC's ACV SaaS growth rate was in the mid-single digits year-over-year, driven by demand for Horizon SaaS. We saw a slowdown for Workspace ONE project, which were more transformative in nature, as customers focused on establishing work from anywhere protocols. Traction for our modern applications portfolio drove strong product bookings in Q3 and we also saw good performance for Carbon Black Cloud.

As VMware's development and go-to-market efforts have evolved to focus on our five franchise platforms of modern applications, multi-cloud, networking, digital workspace and security, we plan to start highlighting the performance in these areas in upcoming quarters. In Q3, we repurchased 1.8 million shares in the open market at an average price of $144 per share. Through the end of Q3, we utilized over $1 billion from our current repurchase authorization of $2.5 billion.

Turning to guidance. For the full-year FY'21, we are now projecting total revenue of $11,700 million, up 8% year-over-year. We expect subscription and SaaS and license revenue of $5,560 million for FY'21, up 10% year-over-year with subscription and SaaS representing over 45% of this amount.

We expect non-GAAP operating margin to be 32% and expect non-GAAP earnings per share of $7.03 on a diluted share count of 423 million shares for the fiscal year.

Cash from operations is expected to be $3.75 billion and we expect free cash flow of $3.45 billion for fiscal '21.

For Q4, total revenue is expected to be $3,225 million, up 5% year-over-year. We expect subscription and SaaS and license revenue for Q4 to be $1,660 million, up 4.5% year-over-year with subscription and SaaS representing approximately 43% of this amount.

Q4 is typically our seasonally strongest quarter for our on-prem product portfolio. We expect non-GAAP operating margin of 33.5% and non-GAAP EPS of $2.04 per share on a diluted share count of 423 million shares.

We typically give some color on how we are thinking about our upcoming fiscal year at this time. I'll point out that any forecast, given the unprecedented and unpredictable economic impact COVID is having across the globe, has a higher degree of uncertainty than normal. Fortunately, the pandemic hasn't had the level of financial impact on our business we initially expected this year and our current forecast for 8% total revenue growth for FY'21 exceeds the mid-single-digit forecast we've guided to earlier in the year.

For FY '22, we expect total revenue to grow in the high-single digits, factoring in continued growth and a larger mix of our subscription and SaaS portfolio, incremental improvement in our on-prem performance and our current expectation for FY'21 growth. We expect FY'22 non-GAAP operating margin to be similar to our early view for FY'21 of approximately 28%, which reflects investments in subscription and SaaS and the unwinding of the opex benefits experienced in FY'21 due to the impact of COVID-19.

We are pleased with our overall progress in the midst of the global pandemic and while operating virtually. We will continue to invest in and focus on further expanding our subscription and SaaS portfolio, which we believe will drive Company growth, customer satisfaction and shareholder value.

I'll now turn it back to Paul for Q&A.

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. Operator, let's get started.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Phil Winslow. Your line is open.

Philip Winslow -- Wells Fargo Securities -- Analyst

Great. Thanks, guys, for taking my question and congrats on a solid quarter. Pat, a question for you. Obviously, you called out some push outs of those large transformative-type transactions this year. But what are you hearing from customers, especially you sort of in the context of the forward guidance that you're giving for fiscal '22 and sort of how those come back? Because, obviously, the BCP business has been good and Modern App has been good. But how are you thinking about sort of the return of some of the more transformative on-premise deals and how you're incorporating that into -- that early look in next year? Thanks.

Patrick Gelsinger -- Chief Executive Officer

Hey, thanks, Phil. I'll get started with that one. We're pleased with how we executed in Q3, and now three quarters in a row we're ahead of our expectations despite the pandemic. Against that, we view the overall macro environment pretty consistently. We continue to expect a gradual recovery through the next year beginning in Q4. And as we anticipated and indicated last quarter, we saw this impact on the large transformational projects in Q3, particularly on-prem projects and our pipeline is suggesting some level of recovery in this area in Q4 and we do expect to see economy recovers, we expect to see some incremental improvements with our on-prem products in Q4 and continuing into fiscal year '22. And overall the customer conversations, digital transformation is more important than ever. So they're seeing that priority. But again, a lot of turbulence, a lot of prioritization going on inside of that picture overall, but as I said, we are starting to see some of that recovery in Q4 and we expect that to continue in the next year.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Hey, Phil, I would just add, this is Zane. We would expect the first half, obviously, to be more impacted than the second half of next year as we -- as you break out next year. And as Pat mentioned, we see incremental recovery on the on-prem products and feel good about sub and SaaS continuing to grow nicely into FY'22. I'll also point out, as I mentioned in my prepared remarks, this year has surprised us and, obviously, we're coming in at 8% higher than the mid-single digits that we expected earlier in the year. So we're pleased with the momentum we're seeing heading into the fourth quarter here.

