Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Pat Gelsinger – CEO

Paul Ziots – IR

Analysts

Phil Winslow – Credit Suisse

VMware, Inc. (VMW) Credit Suisse 2013 Annual Technology Conference Call December 3, 2013 10:30 AM ET

Phil Winslow – Credit Suisse

As is my duty, I’ve got something else to read now for VMware, forward-looking statements. Statements made in these discussions which are not statements of historical fact are forward-looking statements based upon current expectations. Actual results could differ materially from those projected due to a number of factors, including those referenced in VMware’s most recent SEC filings on Form 10-Q, 10-K and/or 8-K.

So, with that said, moving on to the Second Keynote here, with Pat Gelsinger, CEO of VMware, Pat, thank you for joining us on – here today. We’re excited to have you here.

Pat Gelsinger

Hi, thank you Phil. Great to be here.

Phil Winslow – Credit Suisse

There is, well you’ve had a busy 15 months.

Paul Ziots

It has been, it has been.

Phil Winslow – Credit Suisse

So, it’ll only get faster from here. But I guess, just to level set things here I think in September 2012, you said you took over. Maybe take us kind of over your journey for the past, 14, 15 months here. Lot of change at VMware, where were we, what’s changed, sort of where are we now?

Pat Gelsinger

Yes, it’s been a good 15 months. We’ve got a lot done and clearly stepping into the company, was your questions about your focus for the company, we got pivotal done, we did project focus, we sold off five businesses. We clarified three priorities for the company. Reset turning expectation gave a clear long-term model against that. We’ve met our beat ever since we’ve reset, right. So, things have gone well against that execution.

We solidified the management team, we launched groundbreaking new products between Virtual SAN, or hybrid cloud and maybe most importantly NSX, so we laid out some whole new technology directions against the three priorities, SDDC, hybrid and our end-user computing. And the overall the company is performing well. We’ve responded well to the priorities, to the focused activities and the response from the markets has been very solid.

And clearly we see that customers today have two challenges, right. One is they have to build tomorrow and they have to save money from today to help fund tomorrow. And in the middle of that VMware is very uniquely positioned as one if not maybe the only major IT company that helps them develop, save us today and help with build the architecture for tomorrow. So overall we feel very good about our position.

Phil Winslow – Credit Suisse

In fact actually last night there were two guys I was having dinner and I was told that they said VMware was one of the only vendor that actually got what IT guys wanted. So their pulling around their audiences so that’s that. Let’s get a couple of just business and financial things out of the way before we dive into strategy and technology.

But one of the things that I think a lot of investors have been focused on is three ELA renewal cycles. Maybe talk about just where we are, just one of the second half of ’13 here but also as you look forward to ’14 how do we think about that base of ELA?

Pat Gelsinger

Obviously the ELA renewal we’re in a good period for that as we – the 2010 come up for renewal next year, it’s a good year for renewals as well as we go into ’14, we have right a larger dollar volume of ELAs that will be renewed next year, as well our renewal rates are at or at record levels, right, at or above record levels.

The renewal value, right, as ELAs are being renewed for more than right, they were before and were being successful at bringing at higher value products and suites into the ELAs as well, they now represent 50% of ELA right are against the suites. So overall all of the ELA renewal characteristics are good.

At the same time I would want to emphasize that ELA is actually a small piece of our business, right. I think we got a little bit to focus on it, because those ELA renewals right, represent less than 50% of ELAs or renewals right, and over 50% our new ELAs right, the ELA is about strategic figure relationship with the customer. And ELAs overall represent less than 50% of our business.

So less than 50% of – less than 50, means that that renewal piece right is well before 25% of our business, new ELAs, those relationships are building, we are driving to continue to expand the presence of ELAs as a portion of our revenue, we said we expect this across 50% in the future, but ELA renewals by themselves, right, this is the driver, singular driver of our business.

Phil Winslow – Credit Suisse

All right. Now that we’ve got an ELA question out of the way we can talk about other fun things with the – but let’s talk about ’14 and talk about these new products and product drivers for revenue growth. What are the things that you are focused on as we head into next year?

