VMware Inc. (NYSE: VWM) sells software integral to the operation of websites and other network computing resources. VMware's virtualization software can make multiple physical computers behave like a single, ultra-powerful "virtual" machine, or split apart a single physical machine and make it behave like multiple computers (for example, to host several different websites on the same server). With virtualization software, websites can be run more cheaply and reliably by allowing webmasters to deploy resources "virtually" on an as-needed basis, rather than forcing them to keep excess capacity up and running to handle occasional traffic spikes and crises. In addition to software sales, 30% of VMware's revenue comes from services such as maintenance and upgrades and training. These revenues are recurring and create steady, ongoing cash flows.
One of the main barriers to the penetration of virtualization technology is the perceived complexity of implementing a virtualized system. VMware is currently the leader in the virtualization market with an estimated market share of 80%. The main risk to VMware's long-term success is impending competition from Microsoft, which also offers virtualization software. VWware is ready to move into Microsoft's customer base by offering more than virtualization as witnessed with its recent acquisition of Zimbra, a provider of open source email and collaboration software. VMWare is gearing up to tap into the Microsoft Exchange market by combining its virtualization technology with the Zimbra email platform.
VMware's customer base includes organizations of all sizes across numerous industries and includes 100% of the Fortune 100 and approximately 96% of the Fortune 1000. The company's solutions enable organizations to aggregate multiple servers, storage infrastructure, and networks together into shared pools of capacity that can be allocated dynamically, securely, and reliably to applications as needed, increasing hardware utilization and reducing spending. VMware is organized around providing solutions for three major IT predicaments: reducing costs and increasing operational efficiency in data centers, providing easy access to cloud computing capacity, and simplifying management and control of corporate client computing.
The majority of VMware's sales are made indirectly through a system of more than 4,000 partners, including software distributors and resellers, hardware vendors who bundle the software with their products, and IT management services. VMware also regularly collaborates with tech giants Intel (INTC) and Cisco Systems (CSCO) to develop virtualization software optimized for use with these companies' hardware. These relationships are quite close; both Intel and Cisco hold VMware stock and a seat on its Board of Directors. By leveraging Intel's and Cisco's reputations in the computer hardware industry and VMware's leading position in virtualization software, the companies hope to develop a complete package of virtualization technology that addresses all of their customers' needs.
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Data Center Products and Technology
VMware vSphere is the company's flagship data center platform. Users can choose to deploy the VMware ESX or VMware ESXi hypervisor when they purchase VMware vSphere. A “hypervisor” is a layer of software that resides between the operating system and system hardware to enable virtualization.
VMware also offers free data center products such as VMware Server and a free version of VMware ESXi that encourage the trial, usage, and adoption of VMware virtualization in data centers of all sizes. VMware Server is a virtualization platform that runs on top of an operating system available for trial and download by customers so they can test virtualization.
Personal computing and personal computing devices are undergoing change as users increasingly use multiple devices including desktop personal computers, laptop computers, thin clients, and mobile internet devices to access data and applications. In addition, users are employing various desktop operating systems including Windows, Apple OS X, and Linux to access applications that may run locally on a computer, centrally on a server, or accessed through a web page. This heterogeneity is becoming increasingly common, making it difficult to manage and secure customers’ desktop environments.
VMware desktop virtualization technology decouples the entire desktop environment from its underlying device, enabling customers to create user-centric instead of device-centric desktop environments. There are two main approaches to desktop virtualization: Virtual Desktop Infrastructure (VDI), where the desktop virtual machine runs on a server and is accessed remotely using a display protocol, and client-hosted virtual desktops, where a desktop virtual machine runs locally on a computer and is able to use the local hardware and peripherals. We have products in both of these categories, as well as offerings that combine both approaches.
Desktop Products and Technologies
VMware's desktop products leverage its virtualization technology to deliver desktop virtualization to both enterprise users and personal users. VMware View is the enterprise desktop virtualization platform. VMware View incorporates and extends VMware vSphere into both a Virtual Desktop Infrastructure and a client-hosted virtualization solution that allows a desktop virtual machine to run centrally in the data center or locally.
VMware also sells a range of personal client-hosted desktop virtualization products including:
Applications Middleware and Management
VMware entered the Applications Middleware and Management market with the acquisition of SpringSource Global, Inc. in the third quarter of 2009. SpringSource builds and supports solutions that help organizations build, run, and manage enterprise applications, particularly those written in the Java programming language.
