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2/10/2014
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VMware Navigates High-Wire Act

VMware shows strong profits in fourth quarter, renewed strength as IT spending revives. Commoditization? What commoditization?

VMware concluded 2013 with strength: Its fourth quarter was up 15% over the year-ago period, and revenue for the full year was up 13%, to $5.21 billion over 2012. These numbers disguise more than they reveal.

VMware continues to move upstream at an accelerating pace into virtual datacenter and private-cloud management. That's not only a revenue producer for the company today, but an indicator that, as IT budgets strengthen, VMware is in a position that will yield growing revenue far into the future. The alternative view -- that VMware is in a market that's being commoditized -- is thrown into doubt by the fourth-quarter figures.

For example, without its Pivotal divesture, those numbers would have been up 17% for the year and 20% for the quarter. By moving Cloud Foundry, Spring, Greenplum, and RabbitMQ into Pivotal, VMware got both lower-yield open-source products (and the headcount associated with them) out of the reporting on its core virtualization business. It also assembled a big-data suite that promises to yield its own revenue eventually.

The fourth-quarter results suggest that, as IT spending resumes at a faster pace, VMware will be one of the beneficiaries. There was doubtless more Microsoft Hyper-V and Red Hat KVM in use at the end of 2013 than there was at the end of 2012, so some commoditization is happening. The first is free because it comes embedded in the Windows Server operating system, and the second is free because it's open-source code sponsored by Red Hat.

[Free and open-source virtual machines aren't the threat many think. See VMware Killed By Commoditization? Not So Fast.]

But there remains a huge market for virtualization. Gartner says 68% of the x86 part of the datacenter was virtualized at the end of 2013, up from just 21% in 2008. By 2016, that figure is expected to hit 84%, Gartner predicts. That means more license fees flowing out of VMware's core business as long as customers rely on it to continue the conversion of their datacenters.

Will that be the case? VMware is pushing hard into software-defined networking, a still unproven field with customers, and investing in its own NSX product, while at the same time supporting the commoditizing influence of open-source OpenStack. No one is sure how that dual play plays out.

It's on surer footing as it brings high-level server-log analytics with Log Insight, as well as configuration, performance, and capacity management with vCenter Operations Manager, to IT staffs.

Then it's rolling these products up into suites, vSphere with Operations Management (vSOM, the same as vCenter Operations Manager) and vCloud suite -- vSphere, vCenter Operations, and vCloud Automation Center (the former DynamicOps product that VMware acquired in 2012). Not everybody needs everything VMware has to offer. On the other hand, VMware tries to get you to adopt as much as possible by offering the suites in enterprise license agreements (ELAs). You're already paying a lot for individual VMware licenses. For a little more, you get the whole suite.

CEO Pat Gelsinger, in a teleconference with the Credit Suisse Technology Conference, in December said VMware is "being successful at bringing higher-value products and suites into the ELAs."

Instead of being commoditized, VMware keeps its business on track by pushing into datacenter management, including certain cases of Microsoft Hyper-V and Red Hat KVM hypervisors, now possible under vCloud Automation Center. The network is being reorganized. Storage is being virtualized. With several datacenter automation trends now in play, VMware keeps trying to show up as the unifying force.

(Source: Kapitall)
(Source: Kapitall)

In an interview, Ramin Sayar, senior VP and general manager of VMware's Cloud Management business unit, pointed to the firm's increased profitability in the fourth quarter. It was $335 million, or 77 cents a share in the fourth quarter of 2013, compared to $206 million, or 47 cents a share in the fourth quarter of 2012. Sayar attributed that bump to the growth of VMware's management products. His unit's revenue grew 40% in 2013. That figure is a little misleading, without the 2012 versus 2013 revenue figures themselves, and VMware doesn't break them out by product group. Management products may have accounted for a small percentage of revenue in 2012 when those products were still relatively young, and then could show a large percentage growth in 2013, which they did.

Nevertheless, they are now a significant contributor to VMware's outlook. One VMware customer, Covance in Princeton, N.J., found that vCloud Automation Center, "reduced the service cycle time from a month to a day," Sayar said.

That may or may not be typical. But VMware's fourth quarter shows that it has the revenue to finance more development of management products and that there is a growing market for them. Commoditization is going on at the hypervisor level. VMware keeps elevating its product line above that.

"We think the stock can move higher as IT spending improves and new products gain traction," wrote Wells Fargo Securities analyst Jason Maynard in his research note following the fourth-quarter results.

VMware's 2013 fourth quarter was depressed by the need to pay off Pivotal divesture expenses. In 2012, VMware results were depressed by the need to pay off the $1.26 billion acquisition of Nicira, the software-defined networking firm. This year they'll be depressed by paying $1.54 billion to acquire AirWatch.

VMware keeps betting it can gain enough ground in datacenter automation to justify its heavy investment in development and acquisitions. It's gambling with its investors' faith and confidence that it's on the right track and it will make its bets on automation and management pay off.

In one of his few risky statements, Sayar said, "There is no other company that can address, soup to nuts, the private-cloud-on-premises to public-cloud-off-premises, to mobile-cloud era." AirWatch, once acquired, fits into VMware's interests in managing mobile users regardless of device that they're using.