Pat Gelsinger

From the strictly financial perspective, the revenue drivers over next year are the revenue drivers of this year, right, it’s about the hybrid, I mean, the suite it’s about be calm, it’s about extending the beat field footprint into our management. It’s about growing our EUC business that we’ve gotten momentum on. So those would be the primary revenue drivers for next year.

The new business area is that we relate of the hybrid cloud, NSX, storage, mobility, those really start to kick in, in ’15 and ’16. And yeah, we do expect those to really be the factors that’s why we acceleration our growth rate, yeah we said will be – 15% to 20%, 15%-ish in the near term going in closer to 20% over the 15%, 16% horizon and it would be the new business areas that’s why that accelerated growth rate in the out years.

Phil Winslow – Credit Suisse

And also just to emphasize the point, I just want to make sure NSX in terms of guidance for next year, not really in the ’14 guidance that you guys had really given out there?

Pat Gelsinger

Well, it is in the guidance, well it’s a small number.

Phil Winslow – Credit Suisse

Small number, but it’s not a big number?

Pat Gelsinger

Yeah, we do think that next year for NSX that’s a year of architectural win, right. It’s about those early major customers right who go to production, deployment, who go to large broad PLCs, right it’s about those early market wins that really establish this is the next generation architecture to build and deploy a network of scale. And getting those high quality major right, industry brand on the platform will set us up for a substantial business opportunity beyond that.

Phil Winslow – Credit Suisse

Got it. Now, I want to come back to NSX but let’s talk about the core for a little bit, your core, your server virtualization. One of the questions I get from investors is sort of where are we saturated with the course – the server virtualization. Now, where do you think we are in this life cycle in terms of just penetration, consolidation ratios and adoption?

Pat Gelsinger

Sure. And today, some of those saturation concerns pivot around the 70%-ish number where approximately 70% of enterprise workloads today are running virtualized. And the large majority of those are running on VMware, right. So, 70% - get to 100%, or not.

Well, if you flip that over and look at the physical servers, it’s less than 30% of physical servers are running virtualized today, meaning that over 70% of physical servers, we have lots of workloads running on those virtualized servers but we still have a large footprint of physical servers.

And we have major P to V migrations underway with large customers today because we go into the shop and one of the first questions, one of the first questions I ask any CIO, what percent virtualized are you, right. And often they don’t know.

Phil Winslow – Credit Suisse

They don’t know.

Pat Gelsinger

Right, but they have some number that we throw out and then it’s immediately discussion of okay, what about that other 50%. What are you running, what workload is running on those, do you have a virtual only policy, do you have a virtual first policy. How far to the automation of that? Are you running into due physical, why? HPC, it’s running physical, why?

Let’s operationalize your mission critical workload because when you’ve done that you’re now able to take all of these sub service catalogs for visioning, operational characteristic across the whole franchise and not just the subset of the thing. They become very strategic conversation. So we think that there is still a lot of potential that is just driving virtualization into those largely, it’s physical footprints that exist today.

And of course as we go internationally they are not nearly as penetrated in the virtualization space as they are in the mature markets so that’s an opportunity for us. And as I preach to my guys internally, until it’s 100% we’re not done. Every workload running virtualized, there is a value proposition there in everything that enterprises do right with the benefits of virtualization.

Phil Winslow – Credit Suisse

Got it. So we’re still going to push that penetration higher. And the next question I get there was market share though. As you grow that high, on the high advisor the core, so you remember such that. Maybe you can discuss this competitive environment in particular with R2 coming out of Windows Server 2012, how would you categorize in terms of landscapes?

Pat Gelsinger

We see that Microsoft remains a competitor. They have been since the beginning of the end, and we expect 10 years from that when we’re on stage here or so, they will continue to be. But if anything, the competitive dynamic has moderated a bit, I think there are businesses attracted, we have good presence and customers are more interested right in different conversations that necessarily, I don’t want to change the hypervisor that’s not a strategic conversation anymore.

