VMware, Inc. (NYSE:VMW) Stifel 2019 Cross Sector Insight Conference June 12, 2019 9:10 AM ET
Rajiv Ramaswami - Chief Operating Officer-Products and Cloud Services
Conference Call Participants
Brad Reback - Stifel Nicolaus
Good morning, everyone. I'm Brad Reback with the Stifel software research team. Thanks very much for joining us. Next up, we have Rajiv Ramaswami, COO of Products and Cloud Services at VMware, and Paul Ziots from IR. Thanks both for joining us.
Thank you, Brad, for having us here.
Excellent, so let me read the safe harbor statement first, and we'll get into the Q&A.
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 forms 10-Q, 10-K and 8-K.
All right, excellent.
So Rajiv maybe we could start from a bit of a historical perspective. You go back 10 years ago, VMware was a phenomenal one product company. But over the last several years, the products set has expanded dramatically. And I think investor perception has maybe not kept pace with the product rollout. So maybe update us on where you are today.
Absolutely. So VMware started out with its roots in what we call server virtualization, the ability to virtualize severs and build these highly efficient data centers. And that's really what took us through the first 10 and even 15 years of our history, and that's still a good component of our business. But over the last five to ten years, we've built up billion-dollar-plus businesses in a number of adjacent areas. The first one was management; the second has been networking, software-defined networking; the third, we're getting there, is actually – close to getting there is storage; and the fourth is end user computing.
So each of these businesses now are in that $1 billion range. Now as we've expanded in these adjacent areas, our vision has gotten a lot broader and very relevant to our customers today. So if you look at where we're going today, we are on this mission to deliver any applications, right? Our customers are interested in applications. They're interested in running their current applications. They're interested in transforming themselves with new applications that will enable them to conduct business differently in this digital world.
So our job is to help them run those applications, whether it be traditional applications or whether it be modern applications. Help them build those applications, okay? And give them the flexibility and freedom to run those applications wherever they want on any cloud of their choice. Those applications could be running inside their data centers, they could be running in the edge of their infrastructure, they could be running in the public clouds. So the ability to deliver any application on – from any cloud [finally in the] [ph] last piece to the users, right?
The users are consuming these applications on a range of device. People have PCs, they have Macs, they have iPhones, they have Android devices, and they keep on being – they're out there everywhere consuming these enterprise applications. And so our job is to enable those applications to be delivered from any cloud to the device of their choice.
So that is the broad vision that we're driving. Now within that, I just want to say how are we relevant to the initiatives today, right? So if you look at that context, what are customers trying to do today? They're all operating in this hybrid cloud world and the ability to run across multiple data centers, hybrid cloud, multiple public clouds. So we enable them to run in hybrid clouds. We enable them to operate across multiple clouds.
We enable them to go build modern applications. People are worried about networking and securing all of these applications' users' data. We enable them to do that. And the last piece, our end user computing, is about how do you improve your employee productivity and experience with the digital workplace. So that's the broad set of activities that we are engaged with, with our customers. And that's why our product set now has expanded, our portfolio is broad, and we are more relevant than ever to our customers.
Great, so may be building on the hybrid cloud theme. So several years ago, the combined EMC VMware, I would say, took a very cloud – single cloud focus trying to do it themselves. Post the Dell deal, you signed this fantastic agreement with AWS. You've now expanded that to Azure in a different form, I understand that, and have others as well. So maybe give us an overview of where you stand today, how the partnerships differ amongst themselves.
So, when we say hybrid cloud, we have a unique ability to deliver this hybrid cloud.
Now our customers, what are the customer problem again? So they want to be able to run their applications wherever they want, right. Cloud of their choice, AWS, Azure or their on-prem data centers. What we do is to provide a consistent software stack that can run across any of these environments, on their data centers, in AWS, in Azure, in IBM Cloud and a number other cloud providers. The benefit of having a common software stack that we provide, we call it VMware Cloud Foundation, is that from a customer perspective, these applications are completely portable, right.
When they run an application on our cloud, right, on a VMware stack, it can easily be lifted and shifted to any of the clouds of their choice back and forth. They don't have to spend a lot of dollars refactoring and creating new versions of these applications to run them on the cloud of their choice. Big, big cost savings and time to market, okay, their operations procedures are exactly the same. So the same consistent operating environment across all of these, they don't have to go retrain their people either.