Paul Ziots -- Vice President, Investor Relations

Thanks, Phil. Next question, please.

Operator

Yes. Your next question is from Matt Hedberg. Your line is open.

Matthew Hedberg -- RBC Capital Markets -- Analyst

Great. Thanks for taking my question and congrats on the results here as well. Pat, I know you've previously said the security market is ripe for disruption. And I was wondering if you could provide a bit of an update on just the relative size of your security business, as well as how Carbon -- or how VMware Carbon Black Cloud workload. And just your broad sort of Zero Trust initiative might help that cloud security growth?

Patrick Gelsinger -- Chief Executive Officer

Yeah. Thank you. And as we've indicated, as we look across the full range of our security offerings, the portion of our networking business, the Carbon Black business, the expanding role that we have in workload as well, that were about $1 billion total in our overall security offerings. In Q3, Carbon Black Cloud delivered steady growth. We still have work to do to complete our intrinsic security strategy in the integration work around that. I was extremely happy with the Carbon Black Cloud Workload protection. This idea of being able to use the VM to have an agent-less approach. So this is transformational. We announced the availability six months free, as I described at VMworld 2020. It's a bad day for cyber criminals as we're going to start really pushing this broadly across the massive VMware installed base.

We're also integrating security more centrally into our work from anywhere solution as part of our SASE offering, which Secure Access Service Edge. We'll be integrating more directly Carbon Black with Workspace ONE, with VeloCloud, and our partnerships that we announced with the Zscaler and Menlo. And we're expanding the integration into the endpoints, as well as into our networking solution, as well as our workloads. So, security is playing an increasingly crucial role in our product line overall, also one for our customers, we saw a rapid increase in the number of attacks as we've seen through the COVID period, as I sort of cynically commented, the bad guys didn't take a break despite the pandemic. So, overall, it's a more important piece, good momentum with our intrinsic strategy and some major deliverables this last quarter.

Paul Ziots -- Vice President, Investor Relations

Thank you, Matt. Next question, please.

Operator

Your next question is from Mark Murphy. Your line is open.

Mark Murphy -- J.P. Morgan -- Analyst

Thank you. I'll add my congrats. Pat, a few months ago you had commented that financial services, public sector and telco were all strong in your second half pipeline. I'm curious did some of that business convert over in fiscal Q3. Or is that more teed up for Q4 just given your comment about some recovery there in the Q4 pipeline, maybe Zane can comment on that too? And then -- and just within that, can you comment on the 5G activity in the telco segment?

Patrick Gelsinger -- Chief Executive Officer

Sure, sure. And overall, again, we're pleased with the Q3 year-to-date performance overall, good resonance to the strategy that we had, particularly the strength in SaaS and subscription 44% in the quarter. As it pertains to the three sectors I talked about, financial services, telco and public sector, public sector was good in Q3, and we saw a good performance there. We saw a reasonable performance in telco and financial services. More of the pipeline there is seen in Q4 that we've seen, so a bit more recovery in those areas in Q4. But even as we think about telco, we commented on the three major brands that are now partnering with us, Roger, Singtel and NTT DOCOMO, one of the largest providers in the world. So we are seeing solid momentum in telco.

We do, as I have predicted before, starting to see that inflection point for 5G investments overall and we're clearly seeing customers move from, I'll say small pilots, some locations are now saying, how do I start deploying 5G across my entire network. So, I think we're well on track and our timing for the 5G opportunity is very good. I believe VMware really working to have our telco cloud solution being seen as the operating system for 5G overall. So, I think we're right on track with what we've said and seeing more momentum in the service provider and financial services and that represents a good amounts of our Q4 pipeline.

