Pundits said that cloud would kill VMware. The virtualization giant proved them wrong, and during its most recent quarter saw hybrid cloud and software-as-a-service (SaaS) represent more than 13% of its total revenue — a 40% increase compared to last year.
Looking ahead to the next fiscal year, “we also expect hybrid cloud subscription and SaaS to drive much of the future growth of the business and show a significant increase in its percentage mix of total revenue,” CFO Zane Rowe said on VMware’s third quarter of fiscal 2020 earnings call.
This growth highlights VMware’s successful pivot to the cloud, which culminated this year in partnerships with all five of the major public clouds as well as some 4,300 smaller regional cloud providers in more than 120 countries. The vendor’s 2019 push into Kubernetes and containers also strengthens its cloud play and sets it up to earn more revenue from that portfolio next year.
“VMware is definitely a major player in the hybrid cloud business,” said Sid Nag, VP of cloud services and technologies at Gartner Research.
VMware’s Cloud Pivot
Analysts weren’t the only ones that expected the move to the cloud to hurt VMware’s business. Company executives were, too.
“At VMworld four or five years ago, during [VMware CEO] Pat Gelsinger’s keynote, he was pushing back on cloud with a bunch of data saying cloud wouldn’t really be here until 2030,” said Zeus Kerravala, principal analyst at ZK Research. “They had really aligned their strategy to almost hold back cloud adoption. The big pivot came, I think, with the Dell acquisition.”
Dell Technologies owns 81% of VMware, which it acquired from the Dell-EMC merger in 2016. Kerravala says he remembers talking with Michael Dell shortly after the deal closed, and Dell admitted his company missed the boat on earlier technology trends. “He said, ‘You’ll never see Dell do that again,’” Kerravala said. “After the EMC integration, VMware then became all-in on cloud. They became a company that, instead of looking at cloud as something that would hurt their business, they saw it as something that would actually help their business.”
That same year IBM became VMware’s first cloud provider partner. And in August 2016, VMware and Amazon Web Services (AWS) confirmed rumors when they teamed up to deliver a joint service that lets customers run their VMware vSphere private clouds alongside their applications in AWS’ public cloud.
This partnership, of course, became VMware Cloud on AWS, which Gelsinger touted as “the ultimate hybrid solution,” at VMworld in 2017. The partners have since moved from the cloud and into on-premises data centers with AWS Outposts, which launched earlier this month.
‘Easy Button for Hybrid’
While AWS remains VMware’s No. 1 cloud partner, that hasn’t stopped the vendor from teaming up with others. This year it added hybrid cloud deals with Microsoft, Google, and Oracle.
These partnerships with all of the major public cloud providers are significant for a few reasons. First, they show that even the hyperscalers believe that not all workloads are going to move to the cloud, and hybrid IT environments are here to stay. But they also highlight VMware’s success in finding its sweet spot in a hybrid cloud world.
As Ajay Patel, SVP and GM of VMware’s Cloud Provider Software business unit said in an earlier interview: “cloud is the new hardware” and VMware provides the unified management layer. “The world is going to be hybrid,” Patel said, and VMware’s strategy is to provide consistent infrastructure and operations across customers’ data centers and private clouds as well as public clouds. “Customers want a consistent infrastructure for running [virtual machine] and container workloads across the edge, data center, and the cloud.”
In other words, not only does VMware keep its on-premises business, but it also becomes vital to its customers’ cloud migrations. “They very successfully managed to protect their existing customers base of 60-plus million vSphere licenses while providing them an on-ramp onto the public cloud with their clever hybrid strategy,” Nag said.
VMware’s install base has more to do with its success than its products, Kerravala said.
“From an overall share perspective, there’s no hypervisors that’s more widely deployed than VMware,” he said. “VMware is the control plane of the data center, and customers want to maintain vCenter as their control plane for hybrid environments. So the hybrid model that VMware has created with the cloud companies is ideal.”
Up Next: Cloud Native
VMware came late to the cloud party, “and given how late they were, they were certainly lucky to have caught up so quickly,” Kerravala added.
But now that VMware is at the party, it’s dancing on tables with a bottle of champagne in each hand. And by that, we mean it’s embracing cloud native.
Late last year Gelsinger outlined VMware’s top three priorities for 2019: NSX, cloud, and containers. “If we come out of next year and let people really see us in the lead in those domains, score,” he said, during his keynote at the Barclays Global Technology, Media, and Telecommunications Conference.
In addition to all of its public cloud deals this year, VMware also pushed hard into containers, spending billions on Kubernetes- and cloud-native focused startups including sister company Pivotal, which it acquired for $2.7 billion. And at this year’s VMworld, the vendor rolled out a new Kubernetes’ products and services portfolio called Tanzu.
VMware Cloud on AWS and its similar services with other public cloud providers gives customers “the easy button” for hybrid cloud, Gelsinger said on VMware’s most recent earnings call. But then, once companies have migrated to the cloud, they also want to develop and deploy cloud-native apps, and this is where the Tanzu portfolio comes into play.
“So we see it as this ability to migrate and modernize, do it with hybrid cloud and multi-cloud,” Gelsinger said. “VMware is just positioned to be able to do those things as no other vendor is.”
It’s a bold statement. But at least as of now, Gelsinger appears to be right.