Oct 21, 2014
Executives
Paul Ziots – VP, IR Pat Gelsinger – CEO Carl Eschenbach – President and COO Jonathan Chadwick – CFO, COO and EVP
Analysts
Brent Thill – UBS Kash Rangan – Bank of America Merrill Lynch Walter Pritchard – Citibank Phil Winslow – Credit Suisse Raimo Lenschow – Barclays Heather Bellini – Goldman Sachs Rick Sherlund – Nomura Matt Hedberg – RBC Capital Markets Abhey Lamba – Mizuho Securities USA Inc. Rajesh Ghai – Macquarie Group Keith Weiss – Morgan Stanley Mark Moerdler – Sanford Bernstein Michael Turits – Raymond James
Operator
Welcome, and thank you for standing by. (Operator Instructions) I would now like to turn the call over to Paul Ziots, Vice President, Investor Relations.
Sir, you may begin.
Paul Ziots
Thank you. Good afternoon, everyone, and welcome to VMware’s third quarter 2014 earnings conference call.
On the call, we have Pat Gelsinger, Chief Executive Officer; Carl Eschenbach, President and Chief Operating Officer, and Jonathan Chadwick, Chief Financial Officer and Chief Operating 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 can also be downloaded at the conclusion of the webcast from ir.vmware.com.
We have also included in our earnings release and posted on our website historical data for revenue and unearned revenue, excluding revenues in each period attributed to the products and services contributed to Pivotal Software and the products and services associated with divestitures consummated by VMware in 2013. On this call today, we will make forward-looking statements that are subject to risks and uncertainties.
Actual results may differ materially as a result of various risk factors, including those described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC. 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’s payroll tax on employee stock transactions, the net effect of amortization and capitalization of software, certain ligation and other related items, acquisition-related items and realignment related net gains and charges.
As mentioned, we have presented historical data for revenue and unearned revenue, excluding Pivotal and all 2013 divestitures. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in the press release and on our Investor Relations website.
The webcast replay of this call will be available for the next 60 days on our company website under the Investor Relations link. Our fourth quarter 2014 quiet period begins at the close of business December 12, 2014.
Unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2013. With that, I’ll turn it over to Pat.
Pat Gelsinger
Thank you, Paul, and good afternoon, everyone. It was good to see many of you at our recent financial analyst day.
Overall, we have once again met our guidance for the quarter. We are pleased with our revenue growth of 18% and that our operating margin exceeded our guidance.
We’re particularly pleased with these results in the context that the industry disruption and economic challenges which are affecting businesses around the world. Looking ahead, our roadmap of groundbreaking innovation is unparalleled and we are seeing continued strong growth and momentum with our new products and services including AirWatch, NSX, V SAN and vCloud Air.
We are also continuing to attract the best leaders in the industry across all of our businesses. Customers are telling me that their businesses are facing more change and disruption than ever before.
Business models that once seemed solid and permanent are being replaced by fluid rapidly shape shifting new approaches. They also recognize that in this fluid world, software is now the primary means of engaging prospects and customers and is the key driver of innovation and growth.
Customers come to us to embrace a new model for IT, a software-based fluid IT that is able to separate itself from the constraints of hardware, one that is able to instantly provision applications, one that offers the greatest choice without compromise and above all one that offers a new model for security optimized for a world of millions of applications. This is the world of the software-defined enterprise that is enabled by a new model of IT.
We help our customers take advantage of this new model of IT through our software-defined datacenter, hybrid cloud and end-user computing offerings. This past three months we’re rich with customer and industry momentum as we hosted our VMworld 2014 conferences in San Francisco and Barcelona and our AirWatch Connect events in Atlanta and London.
In total, we hosted approximately 33,000 attendees across our industry-leading events where we featured demos, keynotes, hands-on labs and numerous activities for our customers and partners. We also announced the wave of new products and services across our three strategic business imperatives.
Starting with the software-defined datacenter, these announcements included the debut of VMware EVO:RAIL, the fastest way for customers to build and deploy a software-defined datacenter. EVO:RAIL is the first solution that a family of hyper converged infrastructure offerings from VMware going from power on to virtual machines in minutes and will be available from partners including Dell, EMC, Fujitsu, Inspur, NetOne and SuperMicro.
In addition, we were excited to announce two additional partners in Barcelona last week, HP and Hitachi Data Systems. We also announced new virtualization, cloud management and integrated open stack solutions that dramatically advanced the industry’s most complete product portfolio for implementing a software-defined datacenter.
We were also excited to announce joint innovations with Google, Pivotal and Docker which offer our customers containers without compromise helping them to run and manage container-based applications more securely on a common platform at scale in private-public and hybrid clouds. No other vendor offers this unique combination of efficient containers combined with the security and management of VMs on a common platform.
Our open stack and container announcements enable us to provide the greatest choice to our customers without disruption to their IT environments. Last week in Europe, we announced key innovations to our cloud management platform to enable comprehensive management of applications and infrastructure on hybrid clouds.
We unveiled VMware vRealize Suite 6 which is purpose built for managing the hybrid cloud and we also introduce vRealize Code Stream 1.0, an exciting new product that provides a single dashboard for end-to-end visibility of the entire DebOps process. We continue to see VMware NSX gaining significant momentum and industry validation with more than 250 paying customers today.
