Broadcom CEO ‘Transforming’ VMware to Bring Private Cloud to ‘Largest Enterprises’

Broadcom CEO Hock Tan isn’t keen to drive the chipmaker to undertake more M&A now that VMware resides under its belt.

“Right now, I'm having my hands really full and enjoying myself … transforming the business model of VMware,” Tan, Broadcom’s CEO, told analysts on Sept. 5, during the company’s fiscal third-quarter earnings call, according to the transcript via The Motley Fool. “It's a great experience.”

Tan was responding to a question about whether Broadcom has more acquisitions on its radar, and whether those would focus on software or semiconductors.

But Tan was clear: “No,” he said. “I'm very focused on … VMware as it continues to accelerate in getting private cloud deployed in the largest enterprises in the world.”

Those efforts might take another year or two before they’re complete, he added.

Broadcom CEO: Taking VMware Back to Private Cloud

Tan’s comments further reflected what channel partners heard last week during VMware Explore — that Broadcom is pulling VMware back to a private cloud model. 

Broadcom's Hock Tan

“Ten years ago, your CEO, your board of directors fell in love with the promise of public cloud, and they drove you to public cloud first,” Tan said last week. “Because of this, I see you're all now suffering from PTSD.”

Private cloud, he insisted, is the future.

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“It’s about staying on-prem and in control," said Tan from the stage at VMware Explore in Las Vegas last month.

VMware had been pursuing a “multicloud” strategy prior to the $61 billion Broadcom purchase, which closed last November. The latest version of VMware Cloud Foundation, however, is trained solely on supporting on-premises deployments. 

Tan: VMware Spending Down, Bookings Up

In addition, smaller channel partners and their end users likely are feeling affirmed in what they’ve experienced since Broadcom took over VMware: that Tan and Co. are intent on targeting only the largest, most profitable customers. To be sure, Broadcom has cemented a reputation for squeezing operating margins to the bone so shareholders gain large returns. On Thursday, Tan spoke to that very outcome.

“[W]e continue to drive down costs in VMware,” the Broadcom CEO said. “We brought VMware spending down to $1.3 million in Q3 from $1.6 million in Q2.”

At the same time, VMware contributed $3.8 billion in revenue in the third quarter, Tan said, noting, “VMware bookings continue to accelerate.”

To that point, Tan said VMware added more than 15 million CPU cores of VCF in the latest quarter. That represented more than 80% of the total VMware products filling up the pipeline in the three months that ended June 30. The figures further point to 32% higher annualized booking value, Tan said. 

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Whether those numbers reflect more interest in VMware or come as a result of Broadcom’s full shift to subscription licensing, which many buyers say are pushing their costs higher − or stem from a combination of both − remains the question. Tan did say on the analyst call that VCF is attracting “new subscribers.” He did not provide specifics other than to point out, “[W]e continue to see accelerated bookings and, by extension, accelerated growth.”

Broadcom CEO Leaning on VMware for Overall Software Growth

Overall, Broadcom’s infrastructure software revenue totaled $5.8 billion, to which VMware pitched in 44% of that 200% year-on-year growth, said Kirsten Spears, chief financial and accounting officer at Broadcom.

And the changes Broadcom has enacted at VMware are bearing fruit, Tan said. In fact, Broadcom seems to be leaning on VMware more than its other software groups when it comes to growth.

“[W]hat we are looking toward more is how VMware picks up over the next several years, year-and-a-half,” he said.

Meanwhile, for Broadcom’s fiscal fourth quarter, Tan expects VMware revenue to keep rising even as expenses continue to drop. 

Broadcom’s latest earnings call comes in the same week that news broke that AT&T is suing the chipmaker for breach of contract. AT&T says Broadcom is refusing to deliver contractual support services unless the telco agrees to move to subscription licensing, which it says will incur such high costs that national security could be at stake.