VMware Global Support Services
VMware offers three support and subscription programs (Platinum, Gold, and Silver) on an annual or multi-year subscription basis, that include VMware support along with access to periodic updates, bug fixes, and enhancements to products.
VMware Consulting Services
VMware Certified Professionals provide on-site assistance throughout the virtualization adoption lifecycle to accelerate the implementation of our virtualization solutions. VCPs conduct initial assessments and upgrade workshops and prepare detailed implementation project plans. Once customers are ready for standardization across their enterprise, VCPs help integrate virtual infrastructure into enterprise systems and processes.
VMware Education Services
VMware courses provide extensive hands-on labs, case study examples, and course materials. Customers work in teams of two on servers located offsite using a variety of remote access technologies.
According to tech research firm IDC, a typical x86 server (the standard for business networks) utilizes only 10% to 15% of its capacity. The reason for this is that companies often run only one application per server to minimize the risk that a problem with one application will affect numerous others. While this is perhaps the safest method to ensure that one faulty program doesn't bring the whole system down, it is also rather expensive. Using VMware's virtualization technology, companies can safely run more than one application per physical machine. VMware estimates that one virtualized server can perform the same work as up to ten standard servers; this can save firms a ton of money by letting them use their existing capacity more efficiently. As companies in competitive industries like technology, pharmaceuticals, and telecommunications, look for ways to cut overhead, VMware's virtualization software will become increasingly popular.
VMware currently dominates the virtualization market, but competition from software giant Microsoft (MSFT) could cut into the company's lead. Microsoft is the primary competitor for VMware's data center virtualization solutions. In 2009, Microsoft released the second generation of its Hyper-V virtualization offering and continues to develop virtual management products. Microsoft also continues to articulate a cloud-based computing initiative. Microsoft’s offerings are positioned to compete with VMware's virtual infrastructure, virtualization management, and some of its free data center product offerings. Microsoft’s cloud initiative may eventually compete with VMware's cloud offerings and with cloud service providers who standardize on VMware's solutions. VMware also competes with Citrix for desktop virtualization solutions and with companies whose virtualization products are based on emerging open-source technologies.
While VMware's leading position in the virtualization industry and reputation for quality give it some protection against competitors, going up against Microsoft can be a daunting prospect for any company.
Revenues from customers outside the United States comprised approximately 49% of VMware's total revenues in 2009 and 48% of total revenues in 2008. This has opened up currency issues as the company noted margin weakness due in part to the falling dollar. It would be very difficult and complicated to hedge foreign currency exposure As such, it receives payment in a wide range of currencies; its revenue, however, is reported in U.S. dollars. Any change in the exchange rates between the dollar and other currencies in which VMware conducts business could have a significant effect on reported revenues. If the value of the dollar declines against other currencies, VMware's revenues would be boosted, as every unit of foreign currency would translate to a larger number of U.S. dollars. The same applies in reverse, however; a rise in the value of the dollar would make international sales look relatively smaller. Recently, the dollar has been weak in comparison to other major currencies; a continuation of this trend would be beneficial for VMware and other companies that do business outside of the country.
Currently, VMware leads the server virtualization industry by a substantial margin. The next largest competitor is Microsoft (MSFT), which looks poised to make a strong push into the market over the next year or two. Apple (AAPL) has released software called Boot Camp (which allows Intel-based Macs to run Windows operating systems in addition to OS X), though this is aimed primarily at consumers and (unlike VMware Fusion) does not allow the use of both OSes simultaneously. Other, smaller competitors include Novell (NOVL), XenSource (recently acquired by Citrix Systems (CTXS)), and Red Hat (RHT), though none of these companies holds more than a 2-3% share of the virtualization market. The still-growing market has plenty of growth potential for all, however; there are so many untapped customer bases that it'll be a while before the firms really start fighting over business.
One distinguishing characteristic of VMware is that it's dedicated to the virtualization industry, whereas all of its major competitors have extensive operations in other areas of the technology industry. This puts VMware in a more leveraged position; if virtualization takes off, it stands to benefit more than say, Microsoft, whose bottom line would look about the same either way. On the other hand, if virtualization were to fail for some reason, VMware wouldn't have any revenue sources.