And it seems like Microsoft has just distracted for all the other things that are going on there, so if I say anything right the competitive dynamic, it’s a bit less over the last quarter or two. And our focus continues to be right such that server virtualization platform that we have is a launching pad for the rest of the suite, right. It’s about the management, it’s about the networking, it’s about the storage technology, delivering that as a suite. And in those areas we’re just dramatically differentiated vis-à-vis Microsoft, KVM or any other alternative, yeah.

Phil Winslow – Credit Suisse

So with that, looks like we’re walking up the stack here.

Pat Gelsinger

Okay.

Phil Winslow – Credit Suisse

Of the platform we’d like to start with management tools. Maybe you can provide us an update on vCloud Suite, another focus for basically almost ever since you took over really there?

Pat Gelsinger

Yes, yes. At certain stage we launched it.

Phil Winslow – Credit Suisse

Exactly, exactly.

Pat Gelsinger

Day one right.

Phil Winslow – Credit Suisse

Exactly I was there. So, where are we at vCloud Suite, how is that performing every quarter to your expectations and how should we think about server adoption that is going forward?

Pat Gelsinger

Yes, in terms of expectation, we’ve exceeded our expectation at every quarter since we’ve launched, maybe that means that my guys were sand-bagging but I see pushing them to raise the expectations as we go forward. But we’ve exceeded expectation, but we’re less than 5% penetrated into the installed base for the management tool.

And so, it’s a lot of upside for us as we go forward. IDC we’re now the number one cloud management provider. We’re growing faster than anyone else. So being number one and growing faster, clearly this is an accelerating space for us. And the conversation that it gets us into with conversation with customers is very strategic, right. Let’s change the way you operate IT, let’s go build a self service provisioning catalog.

Let’s go build a true big data operational environment of scale, let’s really provide financial show back and build back into your customers from that complete provisioning, automated provisioning environment. Really it’s a great opportunity and there is also the enormous amount of legacy, B&C and CA, and (inaudible) and so on that are out there that really needs a very fresh view of a cloud automation environment. Good business for us.

Phil Winslow – Credit Suisse

One of my favorite new products, vSOM, lot of folks on vCloud really put, I wonder if you could also provide an update on vSOM and also maybe just level set for people just where does vSOM fit into this spectrum of vSphere and the vCloud Suite?

Pat Gelsinger

Yes, and vSOM just for, to find the acronym, it’s vSphere with operations management. And we launch what internally we call vCOP or the vCloud operations as we about year and half ago, that product is a highly differentiated analytic big data tool to be able to look at the scale cloud environment. So that product is doing extremely well, the fastest, within our fastest growing management product, it’s the fastest growing product within that. So it’s doing extremely well.

Customer conversations and imagine a major customer who right, licenses up for renewal and we go into the conversation, of course my sales guy starts at the top, the vCloud Suite enterprise, right, the whole deal. And the customer might say I just did a B&C deal a year ago, I’m not quite ready to go all the way for the full suite, you don’t have my CI, you don’t have – whatever it might be.

And against that vSOM provides a good step, and we’re having good attach rate even into large enterprise customers saying wow, that operational stuff, I can show ROI on that very quickly.

And that’s automation of my environment, right, root cause analytics, being able to show performance probably next in the environment where I could just get a lot more out of my existing franchise, very quick to demonstrate in ROI, we installed a product within four days, right. We have rich telemetry on the operational environment, a very powerful product in the family. And it provides this nice first step into the Management Suite of VMware. So going extremely well.

Phil Winslow – Credit Suisse

Perfect. Well, let’s talk about your hybrid cloud service for a little bit, your transition continues to transition up stack your management to hybrid cloud service. How do you I guess position that – or how do you think about running your own sort of cloud service versus the VMware service product partners out there?

Pat Gelsinger

Yes, clearly, given the environment that we’re in for cloud, the secular shift for cloud, the broad position of Amazon, every enterprise customer is ready to have a conversation of our cloud, right. They’re already – something is going on, they got some crazy and tested that, and they got a line of business that they’re involved in some projects. They have no idea how to bring them back into some governed environment.

