VMware shows strong profits in fourth quarter, renewed strength because it spending revives. Commoditization? What commoditization?

VMware concluded 2013 with strength: Its fourth quarter was up 15% over the year-ago period, and revenue for the complete year was up 13%, to $5.21 billion over 2012. These numbers disguise greater than they reveal.

VMware continues to go upstream at an accelerating pace into virtual datacenter and personal-cloud management. That isn’t just a revenue producer for the corporate today, but a trademark that, because it budgets strengthen, VMware is able on the way to yield growing revenue far into the longer term. The other view — that VMware is in a market that’s being commoditized — is thrown into doubt by the fourth-quarter figures.

For example, without its Pivotal divesture, those numbers would had been up 17% for the year and 20% for the quarter. By moving Cloud Foundry, Spring, Greenplum, and RabbitMQ into Pivotal, VMware got both lower-yield open-source products (and the headcount related to them) out of the reporting on its core virtualization business. It also assembled an enormous-data suite that promises to yield its own revenue eventually.

The fourth-quarter results suggest that, because it spending resumes at a faster pace, VMware might be one of the crucial beneficiaries. There has been doubtless more Microsoft Hyper-V and Red Hat KVM in use on the end of 2013 than there has been on the end of 2012, so some commoditization is occurring. The 1st is free since it comes embedded within the Windows Server operating system, and the second one is free because it’s open-source code sponsored by Red Hat.

[Free and open-source virtual machines aren’t the threat many think. See VMware Killed By Commoditization? Not So Fast.]

But there remains an incredible marketplace for virtualization. Gartner says 68% of the x86 element of the datacenter was virtualized on the end of 2013, up from just 21% in 2008. By 2016, that figure is predicted to hit 84%, Gartner predicts. That suggests more license fees flowing out of VMware’s core business so long as customers depend on it to continue the conversion in their datacenters.

Will that be the case? VMware is pushing hard into software-defined networking, a still unproven field with customers, and investing in its own NSX product, while jointly supporting the commoditizing influence of open-source OpenStack. Nobody is bound how that dual play plays out.

It’s on surer footing because it brings high-level server-log analytics with Log Insight, in addition to configuration, performance, and capacity management with vCenter Operations Manager, to IT staffs.

Then it’s rolling these products up into suites, vSphere with Operations Management (vSOM, similar to vCenter Operations Manager) and vCloud suite — vSphere, vCenter Operations, and vCloud Automation Center (the previous DynamicOps product that VMware acquired in 2012). Not everybody needs everything VMware has to supply. However, VMware tries to get you to adopt up to possible by offering the suites in enterprise license agreements (ELAs). You’re already paying lots for individual VMware licenses. For slightly more, you get the full suite.

CEO Pat Gelsinger, in a teleconference with the Credit Suisse Technology Conference, in December said VMware is “being successful at bringing higher-value products and suites into the ELAs.”

Instead of being commoditized, VMware keeps its business on course by pushing into datacenter management, including certain cases of Microsoft Hyper-V and Red Hat KVM hypervisors, now possible under vCloud Automation Center. The network is being reorganized. Storage is being virtualized. With several datacenter automation trends now in play, VMware keeps seeking to appear because the unifying force.

In an interview, Ramin Sayar, senior VP and general manager of VMware’s Cloud Management business unit, pointed to the firm’s increased profitability within the fourth quarter. It was $335 million, or 77 cents a share within the fourth quarter of 2013, in comparison with $206 million, or 47 cents a share inside the fourth quarter of 2012. Sayar attributed that bump to the expansion of VMware’s management products. His unit’s revenue grew 40% in 2013. That figure is a bit misleading, without the 2012 versus 2013 revenue figures themselves, and VMware doesn’t break them out by product group. Management products may need accounted for a small percentage of revenue in 2012 when those products were still relatively young, after which could show a big percentage growth in 2013, which they did.

Nevertheless, they’re now an important contributor to VMware’s outlook. One VMware customer, Covance in Princeton, N.J., found that vCloud Automation Center, “reduced the service cycle time from a month to an afternoon,” Sayar said.

That may or will not be typical. But VMware’s fourth quarter shows that it has the revenue to finance more development of management products and that there’s a growing marketplace for them. Commoditization is happening on the hypervisor level. VMware keeps elevating its product line above that.

“We predict the stock can move higher because it spending improves and new products gain traction,” wrote Wells Fargo Securities analyst Jason Maynard in his research note following the fourth-quarter results.

VMware’s 2013 fourth quarter was depressed by the necessity to repay Pivotal divesture expenses. In 2012, VMware results were depressed by the necessity to repay the $1.26 billion acquisition of Nicira, the software-defined networking firm. This year they’ll be depressed by paying $1.54 billion to obtain AirWatch.

VMware keeps betting it is able to gain enough ground in datacenter automation to justify its heavy investment in development and acquisitions. It’s gambling with its investors’ faith and confidence that it’s on target and it’ll make its bets on automation and management repay.

In one in all his few risky statements, Sayar said, “There isn’t a other company that may address, soup to nuts, the personal-cloud-on-premises to public-cloud-off-premises, to mobile-cloud era.” AirWatch, once acquired, fits into VMware’s interests in managing mobile users no matter device that they are using.

So far, customers and investors are sticking with VMware, despite the specter of commoditization. That could be because it is a high-wire act that few can deal with exclusively or care to emulate.

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Charles Babcock is an editor-at-large for InformationWeek, having joined the publication in 2003. He’s the previous editor-in-chief of Digital News, former software editor of Computerworld and previous technology editor of Interactive Week. He’s a graduate of Syracuse … View Full Bio

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