So that's what we provide. And we're uniquely capable of doing that because we are a software layer. We're not wedded to any single cloud, right. And so we provide this across multiple clouds. Now let's talk about how we do it. On a broad level, our customers consume our offerings in three ways. The traditional way was we sell them software, they run it, they manage it themselves. We call that customer-managed, and a large portion of our business is that way. The other side of the equation is where we run the service and deliver the infrastructure as a service to our customers, and they just simply consume it and they run their applications and workloads.
Our VMware Cloud on AWS is our preferred choice for doing that, and we – in that scenario, we provide a service, right. The same stack is delivered as a service by us inside AWS data centers, right. That's the VMware Cloud on AWS offering, and that's what we call VMware-managed.
The third aspect is we also provide our software to partners, and the partners then run that as a service and deliver it to their customers. We call that partner-managed. Our Azure offering as well as our IBM Cloud offering fall into that category. We provide our software to IBM. IBM runs it as a service and delivers it on their – from their data centers to their customers. The same thing – Azure is doing the same thing. So Azure uses their – two of their partners, Virtustream and Cloud Simple, to deliver our VMware stack from their infrastructure to their customers.
So we have these three different models and all three coexist. And from a customer perspective, they get to have – operate in a consistent infrastructure, consistent environment across all of these clouds.
Do the economics look meaningfully different to VMware across these three different deployments?
Yes. From an economic perspective, actually, the bigger thing as you alluded to at the beginning here is a lot of our customers are still consuming one of our products, which is VCF, okay. Now when we get to the cloud, whether it be a VMware Cloud Foundation on-prem or in AWS or in Azure, now the customers are consuming our compute offering, VCF; they're computing, storage, V SAN; they're consuming networking, NSX; right. And so our overall offering now is compute, storage, networking, all put together regardless of which cloud that they're in.
So from an economic perspective for us, by the way, they're consuming more of our products, right? And of course, from a customer perspective, we have to be a competitive operating across all of these [indiscernible], and we strive to be.
And have you seen as customers have begun the movement – let's just talk about VMC on AWS for the more mature ones that have begun to move some workloads there that maybe didn't have meaningful networking or storage products from you on-prem that they're starting to bring some of that back on-prem as well to harmonize their environments?
Yes. I mean, so the large majority of our customers who've gone with our VMware Cloud and AWS only had VCF. And so now they go to the full VMware Cloud on AWS. Now the journey for many of these customers is it's a dual journey, right. They're not all going to the cloud or they're not all, right, getting out of their data centers, it's a combination. They're going to run their applications inside their data centers, and some of their applications, they're going to go run in the cloud. So when we go to this model, customers are – on their on-prem, they're moving from just VCF to this full VMware Cloud Foundation that also includes networking and storage.
And that same infrastructure now they're getting in AWS, right. And so the use cases actually tend to be very much along those same lines. So the three use cases that people are using here, right, let me walk through each of them. The first is many of our customers have a number of data centers. What they're looking to do is some level of consolidation, and so they'll run across fewer data centers, get – saves them costs, saves them operating issues, right? And then they'll run some of their data centers in the cloud, okay? That's the first use case.
The second use case is elastic capacity expansion where you need capacity temporarily perhaps, and you can easily get that back and forth in the cloud versus trying to do that on-prem. And the third is disaster recovery, right? So if you want to do disaster recovery, instead of having a data center just dedicated for that, now you can do that in the cloud.
I'll give you an example of a customer, right? This is a large outsourcer in India. We were just talking to them a couple of weeks ago. They operate 22 data centers around the world globally, and they're sitting out of India operating these data centers. They're finding it painful for two reasons. First, they have to operate all of these across – around the world and they don't really want to be in the business of operating data centers, number one.
Number two, for them, a key competitive advantage is being able to onboard new customers quickly and get them capacity as needed, and when customers leave they have to be able to exit as well. So that is a notion of being able to on board quickly, get capacity need as quickly as you can and then get rid of it when you don't need it, right? And both of those drive adoption of VMware Cloud and AWS, right? So exactly that model.
You don't have to operate all these data centers around the world, we can operate it for them in all these AWS zone around the world. We can get them that elastic capacity expansion and be able to onboard customers very quickly, and we can give them very robust disaster recovery. So that's classic all three use cases playing in a typical customer environment.
