Jan 24, 2011
Executives
Tod Nielsen - Co-President of Applications Platform Mark Peek - Chief Financial Officer and Co-President of Business Operations Michael Haase - IR Paul Maritz - Chief Executive Officer, Director and Member of Mergers and Acquisitions Committee
Analysts
Brian Marshall - Gleacher & Company, Inc. Adam Holt - Morgan Stanley Derek Bingham - Goldman Sachs Group Inc.
Heather Bellini - ISI Group Inc. Brent Thill - UBS Investment Bank Jayson Noland - Robert W.
Baird & Co. Incorporated John DiFucci - JP Morgan Chase & Co Philip Winslow - Crédit Suisse AG Walter Pritchard - Citigroup Inc Jason Maynard - Wells Fargo Securities, LLC Israel Hernandez - Barclays Capital Kash Rangan - BofA Merrill Lynch
Operator
Welcome to the VMware Fourth Quarter 2010 Earnings Call, and thank you for standing by. [Operator Instructions] I will now turn the meeting over to Mike Haase, Vice President of Investor Relations.
Michael Haase
Welcome to VMware's Fourth Quarter and Full Year 2010 Earnings Conference Call. We will have prepared remarks from Mark Peek, our Chief Financial Officer.
Paul Maritz, our CEO, and Tod Nielsen, our COO, will join Mark for the Q&A session. Our press release was issued after close of market, and is posted on our website, where this call is being simultaneously webcast.
Statements made on this call include forward-looking statements such as those with the words will, believes, expects, continues and similar phrases that denote future expectation or intent regarding our financial outlook, product offerings, customer demand and other matters. These statements are based on the environment as we currently see it and are subject to risks and uncertainties.
Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-Q and Form 10-K for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. In addition, during today's call, we will discuss certain non-GAAP financial measures.
These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for or an isolation from, GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of intangible assets, employer payroll tax and employee stock transactions, the net effect of amortization and capitalization of software and acquisition-related items.
You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in the press release and on the Investor Relations page of our website. The webcast replay of this call will be available for the next 30 days on our company website under the Investor Relations link.
Our first quarter quiet period begins at the close of business, March 17, 2011. Also unless otherwise stated, all financial comparisons in this call will be in reference to our results with the comparable period of 2010.
With that, let me hand it over to Mark.
Mark Peek
Thanks, Mike, and good afternoon, everyone. We capped an outstanding 2010 with a great fourth quarter, producing record revenue, non-GAAP operating margin and free cash flows.
Total fourth quarter revenues increased 37%, and license revenues increased 39%, and as you'll recall, we posted a strong performance in Q4 2009. For the year, revenue grew 41%, with license revenue growing 36% compared to a 13% decline in 2009.
Our non-GAAP operating margin was 29.6% for the quarter and 28.5% for the year, primarily driven by the operating leverage of our revenue growth. Full year free cash flows were $1.2 billion, an increase of 43% from a year ago.
Before diving further into our discussion of Q4 and 2011 guidance, I want to take a few moments to reflect back on 2010. We achieved much during the past year and clearly raised the bar on our performance.
The IT spending environment improved dramatically compared to 2009, and we were able to capitalize by continuing to offer superior and trusted products, and we executed well, all of this in the face of determined and persistent competition. During 2010, we successfully delivered on multiple product releases, including vSphere 4.1 and View 4.5, each receiving industry awards and positive recognition broadly from our community and customers.
We integrated seven acquisitions during 2010, welcoming approximately 600 people from Zimbra, RTL Software, EMC's Ionix group, GemStone, RabbitMQ, TriCipher and Integrien. We increased our net headcount by nearly 2,000 people, including the 600 through acquisitions.
We expanded our international footprint and customer-facing capacity, particularly in the key markets of China, Japan, Eastern Europe and Latin America. All of this was accomplished while maintaining high standards of product quality and improving our 2010 non-GAAP operating margin by over 450 basis points.