Mark Murphy -- J.P. Morgan -- Analyst

Thank you.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Yeah. Mark, I would just add some additional color maybe on Q3, that would be helpful. If you look at our larger deals, we had 16 in Q3 that were over $10 million versus the 19 we had in the same quarter last year. So, it was a tougher compare. There were also slightly larger deals in the quarter of last year. And we've been talking about the impact, particularly on on-prem for these transformative deals. Obviously, that did impact us in Q3. Other sectors that did well, obviously, we saw good strength on the public side, and pharmaceuticals actually had a good quarter as well. But, as Pat mentioned, we feel good about demand heading into the fourth quarter.

Paul Ziots -- Vice President, Investor Relations

Thank you, Mark. Next question, please.

Operator

Your next question is from Walter Pritchard. Your line is open.

Walter Pritchard -- Citigroup -- Analyst

Hi, thanks. I'm wondering, Zane and Pat, if you could talk about the pace of rollout and adoption of the subscription offerings on the core vSphere side you're expecting as you outlined for next year. And then how that's factored into the high-single digits revenue and 28% margin for 2020 -- 2022, excuse me?

Patrick Gelsinger -- Chief Executive Officer

Yeah. And I'll say, maybe I'll start and then ask Zane to jump on. We're pleased with the sub and SaaS momentum overall. It was another good quarter for that building on the good momentum we had from Q2, and we expect that to continue in Q4. Now, we also said that we cross sub -- subscription and SaaS crossed license for the first time in Q3, we expect that to reverse in Q4 as license always has a great Q4 quarter but we expect that to flip back and really be the case for the entirety of next year as we see that sustained subscription and SaaS.

As I said, we're expecting all of our major product offerings as sub and SaaS in the next year. So that's on track. We're also going to have increasingly flexible purchase mechanisms for customers for the cloud migration. And one example of that was the Flex offerings for vRealize that we launched and are well received. So that's really sort of a first step in that direction for across the portfolio. We're putting in place programs, incentives for customers to help them with the pivot to sub and SaaS. We're also doing more work on our SaaS operations to be able to help take scale and really bring that to our customers. And as you well know, in a SaaS business, it's really much more about consumption and their success and we rolled out our Success 360 offerings this quarter as well.

And last comment there would be, we just see that we are well under way with the sub and SaaS conversion, but we're also uniquely positioned on-prem to satisfy both sides of the business as we think no one else is as well positioned to do both the on-prem and the cloud offerings.

Zane?

Zane Rowe -- Chief Financial Officer and Executive Vice President

Yeah. I would just add, obviously, it's ratable revenue recognition as we head into FY'22, and we do expect the sub and SaaS mix to become a bigger part of our mix for the upcoming year and years beyond that. So, we do expect revenue to progress and grow nicely along with those bookings growth. Of course, we've also been focused on ACV. So as you look at our total bookings, they are impacted by tighter duration as we focus more on ACV in our sub and SaaS categories versus TCV. An example would be even VCPP, which has had a great year and continues to show strong growth, you don't get that same level of bookings. So, we'd point more toward revenue growth, then we would bookings growth as you think about the mix of both on-prem and the sub and SaaS businesses that we have. But we're generally very pleased with the 44% this quarter, that will continue. Obviously, we'll lap Carbon Black next quarter, which will impact our growth next quarter, but we like the strength and the trend we're seeing well into next year.

Paul Ziots -- Vice President, Investor Relations

Thank you, Walter. Next question, please.

Operator

Yes. Your next question is from Mark Moerdler. Your line is open.

Mark Moerdler -- Sanford C. Bernstein & Co. -- Analyst

Thank you very much and congratulations on the solid quarter. I want to follow-up a little more on the shift to subscription and SaaS. A shift to subscription and SaaS normally creates a headwind near-term to revenue but helps things like CRP outperform, which is what we saw at VMware. Can you give us any sense of how you think about the impact of the shift is having on the revenue in quarter? In other words, how much faster could revenue have grown if it had come in as license and maintenance versus subscription and SaaS?

Zane Rowe -- Chief Financial Officer and Executive Vice President

Yeah. It's a great question, Mark, I'll start. Because of the nature of our product portfolio, there is no doubt that it's having some impact and we've got a number of models to think about how you would break out one versus the other. But we are -- the way we're running the business and the way we think about the product set, candidly, we're looking at the two businesses as two opportunities and we don't like to necessarily call one out as a headwind. There is no debate, though, if you were to just, in some of the cases that we've talked for a number of quarters about EUC, for example, you only think about VMC and VCF. There are options that are more on-prem or otherwise sort of where you'd recognize the revenue upfront versus the sub and SaaS portfolio that we've been pushing. We're very comfortable with the smile that you alluded to with the long-term value that we're going to be getting out of our sub and SaaS portfolio, so we're very encouraged by, not only the growth we're seeing there, but the long-term value for our customers and ourselves obviously, which is why we're sort of thinking about them independently although as one company and not trying to call out the headwind.

