VMware Q3: Subscription And SaaS Eclipse On-Premises Licenses - A First

Subscription and SaaS revenue rang in at $676 million, a 44 percent year-over-year increase from the same quarter last year, with better-than-expected growth in the VMware Cloud Provider Program, modern applications and VMware Cloud on AWS.

VMware’s subscription and Software-as-a-Service (SaaS) revenue in the just completed fiscal third quarter surpassed the company’s on-premises license revenue for the first time as the virtualization technology leader beat analysts’ earnings expectations.

Subscription and SaaS revenue rang in at $676 million, a 44 percent year-over-year increase from the same quarter last year, with better-than-expected growth in the VMware Cloud Provider Program, modern applications and VMware Cloud on AWS.

Subscription and SaaS revenue represented 24 percent of VMware’s total revenue for the fiscal 2021 third quarter, ending Oct. 30. Total revenue increased 8 percent to $2.86 billion in the quarter from the same period last year, eclipsing the Zacks Consensus Estimate of $2.81 billion.

“We are pleased with our Q3 financial performance,” VMware CEO Pat Gelsinger (pictured) said Tuesday during the company’s financial earnings call. “As we continue to navigate through the global [coronavirus] pandemic, our any-cloud, any-application, anywhere strategy continues to resonate with our customers as they manage through these unprecedented times.”

VMware reported net income of $434 million or $1.02 earnings per share (EPS) for the quarter, compared to $407 million or $0.96 EPS in last year’s third quarter. Non-GAAP EPS was $1.66, beating the Zacks Consensus Estimate of $1.43. VMware has beaten Zacks Consensus Estimate in four of the past five quarters.

“As we anticipated, we saw continued COVID-19 impact on large, transformational on-premises projects in Q3, even as our pipeline suggests some level of recovery in this area in Q4,” Gelsinger said. “We continue to expand our five-franchise platform capabilities to work first and best in the cloud, enable a unique multi-cloud capability and also support customers who prefer to maintain some or all of their capacity on premises.”

The Palo Alto, Calif.-based company’s development and go-to-market efforts are trained on multi-cloud, application modernization, networking, security and the digital workspace. It plans to highlight its performance in those areas in upcoming quarters, according to chief financial officer Zane Rowe.

In line with its guidance, VMware’s on-premises perpetual license revenue declined 12 percent in the quarter to $639 million, with large transformational projects slowing due to the impact of COVID-19, Rowe said. VMware had 16 $10 million-plus deals in the third quarter versus 19 in the same quarter last year that overall were slightly larger. As the economy recovers, the company expects to see some incremental improvements with its on-premises products in the fourth quarter and continuing into fiscal year 2022.

Subscription And SaaS Revenue

VMware hired Mike Hayes, the former head of strategic operations at Cognizant, last month as its new chief digital transformation officer to lead the company’s SaaS sales push.

“We are on track to make most of our major product offerings available as subscription and SaaS in the next calendar year, providing a broader set of consumption choices for our customers with the flexibility they need,” Gelsinger said.

While subscription and SaaS revenue eclipsed on-premise license revenue in the third quarter, that should change in the fourth quarter, which typically is strong for on-premises license revenue, Gelsinger noted.

“But we expect that to flip back and really be the case for the entirety of next year, as we see that sustained subscription and SaaS,” Gelsinger said.

Tanzu

VMware is seeing good customer momentum for its Tanzu portfolio, rolled out in 2019 to help enterprises build, run and manage software applications on Kubernetes, according to Gelsinger, who noted financial services company Fiserv leveraged Tanzu to build a system that enabled 18,000 small and mid-size businesses to quickly apply for the federal government’s Paycheck Protection Program funding amid the coronavirus pandemic and the resulting economic slowdown.

“On Tanzu...we‘re very pleased with our Q3 performance,” the CEO said. “It was comfortably ahead of our expectations for the quarter [and] continues to build momentum. We’re having good success bringing forward our long-term Pivotal customers as they embrace the larger Tanzu strategy.”

VMware Tanzu is now supported across VMware Cloud on AWS, Azure VMware Solution and Oracle Cloud VMware Solution.

“We also recently announced the packaging of Tanzu products into four simple editions targeted directly at the most common application modernization challenges,” Gelsinger said.

VMware Cloud On AWS

VMware’s multi-cloud strategy has taken “major strides forward,” with annual recurring revenue approximating $1 billion, and revenue from VMware Cloud on AWS continuing to grow more than 100 percent year over year, Gelsinger said.

“This was a tremendous quarter for us on our overall multi-cloud strategy, and the accelerated momentum that we saw with our top enterprise customers was very, very encouraging,” he said. “All hyperscale offerings are now available in transacting VMware Cloud including Microsoft, Google, Alibaba, IBM and Oracle, as well as the VMware Cloud on Dell EMC. Our unique solution is increasingly being viewed as the most effective path for customers such as Deutsche Borse Group to execute a multi-cloud strategy, and Chevron, which is leveraging Azure VMware Solution to advance and scale its cloud journey.”

VMware’s first Azure offerings are now shipping and seeing strong interest following the VMworld 2020 conference, according to Gelsinger.

“Exciting to see Microsoft coming behind that strongly, but I will say the lead horse for us remains our preferred partnership with Amazon,” Gelsinger said. “Amazon showing up to sell that offering has proven to be very strong. They have a dedicated sales team that‘s ramping nicely.”

Outlook

VMware is now projecting full-year total revenue of $11.7 billion for fiscal 2021, up 8 percent year over year. Subscription, SaaS and license revenue is expected to total $5.5 billion, up 10 percent, with subscription and SaaS representing more than 45 percent of sales.

“Any forecast, given the unprecedented and unpredictable economic impact COVID is having across the globe, has a higher degree of uncertainty than normal,” Rowe said. “ Fortunately, the pandemic hasn’t had the level of financial impact on our business we initially expected this year, and our current forecast for 8 percent total revenue growth for FY ’21 exceeds the mid-single digit forecasts we’ve guided to earlier in the year.”