Over the past quarter, we announced strategic technology and go-to-market partnerships for NSX with the rest of Networks, F5 and HP as well as the technology and global reseller agreement with Dell to deliver NSX solutions worldwide. At VMworld Europe, we announced plans with CFC for the new web scale infrastructure as a service platform which will be built on OpenStack and VMware Software-Defined Data Center solutions including NSX.
We also announced the partnership of Palo Alto Networks to deliver unified security for the hybrid cloud. On the hybrid cloud front, I am excited to report that VMware continues to rapidly expand the capabilities and global footprint of our vCloud Air hybrid cloud platform, the best and fastest way to an enterprise-class hybrid cloud.
It’s still early in the game for the secular shift to enterprise-class hybrid cloud computing. VMware is listed as one of only five mega providers in Gartner’s 2015 planning guide for cloud computing and we believe it’s because of our rapidly expanding service offerings, geographic reach and extensive partner network.
In fact that VMworld 2014 Europe, we announced a number of new services as well as another new VMware new operated datacenter located in Germany. This new central European location will help address German and EU compliance and data protection regulations and demonstrates our commitment to expand our hybrid cloud services around the world.
One of the exciting new services we announced is VMware vCloud Air Object Storage. This is based on EMC ViPR technology that offers extremely scalable cost effective and durable storage for unstructured data.
We have also seen exciting progress with our end user computing business. We unveiled VMware Workspace Suite which offers a single integrated portal to access VMware Horizon and AirWatch mobile and content management solutions and VMware Horizon.
The result is a unified experience across mobile and desktop devices but also provide a comprehensive management dashboard for IT. We also acquired CloudVolumes, a leading provider of real time application delivery technology that enables VMware Horizon 6 customers to lower their infrastructure and management cost while giving end users a more personalized experience.
Finally, we also announced a series of new and expanded partnerships. This included an agreement with SAP to deliver mobile security in a simplified user experience for mobile applications and a collaborative effort between VMware, NVIDIA and Google to deliver high performance virtual desktops and workstation class graphics to Google Chromebooks.
In summary, our business is growing. We are confident in our strategy and our portfolio of ground breaking new technology is helping customers realize the dramatic benefits of a new software-defined model for IT.
I will now turn it over to Carl to talk more about our business performance in Q3. Carl?
Carl Eschenbach
Thank you, Pat. We remain pleased with the increasing breathe and growth of our new product offerings across all three of our business priorities, the software-defined datacenter, hybrid cloud and end user computing.
Customers continued to move from buying purely standalone vSphere to purchasing our sweet and additional products such as network virtualization. We continue to transition from being a compute-virtualization company to a provider of a broad range of cloud infrastructure and mobile offerings.
We’re particularly pleased with the ongoing performance of our newest products such as NSX Network Virtualization, Virtual SAN Storage Virtualization, vCloud Air, Hybrid Cloud, and AirWatch mobility products. Although these newest offerings are still small in relation to our overall business.
Operationally our global sales teams remain confident in selling our powerful lineup of solutions. Our ELA business pipeline continues to remain strong.
Although deals are becoming more complex this reflects the fact that customers are choosing to include vCloud Suites and new emerging products as part of their ELAs. As a result larger deals can take more time to put together as customers look to develop a more strategic partnership with us.
In general it was a challenging environment for large deals given the change and turbulence in the industry. And we were not immune to this in Q3.
Even this and because a larger federal ELA that I mentioned in last quarter’s earnings call did not yet closed, we had suspected a slightly stronger bookings profile for the third quarter. Approximately 29% of total bookings were ELAs.
We closed three deals greater than $10 million in the quarter compared to five deals in Q3 last year which included our largest deal ever. Meanwhile the channel enablement activities we have talked about previously continued to bear fruit.
This resulted in another quarter of improving transactional bookings. Our renewal performance during the quarter was once again very strong.
Q3 was the highest ever in quarter renewal rate for support and our in-quarter renewal rate for ELAs also remained at near record levels. The average term for support remained well above 24 months.
Moving to regional bookings performance we saw similar growth across all three geographies. Overall, bookings grew year-over-year in our Asia Pacific region despite continued softness in Japan.
We once again had solid growth in China which is in contrast with many of our peers. While in EMEA bookings grew, in Russia geopolitical tensions weighed on the bookings performance and we saw an over 50% decline year-over-year.
In a weak German economy we saw lower bookings than expected with our German sales leadership team now solidly in place we expect to see better bookings performance going forward. Overall performance in the region was aided by strong execution in Southern Europe despite the challenging macro environment.
In the Americas as you all recall we were forecasting a strong federal performance driven by a particularly large ELA opportunity. This larger ELA did not complete in the quarter which lead to a year-over-year decline in our federal business.
We continue to track this substantial opportunity. Given all of this overall bookings in the Americas were up in line with the rest of the business but not as much as we were forecasting.
Taking a look at product groups end-user computing including AirWatch grew license bookings over 60% year-over-year in Q3. The core VMware salesforce in our channel are increasingly leveraging EUC and bringing the expanded portfolio of products to our enterprise customers.
Within end-user computing our desktop license bookings once again grew double digits year-over-year. In addition we saw strong momentum from Horizon desktop as a service, our cloud-based desktop service introduced in Q1.
AirWAtch had a very strong quarter and continued to build upon its leadership position. We believe AirWatch increased its number one position in market share in enterprise mobile management and security.
We continued to accelerate our joined go-to-market efforts in brought deeper collaboration among the VMware and AirWatch salesforces. Moving to cloud management.