Patrick Gelsinger -- Chief Executive Officer

Yeah. And as we've said, as we are converting customers more and more into that, we're also going to be presenting more flexible models for customers so they're going to be able to essentially make that migration at their business pace for it. We've done that with vRealize offering as we said and we're getting good response from customers for that. Also, many times as customers are making that, it isn't a dollar-for-dollar switch, right? It's moving to a richer offering as well, as they become part of our cloud offerings, they're buying into the full solution of VMware so we do see benefit for a richer portfolio of our solutions as well, as they're making that migration to our cloud-based offerings. So, overall, we see it as a great opportunity for greater lifetime value in those customer relationships and all of our indications so far are very strong in that direction.

Paul Ziots -- Vice President, Investor Relations

Thank you, Mark. Next question, please.

Operator

Your next question is from Raimo Lenschow. Your line is open.

Raimo Lenschow -- Barclays Capital -- Analyst

Hey. Congrats from me as well. Quick question on EUC, you commented on like strength in Horizon and kind of maybe -- kind of more push back or push out a little bit on Workspace ONE. Can you talk a little bit about the dynamics there because it does seem all that with more working from home you would think that this area would see a lot more focus from clients like is it more tactical than strategically at the moment or what's going on there? Thank you.

Patrick Gelsinger -- Chief Executive Officer

Yeah. Thank you, Raimo. And really has been a bit of both sides of the business and overall, you see a great role as part of our enabling organizations to work from anywhere, the business continuity, resiliency. We saw a lot of strength in the Horizon VDI solution and Horizon Cloud, in particular, and where customers needed a VDI solution, we just saw very strong growth and those scaling up. And as a result, our -- and as we saw in Q2, our Horizon SaaS mix was particularly strong and as we continue to grow year-on-year.

A lot of the Workspace ONE deals, MDM deals, etc., are much more transformational deals. And they would be lining up with, I'll say, the comments that we made around transformative deals overall, where they were more impacted by COVID. We also saw that we had a unique exposure to some of the vertical segments, and we have particular strength in healthcare, travel, retail, leisure and those segments were uniquely impacted by COVID as well. So, I think we had some unique aspects to our business in those vertical markets that were uniquely hurt by COVID. Overall, though, we continue to feel very good about the business. Gartner gave us another UEM leadership Magic Quadrant third year in a row. We also saw that our offerings, as we bring together our complete SASE solution for work from anywhere, are getting a lot of interest from the marketplace. So we feel well positioned overall, even though the business itself had some unique dynamics inside of it.

Raimo Lenschow -- Barclays Capital -- Analyst

Okay. Thank you.

Paul Ziots -- Vice President, Investor Relations

Thank you, Raimo. Next question, please.

Operator

Your next question is from Keith Weiss. Your line is open.

Keith Weiss -- Morgan Stanley -- Analyst

Excellent. Thank you, guys, for taking the question. One for Pat and one for Zane. Pat, when you're talking about the delays that you're seeing in these large transformational deals, whenever I think about larger deals and large transformational deals taking place at the VMware, I'm thinking about the enterprise license agreements that you guys typically sign. Is this where you're seeing those delays? And since these are like typically three-year contracts, do you have to wait another three years for guys to get on-board with this, or is there sort of inter -- like inter sort of renewal periods where you could come back and get this demand on a go-forward basis?

Patrick Gelsinger -- Chief Executive Officer

Yeah. I'll say, generally we're seeing those large deals just take longer, and our renewal rates are very strong so we don't have any concerns in that regard. But the big deals are taking longer, it may be a quarter longer to go finish it. There is another sign off required. They are looking and saying, boy, my priorities are shifting around because I'm not spending as much time in the datacenter yet. We can't have our teams back in place. We see that on the subscription and SaaS side of our business. But overall, as Zane said, 16 $10 million-plus deals, we still see a lot of activity there. We're also seeing -- continue to see good attach of our strategic products as part of it, three of 10 included VMC on Amazon, four of 10 Tanzu, we really continue to see NSX, vSAN, EUC management have high attach rate overall. So, we feel very comfortable that our strategic position and our strategy is highly resonant to our customers' digital transformation, even though, as I say, big transformational deals, yes, it's a little bit more challenging in this COVID environment.

