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VMware, Inc. (NYSE:VMW)

Cowen Technology, Media & Telecom Conference

May 28, 2014 10:15 a.m. ET

Executives

Steve Mullaney – SVP and GM, Networking and Security Business Unit

Analysts

Gregg Moskowitz - Cowen & Company

Gregg Moskowitz - Cowen & Company

Okay, good morning everyone. Thank you very much for joining. I am Gregg Moskowitz. I cover infrastructure software for Cowen. Really pleased to have with me Steve Mullaney. Steve is the general manager of the Networking and Security business unit over at VMware. Steve, thanks very much for being here.

So Steve is going to start by giving a presentation, roughly 10 minutes or so, or 10, 15 minutes, and then after that we’ll do Q&A. Just in terms of the safe harbor, statements made in these discussions which are not statements of historical facts 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 Forms 10-Q, 10-K and 8-K. So with that, Steve?

Steve Mullaney

Greg, thanks everybody. So okay, I have like maybe just 10 minutes, just kind of prepared remarks and then I think we’re going to do some Q&A.

So I have been in the IT industry for, actually would be 30 years this summer, and started my career at a company called SynOptics. And right after transition from kind of the mainframe model of computing to the client server model computing and you think about this massive transformation that we’ve made over the last 25 or 30 years, where you add thousands of users and hundreds in apps and go into millions of users and thousands of apps, and really has been kind of the model of how we’ve built data centers and built IT over the last 25 years.

The exciting thing is we’re going through another one of those transformations right now, call it mobile cloud, whatever you want to call it. But going to now mobile devices, iPads and phones and things like that, with billions of users and millions of applications, and really going to I would say more of this kind of agile Amazon like model for IT, right? And so if you – when you talk to CIOs of enterprises and even service providers this is a transformation that they are going through. They are going through this type of model, and it’s very transformative for what they’re going to do.

The great thing from a perspective of VMware is we’re uniquely positioned in the market to be able to deliver solutions based on this and this model of computing. Starting with the concept of a software defined data center, I have not met an IT leader that does not love the concept of a software defined data center. So they all understand, I need to become more like Amazon, I need to get this agility, I need to be able to provision my applications in minutes, not months. In order to do that, I have got to decouple using virtualization from all my infrastructure, not just compute, but the network as well as storage and with orchestration software around there and that’s what VMware does.

Now in order to access that software defined data center, you have to have a mobile management strategy. We recently acquired AirWatch, complementing what we are doing from a VDI and desktop perspective and really being able to give people a manageable window and secure window into this software defined data center.

And then increasingly what’s going to happen is people are not going to have just their data center, right? It’s going to be a hybrid model where I am going to have hosted data centers, I am going to have multiple data centers and so any strategy for this world have to be able to come from – include a hybrid strategy, and – but we are doing with vCloud hybrid services, vCHS, and this space is a great thing for our customers, you’ve seen some of the things that acquisition of Desktone, the disaster recovery as a service, these are great fantastic things that we can offer as one button type services to extend to our existing customers inside their internal data centers and be able to now have a managed environment.

One of the things that a lot of people are now realizing is as their departments go to Amazon, what they realize is they’ve lost this ability, they’ve lost control. What they are looking for is an Amazon like experience but in the security and the operational model that they currently have in the enterprise and this is what the hybrid cloud enables for us.

And so when you look at the growth drivers at a high level perspective of the company, in FY’13 and ’14 it was – it’s vSphere, it’s vCloud suites, it’s vSoft [ph], it’s the things you know about, and v within UC and VSPP which are partnership program with our service providers for hybrid cloud. As we go into 2015, these are the things that are going to become more meaningful. Networking and security which is what I own [ph] and we will be talking about that, VCM which is announced this year, Virtual SAN, which again will be – which will be a meaningful future direction in 2015, as well as I talked about AirWatch as well as vCHS. So these things in 2015 will become the growth drivers for the company.

To go back to SDDC, I talked about this, there is a – I call it the profession of faith. There is a belief system happening right now in IT for your data center. Do you believe in a software defined data center, or do you believe in the kind of the way you have been doing it to date which is more of a hardware defined data center. And the answer really is out there. In fact, software defined data centers have been around 10 years. When you look at what Google and Facebook and Amazon and the real innovators of data centers, 10 years ago they looked and they said, in order for me to build a scalable, secure, operationally simplified data center, I’ve got to decouple from the physical infrastructure. In fact, all those vendors actually make their own servers, they make their own networking gear and they decouple and they put the intelligence in the software.

