Virtual SANs And Networks Taking Off, Says VMware 

The transformation of virtualized servers into clouds continues apace at enterprises, and is driving VMware to new heights. The company is now at a $6 billion annual run rate, its initial forays into network and storage virtualization are off to a good start, and its cloud business is growing sharply.

In the second quarter ended in June, VMware posted software license sales of $614 million, up 15.6 percent. Software maintenance continues to be the biggest driver of revenue for the virtualization juggernaut, and hit $737 million, up 20 percent from the year ago period. Professional services revenues were up a smidgen to $106 million and consistent with VMware's desire to drive customers to its channel partners for such services. All told, the company booked $1.46 billion in sales, up 17.2 percent. Costs were up across the board at VMware in the quarter as the company invests in future products and services and as it deals with competitive pressures from Microsoft and to a lesser extent from Red Hat, Citrix Systems, and a few others. And thus net income in the period fell by 31.8 percent to $167 million.

But don't worry, VMware has plenty of money. The company has more than $2 billion in cash, another $4.58 billion in short-term investments, and another $4.39 billion in unearned revenue sitting on the books. The company’s headcount has increased by 32 percent to 17,100 in the past year as it expands from server and desktop virtualization to a much broader suite of tools that virtualize applications, run them on software-defined servers, storage, and switches in either private datacenters or ones run by VMware or its partners.

VMware has plenty of financial maneuvering room, and it will need it as Microsoft continues to bring its own impressive resources to bear when it comes to virtualizing infrastructure and applications that run atop its Windows Server platform. The need to get Windows applications cloudy is what has largely propelled VMware to become a $6 billion software company. The company is telling Wall Street that it can close 2014 with somewhere between $5.96 billion and $6.08 billion in revenues, with between $2.56 billion and $2.62 billion of that coming from software license sales.

"We are committed to providing our customers with the openness and choice of software defined future, where all core components are virtualized, infrastructure is highly automated and delivered via software, and customers are not locked into closed, proprietary technologies," VMware CEO Pat Gelsinger said on a call going over the financial results. "We do this from devices to datacenters, and across private, public, and hybrid clouds – all this in the same secure and consistent environment."

Gelsinger said on the call that the NSX network virtualization stack, which is largely built upon software that VMware got through its $1.26 billion acquisition of network virtualization startup Nicira two summers ago, now has 150 paying customers. Carl Eschenbach, VMware's president, said that the NSX stack had an annualized run rate of around $100 million and was getting traction in all geographies and all verticals. Eschenbach said that NSX represented a "decade-plus opportunity" and that the momentum for it was real. VMware has added NSX to the official company price list and is starting to push it through its sales channel, he added.

The Virtual SAN software that VMware announced last summer and made generally available earlier this year is taking off as well, Eschenbach said. It now has over 300 paying customers and has exceeded VMware's internal plans for bookings. With vSAN, a cluster of servers running VMware's ESXi hypervisor has a storage layer embedded in the hypervisor that allows a server cluster to turn local disks spread across the server nodes into a virtual storage area network. When vSAN became generally available in March, over 12,000 customers had participated in the beta program that was opened up in November, so the pipeline for vSAN is large indeed and it formed very quickly. There is pent-up demand for vSAN.

On the cloud front, Eschenbach said that VMware's hybrid cloud business, which includes the company's own vCloud Hybrid Service public cloud as well as the clouds that have been built by approximately 4,000 partners, grew by nearly 80 percent in the quarter. (Presumably that revenue includes both sales of infrastructure services on the VMware vCHS and software licenses to those partner providers, but maybe VMware is talking about the economic value of the infrastructure services. VMware is vague about this.)

In the quarter, enterprise license agreements accounted for around 37 percent of total bookings, and the company inked eight ELA deals worth more than $10 million. Renewal rates for software support contracts were the highest in the company's history. Cloud management tools are now installed at about 12 percent of the VMware server virtualization customer base, and vCloud and other add-ons to the ESXi hypervisor and vSphere management stack had bookings growth higher than 30 percent in the quarter. About half of the ELAs that VMware signed with customers had a vCloud Suite component to them in the second quarter.