VMware Earnings Beat Expectations In Q2 As Cloud Services Feed Back Into On-Prem Business

VMware closed the second quarter of fiscal year 2019 with strong financials powered not only by growth in its emerging product line, but also by its legacy compute virtualization business.

In a Thursday earnings call, CEO Pat Gelsinger attributed the results for the quarter ended Aug. 3, which beat analyst expectations and led to increases in guidance across the board, to broad-based strength across the company's increasingly diverse portfolio.

VMware is seeing its hybrid cloud alliances, including VMware Cloud on AWS, actually driving licensing deals for its on-premises products, Gelsinger said.

[Related: VMware's Multi-Cloud Strategy And Broader Portfolio Look To Be Paying Off]

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Responding to an analyst surprised by that unexpected level of growth in its core vSphere compute business, Gelsinger explained the virtualization leader's cloud posture wasn't just a one-way street.

"We clearly see this hybrid computing model as the right answer," Gelsinger said. "As customers see the strength of VMware in the cloud, they're becoming more confident in commitment to us on-premises."

Hybrid cloud partnerships with industry giants like Amazon and IBM are creating a dynamic that's enabling some workloads to be "repatriated" back on-premises, he said.

And VMware Cloud on AWS, which always comes equipped with the full VMware stack—vSphere, vSAN virtual storage and NSX virtual networking—is encouraging customers to experiment with and then adopt those latest VMware technologies in their own data centers as well, he said.

VMware Cloud on AWS started showing greater traction at the end of the quarter, Gelsinger said, with hundreds of paying customers on-boarding to the platform.

Gelsinger said some 150 partners have earned the competency around that hybrid cloud service, with around 50 that already have started to transact deals.

Most use cases for the hybrid service currently involve migrating existing workloads to the cloud, Gelsinger said.

Selling to its existing install base was expected as the starting point for adoption. But when the service enters its second phase, "we expect people to rethink their data center strategy, repatriate workloads, shift their view of what's on-premises and in the cloud," Gelsinger told analysts.

VMware's total revenue was up 13 percent year over year to $2.17 billion, with licensing revenue of $900 million up 15 percent.

Quarterly earnings of $1.54 per share beat Wall Street's consensus expectations of $1.49. The company's stock, however, ticked down from $154.77 at market close to $149.20 at the time of this publication.

The VMware Cloud Provider Program, a global network of more than 4,000 managed services partners hosting clouds built with VMware infrastructure, delivered robust revenue growth above 30 percent.

IBM was one important driver of that growth, hosting a steadily growing base of 1,700 customers using its VMware cloud service that are ramping consumption, VMware's CEO said.

VMware CFO Zane Rowe acknowledged on the earnings call the company's outlook as to a slowdown of its core compute business was "pleasantly wrong."

But that hasn't changed VMware's longer-term outlook expecting business to shift from traditional infrastructure to cloud services, Rowe said.

VMware also saw 40 percent growth in the NSX network virtualization business. And while it's still early days, Gelsinger said the company exceeded customer adoption goals for the quarter for PKS, its Kubernetes container service in partnership with Pivotal and Google.

"We're seeing the idea of containers and Kubernetes is a very hot topic for enterprise customers," Gelsinger said. "We're clearly embracing this, making it a standard element of the VMware sales engagement."