The problem is for IT where – okay, if I am Google and I am Facebook, I own the application, I can put the intelligence in the software and I can build this wonderful data center that upon every metric that I could measure it, it’s better than the hardware defined data center. The problem is for IT, you may have 3000, 4000, 5000 applications that you don’t own. In fact, even Google and Facebook in their internal IT cannot do it this way because they don't own the applications.

So how do I put intelligence into something I don't own? You can't. What VMware does and [indiscernible] is you can actually at the hypervisor level, it is software but it allows you to use any application that you currently have today, make no changes and have it look like it's running on top of the software defined data center. So that’s effectively what we do – I mean if you think about what VMware is doing from a data center perspective, we are enabling IT – just the rest of everybody else to be able to operate in what looks like a software defined data center, and just like the innovative guys, Amazon, Google, Facebook and others.

And then by definition, when you start thinking about not just within one data center but multiple data centers as well as hosted data centers, by definition a hardware defined data center requires lots -- the same hardware in everyday center. There is no way you're going to be able have that, right? There is no way that you’re going to have the exact version of that OS, in that exact version of that hardware platform in every single data center, right? By decoupling you now give yourself the agility to deliver this software defined IT infrastructure not just within one data center but across multiple data centers which is the way the world is going.

The other thing that's really interesting for VMware is we like to call it the Goldilocks zone, so it’s neither too hot, not too cold, it’s perfect for the existence of life. The hypervisor is actually the perfect location for intelligence where we can now take things like firewalling, load-balancing, all networking services, security – not just L2L3 [ph], but 4 through 7 services and actually integrate them into the firewall, I mean into the hypervisor.

And what’s great about that is the reason this is a strategic high ground is it’s close enough to the application in the host since it has context. So it's not just looking at packets to kind of figure out what's going on, but yet it’s far enough away from the application such that it has isolation and the ability to enforce security policies without being turned off as it could be in the application.

And so by doing that, we’re really enabling a scalable model of delivering these services, and what you’re going to see from VMware is now not just the existing services go into the hypervisor, but you’re going to now see services that don't exist in the hardware defined world. So for example, vMotion from the server of virtualization perspective did not exist in the hardware world, there was no concept of moving of a physical server around, you would just never do that.

You’re going to see very similar things from us in 2015 around security and other networking functions that don't exist today because of the location, because of that strategic high ground of being in the hypervisor and understanding the context of the user as well as being part of the infrastructure.

So that’s all the prepared remarks I have for today and we will start to go into some Q&A right now.

Question-and-Answer Session

Gregg Moskowitz - Cowen & Company

Perfect, that’s great. Thanks very much, Steve. So maybe by way of getting started, and I think everyone in this room is probably very curious to hear a whole lot more around NSX specifically. And of course, you came from Nicira. But, if you could sort of talk about where we are today, have we begun to see any deployment in scale from an NSX standpoint, or is it a bit too early for that?

Steve Mullaney

So just as a background, I was the CEO of Nicira and then two years ago we were acquired by VMware and the timing of things have gone, for the most part pretty much what I thought it would do. Even at Nicira, we had some of the earliest customers, guys like eBay, Rackspace and others, were the most demanding, I would say from a scale perspective. So we were in production with them years ago, right? So where we’re at now is – we are past – we are well past the, I call it, the crazy lunatic early, early adopter people. That was years ago. Really I would say end of last year was the point where we hit, where we started getting I would say more normal enterprises, right? Classical, traditional boring manufacturing retail, beyond even the financial services. That looked at NSX and network virtualization and said okay I need to go and do this.

And what’s interesting is there's two things that have emerged. Number one, every single customer I ever talked to, honestly every single one loves the concept of a software defined data center, they know that strategically that is where they are getting. So every single person does that. What happens though with software defined data center and that thing is it’s so strategic and so important to them that isn’t something that they're going to go and implement immediately, because it involves humans, right? You’ve got all these silos that they now have to have work together. So the security team, the networking team, the storage team, the of applications etc. and I need to completely change the way I build my IT organization. This is a transformation and instead of having these individual silos, I need them to come together and I am going to build a software defined data center, so I am building one product now, it’s called the data center. So this is unbelievable, this is exactly where I want to go and let me gather everybody, we’ll get on the path. And that’s why what you see this year in 2014 there is a lot of, I’d call it, production trials and limited production environments because it's so transformative people just want to make sure that this is all good and this is something that my team can handle.