Paul Ziots -- Vice President, Investor Relations

Thank you, Keith.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. And then for...

Paul Ziots -- Vice President, Investor Relations

Keith, we'll come back if we have time at the end for your second question, because we keep it to one question. Okay? The others will get upset. Thank you.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. Got it. Got it. Okay.

Paul Ziots -- Vice President, Investor Relations

Next question, please.

Operator

Your next question is from Brent Thill. Your line is open.

Parthiv Varadarajan -- Jefferies -- Analyst

Thanks. This is Parthiv on for Brent. Can you remind us how the sales force is incentivized today with both perpetual and sub and SaaS on the price list? Do incentives skew one way or another or are reps generally commissioned neutral between those two deploying models?

Patrick Gelsinger -- Chief Executive Officer

Yeah. Thank you. It's a little bit complicated, right, because different products have different characteristics but the sales force is compensated for both, right, perpetual and the SaaS products. Generally, there are some uplift because most of the SaaS products have an ACV characteristic associated with them. Also, we have specialist sales teams who solely sell particular product areas. For instance, VMware Cloud, right, there is a specialist team, and they're only compensated on selling those products as well. So, overall, I would say, we are in that sales force transformation process as well. And as we're building more subscription and SaaS in the portfolio, we are incenting our sales force to get ahead of where our business outlook is. So we're driving more, I'll say, a rich portfolio of their quotas and their compensation to lead the way with our customers in the subscription and SaaS piece. But overall, we have many segments of our customer base that are going to be perpetual forever, right? And as we look at public sector, telco, financial services, as three that I've talked about with a strong bias to a long-term position of mostly or entirely on-premise, we really will have that dual view of our sales compensation into the future.

We'd also say some of the offerings like Success 360 that we launched this quarter, that are really driven to consumption success of our customers where a lot of the SaaS business is smaller initially and it's not growing it over time, and our Success 360 offerings are starting to get great momentum with our customer success teams and sales force and being attached to deals. So, overall, we're well in that transition and we'll certainly talk more about this as we go into our next fiscal year where we'll make more aggressive adjustments to our subscription and SaaS sales incentives.

Paul Ziots -- Vice President, Investor Relations

Thanks, Parthiv. Next question, please.

Operator

Your next question is from Karl Keirstead. Your line is open.

Karl Keirstead -- Deutsche Bank -- Analyst

Thank you. Maybe this one is for Pat. I'd love to ask you about some of the younger emerging businesses like NSX and vSAN. In contrast to the core SDDC portfolio that came in flat on the bookings front and as Zane said, maybe slightly better than expected, if I heard you correctly, I think the bookings growth was down low- to mid-teens for some of these products like NSX and vSAN. And I'm wondering why that would be, because typically they've been able to sort of power through some cyclical downturns, but this time it feels like they're getting dragged down a little bit more than we would think by these on-prem delays. And I'm just wondering if you could help us understand why whether there is anything else going on architecturally inside large enterprises that might be impacting the bookings growth for some of those previously high growth businesses. Thank you.

Patrick Gelsinger -- Chief Executive Officer

Yeah. I think there is maybe two factors: one is, just the big transformational deals and NSX, vSAN, large components of those areas. So we just saw more impact in many of those projects, a lot of those are major transformation of data centers moving to private clouds, we saw more impact there. Overall, we're very pleased with our positions on both of those product areas. We're continuing to see, for instance, like VxRail, had growth this quarter, so that portion of the vSAN business was good. We also had a great momentum in some portions of the NSX business, like the Avi load balancer doubled year-over-year. It's a smaller piece of the portfolio, also great interest in some of the new areas, such as the firewall capabilities, IDS, IPS. So we see a lot of interest in it. We'd also point out that on the NSX side, a lot of momentum around SD-WAN and our work from anywhere.