So far, customers and investors are sticking with VMware, despite the threat of commoditization. That may be because it's a high-wire act that few can concentrate on exclusively or care to emulate.

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Charles Babcock is an editor-at-large for InformationWeek, having joined the publication in 2003. He is the former editor-in-chief of Digital News, former software editor of Computerworld and former technology editor of Interactive Week. He is a graduate of Syracuse ... View Full Bio

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Lorna Garey
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Lorna Garey,
User Rank: Author
2/12/2014 | 5:29:59 PM
Re: VMware ecosystem?
That's certainly true that VMware/EMC aren't about to share the good candy, but can you really fault it for that? Shareholders sure don't. And, plenty of IT pros think only VMware is really enterprise-class. As long as that perception remains, it can get away with the lock in.
Stratustician
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Stratustician,
User Rank: Ninja
2/12/2014 | 12:03:12 PM
Re: VMware ecosystem?
I'm not against VMware sprawling into an ecosystem per-say, more that I am worried that it could cause a closed system in that it will cause platform specific requirements to leverage these tools.  So they wouldn't port to a non-VMware environment, limiting how customers can leverage the tools. Much like if you want to piece together a solution from multiple vendors, if you risk vendor lock-in (granted, to less of an extent) the adoption will drop off significantly.  This would be greatly resolved by leveraging the APIs to work in OpenStack, AWS and Azure. Counter-productive to growing VMware platform sales, but the value it would bring to other platforms could create a new service revenue stream.  As long as the tools aren't native to VMware environments, VMware/EMC is laughing, but the reality is that it could be some time before they give up all these nice goodies to folks running hypervisors from the competition.
Laurianne
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Laurianne,
User Rank: Author
2/12/2014 | 11:58:17 AM
Re: VMware ecosystem?
Thanks for chiming in here. Curious, why wouldn't you want VMware to develop into more of an ecosystem? I think they and the other players know that cloud workload portability is a key consideration for IT.
Stratustician
IW Pick
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Stratustician,
User Rank: Ninja
2/12/2014 | 11:38:51 AM
VMware ecosystem?
While I am a VMware supporter, I worry that they are trying to become too wide in terms of offerings.  Management tools are definitely critical, but it's as if they are trying to be a full ecosystem (almost like the ERP monoliths).  Unless they do indeed traverse the world of OpenStack and other non-VMware platforms, there is definitely risk of creating a closed ecosystem indirectly, limiting how their tools fit into non-VMware stacks. The latest sprawl into mobile device management will either be an indicator of how wide they plan to expand their involvement in virtualization, or dilute the core competency of the original virtualization platform.  We've seen a few products that were launched before fully integrated into the larger platform, so it'll be interesting to see if these products will indeed support more platform types to give new sources of revenues for their management tools.
Charlie Babcock
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Charlie Babcock,
User Rank: Ninja
2/11/2014 | 2:09:20 PM
Log Insight is core to where VMware is taking the product line
Splunk and Sumo Logic will thrive in their own markets, but Log Insight will do very well at VMware shops where an increasing number of products will rely on analytics from Log Insight.
Drew Conry-Murray
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Drew Conry-Murray,
User Rank: Ninja
2/11/2014 | 10:02:15 AM
Re: Management tools
I'm really curious to see how VMware's SDN moves play out. The company definately shook up the legacy vendors in the networking market via Nicira/NSX. Now we have to see if VMware can grab customers there.
Michaelrj
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Michaelrj,
User Rank: Apprentice
2/11/2014 | 5:48:39 AM
VMWare vCenter Log Insight
Dear Mr Babcock,

In July last year when VMW launched Log Insight, you wrote an article saying that potential competitors such as Splunk and Sumo Logic weren't concerned, because the new product's search capabilities were inferior. Do you have an opinion as to whether that's true and whether VMW is getting any traction with the product?


Thanks
Li Tan
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Li Tan,
User Rank: Ninja
2/11/2014 | 2:27:14 AM
Re: VMware's open source tightrope
It's not doubt that VMWare is trying to embrace open source stuff more than ever. It's part of it's strategy to capture the high-end of the market and gain more market share/profit in short term. So indeed it's a kind of high-wire act. It performed pretty well in 2013 and I would like to see if it can continue with the trend to produce more amazing "v" series product.
danielcawrey
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danielcawrey,
User Rank: Ninja
2/10/2014 | 2:38:38 PM
Re: Management tools
VMWare started by offering a huge value play with businesses in optimizing hardware via virtualization. But it is interesting to see as they grow that they want to be a total value player for businesses. 

It kind of reminds me a bit of what Microsoft has done for years. It seems, however, that VMWare is more on top of their game: Plays on the cloud and SDN are examples of how VMWare is able to branch out - lets see just how successful they can be in those areas before judgement is passed... 
Charlie Babcock
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Charlie Babcock,
User Rank: Ninja
2/10/2014 | 2:34:01 PM
VMware's open source tightrope
Part of what I call VMware's high wire act is to contribute to and cooperate with open source code projects. VMware has never demonstrated the animosity to open source that some other companies have, even though it is a strongly proprietary firm. That probably goes back to the academic roots and ties of its founders, including Mendel Rosenbl and Diane Greene. Now that it's under EMC-style management, it's still showing that same balancing act. And open source developes have been able to  accept it hanging around and contributing to projects.
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