VMware, Inc. (VMW) Presents at William Blair 40th Annual Growth Stock Virtual Conference (Transcript)

VMware, Inc. (NYSE:VMW) William Blair 40th Annual Growth Stock Virtual Conference June 10, 2020 1:00 PM ET

Company Participants

Rajiv Ramaswami - COO, Products & Cloud Services

Conference Call Participants

Jason Ader - William Blair & Company

Jason Ader

Good afternoon, everyone. I am Jason Ader. Welcome to our virtual fireside chat with VMware Chief Operating Officer, Rajiv Ramaswami. Rajiv thanks for being with us Today.

Rajiv Ramaswami

Glad to be here with you Jason, virtually though.

Jason Ader

Before we begin, I am required to inform you that a complete list of research disclosures or potential conflicts of interest is detailed on our website at williamblair.com. In addition to statements made by VMware 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 VMware's most recent SEC filings on Form 10-Q, 10-K and 8-K. Finally, there should be a question box in the webcast. So, please submit any questions you have. In real-time during the fireside chat, so we can queue those up without any delay.

With that, out of the way, let's dive into questions.

Question-and-Answer Session

Q - Jason Ader

So first of all, Rajiv, in the tech space, there are pure-play cloud players with rapid growth rates and those revaluations and then there's legacy on-prem players with shrinking businesses that industries have kicked to the curve. And certainly with COVID-19 this gap, this gap between haves and have not seems only to be widening. Where does the VMware fit into that spectrum?

Rajiv Ramaswami

Yes. Jason, let me walk you through the evolution of our company because we've been consistently evolving here over the last several years. We started out as you all know with server virtualization and vSphere. And from there, we've built billion dollar plus businesses and network virtualization NSX, storage, vSAN, end-user computing, EUC, and that is sort of the second inning so far journey. And over the last several years, we've set out to also focus on what we call multi-cloud.

And today, if you look at where we’re going as a company, we're currently focused on five areas that we call five franchises. All of which are very critical to the transformation journey for our customers. And the five are application modernization, multi-cloud, networking, security, and end user computing, and all those five are absolutely square, front and center of our customers in terms of I'd say, look at post-COVID and the world post-COVID that the world goes more digital and in terms of focus on desktop issues.

So if you look at specifically on the cloud questions, multi-cloud specific area, we think the world is going to be a hybrid cloud world. Applications are running everywhere, they are running of course in the public cloud, they're running customer data centers and they're going to be running in edge locations driven by lots of data processing, local needs and latency requirements.

So, you're going to see a world where workloads and applications are running everywhere. And we are in a unique position from our cloud perspective to provide a consistent VMware's stack that runs in all of these locations. Its available now in all the major cloud providers site AWS both with our oldest and preferred relationship, but now we have Azure, we have Google, we have Alibaba and of course we also have IBM in the past.

And so this flexibility and providing consistency allows us to become a significant player in the cloud world going forward. Now, the last piece of that is, while we're on this journey to these five franchises and becoming a multi-cloud player, we are also transforming the Company to focus more on SaaS and subscription. A lot of our new offerings are all SaaS and subscription type offerings. In addition even the existing license business over time is going to be more and more SaaS in subscription.

Today, our SaaS and subscription business is around 21% of revenue, but it's growing very rapidly at about 40%. So again to go forward, I think they're very much focused on areas that our customers care about. Cloud is a very critical part of where we had tremendous value and we’re in the process of moving to more and more of the SaaS company.

Jason Ader

Okay, great. And from a customer perspective, I guess, what is the advantage of working with a consistent infrastructure stack?

Rajiv Ramaswami

Yes. So if you look at the cloud journeys of customers, customers have to manage their application portfolio. The application portfolio is both the existing applications that they have and also brand new applications that they are developing. Now, moving an app from on-prem data centers to the public cloud, this is a daunting task, right.

It sometimes needs to be re-factored. It can be quite an expensive proposition, maybe up to $1 million per app to re-factor the app for use in a public cloud environment. If they go VMware stack, they can move their applications assets versus without any refactoring. So, it is the fastest and easiest way to migrate to the cloud or existing application.

Second, they don't have to change any of their operating procedures or retrain their staff to figure out how to operate in a cloud environment. It's exactly the same tools, the same kind of security and compliance, the same management, all of that remains the same. So no retaining required. The third is flexibility. The VMware Stack is available on the cloud of their choice. If they want AWS, it's there. If it's Azure, it's there. And so, it's available everywhere.

And fourth, where are -- which are public cloud vendors that you pick on with the VMware stack, they also have access to the full range of native cloud services that are available at that cloud provider. So, this enables this also to be a platform for not just existing applications, but also for brand new modern application development. And so there's no further the value proposition as to why customers are adopting VMware hybrid cloud solution.

