VMware execs all smiles with great report card, leaving its troubles for another day

VMware (s vmw) CEO Pat Gelsinger sounded as enthusiastic as ever Tuesday as he told analysts how well the company fared in the second quarter and how the company stands to thrive with its software-defined data center vision in the quarters to come.
Given the results, perhaps Gelsinger could be forgiven for setting aside the company’s myriad troubles for an afternoon: the recent brain drain, uncertainty around the chances of its previously announced Infrastructure-as-a-Service (IaaS) product and questions about the future of the core vSphere server virtualization offering.
Earnings for the second quarter were $244 million, or 57 cents per share, up 28 percent year over year. Non-GAAP net income was $343 million, or 79 cents a share — a nice surprise compared with the 77 cent per share analyst estimate. The high end of VMware’s revenue guidance for the fiscal year got bumped up from $5.24 billion to $5.26 billion. Gelsinger also had solid revenue to boast of — $1.24 billion, up 11 percent year over year, and around $13 million north of analyst expectations. He struck an optimistic tone about the company’s execution and prospects on a conference call following the release of the numbers.
On the IaaS product, vCloud Hybrid Service, which is in an early-access program until general availability in the fourth quarter, Gelsinger said that “the program is generating tremendous interest from our customers” and that “we have really hit the nail on the head” in terms of offering a product enterprises will want to use. But some developers at VMware shops might have poked around on earlier-to-market IaaS products, such as Amazon (s amzn) Web Services or even the Google (s goog) Compute Engine, and good experiences there might inhibit adoption of VMware’s take of IaaS. Meanwhile the company will inevitably have to deal with inquiries about cloud security. That’s a topic we’ll take up with Joe Baguley, VMware’s chief technology officer for Europe, the Middle East and Africa, and other cloud executives at our Structure:Europe conference in London on September 18-19.
Aside from the cloud opportunity, Gelsinger said VMware can look forward to serious revenue from network virtualization coming in early 2014 and new storage virtualization products — which will be discussed at VMworld next month — toward the end of 2014 and into 2015. Those could become key elements of the company’s software-defined data center strategy, right next to server virtualization.
But that doesn’t address the prospects for vSphere. Gelsinger mentioned that more than 35 percent of licensed bookings in the quarter were for products other than vSphere. One analyst asked where that leaves vSphere itself, and Gelsinger told him “our strategy … is to focus on the delivery of the broader-than-just-vSphere opportunity.” Still, Carl Eschenbach, the company’s president and chief operating officer, added that VMware is “very bullish on the opportunity for the core vSphere business to continue to grow in the second half of the year.” After that, though, Eschenbach didn’t say what might happen.
And then there’s OpenStack. Gelsinger fielded a question about what threat the company sees from the open-source cloud software that just turned 3. VMware has been embracing the OpenStack API, Gelsinger said, and pushing products compatible with OpenStack to businesses deploying the software. But it might not be very much business there just yet; he called OpenStack “an incremental opportunity.”
VMware isn’t held back by the decline of the PC era, as evidenced by missed estimates last week from Intel (s intc) and Microsoft. (s msft) However, the company does have to contend with the devolution of the hypervisor into commodity status, prices that might be less palatable than viable alternatives from competitors and partners miffed by the vCloud Hybrid Service offering competition to their clouds.
My colleague Barb Darrow highlighted these issues last week, and executives didn’t spend much time talking about them on Tuesday. There was apparently too much good news to discuss.
This story was updated at 6:04 p.m. PT to add revenue guidance figures.