VMware is “on track” to spin off from Dell Technologies in early November, a move that will provide “increased strategic, operational and financial flexibility” for the company, CEO Raghu Raghuram said Thursday during the company’s quarterly call.
Dell has been waiting to spin off its 81-percent stake in Palo Alto, Calif.-based VMware – a deal that Dell first officially unveiled in July 2020 – in order for it to be tax-free. Round Rock, Texas-based Dell is waiting for a five-year rule to take effect for the transaction to be tax-free from the government. Dell officially acquired EMC and its subsidiaries, including VMware, for a historic $67 billion on Sept. 7, 2016.
During VMware’s call with analysts for the second quarter of its fiscal year 2022, ended July 30, Raghuram said that “we remain on track to spin off from Dell in early November of this year.”
“As a standalone company, we will have increased strategic, operational and financial flexibility to drive VMware’s growth strategy while also strengthening our longstanding strategic relationship with Dell, a partnership we expect will continue to benefit our customers and partners, as well as both Dell and VMware,” Raghuram said.
The spinoff will build “trust” in VMware as a provider of multi-cloud solutions, providing a competitive advantage, he said.
“We are industry neutral,” Raghuram said. “We have a great set of cloud partners, but when customers want to select cloud, when they want to be cloud smart, they want an industry neutral player to help them figure out which applications go where. And we are uniquely set up to do that. And with our spin, that position also gets strengthened as we become the Switzerland of the industry.”
Zane Rowe, chief financial officer of the company, said VMware doesn’t expect “significant changes” to the agreements in place with Dell around research and development and go-to-market.
“We‘ve been operating as two separate entities for some time now,” he said. “We have a CFA (Commercial Framework Agreement) that is signed. We look forward to continuing the partnership with Dell. If anything, I think there are more incentives in the new relationship.”
The Dell and VMware teams have “been working on this for five-plus years together,” Rowe said.
“I think we’ve established good arm’s length agreements and have a terrific partnership with them,” he said. “So while we expect to expand our ecosystem, we will continue to have that partnership and expect to grow that partnership with Dell. I don’t expect to see significant changes if you just think about the P&L (profit and loss) related to the spin-off.”
Ultimately, “we’ve been arm’s length already and I don’t expect any significant changes on that part. If anything, I think we’ve codified the strength of the agreement and would expect to see continued growth with our partners,” Rowe said.
The call was also the first for Raghuram, who became CEO on June 1, as chief executive of VMware.
‘Larger Than Expected’ License Demand
Customer preference for buying VMware products with licenses as opposed to subscription surprised the company’s executives, Rowe said.
Customers took “a slightly larger than expected mix of perpetual licenses as well as term licenses in certain product areas such as EUC (end-user computing),” Rowe said.
“It turns out that in certain geographies and in certain verticals, given the choice, customers prefer licensed software business model over subscription and SaaS business model,” Raghuram added.
Still, the executives told listeners on the call that they expect some license customers to eventually switch to subscriptions, which comes with “the increased possibility of upselling and cross-selling them a larger portion of our portfolio more easily because customer uptake of SaaS is easier than customer uptake of on-premise license, where they have installed software and deployed,” Raghuram said.
“We provide customers with the choice and flexibility on their cloud journey, and many of them start their cloud journey on-premise at that time using our term license,” he said. “As they move to the cloud, they use our subscription offerings. But if you step back and if you actually look out over the next year or so, we are very bullish about our overall subscription and SaaS portfolio. This is a big focus of mine.”
The further adoption of subscriptions and programs such as VMware Cloud Universal — a subscription for VMware multi-cloud infrastructure and management services across data center, edge and public cloud — will also have benefits for channel partners and resellers, Raghuram said.
“As this happens, we‘ll be able to also strengthen our go-to-market mechanisms and have programs like Universal really be how we drive the growth of this, both directly and through our channel partners and other resellers,” he said. “So when you put all of that together I expect to see our SaaS and subscription percentages, the growth percentages increase in SaaS and subscription as a percentage of total also become more sizable.”
Cloud Smart, Not Cloud First
Raghuram said during the quarterly call that VMware is investing in providing customers flexibility to choose whichever cloud services they want, with fear of getting locked into a single cloud provider among their concerns. Customers are “evolving their strategy from a cloud first, to a cloud smart philosophy, where they‘re picking the right clouds and cloud services for the right workload, including private cloud and even on the edge.”
Raghuram highlighted a deeper relationship with other vendors including Amazon Web Services and Zoom. Recent VMware-AWS advancements include “key engineering capabilities and footprint expansion, including the new AWS Milan region,” he said. Zoom enhancements include more “interoperability between VMware Anywhere Workspace and the Zoom platform, enabling a better and more secure collaboration experience for hybrid work environments.”
Raghuram also told listeners that the company’s VMworld conference Oct. 4 to Oct. 7 will be virtual, as it was last year.
Hyperscaler-led agreements “are becoming an important channel for scaling our cloud offerings,” Rowe said. “With this route to market the length of time from bookings to revenue can be slightly longer as compared with VMware direct sales.”
Nalit Patel, CEO of Livingston, N.J.-based VMware partner All Solutions, told CRN in an interview that demand for VMware services has increased in tandem with rising demand for SD-WAN, containers, blockchain and IoT services.
One change Patel said he’d like to see from VMware is a decrease in the price of the company’s products and services, which he called “very pricey” when working with a customer that wants a multi-cloud environment.
“Reduce the licensing fees because by the time you add up all the cost and when the customer starts looking at it, especially for cloud, they‘re like, ‘Why am I paying one, two, three, four? There are too many people picking my pocket,’” Patel said. “And VMware is one of them.”
“If you want to keep longevity of the customer, come up with a better model in terms of licensing and reducing the cost,” he continued.
VMware saw $3.14 billion in sales during the quarter, an increase of 9 percent year over year.
Subscription, software-as-a-service and license revenue was $1.51 billion in sales, an increase of 12 percent year over year.
Subscription and SaaS sales for the quarter was $776 million, an increase of 23 percent year over year.
And subscription and SaaS annual recurring revenue was $3.15 billion, an increase of 26 percent year over year.
The “largest contributors” to subscription and SaaS sales were VMware Cloud Provider Program, modern applications — a segment that includes Tanzu and Pivotal — EUC, Carbon Black and VMware Cloud on AWS, which grew “nearly 80 percent year over year,” Rowe said on the call without breaking out exact figures.
Core software-defined data center product bookings increased more than 20 percent year over year. Compute increased more than 20 percent. “Compute growth was strong in both on-prem, and cloud deployments, benefiting from an improved economic backdrop, strength in our commercial business thanks in part to our partners, and continued growth in our multi-cloud subscription and SaaS offerings,” Rowe said.
Cloud management increased more than 30 percent, Rowe said, driven by vRealize Cloud Universal.
EUC and NSX product bookings were “both up in the strong double digits” year over year. Product bookings for vSAN grew “in the low single digits” year over year.
Subscription and SaaS annual contract value bookings for EUC grew “in the strong double digits year over year, driven by both Horizon and Workspace One,” Rowe said.
The company expects to see $3.1 billion in sales in the next quarter, $1.5 billion from subscription, SaaS and license revenue, he said. VMware expects $12.8 billion in sales for fiscal year 2022, $6.3 billion from subscription, SaaS and license revenue.RELATED TOPICS:
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