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December 8, 2023
There also are big changes in store for Carbon Black and the end-user computing group. Along the way, expect Broadcom to push enterprises — through its direct sales teams and channel partners — to renew their VMware platforms on the “higher-value software stack” and in the form of subscriptions.
Broadcom's Hock Tan
“We are now refocusing VMware on its core business of creating private and hybrid cloud environments among large enterprises globally and divesting non-core assets,” Hock Tan, president and CEO of Broadcom, said during a Dec. 7 earnings call with analysts, according to a transcript from The Motley Fool.
Achieving those goals will “take about a year and will require close to $1 billion in transition spending,” Tan added.
Much of that money will go toward building microservices tools to help enterprises consume more VMware cloud computing capabilities.
“This will be our focus,” Tan said.
Because of that (and perhaps to few industry observers’ surprise), Broadcom is shedding VMware’s end-user computing (EUC) and Carbon Black businesses. Doing so will help VMware contribute $12 billion in revenue to Broadcom over the first 11 months of 2024, Tan said.
Selling off two “non-core” divisions will save Broadcom from distractions, Tan said. In any acquisition, he explained, the company looks for “the biggest value for our business model.”
“[W]e then do not want to be distracted by non-core focus. And VMware for us is about core. It's about data centers, it's about core networks and core compute.”
Even so, Tan noted, EUC and Carbon Black are solid and capable units.
“Let's make no mistake,” he said. “They are very sustaining. They are very stable, good assets. And why we chose to sell them is typically our playbook.”
In addition, largely because so many EUC and Carbon Black customers also use VMware Cloud Foundation, Broadcom won’t offload them to just anyone.
“We'll find good homes for them because there are a lot of very interested parties who are more than happy to take those assets,” Tan said. “And we'll be very, very thoughtful about where we put those assets eventually, simply because the customers of many of these two assets … are also the same customers to the VMware Cloud Foundation.”
Furthermore, Broadcom plans to convert most of VMware’s base of 60% perpetual licenses to subscriptions by the end of its 2024 fiscal year, said Kirsten Spears, chief financial and accounting officer at Broadcom.
Like the divestiture of EUC and Carbon Black, this shift also comes as little surprise. Even prior to the May 2022 announcement of the Broadcom acquisition, VMware was working to move to a recurring revenue model via subscriptions. It’s been a long and difficult road, given that the 25-year-old company still has so many customers on perpetual licenses.
Broadcom does not expect that a VMware subscription approach will result in immediate avalanches of money. As enterprise renewals come up, “we will kick it off at a much lower rate because subscription generally brings down revenues … in software based on revenue recognition,” Tan told analysts. “But we see a trajectory of accelerated growth even in 2024 — through 2024.”
Part of that will come as Broadcom looks to generative AI powered by Nvidia and VMware Cloud Foundation to propel revenue. Of interest, though, is that Nvidia also competes against Broadcom’s other AI offerings, which impinged on the latest earnings results.
As for how Broadcom will treat the ongoing VMware move to subscriptions, it will happen differently compared to similar efforts around Symantec and CA Technologies, Tan said. Those brands have different customer and technology bases, much of both comprising legacy roots.
With VMware, on the other hand, “we're selling a product of the present and of the future,” Tan said. “It is a growth product to be able to create a virtualized cloud environment in your own data center on-prem for any global company. … This is then giving these enterprises the opportunity to have a hyperscaler on-prem. That's the plan we're doing, plain and simple.”
Tan spoke on Dec. 7 during Broadcom’s latest earnings call. The company’s numbers reflected weaker enterprise spending than analysts had forecast. Revenue totaled $9.3 billion; Wall Street had estimated it would come to $9.41 billion. Still, the number rose from the same period a year ago when Broadcom recorded $8.93 billion in revenue. For the latest quarter, net income amounted to $3.5 billion, up from about $3.3 billion a year ago.
Shares of Broadcom were trading lower on Friday, down a little more than $7.50 at the time of publication to $915.10.
Separately, Broadcom continues to lay off VMware staff around the world. One of the latest rounds is now hitting 577 workers in Austin, Texas. That brings the total so far to more than 3,000 globally.
Contributing Editor, Channel Futures
Kelly Teal has more than 20 years’ experience as a journalist, editor and analyst, with longtime expertise in the indirect channel. She worked on the Channel Partners magazine staff for 11 years. Kelly now is principal of Kreativ Energy LLC.
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