So, every conversation, with every CIO, a cloud – a public cloud conversation is a quick conversation. They’re ready to have it. They’re anxious to build their strategy in that area.

And into that we walk in and we say we’re going to help you extend from your current internal datacenters to a set of secure, governed SLA public cloud alternatives that give you the opportunity to seamlessly move out but also seamlessly move fast. And that’s what VMware will do for you in that space.

It’s an inside out strategy as opposed to outside reaching in and trying to rip workload into a public cloud that they don’t control, isn’t governed, they can’t come back to, becomes a proprietary total sack, right. So they can’t ever leave when they’ve gone to that environment.

And that conversation with customers goes very well. We’re able to turn right those into pipeline customers very quickly because they say ah, that’s much more aligned to my enterprise requirements. Because I might do test the dab in the public cloud but I need to deploy internally for regulatory or international or other reasons that might be the case. I do want to be able to burst to the cloud, but I still got this big footprint that I want to be able to operate because I made those capital investments.

I got all these regulatory requirements that totally no way am I moving a lot of those workloads to the public cloud, right. But I really would like to have the flexibility to be able to take advantage of it but to come back. I would like to DR in the cloud because generally I practiced on DR.

And being able to do that it’s a trusted provider. I do need the security, the governance, the management accelerant being able to deliver that look for here in the way. So that’s the positioning right that we’ve taken. The response for that from customers has been very positive but it’s early days. We’re just on GA on the service August 26, and it’s way too early to declare a success. But our positioning clearly has been right on the money from what we’re hearing enterprise customers say they want.

Phil Winslow – Credit Suisse

Well, we both know the value of disaster recovery, which carries the equity research quite reasonably. But thankfully it’s in VMware. But let’s talk about – now we’ve talked about the hybrid cloud service and talked about management tools. And one of the questions I get then when you think about public cloud, private cloud, hybrid cloud and management tools is open stack, you need a cloud stack. How I guess where are we right now sort of your support of open stack but also having vCloud Suite, how do you balance this I guess?

Pat Gelsinger

We’ve taken a good position I think on open stack that says it’s a mature, it’s – it’s the layers right, open stack, it’s not a saying it’s a stack. We’re going to aggressively sell our component technologies into open stack environment, some are at open stack ATIs, two are products.

And also we’re not disarming the open stack community, in fact we’re contributing significantly to it, right, a meaningful way. And our networking layer is clearly the preferred choice for open stack networking. We have good attach rate of ESX of the hyperviser into open stack. And we’re getting some traction into the management layer of open stack.

Now that said, open stack is very immature, right. It has substantially depreciative functionality versus what VMware offers today. It’s quite chaotic, there was 18 different distributions, I think at last counts today. It’s not concealing into a common compatible stack. And enterprise customers, we are looking at it and saying, do I really want to go backward in functionality right, for heterogeneous environments internally for something that isn’t nearly as robust than mature at this point in time.

And what I really want to do is move much more to a cloud operations environment and focus my resources on new apps and mobile developments and so on. For the most part, I don’t expect it to ever be successful coming back in the enterprise. I don’t expect the cloud – the open stack providers to be successful selling to service providers because they’re engineers of scale, they’re not going to pay for distribution, they’re just going to get the apache bits themselves.

So, it’s not clear that it’s concealing into anything, right. It’s not clear there is a good business model here over time. And I’m very doubtful that it will have meaningful penetration for the enterprise segment anytime soon if every. It feels like a lot more like Unix and Linux.

Phil Winslow – Credit Suisse

Well, actually that was my question, sort of like, is this going to become sort of the next Unix, and partially these guys were talking about on a patchy license versus GPL, I mean, that’s just inherently more of a risk to go down the Unix path?

Pat Gelsinger

I believe so, I believe it would tend to de-fragment and stay fragmented, you’re not going to have a singular leader emerge in that regard. But our strategy is somewhat – I don’t need to be right or wrong there, right. Our strategy is working, we’re getting success for our components in those customer segments that are adopting it.

In fact as we said on the earnings call, our business with open stack customers is growing faster than the rest of our business. This says our strategy is working, right. We are embracing it where it’s appropriate and we’re enhancing our business by accelerating into those areas.