Our cloud management platform continued to be an industry leader for cloud management and automation. Our direct salesforce and the channel continued to work towards making the no naked vSphere vision a reality.
Greater than 75% of our vCloud Suite license bookings continued to be attached to ELAs. Our cloud management penetration is now over 12% of our installed base leaving us plenty of room for growth.
A successful VMworld Barcelona brought announcements of a wave of new cloud management offerings and capabilities. These include updates to VMware vRealize Suite 6, a cloud management platform purposely built for the hybrid cloud.
A major update of VMware vRealize operations and a beta launch of VMware vRealize air compliance, a new addition to the VMware family of cloud management software as a service offerings. Finally, we extended our position in cloud management with our launch of vRealize Code Stream.
vRealize Code Stream will accelerate application releases and extend the agility provided by continuous integration to continuous delivery enabling frequent, reliable software releases while reducing operational risk. Now over 80% of our management suite is in its second generation of development enabling IT Managers to better and manage both modern application architectures as well as traditional three-tier business applications that are both deployed on premise or in the public cloud.
In addition, we are well underway with our vSphere 6 public beta program, which is receiving a great response and will make vSphere more and more appropriate for cloud-native applications with enhanced big data and Hadoop support. Our network virtualization platform, VMware NSX gained significant momentum once again in Q3.
We are extremely pleased with the bookings performance in the quarter as we saw successes across a wide variety of industries, market segments and GEOs. At the end of Q3, NSX had over 250 paying customers.
We were particularly pleased with the success of NSX in the US Federal sector in Q3 and we find it exciting that our US Federal government is rapidly adopting such a new technology. At VMworld in San Francisco, the team had over 11,000 attendees at NSX sessions and NSX was number one in terms of meeting request and hands-on lab participation.
Our customers are embracing the NSX solution, not only as a network virtualization platform but as a network security one as well. Our highly differentiated micro-segmentation capability is driving significant interest in our customer base.
With traction across all GEOs and verticals, we are closing key architectural wins as customers look to transform their network operations in a similar way they did with compute through the use of vSphere and server virtualization. Moving to Virtual SAN, we couldn’t be more pleased with the products performance in its second quarter of availability.
We are seeing successes across a wide variety of industries, market segments and GEOs. In Q3, we saw a significant increase in Virtual SAN being sold through the channel.
Turning to Hybrid Cloud, our vision of a hybrid cloud world is being adopted by customers as they increasingly seek to combine their on-premise investments with the best that the cloud has to offer. We grew our hybrid cloud business over 80% year-over-year.
I am pleased to know, we have continued to see significant momentum in our second quarter of offering vCloud Hybrid Service Disaster Recovery and early customer adoption has been extremely positive. In Q3, we also announced expansion of our hybrid offering through vCloud Air OnDemand, which is a new online channel helping us capture the secular move of workloads to [indiscernible] cloud-delivered models.
We continue to expand our global footprint by announcing in early access program in our first locations in Japan and Germany opening up our first vCloud Air location in New Jersey in collaboration with our partner, Centrelink and announced to early access program for our vCloud government service in the US. In Q3 we saw very strong PSO consulting bookings.
Our customers are looking to VMware more than ever for expertise and helping them deploy the software defined data center transition to the hybrid cloud and transformed their desktop in mobile environments. We are seeing major Fortune 50 companies leverage VMware’s professional services as they move towards full deployment of a complete set of software defined data center deployments.
In summary, when we look in particular at the performance of our newer technologies in the momentum we are seeing, we had a solid Q3. We’re continuing to invest and enabling our sales force and channel around our new growth products and see these market opportunities paying off in the coming quarters.
Our industry is going through a significant transformation as our customers shift to a software defined enterprise and a new model for our IT. We are looking forward to helping our customers take advantage of this change through our technology leadership across our software defined data center hybrid cloud and user computing offerings.
With that, let me turn it over to Jonathan.
Jonathan Chadwick
Thank you, Carl. We are pleased with our Q3 financial results exceeding the midpoint of our revenue guidance, and exceeding non-GAAP operating margin guidance for the quarter.
Q3 total revenue was $1,515,000,000, $15 million above the midpoint of our guidance range, and up 18% year-over-year. License revenue of $639 million also exceeded the midpoint of our guidance and was up 13% year-over-year.
We also remain pleased with the increasing breadth and diversification of our business with non-standalone vSphere license bookings once again greater than 50% of total license bookings up for more than 40% in Q3 2013. Specifically, license and subscription bookings in these areas beyond standalone vSphere, grew over 25% year-over-year.
We achieved this level of growth despite the softness in ELAs we experienced in Q3. In addition, we are capturing the market’s movement to hybrid cloud.
While our hybrid cloud and SaaS offerings including AirWatch, vCloud Air, vCloud Air Network and desktop as a service are relatively small components of our overall business today at just under 5% of our total revenues for Q3. These offerings were up over 100% year-over-year in aggregate.
Moving on operating margin, our Q3 non-GAAP operating margin was 30.4% significantly above our guidance. This was due largely to higher revenues than originally planned.
Given the momentum we are seeing on our next generation products, and the rapid changes in the market, we expect to continue making investments in our newer business areas while maintaining clear leadership in key areas, such as compute virtualization. Diluted non-GAAP EPS for Q3, was $0.87 on approximately 434 million shares.
Overall, Q3 was a strong P&L performance for the company and we are pleased with these results. I’ll now focus on key additional highlights that will be helpful in understanding our Q3 performance.
