VMware's CEO sees more JEDI-like cloud contract opportunities with government

VMworld
Led by its NSX and VeloCloud segments, VMware posts solid results in the third quarter. (FierceTelecom)

While the saga of the 10-year, $10 billion JEDI cloud contract continues to play out, VMware CEO Pat Gelsinger said his company is well positioned to play a role in future government cloud contracts.

Speaking on the Tuesday, third quarter earnings call, Gelsinger said VMware has "the most complete set of partners on the planet," which includes Amazon Web Services, Microsoft Azure, Google, Oracle, IBM and 4,300 VMware cloud partners worldwide.

RELATED: Amazon protests Pentagon picking Microsoft for its $10B JEDI cloud contract

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After numerous twists and turns, the U.S. Department of Defense awarded the JEDI contract to Microsoft Azure despite AWS being considered the front-runner. There has been speculation that Azure won the contract due to President Donald Trump's dislike of AWS founder and Washington Post owner Jeff Bezos. On Friday, AWS filed a lawsuit challenging the Defense Department’s decision to award the cloud contract to Microsoft.

Regardless of the end result for JEDI, VMware has forged cloud partnerships with both Microsoft and Amazon, and it could win additional cloud contracts through its other partnerships. Gelsinger said on the earnings call that VMware's multi-cloud and hybrid cloud strategy was unrivaled in the industry.

"We'll just say overall that we're following the JEDI event closely as I'm sure many of you are as well, and we're looking forward to getting to the eventual outcome of the appeals process," Gelsinger said during the Q&A with analysts, according to Seeking Alpha. "We'd also point out that the JEDI contract vehicle itself is one of many, right? And this represents just a piece of a much, much broader set of cloud opportunities in the government.

"Overall, we're well-positioned with our current partnerships and we do expect that through those partnerships that we'll have a thriving government business, both on-premise as we have had as well as in hybrid and cloud offerings."

Gelsinger noted that VMware already has a "very high market share in the government," and that its hybrid cloud was valuable to government customers.

"As we've discussed in the past, we've seen extremely high interest from CIOs in the government as they see huge value for this really -- this ability to migrate to the cloud," Gelsinger said. "We really see that we have great opportunity in the government and with our hybrid cloud offerings in the government space in the future."

In its third quarter results, hybrid cloud subscriptions and software-as-a-service (SaaS) accounted for more than 13% of VMware's total revenues. VMware posted revenues of $2.46 billion in the third quarter, which was an 11.6% increase on a year-over-year basis.

While Cisco, Juniper Networks and Arista Networks struggled in the last quarter, VMware turned in a solid quarter. VMware reported third quarter earnings of $621 million, or $1.50 per share while non-GAAP earnings for the quarter were $1.49 a share.

Wall Street had expected VMware to report third quarter non-GAAP earnings per share of $1.43 a share on revenue of $2.41 billion.

VMware's NSX, VeloCloud and vSAN products led the way for VMware in the third quarter. Gelsinger said eight of VMware's top-10 deals in the quarter included NSX and VeloCloud. In the quarter, VMware reeled in 18 deals that were more than $10 million.

Ever since VMware bought SD-WAN vendor VeloCloud two years ago, it has been working to integrate it across its portfolio, and those efforts are now fruitful. In February, VMware announced a major update to its NSX platform at Mobile World Congress.

VMware's services revenues, which account for 60% of its total revenues, increased 11.4% to $1.48 billion while license revenues (38% of total revenue) increased 7% year-over-year to $947 million, which was slightly below management's guidance of $950 million.

Looking at VMware's revenues by region, international revenues (52% of revenues) increased 12% from the same quarter a year ago to $1.28 billion while U.S. revenues (48% of total revenues) increased 11% to $1.17 billion in the quarter.

RELATED: VMware snags Carbon Black and Pivotal for $4.8B

VMware closed its acquisition of Carbon Black on Oct. 8 and is on track to close its Pivotal deal by the end of the fiscal year. Collectively, VMware paid $4.8 billion for both companies.

"The enthusiasm for Carbon Black is high and the strategy of intrinsic security has resonated very well," Gelsinger said. "And just to reinforce that a bit this idea that we're going to build security into the infrastructure. We're going to build it into vSphere. We're going to build it into NSX as we've been doing with microsegmentation, but further enhance it with Carbon Black."

RELATED: VMware throws down the gauntlet on Kubernetes with Tanzu platform

At VMworld in August, VMware announced a new Kubernetes platform called Tanzu, which is built with Pivotal and Heptio's Kubernetes technologies. 

"We're really excited about the capabilities, and we really see this coming together," Gelsinger said when asked about Tanzu. "Overall, we've seen an extremely positive response from the market on Tanzu."

For the fourth quarter, license revenue is expected to be $1.39 billion, an increase of 13% year-over-year while total revenue is expected to be $2.95 billion, up 13.8% year-over-year. VMware expects non-GAAP operating margin of 37.6% and non-GAAP EPS of $2.16 per share on a diluted share count of 414 million shares.

For the full year VMware is projecting an increase in total revenue to $10.1 billion, up 12.5% year-over-year, which includes the addition of Carbon Black's financials after the deal closes. Carbon Black accounts for the largest portion of the revenue increase. VMware expects license revenue of $4.245 billion for fiscal year 2020, up 12% year-over-year.

The company projects non-GAAP operating margin to be 33% and non-GAAP earnings per share of $6.58 on a diluted share count of 416 million shares for the fiscal year.

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