And importantly, with our three-layer strategy focused on modernizing infrastructure, application platforms and end-user computing, we enter 2011 well-positioned to help customers navigate the journey to cloud computing. We are pleased with our 2010 accomplishments and want to thank all of the people of VMware, our partners and our customers.
Now I'll walk you through the financial details. The total revenue for the fourth quarter were $836 million, an increase of 37% from a year ago, or 38% on a constant currency basis.
We believe we experienced the strongest Q4 budget flush we have seen since going public in 2007, helping to drive record volume in Enterprise License Agreements, which represented over 26% of total bookings for the quarter. The quarter was characterized by strong and balanced growth across geographies, with U.S.
and international bookings split evenly and transactions with order values above and below $50,000 evenly split. A great performance by both our channel partners and our direct enablement teams.
License revenues were $422 million, up 39% from last year despite a difficult compare, with strong and balanced performance across our global regions. Despite record volume ELA performance, which generally offer higher discounts for the volumes purchased, the strong demand for Enterprise and Enterprise Plus versions of vSphere resulted in overall ASPs per vSphere unit being flat compared to Q3.
Demand for our desktop solution was also strong, helping to drive record desktop license bookings. Each product category in our portfolio met or exceeded our Q4 operating plan.
U.S. revenues increased 39% year-over-year to $439 million, and international revenues were $396 million, an increase of 35% compared to 2009.
Again, demand was balanced across all geographies. During the quarter, we closed two eight-figure ELAs, including one with EMC.
ELA renewals represent an important component of our transaction pipeline. During Q4, customers once again renewed their contracts at a higher dollar value on average than the original agreements, with an average maintenance term of approximately three years.
2010 was our first full year of renewing the initial three-year Enterprise agreements from 2007, and we have been very pleased with the results. Despite determined competitive efforts to prevent ELA renewals, so far over 80% have renewed or entered into a new ELA, and only 3% of customers terminated agreements, and we believe most of these were not for a competitive switch.
The remaining continue to be a part of our 2011 pipeline. We continue to see an excellent opportunity for ELA renewals.
However, keep in mind that we will be moving into the three-year anniversary of the 2008 financial crisis in the back half of this year, and the ELA renewal pipeline will be commensurate with our business three years ago. Platform maintenance and support revenue was $345 million, up 40% compared to last year.
As expected, recovered back maintenance revenue recognized in Q4 was down compared to the same period of 2009. The recovery program has now been operating for seven quarters, and we have done a good job of getting customers current that had lapsed on their maintenance agreement.
We expect back maintenance for the first quarter of 2011 to be lower compared to the same period of 2010. Customers continued to buy, on average, more than 24 months of support and maintenance with each new license purchased, illustrating their strong commitment to VMware as a core element of their data center architecture and longer-term private and hybrid cloud strategy.
Professional services revenue was $68 million, up 18% from last year. The increase was driven largely by strong consulting and training revenue.
Total deferred revenues ended the year at $1.9 billion, up 40% from the end of 2009, and an increase of 24% sequentially. The complexity of our deferred revenue has increased over time as a result of acquisitions, an expanded product portfolio and a broader range of pricing and packaging alternatives.
Over 80% of our deferred revenue is recognized ratably with the passage of time and includes primarily maintenance bookings. However, a growing portion is ratably recognized license bookings.
In addition, over 7% of deferred revenue is the result of prepaid professional services, including training, and is recognized as the services are delivered. And finally, just over 10% of deferred revenue is software license revenue, which is recognized upon product delivery or product releases.
2010 was a tremendous year for VMware, and we are pleased with our financial results and operational progress. We are also cognizant that we, along with the industry, benefited from pent-up demand from slower spending in 2009 and significantly higher server shipments during 2010.
In 2011, we won't have these advantages. Likewise, we remain cautious about the macroeconomic environment and the volatility we are observing in the world economy and individual sovereign nations.
With this backdrop, we expect first quarter revenues to be within a range of $800 million and $820 million, or year-over-year growth of between 26% and 29%. Revenue from our 2010 M&A activity represents low single-digit percentage of our guidance.
