VMware Reports Strong 2016 Growth and Dismisses HPE Threat, but Needs a Plan to Protect New Businesses

C. Drake
C. Drake

Summary Bullets:

  • VMware has emphasized the importance of emerging businesses such as hybrid cloud and hyper-converged infrastructure to its 2016 revenue performance.
  • In order to safeguard future growth, VMware must pay attention to the rapidly changing competitive dynamics within these emerging business segments.

Presenting his company’s Q4 and full-year results for 2016, VMware CFO Zane Rowe noted the important contribution of emerging businesses such as hybrid cloud and hyper-converged infrastructure (HCI) to VMware’s overall performance. In Q4, hybrid cloud and SaaS revenue – a category that includes vCloud Air and SaaS offerings such as vRealize as a Service – experienced double-digit growth and accounted for 8% of total revenue. VMware has emphasized the importance of its Cross-Cloud Services initiative – commercially availability in mid-2017 – for the future of its hybrid cloud strategy. Another key element of this strategy is Cloud Foundation, a software-defined data center platform based on NSX, vSphere and vSAN for building private clouds and extending them to the public cloud.

Meanwhile, total customers of VMware’s vSAN and VxRail HCI software offerings exceeded 7,000 at the end of 2016, with bookings for the year increasing by more than 150%. Despite the strong growth, VMware’s HCI business accounted for $300 million, or just 4.2% of total revenue in 2016. In addition, repeat customers accounted for the top five vSAN deals in Q4, underscoring the possible dependence of VMware’s HCI business on its established customer base.

Although VMware CEO Pat Gelsinger seemed unconcerned when asked about HPE’s planned acquisition of HCI provider SimpliVity, the deal has potential to increase HPE’s own competitiveness as an HCI provider and shake up existing market dynamics. HPE has said that, at least in the medium term, it will continue offering its HC 380 and HC 250 HCI solutions based on VMware’s virtualization technology. However, HPE has also indicated a determination to cut both its and SimpliVity’s dependence on competitor technologies. Although breaking a dependence on VMware may be difficult for HPE to achieve, the perceived opportunity for HCI growth among non-VMware customers could be motivation enough for HPE to try. This would be in line with continued efforts to cut EMC assets from HPE product lines since the completion of Dell’s acquisition of EMC. It’s notable that VMware’s parent company, Dell EMC, also recognizes the potential for HCI growth among organizations that don’t use VMware equipment. This recognition is reflected in the continued commitment of Dell EMC to its XC Series HCI solution based on its partnership agreement with Nutanix (recently extended to 2021).

On top of the direct benefits of the SimpliVity acquisition to HPE, and the potential to shake up existing hardware and software partnership agreements, it’s likely that HPE’s acquisition of SimpliVity will fuel further market consolidation as OEMs purchase HCI software specialists and utilize the acquired technology to boost overall competitiveness. Such an acquisition may also be of interest to VMware as it looks to safeguard the continued growth and development of its HCI business.

Looking beyond HCI, HPE plans to use SimpliVity’s software to boost its hybrid IT strategy and its efforts to develop a multi-cloud, multi-IaaS platform, powered by automation software and composable infrastructure. HPE envisages SimpliVity becoming the software-defined storage layer that supports a range of new solutions. VMware should closely monitor these developments and assess what they mean for HPE’s ability to drive enterprise demand for hybrid cloud and hybrid IT solutions.

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