The other thing that happened though and this again started in the last year was – the next huge case, also everyone wants which is micro segmentation. So I talked a little bit about it in terms of the location of the hypervisor. I am not sure why it’s happened, I don't know if it's that – it’s the Target, CIO and the CEO of Target getting fired, I don't know if it’s public breaches, I think whatever happened over the last six months, all IT has realized now that, that doing firewalling at the perimeter of the data center is not enough, and that’s what – that’s what we’ve done. That’s what, we put a big wall at the outside of the gates of the data center and then once you go past that wall, you get to go anywhere you want. For some reason everyone has now understood that I need to start doing segmentation inside data center. So what they call east west traffic as opposed to north-south, not just coming in and out of the data center but actually once you're in the data center, I need to start firewalling and Forrester calls that a zero trust model. I think people used to think I trust in the inside, once you’re in the data center I trust you. Outside of the data center, I don't trust. At that perimeter, I put a firewall.

What people are realizing now is that’s not -- you can’t trust anybody, right? I think Target has proven that, because people get – they breach your partners, and then they come in the data center with the credentials of the partner and then once they’re in, they get free reign. The problem now is the amount of traffic inside the data center is 10 times the amount going in and out because of the richness of the applications. And when they look at doing micro segmentation in the hardware defined data center world, it means 10, sometimes hundreds of physical firewalls inside the data center which is usually tens to multiple tens of millions of dollars and then from an operational perspective it’s very brittle and when you – the VMs move around, the policy doesn’t move with it, it is incredibly difficult from an operational perspective to keep up with the policy.

Enter network virtualization where the functions the L4 through 7 functions are distributed and so now we can keep up with the performance which might be terabit of capacity inside the f data center because every host has 20 Gb line rate firewalling capacity. So as you add servers, you add more firewalling capacity, and the same time operationally when you move a VM from one point of the data center to the other, guess what moves with it, the policy, and then when you kill that VM, guess what gets killed, the policy. In a hardware defined world, guess what never happens. Policy never goes away, because they say, what’s that rule, someone says I think it’s for that application. Let’s kill it, look, I kill it. What is it going to ruin, so they don’t know. So you just get this complex mess of operational perspective. So we come in, and with network virtualization we solve the problem that people now really all understand that they need to solve. So what happens is they love SDDC, they love the vision, they know that they want to get there, but now they also have what I call the chasm-crossing application, which says I need this and I need this now. So just last month we’re talking to someone in the Army. We talked about micro segmentation, he says I have two things for you, where have you been all my life, and can I implement it tomorrow, right? That’s the kind of things, so it’s the combination of I would say the micro segmentation, I need this now with the software defined data center, of course, that's where I'm going, but it’s not something I can probably go do right now because it involves humans. So that’s what I see happening with every customer worldwide.

Gregg Moskowitz - Cowen & Company

And so, it's really a function -- and Carl actually at the last earnings call sort of talked about data center security capabilities becoming front and center. But, if you think historically in that virtualized security, you had Juniper with Outdoor never amounting to anything. Frankly, even VMware's own vShield on a standalone basis didn't do all that much. But, to your point is --

Steve Mullaney

And here's why -- because it’s the difference between virtual firewalls and network virtualization and distributed firewalling, so what’s the one thing that people always in data centers, they always vote connectivity over security every single time. If you degrade the performance, rip it out. So virtual firewalls have horrible performance, one gig at the most. So no one is going to use virtual firewalling because it limits the connectivity, it limits the performance of the data center. And no one will ever implement anything. So the first time because of our – it’s distributed and it’s in kernel, inside ESX, it gets line rate performance, so we do not inhibit the performance at all. That’s why this is going to get implemented and virtual firewalling to date had not.

Gregg Moskowitz - Cowen & Company

Perfect. And your microsegmentation, is that unique to the industry as it stands today?

Steve Mullaney

That’s totally unique to the industry.

