COMPANY NAME

INDUSTRY/ VERTICALS

investment theme

VMWARE

IT Infrastructure, Cyber Security, Virtualization, Cloud, Data.

(1) Digital Transformation.

(2) Hybrid Cloud Computing

(3) Remote Teams

VMWARE STORY

AVORY BRIEF (5 MIN)

Disclaimer: Avory & Company was an investor in the company above at the time of this writing, however, this may change at any time.

This is not a recommendation of the purchase or sale of any securities mentioned. 

 

ELEVATOR PITCH (30 SECONDS)

VMware is well-positioned to take advantage of companies transitioning and amplifying their digital presence. VMware has historically been the dominant software vendor within on-prem data centers. As more workloads move to public clouds, VMware is positioning to become the gateway to orchestrate all clouds (on-prem, private, public, hybrid, multi), along with being a platform for managing, running, and securing applications. 

MANAGEMENT

High caliber management team and the backing of Dell given its ownership. 

FOUNDER LED

No. The company does have an entrepreneurial spirit to it. 

 

BUSINESS MODEL

Upsell existing customers, and broaden the product portfolio into new categories. 

 

QUALITY

High-quality business with +30% operating margins and $3B cash. Mission-critical product. 

 

GROWTH PROFILE

GDP plus 3-7% driven by digital transformation needs and category expansion. 

 

VALUE

10-13x operating cash flow multiple with leading returns on capital deployed. 

 

ECONOMIC MOAT

High barriers and mission-critical to organizations.

MANAGEMENT HIGHLIGHTS

TALENTED TEAM

Pat Gelsinger: Chief Executive Officer

Pat Gelsinger has been serving as CEO of VMware since September 2012, doubling the size of the company during his tenure. He brings almost 40 years of technology and leadership experience.

Sanjay Poonen: Chief Operating Officer

Poonen holds two patents as well as an MBA from Harvard Business School, where he graduated a Baker Scholar; a master's degree in management science and engineering from Stanford University; and a bachelor's degree in computer science, math and engineering from Dartmouth College. 

 
 

Company overview

GLOBAL LEADER IN IT

VMware is a global leader in cloud infrastructure and business mobility. Customers rely on VMware to help them transform the way they build, deliver and consume Information Technology resources in a manner that is evolutionary and based on their specific needs. The company is building a platform for IT professionals which goes beyond its core/legacy virtualization business. The platform is being built both organically and through acquisitions. Additionally, the company is transforming from on-prem only to cloud, to subscription and software. 

 

PRODUCT PORTFOLIO

EXPANDING PRODUCT PORTFOLIO

As expressed above, VMware is building a product portfolio well beyond their "run", "manage", "connect" businesses. They have recently moved into "build" with the acquisitions of Heptio, Bitnami, and Pivotal Software. The acquisition of Heptio was a critical move as Heptio was a startup out of Seattle that was co-founded by Joe Beda and Craig McLuckie, who were two of the three people who co-created Kubernetes back at Google in 2014 (it has since been open-sourced). VMware also went out and purchased Carbon Black to enhance and jumpstart its cloud security business. Many are familiar with CrowdStrike, however, Carbon Black remains a viable solution. One of their more promising segments is VMware Cloud Services. It enables customers to run, manage, connect and better secure their applications across hybrid and multiple public clouds, including Amazon Web Services (“AWS”), Microsoft Azure (“Azure”), Google Cloud Platform (“Google Cloud”) and IBM Cloud, as well as all devices in a common operating environment, regardless whether the underlying infrastructure is VMware-based.

VMware's platform approach is giving them a leg up within enterprises looking to streamline technology partners. Below highlights the most recent success in enterprise selling for VMware. We take this as clear evidence of a successful enterprise selling motion. 

BUSINESS MODEL

PROBLEM

Technology at scale is a complex task with various levels of requirements. Customers want best in breed solutions, that scale across resource types, are secure, and have a level of neutrality to each use case. 

SOLUTION 

VMware is pushing to move closer to the developer, while also providing flexibility for those who want to use on-prem resources, cloud, or a multi/hybrid approach.  

PARTNERS

VMware has more than 1,000 technology partners/resellers with whom they bring offerings to the marketplace and over 4,500 active cloud provider partners. 

TARGET CUSTOMER

Large enterprises with scale. Developers looking to build and then scale. 

VALUE PROPOSITION

The ability to provide an all in one solution that scales. 

SELLING MOTION 

Channel partners, direct selling, self onboard with SAAS products. 

COST STRUCTURE

High gross margin, with powerful operating margin levels around 30-40%.

REVENUE DRIVERS

The company generates revenue through licensing software under perpetual licenses or consumption-based contracts and related software maintenance and support, software subscriptions, hosted services, training and consulting services.

 
 

NOTABLE CUSTOMERS

ENTERPRISE FOCUS

 

GO TO MARKET STRATEGY

EFFICIENT SALES APPROACH

VMware uses a combination of resellers, partners, and a direct sales force in order to generate sales. They already have a large legacy customer base which they can sell new product offerings into. Additionally, as they add more SAAS and subscription offerings, we would expect marketing to become more efficient over time. As shown below, VMware has best in breed gross margins above 80%, and spends nearly 30% of revenue on sales and marketing. This makes them a difficult competitor as they generate over $10B in revenue, therefore $3B in marketing firepower. Their payback period is roughly 4 months unadjusted for acquisitions, and likely around 9 months on a normalized basis. Either way, their go-to-market approach has paid off. 

 

MARKET OPPORTUNITY

MORE PRODUCT = MORE MARKETS

VMware sits at the intersection of old and new and sits as a gateway to public resources. This reliance is driven by their software foundation, as opposed to legacy vendors predominately stuck to their hardware roots. This presents an interesting long term market opportunity for VMware which we believe is well in excess of $100B. 

 

COMPETITION

ESTABLISHED COMPETITORS

Given VMware's diverse product portfolio, they face intense competition both for infrastructure software, along with application software. For virtualization, they go against Mircosoft and Citrix. Within hyper-converged they go against IBM Red Hat, Nutanix, and HPE. Within security, they go against legacy vendors, along with new cloud solutions like CrowdStrike. They also face stiff competition within networking and other key categories. While competition is widespread, VMware does have legacy software advantages as many IT admins are already users of their product for on-prem solutions, and the company has a $3B marketing budget. 

ECONOMIC MOAT

Intellectual Property: They have strong brand awareness build on trust and reliability. Given infrastructure software is critical to the day to day operations of an organization, there is much less trial of emerging tech. Rather, VMware tries to be the ramp to emerging technology through partnerships and integrations. 

Switching Costs: VMware does have native switching costs build into its model. First, these solutions are critical to day to day operations, which naturally make it harder to switch. As they move toward subscription, these costs to switch become tied to contract terms. In addition, as VMware deepens its product portfolio and attaches these solutions to existing users, we believe that this increases the stickiness of the platform. 

Network Effects: There are aspects of network effects that are built within developer and admin communities by which support systems and forums are littered with knowledge. While these are further gaining steam, we would not indicate this as a moat at this time.

Low-Cost Production: None 

 
 

METRICS

ORGANIC GROWTH WITH A HIGH MARGIN OPERATING MODEL

VMware has consistently grown revenue 10-15% organically driven by its success across its product portfolio. Their efficient marketing has led to over 80% gross margins while maintaining 30-40% operating cash flow margins while generating 4-9 months payback. The company trades near a 13x operating cash flow multiple.

Disclaimer: Avory & Company was an investor in the company above at the time of this writing, however, this may change at any time. This is not a recommendation of the purchase or sale of any securities mentioned.