The second factor in addition, I'll say, the big transformational deals is the year-on-year compare. And we had a very strong -- uniquely strong position in our growth Q3 of last year. So that sort of contorts the numbers that you see in Q3 of this year. But those would be the big factors with the transformational deals by far being the biggest.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Hey, Karl, I'll just add just to give some color there. The year-on-year compare, for instance, for NSX was a positive 50% last year and vSAN was well over 35% last year. So, significant challenge when you think about the year-over-year compare. And, obviously, as Pat alluded to, we didn't have -- and I mentioned earlier, we didn't have the size, even our large deals weren't of the size and scale of the large deals that we had last year, and that definitely impacts products like NSX and vSAN.

Karl Keirstead -- Deutsche Bank -- Analyst

Got it. Thank you, both.

Paul Ziots -- Vice President, Investor Relations

Thank you, Karl. Thank you. Next question, please.

Operator

Your next question is from Keith Bachman. Your line is open.

Keith Bachman -- BMO Capital Markets -- Analyst

Yes. Thank you. I would like to direct this to Zane, if I could. Zane, could you give us some of the puts and takes that we should be thinking about for free cash flow in FY'22? For instance, you're guiding operating margins to decline by over 500 basis points. So, I assume that be a headwind. In mix, I heard some conflicting comments. It sounds like some of the on-premise license spend may improve from some of these pent-up deals. And yet SaaS and subscription, I would assume continue to outgrow the Company's weighted average. But if you could just give us any thoughts as we approach next year on a free cash flow assumptions, that would be helpful? Thank you.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Sure, Keith. Yeah. I don't know if Karl texted you the question, he was hoping to line up for me. So, I'll definitely give you some color on this year and then we have -- we don't want to get too far ahead of ourselves into FY'22 but happy to give you, at least some of the dynamics. First off, this has been a good cash flow year for us if you think about the strength we've seen in OCF through the course of this year. It has come in stronger much like our financial performance, I'd say, our operating cash flow performance has held up and actually with the latest increases has increased through the year. I will point out that part of that in the first part of the year is due to the strength that we saw in Q4 of last year. So we will expect to be impacted into FY'22 as you think about this Q4 versus the Q4 we had last year. There has also been some movement quarter-to-quarter, you'll notice, if you look at our OCF in this quarter you see significant strength on a year-over-year basis. There are, obviously, some timing differences, and a number of differences in movement across the quarters that we've experienced and seen this year and part of this is prudent cash management as you would expect.

So we would expect to see some movement coming out of this year and some headwind into next year based on the trends we're seeing, not as significant though on the sub and SaaS at this time. We're still very pleased with the bookings strength we see on the sub and SaaS business, even though cash comes in on a ratable basis or at least more ratable versus perpetual, we're still pleased with the performance we see on both sub and SaaS, as well as on-prem. So, don't want to get too much more than we did into FY'22. It's a good call out, though, there are a number of moving pieces. Obviously, we're quite pleased with the strength we saw through the course of this year and I'll update you more into FY'22 in a quarter.

Paul Ziots -- Vice President, Investor Relations

Thank you, Keith.

Keith Bachman -- BMO Capital Markets -- Analyst

Thank you, Zane.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Sure. Thank you.

Paul Ziots -- Vice President, Investor Relations

Next question, please.

Operator

Your next question is from Kirk Materne. Your line is open.

Kirk Materne -- Evercore ISI -- Analyst

Hi. Thanks very much. And happy soon to be holidays to everyone. So, Pat, I was wondering, you mentioned VMC up triple digits on -- with AWS right now. I was wondering if could just give us some thoughts on how things are going with Azure, as well as GCP. And maybe just in general what clients are talking to you about in terms of multi-cloud strategies? That be great. Thanks.

Patrick Gelsinger -- Chief Executive Officer

Hey, thank you. Yeah. And I'd just say, this was a tremendous quarter for us on our overall multi-cloud strategy and the accelerated momentum that we saw with our top enterprise customers was very encouraging in our business. And now we've sort of -- I'll say, we finished the strategy in a sense that we have all of the hyperscalers are now GA-ed, all are transacting.

The specific question on Azure, we had the first Azure offerings are now shipping. We are seeing a strong interest following VMworld engagement with the Azure sales teams. As I mentioned, Chevron adopted AVS for their multi-cloud journey. It was a very, I'll say, exciting to see Microsoft coming behind that strongly. But I will say, the lead horse for us remains our preferred partnership with Amazon. And we had a very strong quarter, triple-digit growth in that offering again. Amazon is showing up to sell that offering has proven to be a very strong. They have a dedicated sales team that's ramping nicely. We're also getting some tremendous industry feedback, like IDC recently published a survey, 350%-plus three-year ROI, half the cost, half the time, extraordinary metrics as people use it for their cloud migration and big companies, like largest pharmaceuticals in the world signing up, major banks signing up for this to become a data center.

