Current State of Virtualization

In my last article, my topic of conversation was the state of the cloud as it stands in the start of the year 2016. Following that discussion, I want to move a little further down the stack and discuss the state of affairs of virtualization, based on financial results and insight from conference calls.

At the start of 2016, VMware remains the current monarch of the virtualization space, but there are some areas of concern for the company as we move forward into the year. 2016 is shaping up to be a year when VMware will be more reliant on non-vSphere products for long-term licensing growth. Other products, like vSAN, NSX, and EUC, will be detrimental to continuing positive growth and sales. VMware fourth-quarter results show a revenue of $1.87 billion, a 10% year-to-year increase. VMware has lowered its expectations for 2016 somewhat by estimating the year-to-year growth at 2% to 4%, making the estimate for total revenue $6.785 to $6.935 billion.

Based on 2015 results, the key performing metrics of VMware to keep an eye on in 2016 are:

  • AirWatch bookings +50% Y/Y (prior Q +20% Y/Y)
  • ELAs now 42% of total bookings, with 6 deals at >=$10M
  • EUC (AirWatch +VDI) bookings now at $1.2B annual run rate
  • Cloud management penetration over 17% of installed base, up from 14% in 4Q14
  • NSX annual bookings now greater than $600M, up 100+% H/H – 1/3 are repeat customers
  • vSAN annual run rate now over $100M, +~200% Y/Y

There are couple of other areas of concern for VMware in 2016, one of which is related to Dell’s acquisition of EMC. This acquisition raises concerns with VMware’s indirect channel partners. Several large legacy and long-term partners have raised concerns as well, regarding what the future relationship between Dell, EMC, and VMware will be like if and when this acquisition is completed or if it fails. There is a lot of uncertainty with this deal, which raises questions that only time will answer. As for me personally, I am going to place my bets on the acquisition’s failing to close. I guess we will see what happens next.

Taking second place in the virtualization space at the start of 2016 is Citrix, based on its fourth-quarter results, with a revenue of $905 million. This represents a 5% increase year-to-year and a 6% increase for the previous quarter. Citrix saw a 5% increase in its products and licenses, a 15% increase in its SaaS revenues, and a 7% increase in license and support maintenance contracts. Citrix Professional Services saw a 24% decrease year-to-year, and this follows a 13% reduction from the last quarter.

The third-place finish, bringing in a third-quarter revenue of $512 million, is Red Hat. This quarter helped bring in a 16% increase year-to-year, following a 13% increase from the previous quarter. Red Hat is enjoying the results of the new Microsoft partnership to push further adoption of the Linux workloads on Azure. Red Hat had a solid subscription revenue growth of $475 million, which is a 16% increase year-to-year. Infrastructure-related subs are up 12% year-to-year, following a 9% increase from the previous quarter. Application development–related subs were up over 35% year-to-year, following a 37% increase from the previous quarter. Red Hat has estimated its fourth-quarter revenue forecast at $537 million: that would be a 16% increase year-to-year.

I am missing some information on Microsoft’s numbers to be able to properly measure them for this post. However, I do have some information from Microsoft’s December 15 results that indicate that revenue for its Intelligent Cloud business unit, which includes both Hyper-V and Windows Server, increased 5% year-to-year, with the previous quarter having seen an increase of 8%. Microsoft’s Server products saw a 5% growth year-to-year and a 9% increase from the previous quarter. Microsoft has seen growth in the annuity contracts, and that growth has offset the decline in its transactional business. This I expected, as Microsoft has been transitioning away from the transactional business and focusing more of its time and resources on its cloud services.

In conclusion, it is good to see the continued growth in the virtualization space, but I do believe this is the year for some shakeups, with Microsoft predicted to become the king of the cloud, based on revenue, and with VMware expanding NSX capabilities to enable the creation of secure encrypted overlay networks across both the public and private clouds. Finally, Red Hat is enjoying the push for more Linux workloads running on Azure. 2016 is shaping up to be an interesting year with regard to the current state of virtualization.

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