Gregg Moskowitz - Cowen & Company

And also, if you could talk about your partnership with a company that is certainly near and dear to your heart based on your tenure, and that's Palo Alto. Maybe sort of talk about --

Steve Mullaney

I was the first VP of marketing Palo Alto Network, I was the interim CEO for 6 months, love the company. We have a great partnership with Palo Alto Network and it's actually great for both, it’s very unique actually, a lot of partnerships where it really is a one plus one equals three. Palo Alto, for the most part, we go to companies at the data center and they would be kind of one and done, they’d sell a pair of firewalls at the perimeter and that’s it, say what else you got, the customer would say that’s it. They go great. Inside the data center, again they have a virtual firewall but they have the same problem everyone else does – it doesn't have enough performance, so they really couldn’t sell it inside. Enter NSX, and our distributed firewalling capability, we have done a partnership with them, we’ve now integrated Panorama which is their management – their operational platform with our platform such that you can define policy at that one location, and it work automatically across our solution and their solution. And what we do is we don’t do the next generation firewall capability within our firewalling. So we will do kind of the traditional staple inspection firewalling capabilities.

But some customers may say, look, I do have some users or some applications where I want to do the advanced firewalling next generation capability, so great. What will happen is you can do traffic steering from our – so do have all the traffic go through our firewall because we don’t limit the performance and then the selective traffic that you want to go to their VM, we can steer that such that they don’t swamped with everything, you just get sent what they can handle. And it’s all integrated solution and then when the VM moves, guess what, the Palo Alto VMs along with it, all the policy moves along with it, it’s a great integrated solution. So it really is a very good complementary thing. Customers still need the perimeter firewall, so everything they are selling there, that remain, it’s just -- this is how you’re going to go and do firewalling inside the data center.

Gregg Moskowitz - Cowen & Company

Perfect. And where do we stand, Steve? I know it's still somewhat early in the partnership's trajectory or since inception when you announced it. But, where do we stand with regards to POCs? How has that been developing so far?

Steve Mullaney

Great, so we’ve got – we’re pulling them into customers, they are introducing us into customers, we have customers that have deployed now with the joint solution. And now we’re actually starting to do joint sales training and things like that. So my guess is it’s really going to accelerate from there.

Gregg Moskowitz - Cowen & Company

Great. And then if we look at SDN more broadly, so let's take microsegmentation off the table just for a moment and just kind of focus on kind of core networking capability. So, it's astonishing to me, frankly, just how many vendors in this space lay claim to having SDN when frankly most of them don't have a true SDN architecture. Be that as it may, competition is increasing. A lot of people are obviously vying for this space. And what would you say are the main differentiators, again, specifically from a networking standpoint, when it comes to NSX?

Steve Mullaney

So SDN, so here is my rant of SDN. I have no idea what SDN means. I know what network virtualization is, I know, I know how to solve customer problems with solutions. SDN, unfortunately became this thing that lot of the networking vendors grab and they said see, because network virtualization is about decoupling from the physical infrastructure. Network virtualization says I just need a physical network to do one thing and one thing only which is forward IP package. If you’re a networking vendor that’s horrifying, right? You don’t like that. So what they said was they commandeered the term and said SDN to us means software manipulation of our switches, that sounds nice, that’s dumb. You would never want to do that.

But if you are a networking vendor, how else do you lock people into your hardware and not have them be able to use something else, it has to be controlling my physical switches. So that stuff will never happen. So people building controllers and using OpenFlow and all that is absolutely nonsense. In fact, Martin Casado, who's the founder of Nicira, still VMware, he was the inventor of OpenFlow. That was not what he was going to be used for, that’s never going to happen. So any of that nonsense is actually nonsense. And that will remain a $0 billion market forever, mark my words, I have been in networking for 30 years, that’s exactly what happens. Network virtualization is completely different. Our whole thing is you don’t touch the physical infrastructure. This is like server virtualization. What if VMware was coupled to Dell? Would VMware be where VMware is right now? The whole point is to not be coupled to the server infrastructure. That’s what virtualization is about. That’s what gives you the agility. As soon as you tie it to an ASIC, you’re now bound to that ASIC and you need it everywhere and you are bound to the development cycles of that ASIC. Once you decouple and you make – you turn it into software, now you can innovate at software speeds regardless of the physical infrastructure that you have underneath this.

Gregg Moskowitz - Cowen & Company

It helps a lot. And maybe if we could elaborate on one specific vendor, and that's Cisco, because obviously, I get the question asked all the time. And if you look at ACI, and to be fair, we haven't yet seen APIC, their application policy infrastructure controller. So, that'll be coming out pretty shortly. So, maybe it's difficult again to do a full comparison. But if you were to look at ACI specifically, just wondering if you have any additional thoughts.