Our balance sheet remains strong with cash in short term investments are quarter end of $7.1 billion up 7% sequentially. In Q3, our operating cash flow was $606 million, and free cash flow was $506 million.
During the quarter, we repurchased approximately 400,000 shares of our stock for a total of $43 million at an average price of around $99 per share. Total unearned revenue end of the quarter of $4.37 billion, up 20% from Q3 2013 and of which, $1.65 billion in long term, up 17% year-over-year.
Approximately 89% of our unearned revenues will be recognized ratably over future quarters. The unearned revenue mix is largely in line with prior periods and is primarily a reflection of our strong support business.
It’s important to note that the participation and renewal rates for our support business, remain high and that customers enjoy significant ongoing value from VMware including all future product updates and upgrades. In effect, this model is a great combination of a perpetual license business with the ongoing revenues and cash flows associate with the services subscription, to future upgrades and updates.
I’d encourage you to refer to the slides and financial tables accompanying this earnings call for further details on our results. Now turning to guidance, we are reaffirming the midpoint of full year 2014 revenue guidance at $6,020,000,000 with a range of between $6 billion and $6,040,000,000 representing year-over-year growth of between 15% and 16%.
Excluding Pivotal and Divestitures, we continue to expect the midpoint of our 2014 total revenue growth to be approximately 17%. We are also reaffirming the midpoint of full year 2014 license guidance at $2,590,000,000 with a range of between $2,580,000,000 and $2,600,000,000 or up 14% year over year.
Excluding Pivotal and Divestitures, we continue to expect the midpoint of our 2014 license growth rate to be approximately 15%. We continue to expect that non-GAAP operating margin for 2014 will be approximately 31%.
Moving on to operating cash flow for 2014, we expect operating cash flow of between $2.1 billion and $2.3 billion. This revised expectation now reflects a combination of three main items; firstly, softer bookings including the ELA and federal bookings in Q3 Carl just described.
Secondly, we expect to see increased cash tax payments as we continue to transition to being a net cash tax payer, and third, certain installment payments related to the acquisition of Air Watch, will now be paid in cash over the course of 2014 rather than stock, which we were originally considering. As a reminder, we continue to view the large government ELA as a substantial opportunity.
Finally, we are reaffirming our expectation of approximately $350 million of CapEx for 2014. Remaining guidance for 2014 is included in the slide deck posted on our investor relations website.
For Q4 2014, we expect total revenue to be between $1,670,000,000 and $1,710,000,000 up 13% to 15% year-over-year. License revenues for Q4 are expected to be between $765 million and $785 million up 11% to 14% year over year.
Given the typical seasonal strength of Q4, we are expecting to build both license deferred and total deferred revenue but at a lower sequential dollar value increase as compared with last year. We expect non-GAAP operating margin for Q4 to be approximately 33% to 34%.
This reflects our expectation of a strong seasonal quarter for revenues in Q4, and is consistent with our full year non-GAAP operating margin guidance I just provided. And finally, other income and expense is expected to be approximately $5 million in Q4.
In summary, Q3’s revenue and operating profit results was strong, and we were pleased with these results. We saw a great progress in our mobility solutions from AirWatch, our NSX networking products and in early stage returns from storage virtualization.
We also continue to see our overall hybrid cloud business do well. These business areas are key elements of our long term strategy and we were pleased to see the results of our continued investments in these newer areas begin to pay off.
And with that, I’ll turn it back to Paul.
Paul Ziots
Thanks, Jonathan. Before we begin the Q-and-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.
Operator
Yes, thank you. We will now begin the question-and-answer session.
(Operator instructions). And our first question comes from Brent Thill from UBS.
Your line is open.
Brent Thill – UBS
Thanks, good afternoon. Carl, and Jonathan, when you talk about the softness you saw in the ELAs, as we went into the year, you talked about a pretty big pipeline, so I guess I would just assume that the close rates were just lower than the pipeline still there, and that you’re having competitively lots of these deals, these deals have just slipped, if you could add more color to that, that’d be helpful.
Pat Gelsinger
Thanks, Brent, this is Pat and I’ll just start the Q-and-A session with a few comments as we get into it here. You know, overall, you know, our ELAs continue to demonstrate a strategic relationship of customers.
And clearly the breadth of the portfolio is demonstrating that and we really had an extraordinary response to that coming off of VMworld and that, combined with our new growth products, and the overall great financial performance, we really do feel good about the quarter performance even as we discuss some of the areas that clear are opportunities for us going forward. So Carl, if you want to dive in a bit more.
Carl Eschenbach
Yes, sure. Brent, I think you’re asking about Q3 bookings so let me say the following.
As is always the case, we didn’t plan to be down sequentially from Q2 but we were expecting to have a bit stronger quarter in Q3 than we did from a bookings perspective. I think there was actually a few things that led to the software bookings for us First, we expected to have a strong quarter at – over our US Federal business.
As I mentioned last quarter, we were tracking a rather large federal ELA to coincide with the government GRN. And this opportunity did not close in the quarter but I can tell you we’re still actively engaged with the government and this is an opportunity in our pipeline going forward.
We also saw some markets not perform as we had expected specifically Russia, Japan, and Germany, I mentioned in my opening comments. And anytime you have these very large markets in both EMEA and APJ not performing, it makes it difficult for the overall regions to have a really good bookings quarter.
And I’d say we are seeing some of our larger ELAs become more complex. This is because customers actually are interested in all of our solutions.