As is common with Enterprise software seasonality, we expect license revenues to follow normal patterns and decline sequentially by as much as 10%. For the year, we are expecting total revenue of between $3.45 billion and $3.55 billion, or growth of 21% to 24% compared to 2010.
License revenues in 2011 are expected to grow within a range of 14% to 19%. We also expect license revenues to be similar in both the second and third quarters.
I'll now provide some details on our operating expenses. Unless otherwise noted, all references to our expenses and operating results are on a non-GAAP basis, which are reconciled in the press release tables and posted on our Investor Relations website.
Our Q4 operating profit, measured on a non-GAAP basis, was a record $248 million, or 29.6% of revenue compared with 28.6% in Q3 2010 and 25.9% in Q4 2009. Our operating leverage was impacted relative to guidance by the increased variable compensation, as we pay our field based on bookings, not revenue.
We outperformed our quota targets, which also led to higher marginal variable compensation. The net impact of foreign currency during Q4 was a negative 77 basis points to our non-GAAP operating margin relative to the prior quarter.
We ended the year with approximately 9,000 employees, up nearly 2,000 from the beginning of the year and 300 from the beginning of the fourth quarter. We are in a rapidly changing and dynamic environment, and we see much opportunity in the adjacencies to the vSphere platform, so you should expect that we will continue to hire at a brisk pace in 2011 to take advantage of this opportunity.
Fourth quarter R&D expenses increased sequentially $7 million to $143 million, or 17.1% of revenues, as compared with 18.7% a year ago. Sales and marketing expenses for the fourth quarter were $286 million, or 34.3% of revenues, compared with 35.1% a year ago.
Sequentially, sales and marketing increased as a percentage of revenue, largely due to variable compensation on quota accelerators driven by higher fourth quarter bookings. G&A expenses were $64 million, or 7.6% of revenue compared to 8.5% a year ago.
Diluted non-GAAP EPS was $0.46 a share on 428 million diluted shares. The share repurchase program did not have an impact on EPS during the quarter.
Fully diluted EPS benefited by a $0.01 as a result of a lower Q4 tax rate. Our non-GAAP tax rate was 18%, lower than the Q3 rate as a result of the passage of the R&D tax credit.
The GAAP tax rate is significantly lower at 4%, as it reflects a cumulative catch-up for all 2010 as a result of the R&D credit. We expect the non-GAAP tax rate to be approximately 20% for 2011, and the GAAP rate is not expected to be materially different than the non-GAAP tax rate.
As mentioned last quarter, we expect little, if any, margin expansion in 2011. Taking into account our adjustments to GAAP operating income that Mike disclosed at the start of the call, we are guiding the non-GAAP operating margin for the first quarter to 27% to 28% and the full year 2011 to 28% to 29%.
In both cases, about flat compared to the same periods of 2010. The GAAP operating margins for the first quarter and full year 2011 are expected to be approximately 12 to 15 percentage points lower than the non-GAAP operating margins.
Although there is opportunity to expand the margins at this level of scale, we fundamentally believe it is the wrong approach, and we are building our investment model assuming we'll rapidly continue to hire high-quality engineering talent and to expand our international market opportunity. We see a lot of very strong long-term growth opportunities and need to invest to take advantage of them.
Now on to our balance sheet and cash flow statement. Our balance sheet remains strong, with cash, cash equivalents and short-term investments at year-end of $3.3 billion, up $400 million sequentially.
During the quarter, we used approximately $100 million in aggregate in capital spending and our share repurchase program. For the year, cash increased $800 million.
We used nearly $1 billion in aggregate M&A activity, capital spending and our share repurchase program during 2010. Non-GAAP operating cash flows, which exclude adjustments for capitalization of software development costs and excess tax benefits from stock compensation, were $447 million for Q4 and $1.3 billion for 2010.
2010 excess tax benefits from stock compensation increased significantly year-over-year to $223 million, primarily as a result of the appreciation in our stock price. We adjust our operating and free cash flows for excess tax benefits because it converts to cash or reduces our tax liability.