Jason Ader

Okay, great. Now, you guys just came off a quarter where you grew software billings in the mid-teens despite seeing a mid-single digit decline in core software-defined data center license sales. What does this say about diversification in your business? And how dependent are you on continued growth in that core SDDC software?

Rajiv Ramaswami

Yes. So, when we say core SDDC, by the way, we are talking about pure compute and management. And that's what we have defined the core SDDC just to be clear for everybody. Now, first of all, overall, this is a clear fact to the testament of the breadth of our product portfolio right and services with these five franchises that we talked about.

Now, when you look at compute and management, we are increasingly focused on the full cloud stack, VMware Cloud Foundation that includes compute, networking, storage, and management, all put together into an integrated solution. That stack is delivered on-prem as VMware Cloud Foundation, but it's also delivered on all the hyper scalars VMware Cloud and AWS, Azure VMware Solutions or Google VMware Engine as well as the IBM and Alibaba offerings.

So going forward, we're largely focused on that full stack, shelf sales motion, and less on standalone compute and management sales. Compute, for example, standalone represents I think less than 15% of our total booking at this point. And then on top of that on the stack, we are also overlaying our modern app platform which is our Tanzu.

And so together, right, the infrastructure stack with VMware Cloud Foundation and Tanzu which is which a Kubernetes stack on top of app modernization really are the areas of focus when it comes to cloud.

Jason Ader

Got it, okay. And then just back on the quarter. Can you walk us through, I guess, the impact that you're seeing so far from COVID-19? Just puts and takes in the longer term, what do you see is the main consequences of the pandemic just on overall an IT infrastructure?

Rajiv Ramaswami

So initially as COVID hit, most of our customers are very much focused on pricing and business continuity, looking to see how they can keep their lives alive, keep their employees working. And what we saw happened there in very short order was, digital transformation that will normally take several years happening in a matter of few days a week. For example, at VMware, pretty much on a weekend, we went to a completely distributed workforce.

And that of course, we saw that trend and that resulted in a little bit of a surge in demand for some of us specific offerings of our end-user computing, especially virtual desktops and device management. Our SD-WAN offerings, and of course our VMware Cloud and AWS and our Carbon Black security offerings, as these are all very closely tied to enabling a secure and distributed workforce.

Now, yes, I think past and initial trial space, we're kind of a new norm right now. Customers are settled in, they're operating. They know that the crisis is going to last a while, and now it's all about how can we operate efficiently and how do we operate in a way that's empathetic to our employees as well as our customers. And so from a trend perspective, this is going to continue to bode well for work-from-home type solutions and enabling the distributed workforce.

And also the overall multi-cloud stack, VMware Cloud Foundation, VMware Cloud and AWS and the app organization stack, Tanzu. They should both benefit as customers are scaling up their infrastructure on the one side and are becoming much more agile, when it comes to building new applications and going more digital. And cloud migration, a little bit work to our benefit again, as we have the best solution here.

Now coming out of this and as our customers start to think about new opportunities, Pat called this process in the future. And here increasingly now customers are looking at the world going forward, the time to figure out how to create sustainable competitive advantage, and a lot of it is around systematically bolstering digital, right? How do they go digital?

And in that journey as our customers spends on themselves and in fact accelerate the pace at which they transform, we see a natural tailwind for the five franchise platform that we have outlined, multi-cloud, modern app, security, networking and digital workspace. And we're also seeing customers investing and committing to perhaps a fewer smaller set of strategic partners office we hope to be one of them.

And then now coming on, I would also say like, more interest in subscription and SaaS, as customers also want to have ability and flexibility in terms of how to consume these offerings. And of course, we're coming to see obviously a significant impact at travel, entertainment quickly adapting, right?

And there are some other segments like telco, finance and technology, less of an impact public sector and also healthcare perhaps. So that's kind of what we see coming out of this and fundamentally I think customers are going to focus even more on transforming themselves digitally and embrace telco in the future which should bode well for folks like us.

Jason Ader

Okay, great. And then, on your computing side of your business, you talked about the surge that you saw. Do you expect to see like a big fall off, just a bunch of business as you know it was kind of pulled forward?

Rajiv Ramaswami

Yes. So, I think there was certainly an initial surge for example customers focused on scaling out their virtual desktop environments they have deployed to accommodate people working from home. Now, but in the longer-term, we still see sustainable tailwinds because this move to a distributed workforce is here to stay in permanent and we are still you know -- we're just only scratching the surface when it comes to the presence that we have in and the penetration that we have here, right?

