Sanjay Poonen, the chief operating officer of virtualization software pioneer VMware (VMW) was in town from the company’s Palo Alto, Calif., headquarters today, and was kind enough to stop by once again at Barron’s offices to discuss a number of themes, including last week’s deal by VMware corporate parent Dell to go public.
Poonen was last in our office back in December, and it’s always a pleasure to chat with him about big tech trends, as well as progress at VMware.
Dell’s deal sees the privately held operation swap its common stock for the publicly traded “DVMT” shares, which are a tracking stock representing Dell’s 81% stake in VMware. Not everyone is thrilled with that deal, as my colleague Andrew Bary wrote yesterday.
But Poonen, while not commenting on that story itself, repeated Michael Dell’s assertion, and that of VMware Chief Executive Pat Gelsinger, that the deal was the “best deal for shareholders,” and he noted that it had come after “deliberating for seven months.”
During those seven months, it was important, said Poonen, not to let all the chatter cloud VMware’s focus. There was certainly plenty of distraction, as investors and also customers wondered if VMware would be absorbed within Dell.
“A customer will joke or gossip at the beginning of a meeting,” said Poonen, “but after that you get back to business.”
As a result, “None of the speculation affected our business,” he told me.
I asked Poonen about Michael Dell’s assertion that he wants to keep VMware independent as it has been since Dell bought EMC, then parent of VMware, early last year.
“I take Michael at face value, but there is also a business reason to keep it independent,” said Poonen, which goes to his point that VMware has operated as a “Switzerland” in the infrastructure market, partnering with companies such as Cisco Systems (CSCO) and Hewlett Packard Enterprise (HPE) that are competitors to Dell.
“We’ve benefited a lot from our partnership with Dell, but also a lot from being shipped on HP servers,” he observes.
“If you have this incredible diamond” in VMware, he suggests, “but then if it loses that value because it becomes less of a Switzerland, then you’ve removed the value you were seeking” by absorbing the company.
Although “we are very grateful for the Dell partnership,” Poonen notes that in Silicon Valley, “there is value for employees to work for an innovator,” and “software is a very unique type of skillset.”
However, the question of what’s “synergy” between an independent VMware and Dell, on the one hand, and what is partnership in the broader IT market, to some extent hinges on things such as “edge computing” and “hyper-converged” computing.
Edge Computing Emerges
Edge is about moving some computing back to customers’ owned and operated assets, away from the steady trend of centralizing everything in the cloud. And hyper-converged is the rubric for when different computing gear, such as servers and storage and networking, are combined.
At the same time that VMware’s software can be used with HP servers, VMware’s software is also the key ingredient for Dell’s hyper-converged product, called “VxRail.” VMware’s software makes Dell’s VxRail “hum better” than it otherwise would, so much so that “other offerings” from Dell competitors “will be less competitive” than VxRail.
Switzerland, or Helping Dell Get a Leg U p?
Poonen offers that it will come down to whether customers simply want to upgrade what they’ve already got, what’s known as “brownfield,” or buy brand-new computing equipment, known as “greenfield.”
In the latter case, they will probably buy a fully integrated system, choosing between Dell’s VxRail and a Hewlett Packard competing offering, under the “Simplivity” brand.
“It’s a customer choice, whether they want to go to all-new hardware.” I observe that Michael Dell says IT is seeing a wave of new investment, as companies deal with a “tsunami” of data they have to manage “on premise.” He nods and says that “greenfield opportunities are just going to explode” with new investment.
We also talked about the company’s partnership with Amazon.com’s (AMZN) Amazon Web Services, which is allowing VMware to run more and more of its cloud-hosted data centers for customers. VMware is in multiple Amazon “availability zones” in the U.S. and the U.K. already, with Frankfurt coming online soon. “We want to be in every Amazon availability zone over time,” he says. He says he and CEO Gelsinger talk all the time with AWS’s CEO Andy Jassy about extending the capabilities of the partnership.
There are no quantitative stats Poonen can offer to show how the partnership has paid off, but he did point out that VMware has scored some important customers for the cloud service, including the Massachusetts Institute of Technology, which signed a “multiyear, multimillion-dollar” deal with VMware.
Game On for Container Technology
We ended with a discussion of “containers,” a technology for making applications more portable. Some think containers, of which the primary software tool is Google’s “Kubernetes,” could make VMware’s virtual machines much less important.
For example, Cowen & Co. analyst John Blackledge in May wrote a longish article called “The Container Age: Ready for the Next Level,” in which he sees “long-term risk” to VMware given that “VMW has been significantly less aggressive in approaching the container opportunity/threat than we had expected at the start of this journey (stark contrast with Microsoft (MSFT)).”
Poonen disagrees. He sees “decaying interest in OpenStack,” the Red Hat (RHT) offering for virtual machines, which he says “even Red Hat admits.”
“We will embrace open-source [software] all the way from Linux to Cloud Foundry,” an offering from recently public Pivotal Software (PVTL), in which Dell also has a stake, “to Kubernetes,” open-source software for containers created by Alphabet‘s (GOOGL) Google.
“It’s early in the game,” says Poonen regarding containers. He notes that Cloud Foundry is “significantly larger than OpenShift,” Red Hat’s container software. “I wouldn’t subscribe to the view that it’s going to be all OpenShift.”
“I would say it’s going to be, ‘Game on!'”
He notes, too, the “bulk of OpenShift customers run on top of VMware, probably more than run on OpenStack.”
“There will be some of each.”
You can also catch Poonen this evening with Jim Cramer on “Mad Money.”
VMware stock today closed down $1.91, or 1%, to $153.59.
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