Steve Mullaney

Yeah I think there will be a subset of the market that will do whatever Cisco tells them to do. I mean that’s just the way it is, I mean you have a vendor strong as Cisco is always going to be a subset of the market that’s just going to blindly do whatever they tell them to do. And when you think about what Cisco is trying to do, Cisco -- with ACI came out and basically admitted that everything that we've been saying as VMware as the problem statement was true. Yeah, the network is a big problem. So they actually admitted it.

Now what happens though is what they say is the solution to that has nothing to do with this virtualization stuff. And we don’t believe in that. We believe in coupling to the physical hardware, we believe in the power of ASICs. We believe in hardware defined, and it has to be my hardware and by the way not the existing hardware you have in your network now, but my new hardware with my new ASICs and isn’t that a wonderful thing, right? And so as long as you upgrade and rip and replace all your physical infrastructure put in with my new physical infrastructure and then run my software, I will give you a lot of the benefits that VMware is talking about. That’s ACI. So in some senses, they are right. If you don't think about the solution and how you deploy it, they are saying a very similar thing which is, this is about applications, this is about users, this is about agility, and by the way the way I am going to give you the agility, if you’re Cisco, is off [ph] for me, and it’s all new hardware and you get to rip and replace. I have never met an IT person yet who wants to rip and replace their hardware. Meanwhile what we say is what you have is good, in fact, I’d tell customers I love Cisco, more than Cisco love Cisco, because I tell you that your existing Nexus and Catalyst gear is good. That’s all you need, you don’t need to upgrade. And we will give you all these benefits. So I think it just comes down to profession of faith, what do you believe in, do you believe in hardware defined and rip and replace, or do you believe in decoupling in virtualization and leveraging what I have now. But I think there will be customers that will say, nope, I believe in rip and replace and Cisco has never let me down, and there is some percentage of the market that’s going to go that way, and they will be fine.

Gregg Moskowitz - Cowen & Company

Now, John Chambers at their last earnings call did imply that they've been able to more recently win back a number of customers that VMware and that Nicira perhaps on a standalone basis had initially won. Not sure if you have any visibility into that or any thoughts -- .

Steve Mullaney

That’s pretty interesting, he – you can’t win back what you didn’t lose. So they never actually admitted they lost customers but okay, so now they are winning them back. It’s interesting, because the Nexus 9K, what’s the Nexus 9K, Nexus 9K is a cheap switch. It’s not ACI, now what they are saying is this is what will be the ACI capable switch. So absolutely there are going to be big customers, I know many of them that are going, and we encourage them to do this, absolutely buy the 9K, it’s a cheap switch, it’s from Cisco. Cisco is your vendor, absolutely, you still need the physical network. We love Cisco, most of our customers run on Cisco, it's a great cheap switch, use it. So what will happen though is they will go and say they are testing ACI, they’re not testing ACI, they are implementing a cheap switch.

So they are blurring the truth. And that’s what they are going to go and say. So a portion of it, that’s – yes, there are going to be people that are going to look at the 9K. Why wouldn’t you? It’s a great cheap switch.

Gregg Moskowitz - Cowen & Company

And then also, if you look at -- we sort of obviously talked about some of the benefits around network virtualization. Where does it stand today from a -- if you look at NSX, from a total cost of ownership perspective, TCO?

Steve Mullaney

So what we found is – depending on how you look at it and primarily with a SDDC, not imposing -- not forcing a rip and replace, that alone right there is going to enable a much lower cost TCO than a hardware defined. When you think of the pain and suffering that you go through of rip and replacing your entire infrastructure and all of your data centers, that by far outweighs everything. So what Cisco will do is they will ignore that, and they will say, oh, VMware is a tax right on top of this, where – but they've talking, as they look after, they’ve already implemented their rip and replace, you have to look at it from where you’re at today, that says I can take -- I can do this on what you have today.

When you look at that TCO, it’s easily 2 to 3 times less than a hardware defined. The other thing that happens is, as you start looking at like I talked about micro segmentation, when network virtualization enabling that -- even that alone is what -- when you are going to look at, I mean one of our early customers, last year was going to do micro segmentation, was going to cost them $10 million and 70 physical firewalls, it was $3.5 million of NSX. Now you think great, it’s a lot less from a CapEx perspective and then operationally it’s something they could actually deploy and use. So even that one use case is making its way and getting validated and approved from every CFO around.

