VMware CEO: Strong NSX, vSAN, VxRail Growth Drives 2016, AWS Relationship Is Next

VMware's investments in leading edge data center and cloud technology are paying off it sees strong growth in those areas, and the potential for even stronger growth in the coming months.

VMware CEO Pat Gelsinger and CFO Zane Rowe also told financial analysts during the company's fiscal 2016 fourth-quarter conference call on Thursday that the company has laid a strong foundation for a successful long-term partnership with Amazon Web Services (AWS).

Gelsinger said VMware's hyper-converged infrastructure business is leading the market, and is not in the least bit threatened by Hewlett Packard Enterprise's planned acquisition of SimpliVity.

[Related: VMware Cloud For AWS: The Tech Groundwork Is Laid, Partners Look At How To Adopt]

VMware shares rose around 4 percent in after-hours trading.

VMware's fiscal 2016 ended on December 31, and its fiscal year 2018 will start on February 4. Fiscal year 2017, from January 1 to February 3, will be a "stub year," the company said, as it changes to fiscal year bookkeeping.

The new strategic relationship between VMware and Amazon to allow VMware software-defined data center workloads run natively on Amazon Web Services was unveiled in October, and development of the VMware Cloud and VMware's Cross-Cloud Services for AWS is going as expected, Gelsinger said.

While customer response has been "overwhelming" so far, VMware expects no immediate material revenue from the relationship in fiscal year 2018, Gelsinger said.

"[But] strategically, it has an immediate impact on our business," he said. "Customers say, 'Oh, I get it. I can continue with my existing technology.'"

Public cloud is clearly a part of enterprise customers' strategy, but customers look at the performance, cost, and governance issues and know the move to public clouds will not happen overnight, which means hybrid cloud will continue to be the focus of customers for the foreseeable future, Gelsinger said.

Fourth quarter finished off a really strong year for VMware's NSX software-defined networking technology, Gelsinger told analysts. VMware had about 2,400 NSX customers by year-end 2016, or double the customer count of late 2015 and is now enjoying a $1-billion-plus run rate, he said.

NSX bookings in the fourth quarter grew 50 percent over last year, Rowe said.

The fourth quarter also saw VMware close its first $10-million-plus NSX-only deal.

NSX is already integrated across all VMware's selling motions, including Cloud Foundation, Cross-Cloud Services and VMware Cloud on AWS, Gelsinger said. "We're excited about the overall momentum," he said.

VMware also enjoyed a strong growth in its hyper-converged infrastructure technologies, including its vSAN and its VxRail software stacks, Gelsinger said. Between the two, the company has over 7,000 customers. Bookings for the year were up by over 150 percent year-to-year, and are now driving an annual run rate of $300 million, he said.

"We're very confident we're the market leader in hyper-converged software," he said.

Rowe added that vSAN's top five deals in the fourth fiscal quarter 2016 were repeat customers.

Those repeat vSAN customers are important to VMware, Gelsinger said. "In many respects, this has just been a rocket ship, and we expect it to continue into fiscal year '18," he said.

When asked about the potential impact of HPE's planned acquisition of hyper-converged infrastructure vendor SimpliVity on VMware's own hyper-converged infrastructure business, Gelsinger said he was not surprised about the acquisition given his public comments that OEMs will eventually be the primary route to market for the technology.

VMware in the fourth quarter grew its overall business with HPE, Gelsinger said. At the same time, the company has successfully competed against SimpliVity and against HPE's existing hyper-converged infrastructure offerings, he said.

"We have great momentum for our offerings [and in] our confidence in our leadership in this market," he said.

The fourth quarter was also good for VMware's end-user computing business, where license bookings returned to double-digit growth, Gelsinger said. Both its mobility and its Workspace ONE workspace solutions did well during the quarter, he said. Mobile licensing bookings grew 30 percent over last year's fourth quarter, Rowe said.

Gelsinger said VMware's renewed strength in its end-user computing business stems from the fact that only VMware offers all the pieces of a complete solution. "That strategy is what we believe will drive the business in the long-term," he said.

The only part of VMware's business that saw relative weakness was its management licensing, which saw a single-digit decline year-over-year in the fourth quarter.

Gelsinger said he was not concerned because management's future growth is tied to other fast-growing parts of that portfolio. "Management is one of the legs, not the only leg," he said. "We expect sales to be tied to NSX."

VMware reported revenue for its fourth fiscal 2016 quarter of $2.0 billion, up about 9 percent from the $1.9 billion it reported in its fourth fiscal 2015 quarter. That included license revenue of $887 million, up 8 percent over last year; software maintenance revenue of $987 million, up about 4 percent, and professional services revenue of $158 million, up about 13 percent. About half of its revenue came from the U.S. in the fourth quarter.

The company reported GAAP income of $441 million, or $1.04 per share, in the quarter. That compared to $373 million, or 88 cents per share, in the fourth fiscal 2015 quarter. On a non-GAAP basis, income for the fourth quarter was $597 million, or $1.43 per share compared to last year's $534 million, or $1.26 per share.

For all of fiscal 2016, VMware revenue reached $7.1 billion, up about 8 percent over fiscal 2016's revenue of $6.6 billion. Licensing revenue for the year reached $2.8 billion, up 7 percent.

On a GAAP basis, VMware reported income of $1.2 billion, or $2.78 per share, compared to last year's $997 million, or $2.34 per share. Non-GAAP income for fiscal 2016 was $1.9 billion, or $4.39 per share, up from last year's $1.7 billion, or $4.06 per share.

Looking forward, Rowe said VMware's fiscal year 2018 revenues are expected to rise about 7 percent over the fiscal year 2016 to about $7.57 billion. That includes a 6-percent increase in licensing revenue to about $3.0 billion. On a non-GAAP basis, earnings are expected to hit $4.87 per share in fiscal 2018.

"Q4 was a strong finish to a very strong year, and we expect that to continue into fiscal year 2018," he said.