Phil Winslow – Credit Suisse

Now, many of you know, it’s half the keynote without bringing out next year and NSX.

Pat Gelsinger

I knew we would get on this subject.

Phil Winslow – Credit Suisse

Eventually it’s like, it’s kind of a big deal, so I have been told. Let’s talk about NSX. Where are we right now you think in terms of I guess the adoption and sort of software to find networking, some people have asked. Is this like ‘02 or server virtualization but now in 2013. I guess, where are we, how do you think about sort of the customer acceptance of NSX?

Pat Gelsinger

It’s not far from accurate analogy say, this feels like ’03 and ’04 right with ESX. I do think that it would be faster than ESX, ESX it took us 10 years to get to the 70% workload. I think the network cycle would be shorter I’ll describe why in a second. But we are very early in that sense.

We have revolutionary technology that allows you to get extraordinary new efficiencies out of your network. And I believe will be the basis for right the most significant architectural shift in networking in 25 years. That’s the environment that we’re in. But we’re just at the beginning phases of it.

We’ve seen great substance of adoptions, financials, now we’re seeing high-end enterprises through our either in early production or in large PLCs today. So we’ve gone from just the leading right internet and service providers like the Rack Space and eBay, where they clearly moved into right enterprise customers like Citigroup, GE, right we are now right in those phases of adoption of deployment.

We’ve seen production service announcements like NTT CALM that we announced couple of weeks ago. So we are clearly – we’re moving into the early phases of production deployment. We’re seeing the ecosystem rally around us I think we’re now at 33 or 34 NSX partners. We’re seeing the first products being announced, we saw Paulo Alto networks, we saw like the F5 announcements. So number of these are now delivering products right, against their commitments to endorse and participate with the NSX ecosystem but this is still very early.

Now, I asserted that I expect the adoption rate to be faster than EFX, than let’s say that was a 10-year adoption cycle. This will be faster I think because much would be insertion and the momentum of virtualization is already underway. The virtual ports are already part of the ESX environment that customers have been deploying, right for the last three years. But that’s why we say there is more virtual ports than physical ports today.

Also customers have seen the value of virtualization right, it’s not snake oil, this stuff really works and they’ve seen the benefits over the last decade. But this won’t be a two-year adoption cycle. I would say it’s somewhere between the 5-year and 10-year adoption cycle but I do expect it to be less than 10 as a result of some of those early foundational elements that we can build on.

Phil Winslow – Credit Suisse

So, just to actually go to the point you just made there about the virtual ports versus physical ports because I thought that was a key slide from your Investor Day when you saw that crossover point and this year being that crossover point. I got a question for people like what does that mean though, is there a virtual port and then how does that tie into the idea of this faster hockey stick curve of adoption?

Pat Gelsinger

Sure. Yes, so what it means when we have it up there is that they are right in every version of ESX, it’s 4.5, right. It has the notion of virtual ports. And today those virtual ports are being managed by ESX, they have tools like vSphere manager to go enable them and etcetera. But essentially the only thing those ports are, the vast majority of those virtual ports, is taking a virtual port and connecting it to a physical port, essentially a wire.

But now that we have this large installed base, the virtual ports, as we roll-out NSX, we can start delivering value, we can now start automating them, provisioning them and scale, doing service insertion, virtual firewalls, being able to insert load balance of service training, we have a whole bunch of things that networking guys have been drooling over right for many years, now become very simple software driven services to enable.

And that’s one of the reason since we’re already sort of three years into the virtual port deployment that I expect that adoption rate to be able to be faster than ESX deployment where really there was nothing that you were building upon.

Phil Winslow – Credit Suisse

It was just server replacement?

Pat Gelsinger

That’s right. It has to load new software, etcetera and then you get OEMs and bundle it on their platforms etcetera.

Phil Winslow – Credit Suisse

So the key is the pump is prime?

Pat Gelsinger

Yes, there we go.

