5 Things VMware's Management Wants You to Know

By Anders BylundFool.com

When VMware reported third-quarter results in October, the virtual computing pioneer beat Wall Street expectations on both the top and bottom lines. But overseas sales came in a bit soft, and VMware shares fell more than 7% the next day. The stock is still trading in that new, lower range today.

That quarterly report is far from the latest news out of VMware, though. Company executives recently spoke at two major industry conferences, sharing plenty of fresh insights on what's going on.

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Here are five of the juiciest nuggets from VMware's showings at the UBS Global Technology Conference and the Credit Suisse Technology Conference. For starters, you might be surprised to hear that VMware's management don't really mind these low share prices.

VMware CFO Jonathan Chadwick. Source: LinkedIn.

Say what? Low share prices are good? At the UBS confab, inveterate analyst Brent Thill brought up VMware's strong cash reserves and wondered what the company might do with them. VMware CFO Jonathan Chadwick had a quick response:

In other words, Chadwick likes to return cash to shareholders, but dividends are off the table for now. And low share prices obviously boost the efficiency of share buybacks. Under these circumstances, cheap shares can only help the company put its surplus cash to good use.

Chadwick didn't discuss this detail, but low prices also give investors an attractive buy-in window. The stock has traded sideways over the last four years while earnings more than doubled, so VMware's valuation has plunged from over 100 times trailing earnings to a P/E ratio just below 40.

What about growth drivers? Chadwick also cast some light on how VMware plans to keep its sales growing over the next several years. It's all about adjusting to an IT industry in a state of massive flux. The company can't lean on its biggest traditional winners anymore:

This is the innovator's dilemma, writ large.

VMware helped pioneer the virtual computing model on which the modern data center is built. But resting on those laurels would be a quick ticket to bankruptcy, as the computing world has moved on to the nextNext Big Thing.

VMware must kill its old darlings and embrace the new reality by building scalable systems and services that can be hosted anywhere the customer pleases. This is the new model, the "software-defined data center" that Chadwick spoke of, and VMware needs to find a role in the new market reality. So the old vSphere package is becoming an afterthought, a built-in piece of a larger product map, and isn't VMware's biggest growth driver anymore.

VMware CEO Pat Gelsinger. Source: VMware.

Steady as she goesAt the Credit Suisse conference, VMware CEO Pat Gelsinger noted that the strategy shift actually started two years ago, but that he has no intention of changing the tune now.

"When you lay [the strategy] out, about two years after, you're totally bored with it, you should be telling it for two more years," Gelsinger said. "I mean, it takes a while for you to be able [to] execute, build momentum behind it and we are seeing it resonate increasingly." He continued:

Gelsinger is asking investors for some patience, here. The software-defined data center vision is coming into focus at this point, with important components being only a couple of quarters old. Changing course again would be a terrible idea right now, as the next hockey-stick growth moment should be just around the corner.

Do keep in mind that it's VMware's CEO talking, here. It's his job to sell the business story, especially on a stage in front of analysts and investors. That being said, I think Gelsinger's analysis is spot-on. With next-generation computing models like OpenStack knocking on the door, and the rising tide of the Internet of Things poised to change the entire balance of computing demand, VMware's hybrid strategy ties into these trends rather than rejecting them.

Past performance is no guarantee of future results and all that, but I see VMware headed in the right direction.

Big hat, no cattle?VMware doesn't stand alone in the software-defined data center space, of course. In particular, VMware rubs up against networking giant Cisco Systems in many project bids. Cisco likes to claim that its Unified Computing System and 9K switches can outperform VMware's software-based solutions.

Gelsinger fought back with imagery straight out of the Wild West:

Cisco's high-end 9k switch does indeed use specialized hardware to deliver its bits, albeit managed by a flexible software system. I leave it up to the reader to decide whether that qualifies as a pure software-defined networking solution, and whether that definition makes a difference to real-world performance and systems management.

Later in the call, Gelsinger also acknowledged that many VMware installations actually run on Cisco hardware today, since VMware isn't in the business of selling physical machines. So, it's not a battle to the death, but two partners jockeying for larger slices of the end user's ordering pie.

But it's fun to see executives reaching deep into their bags of colorful language. Gelsinger certainly delivered there, and gave investors something new to think about.

The real competitionCisco is more of a sparring partner than a serious head-to-head VMware competitor. Where, then, does Pat Gelsinger see the title fight happening?

In the public cloud market, of course. Gelsinger said clients have flocked to public cloud solutions en masse over the last couple of years, and VMware is one of the leading providers of these services.

"We've said the four big players that we think matter for the long term areAmazon.com's AWS, Microsoft , Google , and VMware, and there isn't a fifth at that layer," said Gelsinger. "It's people who can build big software-driven cloud environments for the future. Against Amazon and Google, the VMware strategy is to focus on three things, focus on the enterprise, focus on hybrid value, and enable a rich partner ecosystem to deliver that value into the industry."

Gelsinger continued:

That's perhaps the clearest description I've seen of what sets the major public cloud players apart from one another. Jeff Bezos might disagree with Gelsinger's view of the enterprise cloud market, but what really matters is how corporate customers look at the market.

I do believe Gelsinger is on the money with his lineup of Four Horsemen, at least at the moment. Keep an eye on these four companies to see how the public cloud market evolves -- and always look out for upstarts or transformed veterans coming up from behind.

The article 5 Things VMware's Management Wants You to Know originally appeared on Fool.com.

Anders Bylund owns shares of Google (A shares). Anders Bylund has the following options: short January 2016 $320 puts on Amazon.com and long January 2016 $320 calls on Amazon.com. The Motley Fool recommends Amazon.com, Cisco Systems, Google (A and C shares), and VMware. The Motley Fool owns shares of Amazon.com, Google (A and C shares), Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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