And as your question would suggest, the multi-cloud aspect of this where we have customers who are now truly buying in and saying, I really view VMware as my multi-cloud partner of scale. A great example of that was Deutsche's Boerse, who now has Google, Amazon, Azure and VMware on-prem. Or another major financial who is using Dimension, our unique offering with Dell EMC on-premise along with the Amazon Cloud. So, we are seeing more momentum to the overall multi-cloud strategy and saying, I want to be able to have this unique ability to be on-premise and in the cloud and multi-cloud and VMware is presenting that to customers at scale. So, overall, this is a great quarter for us. We're seeing good momentum in the business. As I also mentioned in the prepared remarks, that we're now approximately $1 billion ARR in this area of our business, which to me is a great milestone in the significance of this and the continued growth rate to show us we're on the right track with the customers and where the market is headed.

Paul Ziots -- Vice President, Investor Relations

Thank you, Kirk. Next question, please.

Operator

Your next question is from Brad Zelnick. Your line is open.

Brad Zelnick -- Credit Suisse -- Analyst

Excellent. Thank you so much. My question is for Zane. Zane, just following some of the margin commentary for both this year and next, can you help us to quantify what the COVID-related benefit is this year? How much you expect reverts next year? And also, how we should think about any potential cost synergies from Carbon Black and Pivotal and maybe the degree to which that might help next year as well? Thanks.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Yeah. It's a great question. I'd say, the COVID impact is quite significant this year when you think about whether it's just T&E, marketing expenses, facility-related and even candidly, on the headcount side we delayed, as you would expect us to the onset of the pandemic. So, if I were to sort of cut it between revenue outperformance and COVID, I'd say, it's probably two-thirds, one-thirds, if you will, on the expectation on COVID versus revenue outperformance, but obviously, we'll take outperformance whenever we can get it as well.

Along with that, Pat and a number of the team here have been working on how we think about work of the future, and as I talked about the margin guide for FY'22, we expect some of the one-time benefits to -- not to continue into FY'22, but there are a number of efficiencies, whether it's on the M&A front or alternatively just how we do business and how we think about the number of people that need to go to a different site and what T&E looks like in the future, as well as what working from anywhere looks like, quite frankly, and whether there are efficiencies that can be garnered there. So, part of that guide is not only a doubling down on our efforts on subscription and SaaS that Pat articulated, but a number of the efficiencies that we plan on getting through, not only the acquisitions we made this year, but just how we plan on operating business more efficiently into FY'22 and beyond.

Patrick Gelsinger -- Chief Executive Officer

I'd also add that the fast-growing subscription and SaaS portion of the portfolio generate attractive margins when they're at scale, right? And most of them are still, I'll say, in an area of their maturity that some are getting to scale, but many of them aren't yet, right? So as they're growing, they're actually a bit of a negative on operating margin as they're becoming a larger piece of the hole but still don't yet have those attractive at-scale margins that we would expect. And this is part of the SaaS smile. We are excited about it. We're leaning into it. We're bringing a lot of accountability to the operating margins of those businesses as they scale, but it will be a while until they're as attractive as some of the more mature portions of our business and particularly the on-prem businesses which have very attractive margins.

Paul Ziots -- Vice President, Investor Relations

Thank you, Brad.

Brad Zelnick -- Credit Suisse -- Analyst

Thank you very much.

Paul Ziots -- Vice President, Investor Relations

Next question, please.

Operator

Your next question is from Jason Ader. Your line is open. Jason Ader, your line is open.

Jason Ader -- William Blair & Company -- Analyst

Thank you. Hey, guys. I was just wondering if you could talk about impact on software maintenance from COVID and whether it's affected some renewal rates, pricing pressure, overall reduction of terms, anything on that would be helpful. Thanks.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Sure, Jason. Yeah, happy to give you some color there. We were actually very pleased with the key metrics that we track looking at -- attach and looking at the key drivers of our maintenance business were as good as they've ever been and we've had very high rates there. I will say, we did see a little bit of tightening on duration, if you look at it on average and part of that was again tied to deal size and the correlation that we typically get with deal size and the opportunity there. But the key metrics in the business this quarter were as good as we've seen them.