Phil Winslow – Credit Suisse

So, let’s talk about CISCO and your relationship with CISCO and NSX. And with the introduction of NSX, how do you think your relation with CISCO evolved?

Pat Gelsinger

Yes, it’s actually been strange, as a result of NSX. If you were CISCO they haven’t take illogical positions, I’m the leader in networking. I should do right, virtual networking. And we haven’t taken an illogical position item, right. We’re the leader in virtualization of course we’re going to extend it. In fact we already have been quite extending for the last three years to be in this discussion of virtual network ports already.

And now with NSX, we’re going to be able to deliver this independent control planes for next generation network architect. And we think that’s a reasonable position. We think customers are interested in having an independent software driven control plane, just like virtualization wasn’t delivered by HP, IBM, or Dell, it was an independent control plane and that was part of the value proposition for the customers.

CISCO would like it to be their own, they’ve announced ACI, right and proprietary extensions to new hardware upgrades, some have called the HDDC, the hardware decline datacenters. We’re building the SDDC, the SDDC and those stand in pretty smart contrast with each other.

At the same time we’ve taken the position that says we will support CISCO, right, we got blog postings, white papers etcetera of how NSX works with CISCO here. We’re going to make CISCO work better than you ever thought it could, because the compliment right at the software layer with the hardware capabilities, we think enable tremendous value. And we’re going to keep working with CISCO and enable their customers to take advantage of both.

And customers have responded very favorably to that approach and that will continue to be our approach to the marketplace. You run CISCO, I’m going to make it better and I’m going to make sure NSX delivers you a value proposition in combination with your CISCO gear. But we’re not going to be found any physical hardware right, not CISCO versus Juniper with etcetera because that’s part of the value of a virtualized control plane.

Phil Winslow – Credit Suisse

Now, continuing same thing, we think there are two keynotes, software either world. Now let’s talk about switching gearing for a moment from NSX to another one of your new products, vSAN, is virtual SAN product. I don’t think the audience is necessarily is familiar with that as NSX. Maybe just describe that in – what are your goals I guess with virtual SAN and how does that fit into sort of the broad, be more vision on software defined datacenter?

Pat Gelsinger

Yes, and what virtual SAN is and there is actually two things that are part of it. One is a software driven policy and the other is a new tier of storage. And if we keep those apart, the new tier storage vSAN is basically we take local disc in the server and we turn it into a storage rack.

Now, why is that significant? Well, many cases those discs were already in the server and not doing anything useful. So now we’re turning them into a local low cost storage but it’s in the server so it’s high performance, it’s right next to the workload. So you have a low cost, high performance storage tier, that’s flashed centric and over time, our vision is that hot data, hot storage migrate to that server storage cluster, and that enables a new tier of virtualization driven storage.

Of course if hot data has migrated into that compute tier, right, that means that the rest of data is colder and allows you to have more cost optimized deployments having large sets of storage rates in the network, hot edge, cold core. It would be the architectural evolution that we see underway. And vSAN is that technology that’s delivering that software driven storage array.

The second piece is this policy layout. Because what you want to be able to do is eliminate many of the manual processes just like on the networking side, just like on the compute side, right, provisioning this line, provisioning that particular capability. So with SPDM the sellout of storage policy manager, what we’ve done is we’ve now describe how storage you need, what performance you need, what resilience characteristic.

And now you ask the hyperviser right, and management tool to go implement those policies for you, whether it’s being driven by vSAN or whether it’s off a day, storage array somewhere else in the network, so that’s very much automating the operations right of your storage environment. Those are the two critical components vSAN and broad data today will go to general availability in the first half of next year. And these policy mechanisms are part of the vSphere five to five that we started shipping in August.

Phil Winslow – Credit Suisse

We’ve got multiple more questions but I’ll ask one more before opening up to the audience for Q&A. I guess, when you think about all these new products, I mean, lots of new products, it’s been more NSX, virtual SAN, hybrid cloud service, vCloud 3, vSOM, how do we think about these guys contributing to growth when you talk about that long 15% to 20% guidance, how do we sort of layer these into our mind?

