VMware CEO Gelsinger: 3Q Growth Highlights Impact Of Hybrid Cloud Investments, AWS Partnership

The hybrid cloud is driving VMware to new financial heights not only in its most recent fiscal quarter but for all of this year and next.

Investments in hybrid cloud capabilities and Software as a Service, along with solid partnerships with several cloud vendors, in particular Amazon Web Services, is expected to keep VMware on a strong growth path for the foreseeable future.

VMware CEO Pat Gelsinger Wednesday talked about the company's financial growth now and into the future and looked at how several new products, including VMware Cloud on AWS Cloud, Project Dimension and vSphere Platinum, will help with that growth.

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Gelsinger told financial analysts during the company's third fiscal quarter financial conference call that hybrid cloud is continuing to drive strong opportunities toward the Palo Alto, Calif.-based company.

"Customers continue to turn to VMware to help them run, manage, secure and connect their applications in this multi-cloud, multi-device world," Gelsinger said during his prepared remarks. "The increasing importance of hybrid cloud and expectations for IT infrastructure to just work are expanding and driving core IT decisions towards VMware."

VMware Cloud on AWS has continued to expand since it was introduced, with the newest expansion point being the introduction of VMware Cloud on AWS Outposts, which was unveiled this week at the AWS re:Invent conference, Gelsinger said.

VMware Cloud on AWS Outposts delivers the complete VMware software-defined data center stack, which previously ran on the AWS public cloud, as a cloud service running on the new AWS Outposts bare-metal EC2 infrastructures designed to be deployed on-premises in customers' data centers.

VMware this week also unveiled VMware Cloud Foundation for EC2, which Gelsinger said provides AWS-native Outposts customers a software-defined data center experience utilizing such VMware technologies as NSX software-defined networking, vRealize automation and AppDefense.

"Our partnership with AWS is expanding rapidly," he said. "These offerings extend VMware's hybrid cloud vision with consistent infrastructure and operations for all VMware and AWS customers."

These new offerings build on the company's introduction this fall of VMware's Project Dimension, Gelsinger said.

"Project Dimension from VMware enables customers to consume infrastructure that physically resides in data centers, branch or edge sites through a cloud-managed, as-a-service approach," he said. "It will extend the VMware cloud to deliver a hyper-converged appliance-as-a-service for a host of edge, data center and hybrid cloud use cases."

Overall, VMware has aligned its future development around six key innovation areas including compute, software-defined storage, software-defined networking, hyper-converged, cloud and Workspace One, Gelsinger said.

"We continue to invest in our strategy for the future through organic and inorganic approaches," he said. "These investments illustrate opportunities for next year and beyond. We continue to be pleased with our strong performance as our strategy and solutions resonate with our customers."

VMware's expanding relationships will continue to have a positive impact, Gelsinger said, responding to an analyst's question.

VMware is seeing increasing uptake on VMware Cloud on AWS, and has expanded on that with several new joint product introductions at this year's VMworld and AWS re:Invent conferences, he said.

"So now I'd say we're in chapter three of the partnership," he said. "And overall, we see the continued momentum. … The use cases are expanding. We're seeing customer acquisition accelerate."

Gelsinger was asked by another analyst about VMware vSphere Platinum, a new version of VMware vSphere that combines the compute capabilities of vSphere with VMware AppDefense to deliver purpose-built virtual machines to help secure applications.

vSphere Platinum is a great platform on which to build new enthusiasm for a vSphere refresh, Gelsinger said.

"We think this is a very compelling product," he said. "Customers are quite excited about the intrinsic security aspect that this brings to the platform. Because we're really solving security problems that can't be solved in any other way. And that's a very powerful new opportunity. And while the product literally just launched … the response from customers is very exciting."

Gelsinger and VMware CFO Zane Rowe declined to answer questions related to VMware parent company Dell Technologies' move to become a public company via a stock swap with VMware.

However, during his opening prepared remarks, Gelsinger said VMware is pleased with Dell Technologies' progress toward completing the proposed exchange of Dell Class V tracking stock for Dell Technologies Class C common stock.

"Assuming the transaction closes following the stockholder vote scheduled for next month, this would simplify Dell's capital structure and increase alignment with VMware while maintaining VMware's independence."

For its third fiscal quarter of 2019, which ended Nov. 2, VMware reported revenue of $2.20 billion, up 14 percent from the $1.94 billion the company reported for its third fiscal quarter of 2018. That included $884 million in license revenue, up from last year's $758 million, and $1.32 billion in services revenue, up from last year's $1.18 billion.

Net income on a GAAP basis was reported at $334 million, or 81 cents per share, down from last year's $395 million, or 96 cents per share. VMware attributed the drop to a loss of $161 million in an investment in Pivotal Software.

Net income on a non-GAAP basis was reported at $645 million, or $1.56 per share, up from last year's $509 million, or $1.23 per share.

Rowe said that VMware's solid financial performance for the third quarter was highlighted by the success the company is seeing with customers executing on their hybrid cloud initiatives.

Hybrid cloud subscription and SaaS made up over 10 percent of total VMware revenue for the quarter, and grew 35 percent year over year, Rowe said.

VMware's NSX software-defined networking technology has become a customer mainstay, Rowe said. License bookings for its NSX portfolio, including that of Velocloud, grew over 40 percent year over year. VMware's NSX platform was included in nine of the company's top10 deals during the quarter, he said.

vSAN software-defined storage license bookings, including stand-alone vSAN software as well as the vSAN software component of VxRail hyper-converged infrastructure offerings, grew nearly 50 percent over last year, Rowe said.

End-user computing license bookings increased by a high-single-digit percentage, with Workspace One, including SaaS versions, the key driver, he said.

Core software-defined data center license bookings grew in the quarter by a high-single-digit percentage, while total bookings grew by a mid-digit percentage, he said.

Total management bookings were up by over 20 percent year over year, he said.

Looking forward, Rowe said VMware's strong third fiscal quarter performance is leading the company to increase its guidance for full-year fiscal 2019 total revenue, license revenue, non-GAAP earnings per share, cash flow from operations, and free cash flow.

Full-year licensing revenue for fiscal 2019 is now expected to reach $3.780 billion, up 15.9 percent over fiscal 2018. Total revenue is expected to reach $8.882 billion, up 13 percent.

Rowe also provided updates for VMware's fiscal year 2020, saying the company expects total revenue growth of about 12 percent. "[This] includes accelerating our growth in hybrid cloud subscription and SaaS," he said.