Veeam channel chief Kevin Rooney isn’t surprised that customers increasingly are shifting from perpetual software licenses to subscriptions. But the transition is happening at a more rapid pace than he anticipated.

With its entire backup and disaster recovery solutions sold through the channel, Veeam has approximately 9,000 active partners in North America, according to Rooney. About half – 4,000 – are Veeam cloud service providers (VCSPs), added Matt Kalmenson, Veeam’s sales VP. During this week’s VeeamON virtual conference, Rooney and Kalmenson discussed with Channel Futures how partners are adapting to latest trends.

Annual recurring revenue grew 25% year-over-year in the first quarter, closely held Veeam said this month in its quarterly update. A key catalyst of the company’s growth is Veeam Backup for Office 365, which grew 156% for the quarter year-over year. Veeam now counts 6 million subscriptions among 175,000 customers, making it the company’s fastest growing offering.

We sat down with Rooney and Kalmenson for a close look at subscription services and more.

Channel Futures: At what pace are you seeing your traditional resellers move to subscription services?

Veeam’s Kevin Rooney

Kevin Rooney: We’re seeing more and more true hybrid partners. It was very distinct in the beginning. Either you were a full-blown service provider, or you were a traditional reseller that partnered with one of these guys. That is still happening more often than not. But now we are seeing partners doing both.

Matt Kalmenson: We are now able to go out to market however the customer wants to consume; that’s their option. And that goes not only with our partner program, but also with our Veeam universal licensing [VUL] mechanism, which gives mobility to where you want to use your license, whether it’s on premises or in the cloud, it allows you to move workloads back and forth and such.

CF: Is the universal licensing option driving more customers to opt for subscriptions versus perpetual licenses?

Veeam’s Matt Kalmenson

MK: We have our traditional sales organization, where customers can use our backup or DR capabilities along with our other technologies. But they don’t want to own that license; they just want a full one-stop shop. They typically go to one of our service providers. While they don’t pay for the license, they pay for their networking fees, their consumption, their storage fees, bundled into one price coming from the service provider.

CF: What kind of shift are you seeing among customers moving from perpetual licenses to subscriptions?

KR: We’ve seen a huge shift in the last two years, going away from our perpetual licenses and moving to our subscription licenses. That’s probably not a big surprise in general. But the speed at which it’s happened has been a bit of a surprise.

CF: How fast is it shifting now?

KR: North of 50% of the business transacted in North America is via subscription. One of the things that we had to make sure of is that we had the right support for our partners, helping to transition that business to subscription since that’s where the customers were taking us. We had a heavy focus when we launched our new program in 2021 to make sure that it was …

… a profitable exercise, moving a customer from a traditional, large perpetual sale to a one-year or three-year type subscription sale. The sting on those purchases for a sales rep is right up front. You suddenly  had a big deal where someone was going to spend – for example, $500,000 for a perpetual license – and now they’re going to spend $50,000 for a one-year subscription.

CF: What kind of changes did you make to make that profitable for traditional resellers accustomed to those big upfront perpetual licenses?

KR: We worked some things internally in the program to have that be more profitable. Now, when subscriptions come to being renewed, they’re treated like a new license sale from a discounting standpoint. So, actually in the life of that subscription, they will do better in their profitability than they would in selling perpetually and then going back and just renewing the maintenance, because the maintenance was always small, single digits, in terms of margin.

CF: How did you make that work?

KR: When you sell a subscription, you use that subscription for a year. And when it gets done at the end of the year, you have to sell a new subscription. That’s the way people feel — t’s not just renewing the one-year subscription; you’re selling a new one-year subscription. We said we’re not going to have that argument. We said, “Fine, call it a subscription renewal, but we’re going to treat it as a new sale from a discount margin standpoint.” So, there’s a real motivation for our partners to get these subscription sales in place, because the profitability over time in the life of those subscriptions is going to be much more beneficial than the one-time perpetual sale.

CF: What is the math that makes that work?

KR: Well, let’s just put it this way: A perpetual maintenance renewal is low single digits. On a subscription renewal, we can go up to 20 points.

CF: How is this changing the makeup of your overall partner base?

MK: When I started here six years ago, just around the same time as Kevin, we had two distinct go-to-market motions between our service providers and our resellers. Over the years, it’s become more intertwined. We have resellers out there — thousands of resellers, who are either trying to come up with their own service offerings, whether that be backup as a service, managed services, Office 365 as a service or disaster recovery. But a lot of them also don’t want to invest. There are others out there who have already built those offerings and built them [to be] very, very successful. So we’re starting to marry up those ecosystems. In other words, we have these competencies that are now built. And our resellers can go and find service providers that they can then resell. So that ecosystem becomes a little bit more intertwined.

CF: And the resellers would go through the cloud service provider?

KR: Yes, they would negotiate their own relationship. Some of them just get referral fees, while others stay really heavily involved in the deal with the service provider. The big jump-off point is, do they want to build the infrastructure and a NOC and have all of that personnel on board? They’re still out there getting a ton of …

… professional services. It’s just when it comes down to it, are they going to host it in their own environment? And some of our partners, while they have seen massive amounts of their money coming from services, in other cases they think, “You know what, somebody’s already gone out and built that, and they’re doing it better than we could — and probably less expensively than us trying to start from scratch. Why don’t we just partner with them and leverage what they have?”

CF: Veeam Backup for Office 365 protection services has been such a huge hit for Veeam. How are you working with the Microsoft partner ecosystem? Presumably, a large portion of Veeam partners are also Microsoft partners. What kind of mobilization have you done?

KR: It’s a $150 million business for us today. We back up millions of mailboxes, but there are tens of millions still out there that aren’t backed up. So, it’s still with all of the great announcements including version 11, Kasten and going after the container world, the single biggest opportunity for further growth for us is Office 365. And yes, we are going deep and wide with the partners that have really strong Microsoft practices, and we’re getting a willingness because of the strong relationship that Veeam actually has with Microsoft.

CF: How have Microsoft and Veeam positioned this in terms of how partners should be attaching this as an added offering?

KR: Every time an Office 365 product is sold, it should be sold along with Veeam’s backup. There’s an education process that goes on where it’s made clear to the customers: that this is not inherently backed up, and that ultimately the customer has the responsibility for the security and retention of that data.  And that’s what Veeam can provide. It’s a huge opportunity. It will continue to be its fastest-growing, and we’re just scratching the surface.

CF: Switching gears to Kasten, protecting Kubernetes workloads is obviously a whole different area. Are any of your existing partners in this space? Or do you need find new partners that are in that ecosystem?

KR: Interestingly, we just went through this exercise. There is a subset of our partners that have built practices and services on Kubernetes. They are already doing this business today. We have a pyramid approach; we’re going to the folks that have the practices today that are heavily engaged in that community. It’s definitely a strong entry point for us into commercial enterprise accounts. That business is a disrupter and will continue to be over the next couple of years as backup and recovery for containers is going to become a prerequisite.

CF: What are the next steps in terms of enablement that are on your agenda?

KR: Well, our priorities, the first and foremost is Office 365. It’s the low-hanging fruit. We’ve got our teams focused heavily on that. But also, a hot priority is making this transition from perpetual to subscription. All of our partners are going back out and looking at their existing Veeam customer base, and making that migration, sales pitch. And it’s working extremely well.