Free cash flows for the quarter were $406 million and $1.2 billion for the year. Free cash flow per diluted share was $0.95 for the quarter and $2.84 for the year.
As we've mentioned, free cash flow per share can be volatile in the short term, so we believe looking at it over a trailing 12 months is a better indicator of progress. The fully diluted share count increased to 428 million shares for the fourth quarter, driven by the impact of a higher share price in the calculation.
We expect our first quarter 2011 diluted weighted average share count will be approximately 430 million to 435 million shares. And for the full year, we expect the diluted share count to be approximately 440 million to 445 million shares.
We enter 2011 marching strong towards our vision to enable IT as a Service. To this end, we are continuing to invest in building out each layer of our three-layer stack, which will be at the core of this cloud era of computing.
We outlined our strategy to the over 20,000 attendees at VMworld and VMworld Europe in 2010. We are expanding our technical leadership in vSphere and management tools with more capabilities, scale and ease of use.
Leveraging the developer community and assets we have with Spring and vFabric, we are building out the core technologies and cloud-based services that will accelerate developers' success in the cloud. And as the end-user world continues to rapidly change, with new devices and applications demanding easier management of the millions of endpoints, we are building out offerings that leverage our experience with VDI and View.
We enter 2011 well-positioned to enable IT as a Service and delivering our customers agility and incredible savings of time, resources and effort. To summarize, 2010 was a great year, and like much of the industry, we benefited from the easier comparable to 2009.
We are pleased with our execution and solid performance throughout the year. We continue to manage our resources prudently while making the key investments necessary to maximize our long-term growth and free cash flow per share.
Paul, Tod and I will now take questions.
Operator
[Operator Instructions] Our first question will come from Mr. Adam Holt of Morgan Stanley.
Adam Holt - Morgan Stanley
I was hoping you could drill down on what the impact of some of the recently released management suites was in the fourth quarter? And then secondly, looking into calendar '11, I know it's preliminary, but can you just walk through some of the high-level assumptions underpinning the guidance, so -- what their embedded server growth rate in your numbers, what kind of assumptions you have about the ramp in the desktop, ELAs, that sort of thing.
Mark Peek
Sure. First, on the management suite.
We continue to have over 90% of our revenue coming from vSphere and from the vSphere products. And although we're happy with the attach that we're getting and the acceptance of the products by our customers, we're still largely driven by vSphere in that space.
On the guidance, with ELAs, we have another year in 2008 in which we'll be able to do renewals. As I mentioned in the prepared comments, towards the back half of the year that will be impacted somewhat negatively by what occurred with the financial crisis in the back part of 2008.
On server shipments, of course, server shipments are all predicted to go down in 2011, and we think we benefited in 2010 as a result of pent-up demand, because 2009 was so difficult. But the correlation between vSphere licenses and server shipments, although it's somewhat correlative and we think more servers are being virtualized, they're not being virtualized, so we benefit somewhat from that.
Operator
Our next question will come from Mr. Walter Pritchard of Citi.
Walter Pritchard - Citigroup Inc
Mark, I was wondering if you could talk a little bit about maintenance, which was, again, very strong this quarter. And you mentioned that the catch-ups were down year-over-year and expected to continue to be down year-over-year, and that line was much stronger than we predicted.
Just wanted to get some clarity on that front.
Mark Peek
Yes, the maintenance revenue is largely a roll-off of the deferred revenue on our balance sheet. The program that we have in place to go back and capture customers who had expired on maintenance has now been in place for seven quarters.
And so from a year-over-year perspective, it was actually down from Q4 of 2009.
Walter Pritchard - Citigroup Inc
And then just around desktop, you mentioned strength there, and I think last quarter you threw out a data point, about 10% of bookings from desktop. Could you just clarify what you're counting in there?
And as it relates to VDI specifically, because I know you've got things like some of the Fusion products and so forth. But specific to VDI, what type of traction are you seeing, and how has that changed over the last, say, six months or so?