As customers look to deploy the full Software-Defined Data Center architecture and look to leverage things like the Hybrid Cloud and even AirWatch, we’re seeing our larger ELAs take a bit more time to close. And we actually do this as a very positive thing as we are encouraged that our customers are looking to VMware as a strategic partner for their future needs.
And lastly, Brent, I would say it’s important to note we don’t believe we’re actually losing any of the deals right in a given quarter necessarily to the competition. Our customers are very loyal to us and they continue to look to us as one of their most strategic technology partners.
And I will just kind of refer back to Q3 from last year, I think in a year-over-year basis it was a more difficult compare. We had five deals greater than $10 million last year in Q3 which included our largest deal ever.
Paul Ziots
Thank you, Brent. Next question, please.
Operator
Yes. Thank you.
The next question comes from Kash Rangan from Merrill Lynch. Your line is open.
Kash Rangan – Bank of America Merrill Lynch
Hi, guys. Thank you for taking my question.
If you look at the international versus US growth rate, I mean that delta has widened quite a bit the last few quarters. I think Q1, you had about equal growth rate, 14% in each geography.
I think this quarter, it was 27%, US, and in international, it was a high single digit. I just wanted to compare and contrast that comment vis-a-vis your characterization that America’s bookings were just in line of the overall because it would seem like something was more weighted towards US.
And also, Jonathan, I wasn’t sure if I missed – maybe I missed, if you reiterated that calendar ‘15 guidance which you provided at the Analyst Day. Thank you.
Jonathan Chadwick
Well, you could have asked me about foreign exchange there, Kash, but you want 2015 instead. So specifically – don’t forget that revenue is coming off the balance sheet.
And so for the mix of international and domestic revenues in particular, it’s really reflecting how certain transactions ended up getting recognized and as they satisfied certain rev rec criteria. So in Q3 in particular, we had a larger deferral but ended up getting recognized and the conditions around the revenue deferral got satisfied.
And that led to a slightly higher mix or – a little bit higher mix of deferred domestic revenues than you’re referring to separate from the conversation that Carl was referring to with respect to our overall US bookings and all bookings specifically versus revenues. And then with respect to 2015, I didn’t bring it up because I felt we covered it in quite some detail at the Analyst Day.
And so at this point we’re just referring you back to that framework that we provided in August. And as you know we’re going into our seasonally stronger Q4.
As I mentioned a couple of months ago, we’re seeing a number of our newer products perform quite well. But they are smaller dollars and we want to see another quarter or so of performance before we give you formal guidance for 2015, and that’s what we’re committed to do in January.
Paul Ziots
Thank you, Kash. Next question please.
Operator
Yes. Thank you.
The next question comes from Walter Prichard from Citibank. Your line is open.
Walter Pritchard – Citibank
Thanks. So, Kash, didn’t ask this so I will.
On the currency front, Jonathan, could you walk us through the impact during the quarter, what you’re thinking in terms of impact for Q4? And then I know you’re not providing a specific range for next year but as we’re looking at next year as I know your maintenance sort of rolls through and has a delayed impact on effects, could you talk about how we should be thinking about currency in that period?
Jonathan Chadwick
Yes, sure. Thanks very much, Walter.
So the key thing to know is that for our business, about 75% or slightly over of our billings are in US dollars. I’m not so sure that’s universally understood.
We’re actually insulated, at least in terms of reporting, and the US report was somewhat insulated from the net effect. Our deferred revenue on the balance sheet is also reported in over a quarter than US dollars.
So, with a combination of 75% of billings being in USD around the world and our deferred also coming off the balance sheet in US dollars, we had a slight, slight headwind, sequentially, to revenue in Q3. And we had a modest benefit in OpEx and because of translation of Euro costs and other non-USD nominated currency.
So net effect in Q3, top line, very, very modestly impacted. And EPS was impacted positively, probably to the tune of about half a penny or so.
Now, as I go forward into 2,000 in earned deferred in Q3, report probably impacted negatively to the tune of about $5 million to $10 million in Q3 specifically. So it’s lower deferred build on the balance sheet at the end of Q3 due to foreign exchange.
So those are two significant set of impacts because of the way we bill our customers and partners. As we go into 2,000 – as we go into Q4, obviously not in the business of forecasting currency movements, but if the currency rates stay roughly the same position they’re in today, we’re estimating about a $10 million headwind to revenues.
And that is incorporated into the guidance I shared with you for Q4 specifically. There is also potentially a further negative impact on year-over-year deferred revenue build in Q4 if currency stays the same.
But we’ll update you more on that in about 90 days’ time also when we do Q4. But hopefully that helps you think about it in terms of Q3 and Q4 impact.
Paul Ziots
Thank you, Walter. Next question, please.
Operator
Yes, thank you. It comes from Phil Winslow from Credit Suisse.
Your line is open.
Phil Winslow – Credit Suisse
Hey, guys. Thanks, guys, for taking my question.
And I appreciate the color that you guys provided from a geographic perspective in terms of Q3. But as you guys contemplated your Q4 guidance, I wonder if you could help us get a sense for what you baked on in terms of sort of the geographies, whether you’re seeing strength or weakness from the pipeline and just sort of how you thought about conversion rates in terms of the pipeline for this Q4 guidance maybe versus how you’ve done in prior quarters.
Thanks.
Carl Eschenbach
Thanks, Phil. This is Carl, I’ll take that one.
