VMware Q1 Earnings Show Strength Of Hybrid Cloud Strategy, Technology Alliances

The on-premises virtualization leader is continuing to transition its business to subscription services through a broad array of partnerships and an expanding product portfolio, says CEO Pat Gelsinger.

VMware posted strong results for the first quarter of its fiscal year 2020 as the software giant continued its transition to offering a hybrid and multi-cloud platform that's increasingly delivering a stream of subscription revenue, CEO Pat Gelsinger told investors Thursday during the company's first-quarter earnings call.

"We've been emphasizing the hybrid cloud SaaS component of our business," Gelsinger said. That segment now constitutes 12 percent of total VMware revenue and grew 35 percent in the quarter.

First-quarter revenue beat Wall Street expectations thanks to a lineup of new offerings, especially NSX virtual networking and the VMware Cloud on AWS joint hybrid service, he said.

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

VMware notched $2.27 billion in total revenue for the quarter—up 13 percent year over year. Licensed software accounted for $869 million.

Analysts had predicted $2.24 billion in revenue. Despite the performance beat, VMware maintained full-year guidance of $10.03 billion.

An expanding portfolio of subscription services will become a more prominent component of the company's overall business with further adoption of VMware Cloud on AWS and soon the VMware version of the AWS Outposts on-premises solution. VMware's CloudHealth management platform and Workspace One endpoint management service are also boosting that strategic effort, he said.

"We, as a company, are highly committed to drive this portion of the business over time," Gelsinger said.

VMware's channel partners are particularly important in driving NSX and VMware Cloud on AWS deals, he said.

VMware will continue expanding relationships with technology partners that are critical to its success—most notably Amazon Web Services, Microsoft and parent Dell Technologies, which brings channel synergies.

"Generally, every one of these is just giving more use cases that customers can take advantage of," Gelsinger said. Those alliances are "accelerating opportunity for customers to get to the cloud in a more rapid, cost-efficient way.”

While there's been a lot of emphasis on the ability to burst workloads into the cloud for greater flexibility, customers are actually looking to do more "workload balancing" by building integrated hybrid capabilities, Gelsinger said.

"Hybrid operations is starting to emerge as a real use case," the CEO told investors.

Even disaster recovery, which was once limited by storage and networking costs, is emerging as an important use case thanks to the emerging hybrid cloud capabilities, he said.

Gelsinger also took some time to discuss the container market, which is still "very early in its life."

While the number of production deployments of containers is "very modest at this point," he said, "there is consensus that people are going to move to a container-centric model in the future."

That consensus that's building around containers, and specifically Kubernetes, "is really quite spectacular," he said, describing the technology as "the Java of the next two decades."

On that front, VMware's jointly developed Kubernetes service, PKS, is gaining traction, and the acquisition of Heptio has expanded the company's container portfolio. Gelsinger noted that VMware has become the second largest contributor to the Kubernetes project.

NSX, in the first quarter, was included in all 10 of the company's largest deals. It's clearly become "part of standard selling motion of VMware," Gelsinger told investors.

"Customers are looking for a way to do multi-cloud networking that isn't depending on underlying infrastructure," he said.

The company's virtual networking strategy is extended to the edge with VeloCloud, into container environments with service mesh offerings and PKS, into the public cloud through the Amazon and soon-to-be Microsoft Azure joint services, as well as through VxRail hyper-converged infrastructure.

VMware's non-GAAP earnings came in at $1.32 per share, beating expectations of $1.28.

Despite the earnings beat, VMware stock, which closed Thursday at $191.09, fell in after-hours trading to $184.70.