Tod Nielsen
This is Tod. So what we said -- what Mark said in the prepared remarks is in Q4, we saw a record performance in our desktop products overall.
Last quarter, we said that in the U.S., that the license revenue for desktop products was more than 10% of revenue. And for the year in the U.S., license revenue for desktop products was more than 10% of revenue.
What we're including in that number is the View and Workstation products. We're not including Fusion.
And we're continuing to see great proof of concepts and customer interests and are pleased with how the business completed itself in 2010.
Operator
Our next question will come from Ms. Heather Bellini of the ISI Group.
Heather Bellini - ISI Group Inc.
I was wondering if you could talk a little bit on the initial signs from customers on vCloud Director and kind of what the early adopters are saying? And also, if you could talk about the attach of some of the other add-on offerings that you have?
If you could give us a broad idea of how penetrative those are into your installed base?
Paul Maritz
Sure. Heather, this is Paul.
On vCloud Director, as you know, we released that late in the third quarter of last year, so we really only have one quarter of good data now on that. Early indications are positive.
We have customers who are deploying right now that it's just too premature to give you a basic reading on what the impact will be. But early indications are positive.
Heather Bellini - ISI Group Inc.
And how long do you think it takes for you to be able to give us a sense of how that could brand? Is that something you should get more comfortable discussing towards the end of this year?
Paul Maritz
Certainly by the end of this year, yes. And we'll be giving you updates as the quarters go by.
And as Mark said, we're investing very heavily in the management space in general, but compared to vSphere, those are still relatively small numbers.
Heather Bellini - ISI Group Inc.
And just the attach on some of the add-on offerings?
Paul Maritz
Well, again, this is where we're really rolled out the new suite of products in the second half of the year in terms of vCloud Director, the vShield products and the vCenter ops family of management products are -- as you know, we only completed the Integrien acquisition around about the time of VMworld, so we've only really got one quarter of data here. So it's too early to draw a definitive trend there.
But certainly, we have a lot of focus on that area, and it's one of our priorities for 2011, is to grow those businesses.
Operator
Our next question will come from Mr. Kash Rangan of Bank of America and Merrill Lynch.
Kash Rangan - BofA Merrill Lynch
I just wanted to -- just on the Q1 guidance, Mark. License revenues down 10% sequentially.
I do recollect that you get the OEM deferrals. I was just curious why you're thinking license could be down.
In fact, I looked at Q1 2010, they were flattish or up sequentially modestly versus Q4. Maybe you could just walk through what is that change with that driver of your license revenue estimate?
Mark Peek
Sure, Kash. We will benefit some in the first quarter from OEM revenues, because we do report those in arrears.
In the guidance, it's indicated that on the low end of our guidance that we could be down as much as 10% for license revenue. So you can fit that somewhere into the model between the low and the high end of the range.
And we benefited in Q1 of last year from some larger ELAs, which weren't specifically in the pipeline as we closed the quarter. And so just as we look at the pipeline, we think that we'll see more normal seasonality and that there was some budget flush -- a strong budget flush, in fact, in the fourth quarter of this year, and so there may have been some pull-ahead of bookings from Q1.
Kash Rangan - BofA Merrill Lynch
Mark, it can also affect the connection between server shipment growth rate and license revenues. I know you've had a variety of things, attach rate being one, penetration and then the management offerings.
Can you just walk us through each of those? Relatively speaking, can you help us quantify if server shipments are up, say, x%, what would the license revenue track in such a way that we can track the server shipments and gauge for ourselves how you could continue to progress along as you execute against your plan in 2011?
Mark Peek
Well, it would make your life too easy if there was a perfect correlation between the difference in server shipments and our license revenue, because it is made up of a number of components. And it includes how our Enterprise License Agreements go and how far ahead customers are buying on a forward perspective.
There isn't a perfect correlation, because all server shipments aren't being used for virtualization.
Operator
Our next question will come from Mr. Derek Bingham of Goldman Sachs.
Derek Bingham - Goldman Sachs Group Inc.