So, as you could imagine, as we go into every quarter, we take a look at our pipeline. And based on our pipeline heading into Q4 and the conversion rates we’ve applied against it, we baked that into the guidance that we provided for Q4 and we have confidence as we head into what is always out seasonally strongest quarter.
Phil Winslow – Credit Suisse
Did you want to say anything about the GOs in Q3, just to –
Carl Eschenbach
I’m sorry. I can, yes.
I provided some color on the GOs in my prepared remarks. In the US, we said we had some headwinds because of our federal performance in the Americas, specifically around our ELA business.
In EMEA, we said we saw some softness in bookings from both Germany and Russia. I don’t think anyone’s immune right now to what’s happening in Russia.
And as far as Germany goes, I think we’re starting to see some economic headwinds. And I have talked about in the past that we have upgraded our talent in Germany and we have a solid team now on board, and I’m very bullish on their ability to lead that region going forward.
And then as I look at APJ, I indicated that Japan once again was soft for us. And obviously, Japan being one of the largest markets in APJ, if that’s down it’s tough for the quarter to have strong bookings.
But other areas in APJ that were strong for us were Australia, New Zealand and India.
Paul Ziots
Thank you, Phil. Next question, please.
Operator
Yes, thank you. The next question is from Raimo Lenschow from Barclays.
Your line is open.
Raimo Lenschow – Barclays
Thank you. And thanks for the clarification on the currency.
A quick question I had is like, can you talk a little bit about what you see in the NSX pipeline? Obviously, since the summer, your general sales versus pushing it as well, what are you seeing in terms of their ability to get it into the accounts and communicate with the clients there?
Thank you.
Pat Gelsinger
Yes. Thanks, Raimo.
I’ll start and turn it over to Carl. Overall, our NSX response is really accelerating.
And in Q2, we talked about the 150 customers breaking 100 million run rate. And in my Q3 comments, 250 customers now paying on the platform and we really see that acceleration of customer adoption.
We have enormous momentum as we go into Q4 in that regard. So we feel like we really have as we indicated last quarter turned the corner in this strategic value.
And the used cases like microsegmentation are really capturing the industry’s attention as very rapid ways to adopt network virtualization get immediate benefit without a massive network re-architecting. But now that we are in the account, we start to harvest the whole set of additional used cases beyond that first microsegmentation used case.
So we are feeling very encouraged by the adoption that we are seeing even though it really is more material in 2015. Carl, what do you think he asked there [ph]?
Carl Eschenbach
I think – yes. You covered the used cases well.
We’re seeing a couple different used cases as Pat indicated first for network agility and the provisioning of layer two through seven services and this microsegmentation used cases is very much resonating with our customers, and is one of the biggest if you will used cases for NSX. I’d also just like to state straight right that I’ve been extremely pleased with our sales force’s ability to understand network virtualization and network security and we are seeing our sales force very quickly build a robust pipeline as we head into 2015 around NSX.
And also our channel is starting to evolve. And in just last quarter it was the first quarter we even had NSX on our prices for our channel to sell.
So I’m extremely encouraged with our ability to transition our sales force to be able to sell NSX AS part of the software defined data center. And as Pat said we find some really good used cases that our customers are starting to leverage and use to deploy the platform.
Paul Ziots
Thank you, Raimo. Next question, please.
Operator
Yes. Thank you.
Our next question comes from Heather Bellini from Goldman Sachs. Your line is open.
Heather Bellini – Goldman Sachs
Thank you. I just want to follow up to Kash’s question.
You referred to your comments that VMware’s analyst today as a framework for 2015. And I think a lot of us at least probably based on all of our inboxes think that that was a guidance range.
So in light of what your comments are about the microenvironment and the current P headwinds, I guess it would be very helpful to just know if you guys are standing by what I believe your phrase was is that that was mid-teens revenue growth was what you were expecting for calendar ‘15. Thanks.
Jonathan Chadwick
Yes. Heather, this is Jonathan.
That framework, you can term that as guidance if you like but that framework we provided was just actually that. And I think I was pretty clear at that point that we’ll come back and give you more explicit guidance in all the glory detail in January.
Again just to repeat the rationale for that, it’s we see an opportunity. We talked about our total addressable market but we’re going into our seasonality strongest quarter now.
I mean just exited our second seasonally weakest Q3, we need to see how Q4 plays out. We have a portfolio of new products that can and are contributing moving forward but many are newer and they require more data.
So each quarter that goes by provides additional insights as the likely performance over the next year so we’re obviously highly optimistic of them. Given Q3 also, right now we’re watching ELA close rates carefully.
So what we’re doing is we’re sticking to what we said a couple of months ago by providing 2015 guidance on the Q4 call as we indicated in FAD. So no change is how I would think about it.
Paul Ziots
Thank you, Heather. Next question, please.
Operator
Yes. It comes from Rick Sherlund from Nomura.
Your line is open.
Rick Sherlund – Nomura
Yes. Thanks.
Just a couple of quick uncertainty. This Double Irish tax EMA [ph] exposure there, and if you could touch on what’s driving the acceleration and the services business, and any more light you can she on this federal contract, is this a renewal ELA or a new ELA, and if you can give us a sense of what might the issue be there.
Paul Ziots
Rick, we’re actually limiting to one question, please. So would you just pick the one that you’d prefer?
Rick Sherlund – Nomura
The services business.
Jonathan Chadwick
Nice topic, Rick. I’ll to give you an update on the Irish tax if you want to pick one of the...