Pat Gelsinger

Yes, well, in ’14, the opportunity to be driving the suites, the vCloud suite, vSOM, management is the key driver with the most so that would continue to be a huge focus, we built up our specialty sales to go drive that. And the EUC growth next year that again we invested in the specialty sales, it would also be the key financial drivers of ’14.

As we go into ’15 and ’16, that’s when we expect we allude from these are really architectural winds with NSX, right, the broader enterprise adoption, so that will accelerate our growth. we’ll move from the early phases of building pipeline of BCHF, to actually deploying and seeing customers ramp at scale. And we’ll start to deliver substance of value out of the storage products as well.

So those would be the three accelerants of our ’15 and ’16 growth strategy building on top of that core vSphere suites and management and EUC products of ’13 and ’14.

Phil Winslow – Credit Suisse

Got it. All right, well we got the final 10 minutes here for questions from the audience. So, if you could raise your hand and mic up here at the front.

Question-and-Answer Session

Unidentified Analyst

Desktop virtualization market, why that hasn’t evolved as rapidly as some people thought it would? What you guys are doing there competitively and then AWS moving to this desktop as a service?

Pat Gelsinger

Yes, so on the DDI market, overall we had good growth rate in Q1, Q2, Q3 in the Americas was not as strong, it was strong in APJ and Europe. I think there are a couple of reasons for that. One is, we haven’t feel – we were a bit slow in getting our specialty sales in place so they didn’t ramp in the productivity as much as we would have liked to see.

There was a whole raft of these storage products the number one economic driver of DDI is storage. And with the whole raft and new flash driven storage products, where the customers are pausing and their PLCs as they look at those new storage right capabilities and the many cases that turn economics for being negative to positive for DDI deployment.

So yes, we do expect that to become an accelerant even though I think it caused a bit of a pause. And also customers are looking for the complete story of not just DDI but also how do you handle all of my devices including my mobile devices as well. And the whole mobile category is great, in a much more nascent phase of different opportunities and products that we really delivered our products in Q2, a complete suite of those capabilities.

So I think for a variety of those reasons, right, and some of the challenges that sit just facing, Q3 was just not a good quarter in that respect. We do think this will be a growth driver we are looking for a good Q4, as we indicated on our call.

With regard to Amazon and their announcement of the desktop as a service, I actually view this is very good news in multiple regards for us. One is, we’ve already laid our strategy in place with our deskpro and acquisition. And we are substantially advanced in terms of feature functionality, customer adoption, service provider deployment of that so they announced their attention to have a product next year, we are already in the marketplace seeing a ramp.

They’re just sort of – in that sense validating the categories, validating our leadership, their pricing was not very competitive whatsoever. So Amazon now for the first time in the cloud space is no longer an intellectual leader, product leader or pricing leader. So to me I thought that was a great statement from them.

Unidentified Analyst

Hi, thanks Pat. A question about turnover, there is a lot of concern about the turnover announced and the perception that there are lot of resumes floating around the valley from VMware. Could you just comment on that, the actual turnovers and that perception of whether that settles them?

Pat Gelsinger

We, clearly as we went through the management transition, as we went through the focus and project area shifts, there was a bit of an acceleration of turnover. We clearly had some executive turnovers as well in that process.

We have stabilized the management team. I feel very good about the leadership team we brought in, world-class leaders, Sanjay Poonen and Tony Scott, Bill Fathers, Jonathan Chadwick, we’ve now started out to build out the next layer of the leadership team with great hires both in the technical and in the leadership grants. And our attrition rate have begun to decline, right.

And I put a lot of attention on this so we’ve seen, we feel like we’ve turned the corner on that and VMware is seen as a cool innovative place to be just named number three in terms of innovation coming off the momentum of VMworld, right these groundbreaking new technology announcements. So, overall I think we clearly addressed that issue and are seeing it now in the statistical results of our turnover and hiring rates.

Phil Winslow – Credit Suisse

Other questions from the audience? Otherwise, I will continue with some of mine. We can just repeat it.