And as you think about a recent acquisition you did in CloudHealth, help us understand how that really helps customers manage these multi-cloud environments.
Yes. So if you look at these multi-cloud environments, customers use the VMware stack across these in a consistent way, that's one option. They're also using native cloud services, right? So they're using – they go to Azure, AWS, use their native services also. When you're operating in this multi-cloud world, what we find very commonly is customers lack visibility. Because what happens within these customer environments is multiple people are opening up accounts at AWS or Azure, with their credit cards, for example. They're going off and consuming services. So you don't really have a great handle on how much you're spending nor whether you're actually spending this efficiently or not.
So what CloudHealth does is it provides visibility into all the spend associated with any particular cloud, whether it's Azure, whether it's AWS, okay? And then once you have visibility into that spend, then they'll tell you how to optimize it. And so, for example, you might be consuming – you might have picked, for example, on-demand instances, which are quite expensive, and you're consuming that – you've been consuming that on a steady state for quite a while. It might be a lot cheaper to convert that from an on-demand instance to a reserve instance.
So we provide that kind of guidance, like cost, resource optimization. Moving forward, we're also going to provide governance, security, compliance, automation and management, our workloads across all of these clouds, application monitoring. So that whole set of multi-cloud management services is what we provide, starting with the CloudHealth platform.
Got it. Super helpful. Shifting gears. A few years ago, containers were going to be end of you. Maybe update on – us where you stand on that, and actually, the opportunity that it's become rather than the secular challenge.
Yes. So why are containers important? Containers are a great way for people to develop modern applications and sort of building these applications is one big monolithic block, which is really how everything is built today. What that means is that those applications can’t really scale up easily. Any time you have to update an application, you have to update the entire application.
When you go with containers, you are building these out of smaller micro services. And what happens in that case is when you have to update the application, you only have to update a piece of the application. And at the same time, when you want to scale out, you can scale things out on a gradual basis, so which is why people are adopting containers today. Now how are they deploying containers? A vast majority of container deployment today is actually on top of VMs, inside VMs, and that includes container offerings from the public cloud vendors as well, as well as our own offerings.
So for us, containers have turned into a significant opportunity. Today, we offer a full set of Kubernetes-based container orchestration platforms. And Kubernetes has emerged the preferred way for customers to orchestrate their container infrastructure. So Kubernetes is an open-source project. We provide a fully supported upstream distribution of Kubernetes we call that essential. We also add life cycle management, we add networking and security and provide a turnkey enterprise version of Kubernetes that we call Pivotal Kubernetes Service.
And by the way, these offerings are developed jointly with our partner Pivotal. And we take that to market as an enterprise-grade Kubernetes offering that’s available, again, on-prem but also available in multiple clouds. So for us, containers have turned into a completely new opportunity for us to go help our customers modernize their applications.
And you mentioned Pivotal. Maybe you can just help us understand the relationship with Pivotal as you go after, to some extent, a platform as a service strategy with Kubernetes?
Yes. So Pivotal – we work together with Pivotal in building our application-oriented offering. So our Kubernetes offering is jointly developed, engineered and sold together with Pivotal. So we have engineering teams from both companies that came together to build this Kubernetes service. And then that service is taken to market and sold by both Pivotal and us and, of course, we share in the revenues, right, for it. So very tight alliance with them. Again, we see Pivotal delivering the full PaaS solution on top of this Kubernetes platform. We are going together to customers to help them with this application modernization journey. And that’s the relationship, and it’s going well.
Great. Let’s see if there are any questions in the audience. Okay. We’ll continue. Security is something I hear you talk more and more about over the last sort of year or two. Maybe update us where you are in that journey. How you view yourselves – or how you play with the pure plays in that market?
Yeah. I mean if you look at fundamentally the security problem here, at a very top level, security spend within companies is growing at about twice the spend of IT. And yet, at the same time, the impact – security threats continue to increase. And I would say largely, as an industry, we have not been successful at tackling security, okay? And if you look at where the security dollars are being spent, it’s pretty eye-opening.
So most of the money in security these days is spent chasing attacks, and attacks keep changing. Every day, you’ve got new people trying new techniques to come at you. And you look at the equation, it’s kind of very one-sided because the attackers only need to get in and break in once. And if they break in once, they get access to your data, they get access to your sensitive information, and they’ve won.