I mean, there's hundreds of millions of devices in the enterprise environment. And, that's a lot of real estate for us to tap into. So, we are very focused on driving employee engagement and productivity, which I think is a long-term trend especially in the distributed environment. We're focused on delivering modern management to all the laptops out there with transformation windows, Macs across multi platform. And again, all that is going to become even more important as people are working remotely. So, that friendship continued.

Virtual desktops of course, I think there was clearly an initial search there, but we do expect again, the sustain ability for customers to be able to work remotely. And then last but not the least, coming together and user management and security together. So those four cases, I think have long-term trends that we don't continue to drive on end user computing business for the next several years.

Jason Ader

Okay, great. Let's talk about endpoint security and the Carbon Black acquisition. It sounds like there was a pretty clear rationale in conjunction with your end user computing business there. How is integration going so far? And then what is VMware's broader strategy around security?

Rajiv Ramaswami

Yes. So first of all, the integration is going really, really well. The team is integrated well. They are already starting to see the benefits of what VMware can think from a table, from an integration go-to-market perspective. So let me talk about strategy, and then I've talked about go-to-market, right after that and talk about how that's impacting the business. Of course, which of course as possible where we had great quarter with the Carbon Black, strong bookings growth, especially Carbon Black cloud, which grew triple digit and we are now at 15,000 customers.

Now when you look at the strategy here, our goal is to really build an strategy, security as much as possible into platforms, because from an industry perspective, security is being very much a bolt-on, our customers have to bolt-on 50, 60 different point product solutions to try and create a security architecture, super complicated and not necessarily really effective and super expensive.

So our perspective is to build security in as much as possible into endpoints into both the device endpoints and the workload server endpoints into the network, right and into the cloud, and build a cloud analytics platform on top of that. And fundamentally, they're able to therefore protect the entire scene into endpoint applications workloads with a differentiated, highly differentiated, lightweight agent AI powered cloud platform.

Now specifically for Carbon Black and how are we driving integration. So from a product perspective, of course, there's a standard endpoint security business there for them. When it comes to the workload and the server side, we have a unique ability to integrate Carbon Black with vSphere in an agent-less manner. So when somebody buys a vSphere-based environment, whether it'd be computer or full cloud stack, security becomes a natural attach to that and built in, as opposed to having to add a separate platform as bolt-on stuff, acquired a powerful differentiation and making it much easier for customers to deploy workload security.

And similarly when it comes to the endpoint, we are also doing integration of both Phase 1 with Carbon Black to try and bring endpoint in device management and security together, and again, making it easier for customers to consume. So, we have the ability to take Carbon Black platform and then really accelerate that from a product perspective by tighter integration with the rest of the portfolio.

From a go-to-market perspective, we do have a security specialist sales force that we got with Carbon Black, but in addition, we have the VMware core sellers who are of course now looking at endpoint security and making that a founder for example, all our business continuity solutions and building pipeline. We went immediately with Dell, as Dell on the box offering, where as part of their commercial PC business, security becomes an attach and that's been very successful so far already. We're starting to see good traction in terms of security attach on to the Dell PC business. And that's been helping us. We have been getting a lot of new customers along the wing.

And then as we get the rest of integration side, the tighter integration with vSphere and the tighter integration with end user computing, we will be able to drive that to our the rest of our go-to-market motion, right. When you said a cloud solution security becomes an attach and when you said a workplace while again we're able to attach securely to it. So, we expect to see all of this continuing to accelerate the Carbon Black business.

And last but not least, we also added a small tuck-in acquisition offering into the Carbon Black team to help build container security.

Jason Ader

Okay, great. And then looking at VMware Cloud on AWS which grew triple digits in Q1, was this trend driven mainly by COVID? Or are there other catalysts that you can point to? And then how are your partnerships going with the other cloud providers as well?

Rajiv Ramaswami

Yes, I would say, it was not driven as much by COVID. It was more driven by product maturity and much more integrated solution. We've had about two years to mature the offering in the market. We've also combined that with unleashing AWS reselling the offering as of a couple of quarters ago, and that is really also starting to help us.

So, I would say at this point, the use case of that fairly mature in the market and the product offering is pretty mature, cloud migration being an important use case, disaster recovery and elasticity in terms of being able to add capacity on demand very quickly as needed.

So out of all that, yes, we have seen a little bit of a tailwind from COVID-19 because customers do want more agile hybrid cloud solutions. And also the demand for VDI, right virtual desktop use cases, which can also be driven out of the cloud. So those, yes, but more so continued adoption of these big use cases.

