VMware Aims For Container Dominance

Riding a spate of strategic acquisitions, VMware rapidly scaled its subscription hybrid cloud business in the third quarter while preparing to roll out services that will further transform the virtualization leader into a Kubernetes powerhouse.

On the back of its multi-cloud strategy, VMware delivered strong financial results for Q3 of the 2020 fiscal year that ended Nov. 1, CEO Pat Gelsinger and CFO Zane Rowe told investors Tuesday in an earnings call.

Cloud and containers, two technologies that once threatened the business, have become the centerpieces of a strategy to emerge as the dominant player in the hybrid cloud landscape. VMware is anticipating coming growth supercharged by the recently closed acquisition of endpoint security vendor Carbon Black and the soon-to-be realized deal to purchase Pivotal.

[Related: VMware's Multi-Cloud Strategy Delivers Another Strong Quarter]

"Maybe since Java we have not seen a technology, or the VM itself, as important as Kubernetes," Gelsinger said.

VMware looks to shake up that Kubernetes market with two soon-to-be-released offerings.

Tanzu, VMware's coming portfolio of Kubernetes services, will create a "bridge between the developer and operations world," Gelsinger said.

Tanzu Mission Control, a Kubernetes management plane, is the first component to see beta testing with customers.

Also in a beta release is Project Pacific, a re-architecting of VMware's vSphere flagship "into a Kubernetes-native platform" that will enable enterprises to seamlessly add Kubernetes to their IT environments, Gelsinger said.

Running containers and virtual machines in a consistent operating environment delivers the "best of both worlds" in terms of security, agility, performance and compliance. Combining VMs and containers allows customers to modernize their infrastructure while maintaining existing investments in applications, tools and skillsets, Gelsinger said.

Once Pivotal is added to the mix, as expected in the fourth quarter, it will further position VMware in the market with the most-comprehensive enterprise-grade Kubernetes portfolio, he said.

Tanzu and Pacific, both building on the acquisition of Kubernetes startup Heptio, will deliver to customers a "comprehensive, developer-centric Kubernetes portfolio," Gelsinger said.

Those technologies "allow us to embrace public and private as no one else can," Gelsinger said.

Carbon Black is already enabling VMware to offer a "fundamentally new paradigm" for the security industry. The $2.1 billion deal closed in October, and Carbon Black is now operating as a VMware division under the leadership of its former CEO Patrick Morley.

Advancing that product's market penetration is VMware parent Dell Technology's decision to designate Carbon Black the preferred endpoint security solution for its customers.

"Enthusiasm for Carbon Black is high," Gelsinger said, and the company's strategy for intrinsic security built directly into its infrastructure; from vSphere to NSX networking to the Workspace ONE endpoint management platform; "has resonated very well," Gelsinger said.

Gelsinger said VMware is "well of the starting blocks" in its attempt to redefine the security opportunity "in a broken industry."

Pivotal and Carbon Black will further shift the balance of VMware's revenue to a subscription model, Rowe told investors.

Already riding an expanding portfolio of Software-as-a-Service and partnerships with public cloud leaders, the company has scaled to more than 13 percent of total revenue realized through a recurring model.

Those hybrid cloud partnerships with AWS, Microsoft, Google and Oracle are gaining steam as VMware executes its multi-cloud strategy.

VMware Cloud on AWS has matured, Gelsinger said. Revenue through the Amazon partnership has surged by 40 percent, and VMware Cloud Provider Program partners are beginning to incorporate and resell that service.

Common use cases emerging are data center extensions, data center evacuations, disaster recovery and virtual desktops, Gelsinger said, but "we see everything," Gelsinger said.

Once Tanzu comes online, and renews VMware's ecosystem focus on the developer, Gelsinger expects those application development capabilities layered into the AWS hybrid service as well.

A similar joint offering with Google will soon hit market as well.

Gelsinger commended Google's decision to buy CloudSimple, a VMware services provider, and sees that technology accelerating its hybrid partnership as global demand is driving Google to aggressively build out its enterprise capabilities, he said.

VMware's hybrid cloud is the easy button for customers that want to migrate to cloud but hit the "brick wall" of having to re-platform legacy applications, the CEO said.

With its Kubernetes platforms and cloud partnerships, VMware enables customers to modernize and refactor applications as the business needs justify, he said.

A software-defined networking portfolio comprised of NSX, VeloCloud and Avi Networks also performed strongly in the quarter. Customers are "buying into the strategy in networking that it's time to replace hardware with software," Gelsinger told investors.

Asked by an analyst if VMware saw a role for itself in the military's hotly contested JEDI cloud transformation contract, Gelsinger said, "Overall, we're following the JEDI event closely. We're looking forward to get to the eventual outcome of the appeals process."

He reminded that the Joint Enterprise Defense Infrastructure initiative is one of many vehicles to drive business with the government, and through partnerships VMWare is well-positioned to have a thriving government business.

Q3 revenue of $2.46 billion represented growth of 12 percent from the same quarter of the previous year. Licensing revenue came in at $974 million, up 10 percent year-over-year.

Those sales beat Wall Street expectations by $50 million. Earnings of $1.49 per share came six cents higher than analysts had predicted.

VMware stock ticked up in after-hours trading to $166.70 at the time of this publication after closing at $164.90.