VMware SaaS subscription growth has taken a slight hit, as some of its customers continue to stick with perpetual licenses. To be sure, VMware subscription and SaaS revenues are growing at a healthy rate. But the growth rate was marginally less than the company had anticipated during its most recent fiscal quarter.

A key culprit was VMware Horizon, the company’s VDI offering. During its second quarter (FY22) earnings report late last week, VMware said subscription and SaaS revenues of $762 million rose 23% year-over-year. Also, during the quarter that ended July 30, annual recurring revenue (ARR) of $3.2 billion rose 26%. Nevertheless, perpetual license sales of $738 million were 3% higher over the same period last year, higher than expected.

VMware’s Zane Rowe

“We were expecting a few more customers to lean into to the sub and SaaS part of that portfolio, versus the term license,” VMware CFO Zane Rowe said during the company’s earnings webcast. “For a variety of reasons, they chose term, which on the margin actually did impact our split between sub and SaaS and on-prem,” he said.

Overall, VMware revenues of $3.14 billion, which were 9% higher than the same period last year, beat expectations. But concerns about the subscription growth initially sent VMware’s share down 5%. While fewer VMware Horizon deals were subscription-based than expected, Rowe indicated the pandemic was not a weighing factor.

Rowe said VMware was pleased with Horizon’s performance, along with its entire end-user computing (EUC) portfolio, including Workspace One.

“It’s just that the mix, if you will, within those products shifted a little bit more to term than we had expected originally,” he added.

VMware is aggressively adding new cloud management capability to VMware Horizon and Workspace One. Earlier this month, the company announced that all of its VMware Horizon Control Plane services, primarily offered on VMware Cloud for AWS, are also now available with connectivity to Microsoft Azure. VMware Horizon Control Plane services are an extension of the Horizon Control Plane. They enable desktop as a service (DaaS) connected to multiple on-premises and cloud backends.

Bullish on Shift to Subscriptions

VMware expects the rate of growth of its SaaS subscriptions during its second quarter to continue this quarter. In certain geographies and vertical industries, some customers still prefer perpetual licenses over subscriptions, according to VMware CEO Raghu Raghuram. VMware still anticipates a growing share of its customers will continue to prefer subscriptions and SaaS, Raghuram said. VMware has stated its intent to accelerate its shift from perpetual license to subscriptions. At the same time, Raghuram emphasized that VMware will provide its software as customers want it.

VMware’s Raghu Raghuram

“If you look out over the next year or so, we are very bullish about our overall subscription and SaaS portfolio,” Raghuram said. “This is a big focus of mine. And if you look at most of our recent products and innovations, they’ve all come to market with a subscription and SaaS business model, and that will continue. In addition, we are checking all of our existing perpetual license software products and making them also available in a subscription and SaaS business model.”

Raghuram, who became VMware’s CEO on June 1 after predecessor Pat Gelsinger taking the helm at Intel, said that work is underway with products including vSphere, its hyperconverged infrastructure (HCI) product line and NSX. “As we do that, we will be strengthening our subscription and SaaS go-to-market mechanisms. Over the next year, I actually expect our subscription and SaaS business growth to accelerate.”

Divestiture from Dell Technologies on Pace

The planned divestiture of VMware from Dell Technologies is on pace to close in early November, both companies confirmed. Dell announced plans to spin-off its 81% stake in VMware back in April. The move will help shave nearly $10 billion of debt from Dell’s balance sheet. Dell said the spinoff will help accelerate its focus on hybrid cloud, edge, 5G, telecommunications and data management. As a standalone company, Raghuram said he believes VMware has an opportunity to grow faster.

“We will have increased strategic operational and financial flexibility to drive VMware growth strategy, while also strengthening our longstanding strategic relationship with Dell,” Raghuram said. “The partnership, we expect. will continue to benefit our customers and partners as well as both Dell and VMware.”