My first question is on the margin guidance for the year. You just came out of a quarter where you were up pretty significantly year-over-year.
And so just with the investments that you have planned to make, just wondering if you could give us some color on kind of how that ramps through the course of the year? Is there a big kind of hiring push that has already started in the first quarter, or -- I'm just trying to get a sense for the shape of that.
Mark Peek
Sure. Well, there are a few elements to it.
First, we added over 300 people in the fourth quarter. We have the full year impact of adding the 2,000 people that we added in all of 2010.
We have already done some of our hiring into the first quarter. In fact, had a number of hires that we've closed in December that didn't start until the January quarter, until we'd typically see a trend of having an earlier January start date for Q1 in particular.
When you look at Q1 margins, we also impact the benefits reset for elements such as FICA, et cetera. But we expect to be investing heavily in people throughout the year, both from a geographic perspective, as we -- on the sales and marketing area and in technology as we find the high-quality development talent.
Derek Bingham - Goldman Sachs Group Inc.
On the geographic point. International, I think, versus domestic grew similarly in the fourth quarter.
Would you expect international to start outpacing domestic as we move through 2011?
Mark Peek
Certainly, just the size of the markets, the growth rates in -- particularly in Asia-Pacific, we'll outpace. But we had real strength in the U.S.
and strength in South America, in particular.
Operator
Our next question will come from Phil Winslow of Credit Suisse.
Philip Winslow - Crédit Suisse AG
Just a question on the incremental spending and the headcount for 2011. When you think about your two main expense line items, sales and marketing, R&D, which would you imagine growing faster and sort of being the majority of that incremental spend in hiring?
Paul Maritz
This is Paul. We're investing it both ways.
As Mark said, we're investing in the high-growth regions of the world. And we're also investing in new capabilities that we think we need as we enter into this cloud era.
So we're going to see investment in both geographies and product line.
Operator
Our next question will come from John DiFucci of JPMorgan chase.
John DiFucci - JP Morgan Chase & Co
Mark, you said in your prepared remarks, and I think Paul was quoted in the press release, that VMware benefited from an uptick in spending. And I think, Mark, you said it was the strongest Q4 budget flush since you became public in '07.
I'm just curious, do you see that more as just the normal seasonality, or does it feel like it's something beyond that? And I'm not talking about virtualization per se, because that in itself seems to be growing better than a lot of other things and for, I think, obvious reasons.
But as far as the environment out there, do you see things getting better, or is this more seasonal uplift in this quarter?
Paul Maritz
Let me jump in there. This is Paul.
I think the bottom line here is, is we do see things getting better. On the other hand, I think the whole industry reported a very strong spending pattern in Q4, and we're reflecting that.
And what, exactly how much of that strong spend in Q4 was a one-time event or an indication of future strength, nobody, I think, really knows the answer to that. So on the one hand, we're being fairly conservative in our planning, and if the spending in Q4 turns out to have longer legs, that will be very welcome, but we're not assuming it.
John DiFucci - JP Morgan Chase & Co
Just a quick follow-up. Because it looks like international was as strong as U.S.
But Mark, you mentioned Asia, especially, being strong. Just curious, in Europe, and we all read the paper and what's happening out over there.
It hasn't -- Europe has been, I guess, the weakest region, if you count the three major regions: Americas, EMEA and APAC, but it still really hasn't been that weak, and I'm just curious as to what you saw there and what you're assuming in your guidance for next year?
Mark Peek
Well, with respect to the fourth quarter, we had a very balanced performance across all of the geographies. And so we were very pleased with the performance that we had in Western Europe in particular.
We had concerns walking into the quarter about the macroeconomic environment in Europe, and it was -- it outperformed for us. With respect to guidance for the quarter, we look at each of the geographies' pipelines, and so we have a fair degree of comfort in Europe, but, again, continue to be concerned because of some of the sovereign nation issues that we've seen.
Operator
Our next question will come from Israel Hernandez of Barclays Capital.
