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Cloud Helps Drive VMware Revenue Higher

VMware's quarterly earnings, released Tuesday, were a no-drama change of pace for the company. It reported revenue up 5% year-over-year, to $1.59 billion, driven in part by the cloud and other newer software, offsetting declining demand for its traditional server-based virtualization software.

But the news wasn't all good. License revenues for the first quarter, ending March, were $572 million, down 1% year-over-year or up 1% in constant currency. VMware Inc. (NYSE: VMW) is seeing its revenues shift from its traditional vSphere server virtualization software to cloud, SDN and virtual SAN.

VMware "made solid progress with our strategic goal of building momentum for our newer growth business and in the cloud," CEO Pat Gelsinger said in a statement. (See VMware Reports 5% Revenue Growth Q1 2016.)

GAAP net income for the first quarter was $161 million or $0.38 per share, down 17% per diluted share year-over-year. Excluding specific items, VMware earned 86 cents per share, beating average analysts' estimate of 84 cents.

VMware beat analyst expectations, but only just. Analysts expected revenue of $1.58 billion, slightly lower than the actual $1.59 billion.

VMware's board of directors authorized repurchase of up to $1.2 billion of its Class A common stock this year.

The cloud is key to VMware's business going forward, Gelsinger said on the company's Tuesday earnings call with analysts. That includes private cloud, extending private clouds into public clouds and connecting, managing and securing endpoints across multiple clouds, such as Amazon.com Inc. (Nasdaq: AMZN) AWS and Microsoft Corp. (Nasdaq: MSFT) Azure. VMware sees hybrid clouds as becoming the norm for enterprises.

Hybrid cloud and software-as-a-service (SaaS) still form a small part of VMware's revenue, but are growing fast. They accounted for more than 7% of total revenue, with revenue growth over 20% year-over-year. That includes VMware's vCloud Air cloud platform, the vCloud Air Network of cloud partnerships with service providers, some of the AirWatch mobile device management and other "as-a-service" lines.

Sales of the company's NSX SDN products are growing fast too, over 100% year-over-year, and there are now more than 1,400 customers with nearly 350 in production deployment.

On the call, an analyst questioned executives on the vendor's OpenStack and containers strategies.

On OpenStack, VMware's customers are finding alternatives to VMware don't scale, so they use VMware's Integrated OpenStack software and services and get it up and running quickly, Gelsinger said.

Container technology is "fairly immature" but with "huge interest in the industry" and will be a "key part" of application development in the future, Gelsinger said. VMware is embracing containers, he said. Its vSphere Integrated Containers allow efficient use of containers on today's vSphere, using existing networking, policy, security and management. Also, VMware is building Photon, an environment designed from scratch to run containers, and expects to have announcements in the future.

Both OpenStack and containers represent potential existential threats to VMware unless the company gets in front of them. OpenStack is an alternative to VMware's own vCloud Air, while containers are an alternative to the heavier virtual machines, such as vSphere, on which VMware is built.

Wall Street liked what it heard from VMWare. The stock traded at $55.93 after hours, up 8.69%.

Find out more about the cloud at our upcoming Big Communications Event in Austin, Texas, May 24-25. Register now!

The earnings report Tuesday was a relatively calm affair following some dramatic months for VMware. Last quarter, in January, the company announced 800 layoffs as part of its shift from on-premises computing to cloud and networking, and also replaced its CFO. (See VMware Announces 800 Layoffs, Executive Shake-Up.)

Of course, the big bombshell was in October, when Dell Technologies (Nasdaq: DELL) announced it would buy EMC Corp. (NYSE: EMC), which owns a controlling interest in VMware, for $67 billion. Gelsinger said Tuesday he expects to see more details about the timetable for that deal emerging when EMC reports its earnings on Wednesday. (See Dell Buys EMC for $67B in Biggest Tech Deal Ever.)

A few days after the Dell deal was announced, VMware announced the Virtustream cloud partnership with EMC. It backed out of that deal in December. (See VMware Exits Virtustream Cloud Partnership .)

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— Mitch Wagner, Follow me on TwitterVisit my LinkedIn profile, West Coast Bureau Chief, Light Reading.

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