The defenders have to be right every time. They have to ward off every attack. It’s a very tough, tough equation there, right? The odds are on the attacker eventually breaking in. And that’s the challenge we face.
So what happens today is people put in – a typical enterprise puts in 30 to 50 security products, tries to protect their infrastructure, focuses on handling attacks, and it’s fundamentally broken. We think there’s a unique opportunity to shift the landscape in this direction, which is rather than spending all your dollars chasing attacks, focus on protecting what you know is good, right? You know your infrastructure, right? You know what runs on that infrastructure. You know who they should be talking to.
And by changing the focus to locking down what you know is good in your infrastructure versus trying to chase every bad actor out there, you have a much better chance of defeating the attackers. And that’s fundamentally what we do with our security strategy, which is build in security into the infrastructure, focus that security on understanding your applications, understanding user behavior and look at deviation from those.
We may not know the latest and greatest attacks, but we do know that, hey, this is how your environment is supposed to operate. And if there’s changes from that environment, we can tell you. And that fundamentally change the security equation. And how are we delivering that? We are delivering that intrinsically in the infrastructure products that we sell. It’s part of VCF, our compute offering; it’s part of networking, our NSX offering. Encryption is built into everything we do. It’s part of our workspace offering.
So as customers buy our products, they’re getting in that built-in security that’ll help them do a much better job of protecting their infrastructure with fewer products and less complexity than traditional ways of doing it.
And where do you think you are on the journey of educating the customer base around these offerings?
Yes. So if you look at fundamentally how far we have gotten on this, some of these products are further along in this direction than others. For example, with our networking product, NSX, we call intrinsic – what we call service-defined firewall, which is essentially doing what I just said. That represents about 40% to 50% of the use cases of where NSX is sold today. So very strong adoption of that intrinsic security value proposition in the networking space.
In the compute space, late last year is when we launched, essentially, built-in security with vSphere. And so that – again, we think everybody buying VCF should just go build in security as a part of it, right? No need to bolt it on later. And so that’s been fairly early. Similarly, on the workspace side – on the digital workspace side, we’ve started providing security analytics and user behavior analysis, and that’s also fairly recent over the last year. So security is an emerging play for us.
Great. You mentioned storage several times during the presentation. HCI, we had a very controversial area, we’ll say. So what’s your update on the HCI market?
Right. So hyper-converged infrastructure fundamentally started out by combining virtual compute and virtual storage offerings together. You put a bunch of disks, you put a bunch of flash drives together, you manage it all with software and provide enterprise-class storage to customers. And the value proposition is obviously better ROI compared to traditional ways of doing storage, easier management, easier CapEx and OpEx, right? So that’s how it started with HCI, and it’s grown very nicely in the market. It’s the fastest-growing segment within the storage market overall. We are a leader in this space.
Now if you look at where HCI is going, so HCI started from this compute-storage-only thing to now embracing the full stack. So when a customer thinks about HCI today, they’re talking about the full software-defined data center, which includes not just computer storage but compute storage, networking and automation all put together. That’s really VMware Cloud Foundation, which is really what we’ve been doing. And if you look at the products in that space, we are best-in-class in compute, we’re best-in-class in networking, best-in-class in cloud management, right, and a leader in storage as well now.
So that’s a journey for our customers, right? HCI is starting from compute storage, moving to this full stack offering. It doesn’t even stop there. From that, the next step in their journey is to get HCI on the cloud of their choice. So multi-cloud comes in here. Hybrid cloud is a key factor here, too. So with that, so we get them this full stack HCI inside their data centers, and we also make it available to our customers across all these clouds we talked about, AWS, Azure, IBM and 4,000 other cloud provider partners.
So that’s a very powerful thing for our customers to adopt, and that’s why we’re seeing our business doing really well when it comes to storage. I mean we grew, for example, last quarter 50% year-over-year, and you can compare that to what some of our competitors have been doing.
And have you seen customers rolling out the HCI multi-cloud offering fairly aggressively? It seems like that’s a fairly easy use case to get going with.
Yes. Actually, our VMware Cloud and AWS, our Azure offerings, IBM, they’re all HCI, right? So by default, everybody who is using VMware Cloud and AWS is consuming our HCI stack in the cloud.