Gregg Moskowitz - Cowen & Company

And if I were to take a step back, and you sort of think about any very significant enterprise infrastructure technology, Steve, over the years, and there's always a lot of work that has to go into making anything enterprise class. Network virtualization is different. So, I guess, with that said, occasionally we do get questions about the scalability and the stability of the platform. So, where are we today in that area?

Steve Mullaney

Yeah which is – so to me everything in life is about timing, it’s not about when you do things – if you do things, it's about when. So one of the things that we’ve been actually really good about is saying to the community – investment community 2015 is where things are going to get meaningful from a revenue perspective, from a VMware perspective. That doesn’t mean we’re not doing revenue – we are doing good about revenue, it’s just meaningful from a performance perspective, that’s going to be 2015 and that’s when things are going to ramp. What was the question?

Gregg Moskowitz - Cowen & Company

Around the scalability and stability –

Steve Mullaney

So what we are doing now – so 2013 was about getting those early customers, getting those – call it tens of customers, getting those insertions, proving it out, getting it ready. 2014 is now making that transition where I actually personally spend most of my time empowering the VMware Army. So on June 6 it's going official on the price list, worldwide channels NSX. And you don’t that unless you are confident that it’s the right time to do that. You do that too soon, you may have a problem. So we’re at that point where we are now ramping the army and that means VMware, and that means worldwide channels, and opening this up. We would not do that unless we felt like we were in a position where we're getting ready to now crossing that chasm.

Gregg Moskowitz - Cowen & Company

Perfect. Okay. Very helpful. Why don't I pause there and take any questions from the audience?

Unidentified Analyst

Just a follow up on that. So, there's -- it sounds like, based on what you just said and the fact that Cisco has not formally launched the complete solution, there's a lot of [inaudible] marketplace. But basically, if I -- in synopsis, what Cisco is saying and Frank D'Agostino just recently wrote this in response to an article that NSX doesn't scale, and it's expensive. So, can you maybe just focus on those? When you get -- now that you're going out in the market, can you [inaudible) that you're pricing it on a rental -- model, and ---

Steve Mullaney

So I guess what I would tell you is I spend most of my time with customers and I can tell you that none of these questions come up with customers. There is no confusion in the customer. The confusion is with the investor community seriously. And so what happens is Cisco I think is trying to create – because all of you as investors are trying to figure out how is this going to play out – what’s going to happen with VMware, do I sell Cisco, I’ve got to understand it. So there is a lot of interests and questions. And so Cisco has to defend that. So they are going to throw lot of these classic Cisco things. They are going to use Cisco math, and if you’ve been around for a long time, everybody knows what Cisco math. I mean this was big in the 80s, they pulled the old playbook. They do Cisco math, they’d say software doesn’t scale, software doesn't have the visibility, software this, that and the other thing, guess what, when you look at what the Amazon, the Google building a software defined data center, there is no metric you can look at that they are not in order of magnitude better than hardware defined.

Why did they not buy the next version of Cisco? Why are they going to a software defined model, because it is the right way to go. Darwin has spoken, this game is over. We have not played it out yet but customers and Cisco and me, no. Now that doesn’t mean they’re not going to go down without a fight. That’s going to happen. But there is going to be another period of six to nine months where it will still be -- from an investor perspective, it will be confusing because you won't be able to tell who's telling the truth. But it will happen.

Unidentified Analyst

To the question then specifically, now that you are rolling out price list, so forth, you have metrics, on scale, solutions, how many servers or –

Steve Mullaney

So here is the honest truth of scale. So when we were Nicira who were our first customers – so we will start up 50 customers, 1.0 product, who were our first customers? The most demanding data centers in the world that had megal scale requirements, probably not the best ones to pick in terms of being able to satisfy everything they need, I mean would you be better off picking the nice little department of a nice little enterprise that only had 10 servers, right? Unfortunately though, we just said we’re going for the elite of the elite because this is what this solution demands. Now when you do that and it’s two, three years ago guess what, you do have some scale issues, absolutely. Within our product we have probably increased the scale 100 times from the very beginning, and that actually to me is an attribute of it being software defined; that’s a good thing, because guess what, we didn’t have to wait for an ASIC spin, right?