Rick Sherlund – Nomura
Yes. The services business, if you would then, please, the acceleration that you’re seeing in that business.
Paul Ziots
Why don’t you do that, Pat?
Jonathan Chadwick
So on the Irish tax situation, obviously we’ve all been tracking that carefully and understanding what’s going on. As you know, we do pay tax influence [ph] more relevant laws and regulations which is what you’d expect.
We’re a global company. We have many, many jurisdictions we’re operating in.
We do have operations in island as we disclosed in our 10-Q and 10-K. We’re obviously currently analyzing all the changes that are being proposed in the Irish tax law.
If no immediate changes, no immediate impact to us as you know, because they’re not effective until 2020. And there’s a number of companies who are going to be affected by those changes, and I think we have plenty of time to plan for them.
So I’ll just leave it at that at this point.
Carl Eschenbach
Yes. And as I relate to cloud services and professional service, I’m going to split that up with myself and Pat, Rick, if that’s okay.
So let me take the professional services. I had highlighted in my prepared remarks because we’re actually really encouraged that our customers are looking to VMware not just for our technology but our intellectual property on how to stand up some of these new software defined data center architectures.
And in the quarter we had some various sizeable winds where Fortune 50 companies have come to us too in particular one of financial services company, the other are pharmaceutical company have come to us and asked for our help in standing up a new Greenfield software defined data center to help them migrate their legacy workloads in new platform 3 workloads on to this new architecture. So we’re really encouraged that our customers are coming to us both technologically speaking and also for our services intellectual property.
And I’d like to ask Pat to talk a little bit more about cloud services.
Pat Gelsinger
Yes. I would say on the cloud services area that we’re actually feeling very encouraged by our ability to capture our customer’s workloads as well as new service offerings for our overall cloud service portfolio.
We’re seeing that in our vCloud Air network, we’re seeing that with AirWatch, new services like our desktop as a service, and overall these clearly are growth opportunities for us that come with a different business profile and ratable revenue model which is included in our understanding of our business going forward. Seeing that 100% year-on-year growth and now at approximately 5%, that this is becoming a more meaningful portion of our business.
And you will see us speak more specifically in guide for 2015 about this aspect of the business as well. But this was an encouraging quarter for us not just in our new product areas but in the new cloud services area as a portion of our business.
Rick Sherlund – Nomura
Thank you.
Paul Ziots
Thank you, Rick. Next question, please.
Operator
Yes, and it comes from Matt Hedberg from RBC Capital Markets. Your line is open.
Matt Hedberg – RBC Capital Markets
Yes. Thanks for taking my questions, guys.
As a follow-up to an earlier one, you talked about a strong pipeline for NSX. And I wanted to continue to invest in new businesses such as that.
I’m wondering if you could sort of quantify how supply and constraint the NSX business is in terms of the sales force and how are you going to address getting a solution that seems petty revolutionary out there and sort of building a full stack sales force that can sell and implement it?
Jonathan Chadwick
Yes. So let me take that one, Matt.
So about a year ago we started to build a special sales force of both sales reps and system engineers, pre-sale system engineers to address this opportunity around NSX and network virtualization. And we are so far very encouraged with not only the specials [ph] organization but I mentioned earlier about our sales force, our core sales force being able to at least recognize opportunities around network virtualization and things like microsegmentation.
I think it’s also to note, and Pat mentioned a little bit of this in his prepared remarks that we in a very short amount of time had built a very robust ecosystem around NSX with partners like Palo Alto Networks, F5, Arista, and a number of other networking security companies. So it’s not just VMware sales force that are specialists this to market but we’re taking it to market in conjunction with an extremely rich set of ecosystem partners and we are very encouraged with the pipeline build as I mentioned earlier and the ability of both our sales force in our ecosystem to be able to articulate how powerful this platform is around network virtualization.
Paul Ziots
Thank you, Matt. Next question, please.
Operator
Yes. Abhey Lamba from Mizuho Securities.
Your line is open.
Abhey Lamba – Mizuho Securities USA Inc.
Yes. Thanks.
Carl, just you mentioned about that you’re still working on the large deal and the frontend vertical [ph]. Can you give us some dynamics, somewhat decision process or what’s holding that up?
And what can you do to overcome that and similarly the deals in Europe that did not close, just general by plan [ph] and what needs to happen for them to close?
Carl Eschenbach
Sure. Let me start with the federal ELA that I shared with you during last quarter’s conference call, and then again this quarter because I indicated it didn’t close.
Any time you’re dealing with the government, and the deal of this magnitude, the transaction can have a lot of variability in when it actually will close. I would say this specific opportunity had nothing to do with our sales execution in the quarter.
We continue to work extremely close and active with the government on this opportunity that remains in our pipeline as we head into Q4. And we’re very encouraged overall not only with this opportunity but with our federal business as a whole.
As it relates to Europe, again, I think we had quite a solid quarter in Europe even despite a couple of regions like in Germany, in Russia now performing at the level we hadn’t anticipated. We did strength in Europe, in Southern Europe specifically.
If you look at French which has been battling their own economic challenges we had a really solid quarter. So, in Europe I think we had a good quarter and I didn’t see a lot of large ELA slip from one quarter to the next.
Abhey Lamba – Mizuho Securities USA Inc.
Thank you.
Paul Ziots
Thank you Abhey. Next question, please.
Operator
Yes. Rajesh Ghai from Macquarie.
Your line is open.
