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Recurring Revenue Powers VMware Through COVID-19 Crisis As IT Priorities Shift

There’s ‘lots of uncertainty overall, but we expect IT is comfortably better than the GDP and software and cloud is comfortably better than IT over all,’ VMware CEO Pat Gelsinger says of the coronavirus economy during the Q2 2021 earnings call

License deals suffered, subscription services accelerated, as VMware pushed forward its cloud strategy through three more months of the coronavirus crisis, CEO Pat Gelsinger told investors Thursday on the company’s second quarter earnings call.

VMware’s overall Q2 2021 sales of $2.88 billion were up nine percent year-over-year, powered by Software-as-a-Service which now delivers 22 percent of the company’s revenue in a recurring model.

Many VMware customers accelerated their cloud plans in the quarter ended July 31, Gelsinger said, while on-premises implementations slowed as part of overall IT budgets being “reprioritized.”

“We believe as the economy recovers, we will see resumption of on-premises projects,” Gelsinger said.

[Related: VMware Earnings Preview: 5 Things To Watch Out For]

License sales accounted for $719 million in Q2, compared to $773 million the previous year, while subscription and SaaS soared by 43 percent to $631 million. Services provided the remaining $1.53 billion, up almost 8 percent.

VMware had been shifting its focus to cloud and SaaS even before the pandemic, so “we’re leaning into that in a very good time in where the markets are overall,” Gelsinger said.

The quarter was a big one for VMware’s cloud alliances with the industry’s leading infrastructure providers.

Q2 saw the general release of Google Cloud VMware Engine and Oracle Cloud VMware Solution. Microsoft unveiled its next-generation Azure VMware Solution, and the upgraded VMware Cloud on Dell EMC also hit the market for on-premises and edge deployments.

Also in the quarter, new capabilities were introduced for VMware’s flagship public cloud partnership, VMware Cloud on AWS, around app modernization and business continuity and resiliency, partly building on Datrium disaster recovery solutions.

VMware Cloud on AWS grew in the triple digits, said CFO Zane Rowe, who credited AWS partners for that surge.

“The Amazon reseller channel performed very well in Q2,” Rowe told investors.

Gelsinger also called attention to the “really good momentum from the Amazon sales channel.”

Despite the resiliency of cloud through the pandemic, serious headwinds still lie ahead, Gelsinger said.

COVID-19 economic dynamics resemble a “kind of Nike swoosh recovery cycle,” he told investors, with Q2 and Q3 likely the bottom quarters. There will be fits and starts, as certain segments like travel, entertainment and retail remain depressed for a while longer.

There’s “lots of uncertainty overall,” Gelsinger said, “but we expect IT is comfortably better than the GDP and software and cloud is comfortably better than IT over all.”

Gelsinger also told investors that integrations of the company’s two largest recent acquisitions, Pivotal

Software and Carbon Black are on track and showing signs of success.

VMware’s container strategy, anchored by the Tanzu Kubernetes platform, is also revealing itself a winning play, he said.

“We’re starting to see some good co-selling momentum,” he said, in deals like one with Daimler that included VMware Cloud Foundation and Tanzu as part of the auto manufacturer’s digital transformation.

Tanzu Kubernetes Grid, Tanzu Mission Control, vSphere 7.0, “all of those are now starting to gain momentum,” Gelsinger said, exceeding overall bookings for the quarter driven by customer interest in app modernization.

As to Dell Technologies 13D SEC filing exploring a potential VMware spinoff of its 81 percent controlling share, Gelsinger only reiterated that VMware’s board has formed a special committee of independent directors that are evaluating the proposal and conducting discussions with Dell.

There’s still more than a year before that could become a reality, he reminded investors, as the potential spinoff, if approved, wouldn’t happen until September 2021. So far, the company sees that spinoff as one that would bring value to its customers and its shareholders, is all Gelsinger would say about the discussions.

Q2 revenue slightly beat Wall Street’s projections of $2.8 billion, and earnings-per-share of $1.81 were better than the $1.45 analysts expected.

VMware stock, which ended trading Thursday at $142.90 a share, climbed almost five percent in after-hours trading to $149.49 before precipitously dropping to a price of $142.00 at the time of this publication.

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