Israel Hernandez - Barclays Capital
Gentlemen, just a quick question around some of the non-vSphere products. Paul, if you look at the portfolio and you look at 2011 and 2012, which one of the non-vSphere products, whether it's SpringSource or Zimbra or some of the management tools, do you think is capable of breaking out over the next few quarters?
Paul Maritz
Well, I think it partly reflects the length of time that we've been investing in those spaces and the foundation that we've laid there. And clearly, the one that we've been working at longest is the desktop space right now.
So we had strong growth in desktop in 2010, and we're certainly expecting that to continue into 2011. Next after that would be the management products.
Again, we've been investing longest and have made acquisitions, but we certainly see the applications space as being incredibly strategic. So while we don't expect to see huge breakout revenue there in 2011, it is a very important area for us and will, amongst other things, account for our continued spend and investment.
Israel Hernandez - Barclays Capital
Just a quick housekeeping. Mark, just on the other income, that line's been moving around quite a bit quarter-to-quarter.
How should we be thinking about that with respect to 2011?
Mark Peek
Well, we don't treat it as a great differentiator in our model. And there are number of elements that come in and out of it, some of it strategic investments, some of it is the mark on our FX hedging.
And so we just tend to think of it as flat as we model it for the year.
Operator
Our next question will come from Brent Thill of UBS.
Brent Thill - UBS Investment Bank
Mark, on the free cash flow growth, you accelerated this year 43% growth. How should we think about the trajectory for 2011?
Mark Peek
Well, Brent, we target to have our free cash flow grow at least at the pace of our operating margin growth. And we benefit from multiple years of maintenance that we're selling on Enterprise license.
And as you saw, the deferred revenue grew throughout the year. And in fact, for the first time, over 10% of the deferred revenue is coming from software license revenue related to products that we're going to ship or from the delivery of product releases, and that's up from less than 10% over last four quarters or so.
So the answer to the question is really us continuing to maintain to sell multiple years of maintenance as well as operating discipline and cost.
Brent Thill - UBS Investment Bank
And for Paul, if you can address the mobile market and how VMware is addressing, with smart phones and tablets forecasted to exceed the traditional PC ships, how do you view your position in this market?
Paul Maritz
Well, we view ourselves as, fundamentally speaking, to allowing companies that deliver capabilities and applications to their users in a way that's independent of the endpoint device that the user happens to be using at that point in time. So we are crafting a strategy that allows, in the short term, virtual desktop, Windows-based capabilities to be delivered to so-called fix-in clients as well as tablet and home clients.
So we see that as an opportunity, because customers in the future are going to need even greater capabilities to deliver a secure working environment to their users independent of the endpoint device that they're using. We have also some speculative investments in that area.
You might have seen a press release put up, with LG in particular, about a solution we're working with the Android community on that essentially allows you to have two phones within a phone, a work phone and your personal phone coinhabit on the same physical device, which is a nice extension of our core virtualization technology.
Operator
Our next question will come from Jason Maynard of Wells Fargo.
Jason Maynard - Wells Fargo Securities, LLC
I guess I was a little surprised to hear that VDI might be the bigger breakout product than management tools. I'm just curious, when you think about your initial guidance, how much sort of breakout do you have baked into the forecast?
And how do you see this market playing out? Because this has been a space that been talked about for about five years and actually really never materialized in terms of being as big as almost anyone in the industry thought it was going to be.
Mark Peek
Well, Jason, in terms of the broader guidance, we're thinking about both management products and VDI and having them grow faster, obviously, than vSphere, but becoming a bigger portion of our overall bookings. And so, yes, I think we tend to look at them in somewhat of a balanced view and see growth opportunities in both.
Jason Maynard - Wells Fargo Securities, LLC
But I guess, just following up, management tools behind VDI, is that what I'm hearing? Or maybe I'm...
Paul Maritz
This is Paul. I mean, I think the bottom line here is, as I said, it reflects the length of time and the focus that the company has been working on these areas.
And our VDI offerings at this point are more mature and more complete than our management offerings. That being said, we are now starting to deliver a complete set of management offerings for the virtual environment, and we think that there's every opportunity to see that grow in the future.