Rajesh Ghai – Macquarie Group
Yes, thanks. Carl, I wanted to dig into your comment earlier that given your wider product portfolio ELA is more complex and taking longer to close.
Can you tell us how much longer the sales cycles have become? And if you are taking any steps to potentially to use the complexity of deals and potentials rather than sales cycle, and related to that, what sort of ELA close rates are you assuming in your Q4 guidance?
Thank you.
Carl Eschenbach
Yes. So I think there was multiple questions in there, but let me try to work through that.
So first of all, our ELA pipeline remains solid as we head into Q4 which obviously where we took into account in our guidance. In Q3 I had indicated some of the larger ELAs and specifically net new ELAs are taking a bit longer to close because of the complexity of not just VMware, but the customer introducing the desire to have all of our products as part of the ELA not just on premise solutions like the software defined data center, architecture and vCloud Suites, but also interested in vCloud Air, so that they can build an insurance policy into their agreements with us to leverage the public cloud in the future.
We coming out of Q3 have done a couple of things to make sure we’re tracking ELA close rates to determine whether in Q3 this was a specific issue within a given quarter or if we see a bigger trend around ELA close rates. And as we monitor that throughout Q4 we’ll take all of that into context when we think about guidance going forward.
Paul Ziots
Thank you, Rajesh. Next question, please.
Operator
Yes. It comes from Keith Weiss from Morgan Stanley.
Keith Weiss – Morgan Stanley
Thanks from the – thank you guys for taking the question. I want to ask you about license billing, because I know we all calculate going off of the income statement and the balance sheet.
And I know that bookings and billings have some variability. But when we calculated we come up with a highest single digit 7%, to 8% type of license billings growth versus what we had in a solid mid–teens growing the first half of the year; anything in particular that would be sort of impacting that calculation or is it just sort of reflection of that weaker billings – or weaker ELA billings at the quarter?
Jonathan Chadwick
Yes. I think that’s it.
So just to build on Carl’s commentary it really is a reflection of bookings fundamentally. It’s hard to build a third if the bookings don’t come in overall.
But I think Carl has talked about it in a couple of different in his prepared remarks and also overall. We are seeing signs of significant growth and a number of the new product areas but they’re not just big enough yet to have an impact.
And obviously with a larger federal deal not transparent in this particular quarter while it remains an opportunity obviously has an impact on license billings growth. Carl did point out and I’ll just reiterate it.
But this time last year as well was a particularly strong license billings number as well as you all calculate maybe because we had a largest deal ever report in Q3 plus we have five ELAs compared to three ELAs this quarter. So there’s a number of different factors in there.
But fundamentally it’s the same reasons that Carl outlined for you.
Paul Ziots
Thank you Keith. Next one –
Keith Weiss – Morgan Stanley
Got it.
Paul Ziots
Yes. Thank you.
Next question, please.
Operator
Yes. Mark Moerdler from Sanford Bernstein.
Mark Moerdler – Sanford Bernstein
Thank you very much. So drilling in a little more into the ELAs we discuss that – as we’ve already talked about a little bit that you seemed to delay to their adding more products into the mix.
Is this translating into the ELA total dollar value of the deals going up in the pipeline as they take longer or is the new deals bigger than they were before?
Carl Eschenbach
Yes. So, again and when we think about – suddenly just one comment I didn’t make earlier that relates to ELAs.
In the quarter we said we had a very good ELA renewal rates. So our ELAs that came up for renewal within Q3 we were very good at renewing them in a given quarter, net new ELAs because they do include a lot of new products, right, are taking a bit longer.
When we look at the ELAs that we do renew their roughly in line with the size and scope of the ELA that we had closed initially. So some of them can be larger, some of them can be smaller; it really just depends on where the customers is at in the adoption of their technology that they had from the original ELA.
Paul Ziots
Thank you, Mark. Next and I think the last question, please.
Operator
Okay. And that comes from Michael Turits from Raymond James.
Your line is open.
Michael Turits – Raymond James
Hey, Michael Turits. Thank you.
So you reduce your cash flow guidance cost by about $400 million the top end and the bottom. Can you give us some sense of how much of that was from the increase cash tax payments and the installment payment side AirWatch versus the bookings impact?
And should those other two factors are reverse as we go into ‘15?
Jonathan Chadwick
Yes. Michael, that’s a great question.
So, I would say just over half of the adjustment that you have heard us talk about is due to bookings over Q3 and the back off the year, including the slippage of the particularly large federal opportunity. And the remainder just on the half is due to the other two factors I mentioned.
You’ll see a – if everything goes as planned you’ll see a fairly large tax payment in the Q4 period in the cash flow as we continue to transition to a cash taxpayer. We paid almost roughly small amounts if any cash taxes over the last few years as we’ve utilized NOLs, Net Operating Losses since the time of the IPO.
And we’re clearly fully in that transition now to be a cash taxpayer that will impact the Q4. And obviously you should expect us to be a cash taxpayer going forward.
And then the second item I mentioned was the AirWatch acquisition related payments, which we actually have the options to pay in either cash or stock and as we’ve evaluated uses of cash over the course of the back half of this year, we’re anticipating paying in cash. But a quick to answer your question is just over half is bookings.
Pat Gelsinger
So, thank you all for your time and attention in the call today. In summary we’re making good progress across all three of our strategic priorities.
I want to thank our customers, our partners and employees for the passion, support and engagement as we look forward to finish a very strong 2014. Thank you very much.
Operator
Thank you for your participation. That conclude today’s conference call.
You may disconnect.