5 Key VMware Earnings Takeaways: SaaS, AWS, FY22 Guidance

CRN breaks down VMware’s financial expectations for next year, subscription and SaaS momentum and VMware Cloud on AWS growth.

5 Biggest Takeaways From VMware’s Q3 Report

For the first time in the company’s history, subscription and Software-as-a-Service (SaaS) revenue is surpassing on-premises licensing sales as VMware continues to double down on areas like VMware Cloud on AWS and hybrid cloud management.

The Palo Alto, Calif.-based company generated $2.86 billion in revenue during its third fiscal quarter which ended Oct. 30, representing an 8 percent increase in sales year over year. VMware, which currently employs 33,645 people globally, has yet to feel any significant impact from the COVID-19 pandemic as both technology innovation and sales have yet to slow down.

In a bold move, VMware also unveiled revenue expectations for its upcoming fiscal year 2022, which begins Feb. 1, 2021, during its third-quarter financial earnings report with media and analyst.

CRN breaks down the five most important financial results and key takeaways from VMware’s third fiscal quarter earnings report.

SaaS and Subscription Soars 44%, Eclipses On-Premise Licenses

For its third fiscal quarter, VMware generated $676 million in SaaS and subscription revenue, up a whopping 44 percent compared to $470 million one year ago. VMware’s SaaS and subscription sales now make up 24 percent of the company’s total revenue, a figure that continues to climb quarter after quarter.

“Subscription and SaaS revenue increased 44 percent year-over-year in Q3 and surpassed license revenue for the first time,” said Zane Rowe, VMware’s CFO and executive vice president, during the company’s recent third quarter earnings report. “VMware will continue to invest in and focus on further expanding our Subscription and SaaS portfolio, which we believe will drive company growth, customer satisfaction and shareholder value.”

VMware captured $639 million in on-premise license revenue in the third quarter, down 12 percent year over year.

“We are on track to make most of our major product offerings available as subscription and SaaS in the next calendar year, providing a broader set of consumption choices for our customers with the flexibility they need,” Gelsinger said.

The VMware businesses generating subscription and SaaS sales includes VMware Cloud on AWS, Wavefront, Heptio, Pivotal Software, Carbon Black, VeloCloud, AppDefense and some end-user computing (EUC) sales, to name a few.

‘The Lead Horse’: VMC on AWS Up Over 100%

In terms of its public cloud partnerships and go-to-market strategy, VMware CEO Pat Gelsinger said VMware Cloud on AWS remains the company’s top choice. VMware Cloud (VMC) on AWS sales continued to skyrocket at a triple-digit clip during VMware’s third quarter.

“The lead horse for us remains our preferred partnership with Amazon,” said Gelsinger. “And we had a very strong quarter, triple-digit growth in that offering again. Amazon showing up to sell that offering has proven to be very strong. They have a dedicated sales team that’s ramping nicely.”

VMware Cloud on AWS -- which has sparked some concerns from large VMware channel partners -- grew revenues over 100 percent year over year, although VMware did not provide exact sales figures. VMware Cloud is now available on Microsoft, Google, Alibaba, IBM, Oracle and Dell EMC.

Rowe said VMC on AWS traction in the third quarter was “highlighted by continued expansion of the Amazon channel and workload expansion from large VMC customers.”

Q4 Sales Expected To Reach $3.25B; VMware Stock Dips

Although VMware posted solid third quarter sales growth, the company’s stock dropped 6 percent after VMware released its financial results on Nov. 24. At market close on Nov. 24, VMware’s stock was $150.51 per share; by Nov. 25 the company’s stock was trading at $141.69 per share.

The stock drop could be a result of VMware providing financial guidance for its current fourth fiscal quarter 2021, which ends next month on Jan. 29.

VMware expects to generate $3.225 billion in revenue for its fourth quarter, which would represent a 5 percent year over year revenue increase. The company projects capturing $1.66 billion in SaaS, subscription and license revenue during its fourth quarter, up 4.5 percent year over year. VMware projects approximately 43 percent of that $1.66 billion will be from SaaS and subscription.

“Q4 is typically a seasonally strongest quarter for our on-premise product portfolio,” said VMware’s Rowe.

VMware’s stock is trading at $141.64 per share as of Wednesday afternoon.

Dell Sales Grow In Q3

VMware is majority owned by Dell Technologies, who owns a 81 percent stake in the company stemming from Dell’s blockbuster acquisition of EMC in 2016. Dell and VMware, who hold one of the tightest technology partnerships in the industry, both report their quarterly financial results on the same day.

Round Rock, Texas-based Dell was generating $23.48 billion in total revenue for its third fiscal quarter, representing an increase of 3 percent year over year. Net income for the quarter reached $881 million, up 60 percent from $552 million one year ago.

Dell has a record quarter for its Client Solutions Group (CSG) which includes Dell PCs, notebooks and tablets; while sales from its Infrastructure Solutions Group (ISG) which includes servers, storage and hyperconverged infrastructure declined.

Dell’s CSG generated record revenue of $12.3 billion, up 8 percent year over year, with operating income of $1 billion. The company’s ISG businesses fell 4 percent year over year to $8 billion. Dell, the worldwide storage market leader, witnessed a 7 percent drop in storage sales year over year to $3.86 billion.

Dell’s recurring revenue sales, which include as-a-service offerings, hit $6 billion in the quarter, increasing 13 percent year over year. “In the past year, we’ve seen increases in as-a-service and flexible consumption offerings,” said Jeff Clarke (pictured), chief operating officer and vice chairman of Dell Technologies during the company’s third quarter earnings call. “This type of transformation expands recurring revenue, providing even more stability.”

Firm Expects $1B In Sales Growth

VMware not only provided financial expectations for its full fiscal year 2021, but boldly gave revenue estimates for its entire upcoming fiscal year 2022 which begins Feb. 1, 2021.

For its current fiscal year 2021, VMware expects to generate total sales of $11.7 billion, up 8 percent year over year.

VMware’s Rowe said the company is expecting total revenue for fiscal year 2022 to grow “in the high single digits.” If VMware grows annual sales by 8 percent or 9 percent in fiscal year 2022, that would boost total sales by roughly $1 billion.

“For FY22, we expect total revenue to grow in the high single digits, factoring in continued growth and a larger mix of our subscription and SaaS portfolio, incremental improvements in our on-prem performance and our current expectation for FY21 growth,” said Rowe.

Looking ahead to next year, VMware’s CEO said his company expects subscription and SaaS to “become a bigger part of our mix” while on-premise sales are expected to increase as well.

“We’re pleased with how we executed in Q3 and now three quarters in a row, we’re ahead of our expectations, despite the pandemic,” said Gelsinger. “We continue to expect a gradual recovery through the next year, beginning in Q4. … We expect to see some incremental improvements with our on-premise products in Q4 and continuing into fiscal year 2022.”