Q - Unidentified Analyst
You mentioned earlier that more containers are being deployed on virtual machines, I think, [indiscernible]. And so is that sustainable? Or is that just a system where you’re playing because there’s so much hybrid cloud going on or because there’s so much legacy stuff. Is that situation sustainable? Because some containers are not being built on VMs.
Yes. And that’s a very good question. So the question really is: will containers continue to be delivered on top of VMs? Or over time, will there just be separate container infrastructures? And here are the reason why I think it’ll continue to stay on VMs because for the longest time to come, most of our customers are going to be operating in this environment where they have to manage multiple kinds of applications. They’ll have a lot of legacy applications, they’ll have some applications that are being refactored and modernized somewhat, and then some brand-new applications that they’re building natively on containers.
So they’re going to be in this hybrid application world as well for the longest time to come. And what that means is that, ideally, they would like to manage one infrastructure that can support all of these different applications versus having to manage different silos. And that’s one fundamental reason why I think containers and VMs will coexist in the same infrastructure. The second is that with VMs’ established technology, people know how to secure, how to isolate, how to network, how to manage VMs. You can take a group of VMs, make that available to your developers for them to run their container applications in a self-service mode.
So you can have a single infrastructure that caters to the needs of both a modern application developer as well as your legacy infrastructure applications, and that’s the reason why I think this will continue for quite a while to come. We’re seeing this play out at many places. I’ll give you an example from a large bank. So this bank was started out with their container development completely separately on an open stack platform, right? Separate, complete separate infrastructure for modern app development.
What the team found was they were spending all their all their time focusing on the infrastructure rather than building these new applications. Our customers want to spend their time building applications, not managing the infrastructure. So what they are doing is consolidating everything into a single VM-based environment, running on our VMware Cloud Foundation with containers being offered on top of that, which is what we start to see happening across multiple customers as well.
If you were to start a company from scratch, would you build it on VMware's platforms? Or would you kind of ignore that intermediate package and just do it through micro services, either AWS or your version?
Yes. So I think it depends – the question, again, is if you were to build a net new application essentially from scratch, where would you build it? Would you build it on a VMware platform? Would you build it on – natively on a Cloud?
And I think the answer is that it depends. If you are comfortable making a choice that you're going to be locked to a particular single cloud and you are going to be there forever, then I think you could go natively with AWS or Azure or whoever, pick the cloud of your choice, use all their services and build the application. If you think that you want the flexibility to run those applications in multiple environments, then I think the VMware platform makes a lot of sense, right?
Because with that VMware platform, you get the ability to build the application there and run it, for example, in one cloud or the other or even move it back onto your environment, if you choose to do that. In fact, even many of the largest SaaS companies who started out natively in the cloud are also looking at how do I bring back some of those environments in their own data centers. So it depends on what the objective is.
Now in either scenario, by the way, whether you're on a VMware environment or not, even with the VMware environment when you're operating inside one of these public clouds, whether it's an Azure or AWS, our customers get to use the entire set of services, the Azure services or the AWS services. So they do have the flexibility, if they want to, to use these great set of services available in the public cloud and still run their infrastructure on VMware.
Just to follow on to that, what's the additional development cost or time that it takes to do the steps to put it on your platform [indiscernible]?
There is really no additional development time or cost, right? If you go to, for example, a VMware Cloud on AWS or a VMware Cloud infrastructure on-prem, it takes the same effort to develop an application on top of that platform versus a native cloud platform, right? There's no real difference in effort. It's, I think, a choice you make.
Great. So we got about a minute left. Rajiv, maybe just wrapping it all up, what are the couple of key takeaways you want us to leave with from today?
Look, I think we've – we are delivering on this mission that's, I mean, consistent for the last several years of any application, modern and legacy applications, VM applications, container applications from any cloud, cloud of their choice, to our customer to any device. And within that – all with, by the way, built-in security. Within that vision, our customers are driving a number of these initiatives, hybrid cloud, native public clouds, modern application development, networking and security transformations and digital workspace.
We're fairly exposed and engaged with each of these initiatives that our customers are driving. We are very much focused on executing on these strategies. We had a good Q1, we're happy with that. And we are, again, focused on executing for the rest of the year with the strategy that we just outlined.
Excellent. Thanks very much.
Thank you Brad, it’s great to be here.