Pat Gelsinger

Yes, I think building a little bit on the last comment, if I were in a DGFC, right. This was not a bad strategy on his part, in a sense that he needs to prove himself as a valid enterprise supplier, not a new app developer right, value proposition which is proven over the last several years, but you got to somehow say my service is quite suitable for enterprise customers.

And he doesn’t have good SLAs, he doesn’t have the right architecture, right, he doesn’t have a tenanted network, right, there is many things he doesn’t have, he’s just trying to reach in this enterprise customer.

So to start to layer unique enterprise services, like desktop as a service on top of that is for him a way to start reaching into those enterprise of customers so not a bad strategy on their part to begin, to reach right in that way. That said, like I commented before, their service they announced the weak service that doesn’t have very features, substantial feature or capabilities coming out sometime next year in this regard.

So I just reinforced our leadership position in this category overall. And clearly we are aiming at the enterprise customer, that’s our customer they were building on that momentum, and we really see this as an opportunity for them to be validating the category that we’re clearly a leader in.

Unidentified Analyst

I mean, that’s very interesting because to your point they are trying to move and they are trying to change but they’re trying to, we know VMware, I mean, I’m sorry, we know Amazon is a company that attacks and changes marketplaces. But it don’t necessarily extract a lot of profit margin, maybe they do with a reinvested. But the point being is it looks like they’re trying to find other profit pools within computing and IT, and now they’re trying to move up the application to deck. And do you agree with that or how would you look at that?

Pat Gelsinger

Amazon, clearly has done a lot of things in terms of innovation, with respect to the cloud. I think they’re reaching to the enterprise would be very challenged – very challenged. And right, as I said, they’re just top of the service offering, they announced pricing and this was not competitive at that level, it was not – go pence full out of the cost per client per year, right.

So what they describe this is not a very attractive offer, right. So to me in that sense it’s a bit surprising in that regard but I do think they’ll get more competitive over time just as they’ve done. But I don’t think enterprises are necessarily willing right to move to such a model for then I think this service offering that we’ve announced is far more tuned to what an enterprise customer will require.

Phil Winslow – Credit Suisse

Got it. Well, Pat, I guess our 45 minutes is actually almost up. We’ve got three minutes left here. So this last question here.

Pat Gelsinger

Better be a good one.

Phil Winslow – Credit Suisse

It’s kind of good, some good. But going actually back to that last question I asked, you talked about layering the growth in and the timing of these products.

But when you think about prioritizing of how big these businesses could get, when you think about NSX, hybrid cloud, virtual SAN – how do you rank order these? What are your top two that you think, okay, five years out, this is the biggest chunk of revenue of the new products?

Pat Gelsinger

Yes, yes. And if you look at that we said the $50 billion pan if we go back to our analyst, then at the beginning at the year about $40 billion of that was cloud. So that was the largest incremental for a piece that we’re pursuing we’re zero relative speaking. It’s got to be the largest incremental opportunity EST was $80 billion, STDC was $28 billion, as we go through that.

So, clearly the software decline datacenters where we were we have our largest strength, right, as we’re building off that as we move into management network and storage would be largest areas right for revenue growth, right. Within those, right, obviously networking is the largest new incremental area side of that. But each of the four legs is about equal in that $30-ish billion, $28 billion so they’re each about $6 billion, $7 billion, $8 billion respectively.

So, of those, right, clearly, networking, major new growth driver for us, management well underway, like the hybrid cloud, major new growth opportunity for us as we look forward. Storage you see, you see we’re very much – who positions themselves to be a leader in the mobile space, right. And that will be the key determinant of our ability to really reach into that $8 billion can to be successful and not just being number two. And the desktop virtualization right, we’re becoming number one in the complete end user infrastructure position for the future.

Phil Winslow – Credit Suisse

Perfect. All right, with that, I think that’s a good position to wrap up. And Pat, thank you for your time. It’s really executives like yourself who make this conference special. So thank you for your time coming down.

Pat Gelsinger

Thank you.

Phil Winslow – Credit Suisse

I appreciate it.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: VMware's CEO Presents at Credit Suisse 2013 Annual Technology Conference (Transcript)
This Transcript
All Transcripts