Jason Maynard - Wells Fargo Securities, LLC
From a distribution standpoint, where are you sort of at in your journey in terms of building out the, whether you want to call it overlay or specialty sales or management tools and even for the Platform as a Service offering. Is that second, third inning?
Or do you guys feel like you're getting at least closer to being ramped?
Paul Maritz
Well, I think this reflects basically how we think about things. In certain areas, we believe that what we'll be offering is very natural and straightforward additions, almost no-brainer additions for our core underlying platform.
And in those situations, we intend to use the full capability of our exiting sales force here who are very good at delivering those solutions. So we are not looking at management as a completely separate business that requires a totally different sales motion.
We do have specialties in the technology, so we do have specialists, system engineers, for instance, in our sales force who know how to do the different configurations needed for the desktop environment, because how you set things up there, given the peculiarity of the desktop workloads, requires a different configuration there. So we've invested in that.
But in general, our goal is to, over time, be able to move more and more of these investments we are making to get the full benefit of our mainstream sales capabilities.
Operator
Our next question will be from Jayson Noland of Robert Baird.
Jayson Noland - Robert W. Baird & Co. Incorporated
A question for Mark on bookings expectations. Q4 bookings were impressive at about $1.2 billion on our math.
If you look back at Q1 of 2010, booking came down pretty substantially, I think 29% sequentially. Should we expect something like that headed into Q1 of 2011?
Mark Peek
Well, we're not providing specific bookings guidance, but as we stated in the call, a range on total revenue for Q1 of 800 to 820 and as low as 10% sequential decline in license revenue. We continue to expect to benefit from ELA renewals and so continue to expect to have strength in bookings.
We also are having a growing portion of ratable recognition on license revenue. It's still less than 5% of the total deferred revenue, but we continue to have -- that we'll [ph] have bookings outpace revenue over time as that trend grows.
Jayson Noland - Robert W. Baird & Co. Incorporated
Is there anything you can add about the second half of 2011 from a bookings expectation standpoint, just given that 2008 renewal opportunity is somewhat limited?
Mark Peek
Just that we factored it into the guidance. And as we talked about the full year of 14% to 19% license revenue growth, we're thinking about the second and third quarters as being very comparable to each other.
Operator
Our final question will come from Brian Marshall of Gleacher & Company.
Brian Marshall - Gleacher & Company, Inc.
I got a question with regards to the new stacks, specifically, the cloud application platform. Clearly, companies, they have pretty good investment on the Java side with Spring as a framework for Enterprise applications.
Can you talk a little bit about what your thoughts are with regards to Ruby, and it kind of seems to be sort of the leading language for social networks at this point?
Paul Maritz
Sure. This is Paul.
We're strong believers in the whole phenomenon of these third-generation open and open-source-based programming frameworks, and we made a very strong start, as you say, with Spring, but we are fully expecting to extend our offerings to cover other modern programming frameworks, Ruby on Rails in particular.
Brian Marshall - Gleacher & Company, Inc.
Final question for me, I guess. Why wouldn't we expect to see an acceleration with the hockey stick ramp of virtualization adoption within servers?
If you look probably over the last couple years, we maybe added 500 basis points or so of incremental server penetration, with virtualization, that is, and perhaps that's about 30% right now. I mean, is there a reason why that wouldn't accelerate in the future, as this is probably the single best way to lower your IT cost?
Mark Peek
Well, as we look ahead, we realize that the processes themselves have become more powerful and a more powerful component about the number of workloads that you can run per proc and per vSphere license. And so that factors in, that the growth won't necessarily be linear.
There are Enterprise License Agreements that are out there in which our customers have purchased forward for the future. And so, although we fundamentally believe that most workloads, ultimately, can be virtualized, we think that, that journey will be evolutionary, not revolutionary.
Michael Haase
Okay. Thank you, everyone.
That will conclude the call.
Operator
Thank you for your participation on today's conference call. At this time, all parties may disconnect.