Must-know: Why VMware sees competition from Microsoft


Aug. 5 2014, Updated 5:00 p.m. ET

VMware sees competition from Microsoft

EMC (EMC) shares have rallied recently on news that Paul Singer’s activist hedge fund Elliott Management has accumulated a stake worth over $1 billion in the storage giant. According to unconfirmed reports, the fund expects to unlock shareholder value by splitting up the company and selling its parts, including its stake in its listed cloud and virtualization software unit VMware (VMW).

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VMware leads virtualization infrastructure solutions with around a 60% share of the server virtualization market. The company recently posted 2Q14 results above street estimates with revenue up 17% to $1.46 billion from $1.24 billion in the same quarter last year. Revenue from licensing increased 16% to $614 million while software maintenance revenue increased 20% to $737 million, and professional services revenue was up 8.2% to $106 million. The company said the revenue growth reflected the “strong customer adoption of our products and services.” However, net income declined to $167 million, or $0.38 per share, due to an impact from the $1.54 billion acquisition of the mobile security company AirWatch.

The management said on the earnings call that the second quarter saw higher renewal rates for support and for enterprise license agreements (or ELAs) or enterprise license agreements. They added that ~37% of the total second quarter bookings came from ELAs, which was the second-highest contribution for the company during the quarter.

VMware leads server virtualization infrastructure, but Microsoft isn’t far behind

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VMware was recently positioned in the Leaders Quadrant of Gartner Inc.’s 2014 Magic Quadrant for x86 Server Virtualization Infrastructure for the fifth year in a row. Other “niche” players in the space include Red Hat (RHT) with its KVM, Microsoft’s (MSFT) Hyper-V, and Citrix (CTXS) with its Xenserver. VMware said its VMware vSphere, the underlying platform of vSphere with Operations Management and the VMware vCloud Suite, is broadly utilized by enterprises, small and midsize businesses (or SMBs), hybrid and public cloud service providers, and as a foundation for the growing virtual desktop (or VDI) market.

Gartner said VMware’s competition is heating up with Microsoft, which is the only other company in the Leaders Quadrant. Gartner said “Microsoft has effectively closed most of the functionality gap with VMware in terms of the x86 server virtualization infrastructure.” On VMware, the market research firm said that despite customer satisfaction, challenges such as “concern over price and vendor lock-in remains.” It also faces a “difficult growth because of both increasing market saturation and competitive pricing pressure. The other concern is the rapid rise of Infrastructure as a service (or IaaS) cloud providers, particularly Amazon Web Services—based on Xen—as VMware has a smaller share of the newer, cloud workloads.”

The International Data Corporation (or IDC) named VMware as the leading data center automation software vendor based on 2013 software revenues. The IDC’s report, Worldwide Datacenter Automation Software 2013 Vendor Shares, noted that VMware’s lead in 2013 increased 65.6% over 2012 results and its market share now stands at 24.1%. The IDC said worldwide revenue for the data center automation market was $1.8 billion in 2013, representing growth of 22.1% over 2012. According to the IDC, the top five vendors in 2013, based on worldwide revenue, were VMware, IBM, BMC, Hewlett-Packard, and Cisco. They accounted for 68.3% of the submarket total.




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