Broadcom will begin shifting VMware customers to subscriptions from enterprise licensing agreements as it integrates the company over the next year. But there are already signs that VMware customers are beginning to look to rivals such as Nutanix.

During Broadcom's fiscal fourth quarter earnings call, CEO Hock Tan outlined the transition for VMware. In short, Broadcom will spend about $1 billion in transition spending for fiscal 2024, divest VMware's end user compute and Carbon Black businesses, and, more importantly, install a new revenue model.

For Broadcom, VMware's fiscal year contribution of $12 billion in revenue will give the total company about $50 billion in annual revenue. Software, VMware (excluding planned divestitures), CA and Symantec, will be about $20 billion of the total. Broadcom closed the VMware purchase Nov. 22. 

Tan said:

"Our strategy going forward is simply to enable global enterprises to run their applications across the other data centers as well as on public clouds by consuming VMware’s higher-value software stack. And to attract and keep these workloads across the environment, we are investing in a rich catalog of microservices tools. This will be our focus."

The other part of the plan is to convert VMware's installed base from perpetual licenses to subscriptions by the end of fiscal 2024. Today, 60% of VMware's revenue is perpetual. Like similar transitions to subscription models, growth will slow and then reaccelerate with more predictable revenue.

This VMware transition will occur as Broadcom's semiconductor and hardware units pick up steam due to generative AI infrastructure.

Constellation Research analyst Holger Mueller said VMware is seen as the lever to get Broadcom to grow at a double-digit clip. Mueller said:

"Broadcom needs a new spark to return back to double digit growth and hit Tan's ambition for $50 billion in annual revenue and $30 billion in EBITDA. The spark is VMware, which will have to show how much it can grow in the coming fiscal year. It is also clear that Broadcom wants and needs more revenue differentiation, with semiconductor revenue outgrowing the infrastructure software segment. That mix will change with VMware. And then we will see if Broadcom can make its software portfolio grow."

Tan said that VMware's business will revolve around VMware Cloud Foundation and the aim is to virtualize data centers across enterprises for multiple cloud deployments. "We are converting more and more customers step-by-step as they come up for renewal into this higher value stack, and we’re doing it on a subscription basis," said Tan, adding that even during the transition VMware will see double-digit growth for the next three years. Tan said this growth can occur due to "the fact that we are also upselling a higher-value product."

Broadcom expects VMware to be able to accelerate its cloud foundation products via partnerships with Nvidia, Intel and IBM. The game plan is to leverage VMware's platform to enable data centers to run AI workloads easily as well as recently announced updates.

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Tan said he has been meeting with CIOs in small groups and VMware's largest customers and they see the value of the company's stack.

What could go wrong? In a word, business model transitions usually give customers an excuse to look at other options. Nutanix, which reported its fiscal first quarter results at the end of November, is already seeing interest from VMware customers.

To be sure, there are a lot of customers that use VMware and Nutanix in a dual vendor strategy. Nutanix has a Red Hat partnership on OpenShift. That Nutanix-Red Hat option will also be an option for VMware customers.

"(Red Hat) competes against VMware on the application side, we compete with VMware on the infrastructure side," said Nutanix CEO Rajiv Ramaswami. "So, the partnership was very good from that perspective, good synergies on our side. Now, we have seen several customers adopt OpenShift on top of Nutanix, that continues."

Ramaswami said that even before the Broadcom-VMware deal was closed, Nutanix saw interest. "We did close some additional deals that I would consider to be influenced by the Broadcom VMware transaction," he said.

The CEO cited a global 2000 bank that had a dual vendor strategy but plans to standardize on Nutanix given the VMware transition. "They liked us. They were comfortable with us. And then now they have this additional trigger, and they were concerned about what would happen on the other side. So, they went with us as a sole vendor," he said.

According to Ramaswami, enterprise customers are likely to evaluate multiple vendors beyond VMware, but deals will also be unpredictable and cover multiple years. Nutanix could win deals or just be used as a negotiating option as Broadcom tries to transition VMware customers to subscriptions. Ramaswami, said:

"Many customers have signed multiyear ELAs with VMware, prior to the deal closing. And for those that have signed that gives them some time to evaluate options going forward. There certainly continues to be a lot of concerns around all the stuff we've talked about in the past, pricing, increased pricing, potentially dropping support levels, et cetera.

So, we have a significant pipeline of opportunities, and it's growing and a good degree of engagement with prospects, driven by these concerns. It's just difficult to predict timing and magnitude of wins."


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