When you go look at the hard requirements of the VLANs and other things, I can't scale – I need to wait for the next ASIC, you’re talking two or three years. With software, you can continuously improve. We’ve been able to continuously improve over hundred times from years ago. So what Frank is talking about are things that were years ago, but yes, of course, when you are small startup and you’re hitting those customers, you’re going to have scale problem. But for the enterprise, are you kidding me, like we are so far beyond even the financials, we go and talk to the financials and we laugh. They think well, we have some pretty big scale efforts [ph] here, and we go – all right, what do you need, and they tell us and we laugh. Are you kidding me, we have been working with eBay and Yahoo! And Rackspace and AT&T, those guys have real big numbers. You are nothing. So all of that is leftover and honestly it’s just part of the Cisco thing that they have to do to try to stay relevant.

Gregg Moskowitz - Cowen & Company

And there was also a question on term license or rental and just kind of the way you --

Steve Mullaney

Yeah, so we do it both ways. So we offer choice, so we offer it up as a term, on kind of a per VM – because lot of enterprise customers say I only want to buy like a SaaS model, I only want to buy on a subscription kind of term basis. Then there is other people that say this is so strategic to me, I want to own it. So I want to buy perpetual license and for that we do it on a per CPU basis just like we do with vSphere. And I think again the relationship that any vendor has with a customer is you deliver value and the customer pays you for it. If you don’t deliver value, they will pay for it. So you deliver a lot of value, they pay you a lot of money for it. And so we deliver a lot of value, we have not had – ever had a problem with a customer in terms of them saying you are too expensive, or I can’t handle it.

Again if you deliver value, people will pull their wallets out. So all the stuff will – once you know – at some point it will become very clear to everyone, who the winners are.

Gregg Moskowitz - Cowen & Company

Other questions? Steve, one thing I wanted to ask about, we were at the OpenStack Summit in Atlanta a few weeks ago. And so, there was a standing-room-only presentation that we attended with VMware. And VMware continued to espouse interoperability with OpenStack. But, maybe just sort of talk about the advantages in those cases of deploying NSX underneath OpenStack, if you will.

Steve Mullaney

Yes, I mean we created the networking portion of OpenStack, in fact, Dan Wendlandt, who was a Nicira guy is running all of OpenStack development within VMware. We’ve added a whole bunch of development – developers to that. We’re like I think the third or fourth biggest contributor to OpenStack as a company. So we continue to do that. I think where OpenStack is going to go, is OpenStack is going to become a framework for the industry. The individual code within OpenStack isn’t very good. Everyone admits to that. But what I think the industry is going to realize and it’s moving that way is as a framework for plug-ins and codes to fit into, it actually is going to be framework that I think a lot of people are going to agree upon. And so that’s why at VMware we don’t look at OpenStack as an enemy, we look at OpenStack as something that we want to embrace and actually make it better and make it such just that VMware and vSphere and NSX and VSAN and everything else that we do fits better in an OpenStack framework. If we can do that, then it’s great for VMware. So we don’t view it as a OpenStack is bad, we view it as OpenStack is an alternative, is a good framework that we want to make sure and it’s up to us to provide value and make sure that customers see that VMware in an OpenStack environment has better value than non-VMware.

Gregg Moskowitz - Cowen & Company

Perfect. And we've only got about 30, 40 seconds left. One last quick one for you. And I know you don't like the SDN moniker, but I'm going to throw it out anyway. So, Infonetics recently said that 2017 in their view is the year when SDN will go mainstream. We've talked to a number of people who think it's going to be sooner than that, some people that think it could take actually a little bit longer, just to get your view.

Steve Mullaney

Infonetics does not know what SDN means because no one knows what SDN means. So I don’t know how you can say that, but they have to sell reports. I know Michael Howard very well. So okay, great, 2017, there will never be a year of SDN. Okay. Well I will you is 2015 for network virtualization, that’s going to be the year and what will happen is everyone that does all their SDN analysis will just start looking at VMware and say, oh, it really was network virtualization, no SDN. And what we do is the philosophy of SDN, meaning, do you believe that software defined will be the way to go? Yes, I do, so therefore I believe in SDN but not capital S, capital D, capital N. There will be no SDN market.

Gregg Moskowitz - Cowen & Company

All right. Great presentation. We’re out of time, Steve. Thank you very much.

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Source: VMware (VMW) Management Presents at Cowen Technology, Media & Telecom Conference (Transcript)

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