Now, in addition to the AWS offering which used to be a preferred offering, it's the only place where we have VMware delivered service. We also saw the Azure first-party announcement in terms of Azure now offering a VMware -- Azure VMware Solution. And then also Google announcing their Google Cloud VMware Engine, as well as Alibaba and IBM we've for a while.

So, they've already -- we already started seeing pretty good traction with the Azure offering, only because of Azure's presence with enterprise customers. But again, those offerings are relatively new, right. And they will also go through a maturation process and of course, we are going to learn the lessons that the we learned from the AWS offering and apply those two these other cloud offerings as well.

Jason Ader

Okay. Excellent. Just to remind the audience, if you do have a question, please submit it in the question box.

I want to switch gears to Tanzu. Can you walk us through the main components here of that portfolio? And why you think VMware is uniquely positioned to help customers transition into modern apps?

Rajiv Ramaswami

Yes, so there are three components to the Tanzu portfolio. There is build which is where Tanzu application services, which by the way previously was several application services. And now, Tanzu application services have been re-factored to a Kubernetes back end. And that portion helps our customers build new apps.

Then there will be a running of the application itself, which is run on Kubernetes run time platform, which is called Tanzu Kubernetes Grid. Tanzu Kubernetes Grid is deeply integrated with the latest version of vSphere, vSphere-7 that we just launched, comes with Tanzu Kubernetes Grid. It embedded inside of vSphere.

So as part of all our cloud stacks, vSphere, VMware Cloud Foundation, Tanzu now stack getting the run time stack getting built in.

And so, we can therefore now attach standard to our cloud solutions, but Tanzu run time is also available standalone and can be deployed at any cloud.

The last piece is about managing, the Kubernetes environment, and there we have a couple of offering with Tanzu mission control, which manages Kubernetes clusters across multiple cloud environments including vSphere-based environment and non-vSphere-based environment, and then also Tanzu observability, which was previously our Wavefront acquisition, which provides metrics and observability into applications, modern applications.

So for us, I think, we look at this portfolio as a significant, really strong portfolio overall. And we launched a good chunk of this in March and it was the biggest for us in a decade. We had like 200,000 participants attending fully digital event. And the customer feedback is still very early days, but positive. As Pat said in the earnings call, 5 of top 10 deals in the quarter included the Tanzu portfolio. So in general, I think so far we are performing well in Q1 ahead of our expectations on subscription bookings with good renewals.

Jason Ader

Okay, great. And then on the competitive front, I guess who are you competing against mainly there and how do you differentiate the solution? And then secondly on COVID-19, do you think that delays kind of the timeline of when customers adopt Tanzu in these modern apps?

Rajiv Ramaswami

So, on the competition first, I think that there are five key players in this Kubernetes space. The top three cloud providers, all have their own offerings from a run time perspective. And then, Red Hat of course with OpenShift and of course the VMware, right. Those are the ones that we look at.

Now for us, when we look at Tanzu, there I think two differentiated fundamental. One is that ability to be multi-cloud, true multi-cloud. The ability to deliver build and deploy applications of any cloud of your choice without restricting you to a particular cloud, number one.

And number two, the native integration, the tight integration that we have with vSphere environment for all vSphere deployment therefore, it's just a natural thing to extend. For our vSphere customers and we're deploying vSphere. Now, all of a sudden now you enable a modern app platform to be built on top of vSphere.

So, those are the two major advantages and differentiations in terms of how we go-to-market with our Tanzu portfolio compared to the other providers. The cloud providers are obviously focused on their offerings. That doesn't have the integrations that we talk about with vSphere. And so, that's the first question.

I think to your second question, Jason on COVID and what that could do to Tanzu. I think it's a bit early for us to really say much about it. I don't know that it's an immediate tailwind given COVID. Now, I think overtime as customers do respond to COVID, there are opportunities for us customer needs for building apps.

One example was, we worked -- right after COVID hit, we worked with the UK's national health service, using our Tanzu technology to build a contact facing application for COVID. So that's just an example, one example of a fairly quick turnaround in terms of building an asset that could -- that was much needed and deployed very, very quickly.

So, it’s very early to say how this is going to turn out in terms of COVID, but I think overall in the long term, this just mean the customer going to have to go faster than that this is done, which means they have to modernize applications faster.

Jason Ader

All right, and we've got a few minutes left. I wanted to ask you just. How do you respond to some industry and investor criticism that VMware's biting off more than I can chew with all these new products and all the acquisitions that you've done?

Rajiv Ramaswami

Look, first of all, we feel pretty good about our recent acquisitions of Pivotal and Carbon Black. And of course, the Tanzu product launch and we are also feeling good about how these teams being integrated inside of VMware because the key focus of course after any of these acquisitions is to be able to bring them to bear. And this had like two big new pillars to our strategy. Security and application modernization, and both of these are super relevant to companies, as they come out of COVID and move forward.

