Analysis: VMware’s most recent earnings report last week shows that the EMC-owned company is clearly at a tipping point between its core virtualization business and the growing trend across the tech sector toward cloud computing, says analyst Andrew Smith of Technology Business Research. EMC has a major presence in the Research Triangle, N.C. area, and one of VMware’s biggest threats in Raleigh-based Red Hat.

HAMPTON, N.H. – VMware’s 1Q15 earnings results indicate that the vendor has reached a tipping point between its more traditional virtualization business and its future-looking, high-growth hybrid cloud portfolio.

The dynamics of VMware’s business are changing, with approximately 45% of the vendor’s total billings attributed to its compute business (standalone vSphere/ESXi) and the remainder attributed to newer solutions for networking, hybrid cloud management, end-user computing, and storage. The key business implication of this shift is the fact that more than half of VMware’s business now belongs within a solution portfolio which is growing at 30% year-to-year, as opposed to the slowing, virtualization space.

But what do these newer solution sets mean for VMware’s business, whose bread and butter is historically hypervisors and virtualization?

It means VMware’s business is successfully transforming to embrace the opportunities generated from customer migration to the cloud. From a financial perspective, this is going to change how VMware signs enterprise license agreements (ELAs) with customers, as the vendor looks to expand deployments through new software services. From a corporate perspective, expect to see continued focus on cloud product enhancements, integration and branding, especially with the release of vSphere 6.

More specifically, that means expansion of VMware’s vCloud Air platform capabilities and services. TBR believes that VMware will continue to prioritize the migration of customers onto vCloud Air to expand beyond core ESXi/vSphere functionality, and 11% year-to-year revenue growth in 1Q15, combined with license bookings beyond standalone vSphere of 30%, indicated the vendor is off to a promising start.

AirWatch and NSX allow VMware to extend its mobility, networking, and security engagements with customers, but continued momentum depends largely on integration within existing ELAs

The next pieces of the puzzle for VMware include end user computing and SDN solutions AirWatch and NSX, respectively. These products provide natural extensions of VMware’s business beyond hybrid cloud integration and workload migration to mobility, networking and security. This opens the door for cross-sales of associated products and deeper penetration of customer ecosystems.

NSX and AirWatch are keys for achieving higher revenue growth rates because they extend customer engagement with beyond core capabilities for virtualization, operating system, and management to higher value cloud services that customers are increasingly adopting.

VMware continued to build integration opportunity across its portfolio in 1Q15, with its end user computing business, including AirWatch growing license bookings over 50% % year-to-year. In addition, 8 out of 10 of VMware’s largest ELAs signed in 1Q15 included NSX.

TBR believes VMware will continue to experience new product growth during the first half of 2015, but increased adoption will heighten competition with challengers like Red Hat, particularly as VMware increases its OpenStack platform utilization, presenting VMware with additional challenges and potentially requiring increased sales, marketing, and innovation spending to outpace the competition. TBR believes NSX and AIrWatch face an additional, challenging adoption dynamic because VMware does not typically sell them in a standalone fashion. The vendor is relying on these solutions to be adopted and integrated into ELAs signed with new and existing customer.

In other words, if the customer isn’t ready to adopt the product or can’t justify the cost, they can easily turn it down. This may result in high volatility for NSX and VMware adoption rates in the long term.

VMware’s reliance on partners requires constant monitoring of new product momentum to avoid confusion, co-opetition within the EMC federation, and generate adoption

VMware emphasizes its ability to provide vendor-agnostic capabilities through partner-led products such as EVO:RAIL, EVO:RACK and, increasingly, the vCloud Air network. VMware’s strategy combines server, storage, networking and compute solutions into comprehensive packages, which allows partners to benefit from best in class, software-defined solutions integral to the VMware ecosystem. Enhancements and updates to NSX as well as VSAN, VMware’s software-defined storage solution for virtual environments, reinforce the vendor’s commitment to updating its software-defined data center portfolio. However, VMware remains reliant on partners and the wider EMC federation to deploy its solutions across the widest set of infrastructure customers possible.

In the hyperconverged space, VMware will focus on overcoming co-opetition, particularly when it comes to its EVO:RAIL solution. The vendor will focus on ramping partners and shipping solutions into market as fast as possible to avoid leaving any opportunities on the table. On the hybrid cloud side of the business, VMware is focused on providing partner education, particularly with the hybrid cloud capabilities associated with vCloud Air, as well as providing aggressive sales compensation.

Expect product updates and new alliances with technology providers like Google to be a constant in 2015, as VMware seeks to market its hybrid cloud, networking, EUC capabilities

The release of vSphere 6 and integration of Google services on vCloud Air will help bolster ELAs in the short-term, but VMware will remain challenged to drive sales and adoption beyond “naked” or traditional vSphere. TBR believes this will remain a constant struggle for VMware in 2015, as it seeks to break out of its traditional mold with customers and translate its business value to new customers.

In early April, VMware launched a collaboration bundle, which combines AirWatch and Socialcast capabilities into a mobile management suite. TBR believes offerings like this won’t make a significant revenue impact in 1Q14, but will help the vendor sell more consumable bundles which include new products, and ultimately drive adoption.

(C) TBR