Carlos Sava
VMware has begun executing a strategy to create a comprehensive cloud computing solution on top of its leading virtualization technology. On January 12, VMware announced plans to acquire Zimbra, a leading vendor of email and collaboration software from Yahoo! Inc. The transaction is the company’s sixth acquisition since its high profile IPO and partial spinout from EMC in 2007. VMware followed this announcement with two other acquisitions: management tools technology and R&D personnel from RTO software, and select pieces of Ionix for $200 million from majority shareholder EMC. Before these acquisitions were announced, VMware had not been particularly active in the M&A market given its size, leadership position and high profile. This was most likely due to its previously narrow focus on virtualization, which we believe is broadening and accelerating given these recent transactions
Although the acquisition was initially viewed as surprising given the numerous email and collaboration tools providers as well as VMware’s historical focus on virtualization and lack of application offerings, Updata sees a rationale for this type of transaction. The acquisition of Zimbra is part of a new strategy for VMware as it seeks to add demonstrable value to its core strength – virtualization. VMware plans to make Zimbra a part of its cloud computing services. The group’s marketing materials describe its mission as seeking to optimize and increase traditionally low utilization rates of servers while moving IT to the cloud so that businesses are not bogged down by needing to manage IT plumbing and infrastructure. While email is far from the latest technology innovation, it is one of the most ubiquitous and prevalent applications for any business regardless of size or industry. The rapidly increasing volume of email, not to mention SPAM, archiving and compliance requirements, continues to put a strain on IT infrastructures.
Furthermore, rapid adoption of smart phones and mobile email devices has driven up the quantity of email and the amount of backend hardware needed to serve email users. Zimbra is reported to have over 55 million mailboxes, and in 2009 achieved mailbox growth of 86% overall and 165% among small and medium business customers. This unabated need creates an opportunity for VMware to capture the low hanging fruit of making email run more efficiently on less hardware. Additionally, greater adoption of new collaboration methods, such as central file access and management, Web conferencing and other ways to communicate and share information, are expected to follow a similar trajectory to email, providing an ongoing source of growth for VMware. Given the high level of familiarity users have with cloud-based email services such as Yahoo! and Gmail, email also represents a logical beachhead within enterprises for cloud-based services, potentially providing VMware with a valuable position assisting enterprises as they seek to make the transition.
As for its two most recent announcements, VMware gains RTO’s Virtual Profiles management tool, which will improve user experiences, and PinPoint and Discover from Ionix, for application performance monitoring and tracking the hardware and software being utilized. These pieces, which will remain coupled to EMC sales efforts, offer application provisioning, application discovery and dependency mapping, server configuration management and IT service management. Adding these IT management offerings to VMware’s suite will give professionals better insight and control into the servers and resources being used, as well as add a new level of visibility and control over the hardware and software utilizing the VMware platform. We believe that with the addition of these offerings, VMware has composed a platform that can be further grown with other development tools and applications, while also filling the gap between OS and applications and offer greater IT management capabilities.
Another objective of VMware’s acquisitions and product expansion is growth. The company’s growth trajectory has leveled off since going public in 2007. VMware’s revenue has gone from $0.7 billion in 2006 to more than $2.0 billion in 2009. Recently, this growth has slowed, with only an 8% year over year increase in 2009 – a dramatic decrease from 88% in 2007 and 42% in 2008. This decrease is likely a result of a challenging capital-spending environment, but also saturation and competitive pressures from Microsoft, and to a lesser extent Citrix and other open source alternatives. Both Zimbra and Spring Source, a provider of enterprise and web application development and management software which VMware acquired in August 2009, give the company more solutions to sell, presumably a higher price point, and upsell opportunities, which will in turn drive growth.
By combining virtualization technologies with applications, development tools, and IT management capabilities, VMware is providing an end-to-end solution that will be easier to deploy, while avoiding the need for enterprises to undertake complex integration projects to achieve the benefits of virtualization and cloud based services. This theme has been repeated several times recently as Cisco announced its UCS solution, Oracle announced its intentions to leverage the multitude of Sun offerings and HP announced its planned acquisition of 3Com. We expect VMware, through acquisition, to continue its strategy of offering a broader suite of core applications, as well as IT management and development tools for an end-to-end, “plug and play” offering running in highly efficient virtualized environments.