Now again, I think what we are really doing is to simplify our company structure in terms of focusing on these five major solution areas of what we call franchises. And that's we're organizing both our R&D teams and our go-to-market teams around these. Plus, we want to make it again for us to be able to focus in each of these major areas and build solutions and make it easier for our customers to consume those solutions. And that's how we are managing this at VMware.

And then I think, in terms of going forward but new acquisitions and so forth, we largely expect to do small tuck-ins this year, right. We're not thinking about some big acquisitions at this point and we are starting to see some good value. We have done a couple of this year. We've done Octarine for container security for Carbon Black.

We just last week announced the acquisition of Lastline, which adds some sandboxing and network detection response capabilities for our network firewall offering. So, I think in general, we have a good track record of integrating and operating these acquisitions as well as executing across this portfolio that we built so far.

Jason Ader

What gives you that confidence that you can return to normalized double digit growth next year?

Rajiv Ramaswami

Our five franchises that we've talked about now continue to resonate very well with our customers and our CIOs, as they go through their transformation journeys. In the near-term of course [indiscernible] to do with work-from-home distributed workforce is accelerating, continued existing trends around multi and hybrid cloud adoption, zero plus security, edge to cloud connectivity, these will continue.

Our long-term view on tech hasn’t really changed. I think we’re on a 10-year cycle of transformation journey. And of course, there's clearly some near-term COVID-induced disruption, right. There is no doubt GDP is coming down. And I think Pat talked about how, look, I mean, tech spend will outpace the overall GDP spend as the economy recovers. And within tax, we think cloud and software spend will continue to outpace overall tech spend.

And so, that phase as we're squarely in and so companies like us, they are well position in that area which should emerge from this crisis even stronger as the economy recovers.

Jason Ader

One product that I haven't mentioned yet, but I know that you guys have talked about on previous earnings calls, it seems to be doing extremely well is VeloCloud. Can you talk us through what's driving that growth? And how meaningful that product is to the business today?

Rajiv Ramaswami

Yes. So, VeloCloud is a rapidly growing offering. It's part of the overall and NFX portfolio. It's our wide area network solution, SD-WAN solution. We are a market leader in that, if you look at Gartner Magic Quadrant for example. We are the clear market leader in that space. And the reason why this is being adopted and these are the reasons.

The first is, of course, when you look at a distributed environment, which is what we all live in especially distributed branch offices and so forth. Customers historically have been looking at augmenting their MPLS carrier connections with broadband internet.

And VeloCloud type offering provides a unique ability for them to reduce their ongoing operational costs in a significant way by tailing what they use for connectivity. It could be a combination of MPLS, not all MPLS, but some MPLS with combined with broadband, even combined with 4G, and now 5G, so significant ROI from just an ongoing cost benefit.

Number two is, more and more people are consuming cloud-based applications. We all for example, use email in the cloud or bunch of that that we consume from the cloud. And so from wherever we are, we need to be able to access and get the cloud applications. Even the Zoom call that we are on is a good example of that.

And so, one of the unique things that VeloCloud does is, it sends a traffic from where you're located, the edge location, directly into a gateway that we operate inside of the cloud. And from there, we then hand it off to the cloud provider of choice. So, it's almost like you have a direct connect to every cloud provider from wherever you are. And that makes for a much better user experience for consuming cloud based applications. So that's the second point.

And the third point, of course, is around just simply email management. When you have a large number of distributed endpoints, the ability to automate and manage all of these it's just critical. In fact, I am talking to you right now through a VeloCloud box that's sitting in my home office. And so, we've seen that as sort of a new emerging use case for SD-WAN.

Jason Ader

Okay, and then lastly, I think we've got about 30 seconds left. Any final thoughts you'd like to leave the audience with?

Rajiv Ramaswami

Look, I think we've talked about the five franchises that we're focused on app modernization, multi-cloud, networking, security, and digital workspace. And these are all front and center to our customer as we -- as they go forward in their journeys.

We're continuing to work closely with our customers around jointly innovating with them and making them successful, as they come out and they figure out the new normal and moving forward.

And I just want to say, wishing all of you here on this call, please stay healthy, please be safe. And there is a -- we're all going to come out of this crisis even stronger. Thank you.

Jason Ader

Okay. Well, thank you, Rajeev. Thank you, Richard. And thanks to the whole VMware team for participating and best of luck going forward and stay healthy as well.

Rajiv Ramaswami

Thank you, Jason.

Jason Ader

Bye-bye.