Patrick Gelsinger -- Chief Executive Officer

Yeah. And I'd also say we're on a journey with our subscription and SaaS build out of the business so that's where my comments around Success 360 and bringing much more consumption-oriented pieces of our SnS, where many customers will be buying into more premium and consumption-oriented aspects of our customer success model and support models going forward. So, this too will be an accelerant of our subscription and SaaS. It will also be a deepening of how we work with our customers on their journeys and their success and growth from land and expand of their use of our products going forward. So, we're quite excited about those offerings and they have -- they just came to market this last quarter so we see that as a further accelerant and a way for us to drive renewals and consumption for our traditional SnS business.

Zane Rowe -- Chief Financial Officer and Executive Vice President

Jason, I would just add. Obviously, you've seen the decline on that line item, that was tied to the size that I pointed out on the on-prem business. So I did want to point out that it is directly correlated. We've got these great renewal rates, but it is tied to the on-prem performance.

Jason Ader -- William Blair & Company -- Analyst

Makes sense. Thank you.

Paul Ziots -- Vice President, Investor Relations

Thank you, Jason. Next question, please.

Operator

Your next question is from James Fish. Your line is open.

James Fish -- Piper Sandler -- Analyst

Hey, guys. Thanks for squeezing me in here. Most of my questions have been asked. But when you look across enterprise versus commercial, I guess, how are you seeing the health of commercial organizations in the last couple of weeks given kind of wave two? And then surprised we got to this point without any questions around Tanzu this quarter. Any further update on customer interest and how customers are looking to use it in the container world? Thanks.

Patrick Gelsinger -- Chief Executive Officer

Yeah. So let me start with the last piece, and despite Paul, I'll squeeze in a little bit on the first piece. On Tanzu, I just say, we are very pleased with our Q3 performance. It was comfortably ahead of our expectations for the quarter, continues to build momentum. We're having good success bringing forward our long-term Pivotal customers as they embrace the larger Tanzu strategy. We had a very successful SpringOne and VMworld. Expanding Tanzu support on VMware Cloud on AWS, support for Azure and Oracle Cloud. Key partnerships like GitLab and Confluence were announced. We also are beginning to bundle Tanzu into our core infrastructure offerings with Tanzu Standard and Basic. Good momentum in some of the particular areas of Tanzu, like observability. We launched our Tanzu Mission Control, our multi-cloud management solution, also steps around Spring and having our Spring Tanzu offerings, bringing forward the largest Java community. And you have great customer examples like the Fiserv example that we mentioned is just a stellar example of how we can rapidly bring major applications to production scale, and this was the SBA PPP loans for 18,000 small businesses. So, overall, a lot of momentum for Tanzu and we're seeing that really build as we go into the next quarter.

In terms of commercial, it was a good quarter for us in the commercial portion of our business, relatively speaking, and I'm super pleased with that, as an overall area that I would have been more concerned about that coming into the quarter and we did outperform a bit our expectations there.

Paul Ziots -- Vice President, Investor Relations

Thank you, Jim. It looks like we've hit time. So before we conclude, Pat had a final statement, if he wants.

Patrick Gelsinger -- Chief Executive Officer

Hey. Thank you all for joining us. Q3, another good quarter for VMware. And as we continue to navigate these unprecedented times, our focus on building that digital foundation to support our customers' highest priorities is just proving highly effective. And I'll just say, as we head toward our holiday, we'd want to thank you all but also wish you a very happy healthy Thanksgiving. Thank you so much.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Paul Ziots -- Vice President, Investor Relations

Patrick Gelsinger -- Chief Executive Officer

Zane Rowe -- Chief Financial Officer and Executive Vice President

Philip Winslow -- Wells Fargo Securities -- Analyst

Matthew Hedberg -- RBC Capital Markets -- Analyst

Mark Murphy -- J.P. Morgan -- Analyst

Walter Pritchard -- Citigroup -- Analyst

Mark Moerdler -- Sanford C. Bernstein & Co. -- Analyst

Raimo Lenschow -- Barclays Capital -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Parthiv Varadarajan -- Jefferies -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Jason Ader -- William Blair & Company -- Analyst

James Fish -- Piper Sandler -- Analyst

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