Judging by the questions posed to VMware executives on the company's Q209 earnings call Wednesday, investors have the same big question as IT managers: With the release of vSphere 4, has VMware put enough distance between it and Microsoft's increasingly competitive Hyper-V to keep IT departments coming back for more?
On the call, VMware emphasized positive data points: 250,000 downloads of vSphere 4 in the first six weeks of release; revenue at the high end of its guidance. It also claimed strong "transactional" revenue from sales of individual licenses to the small and medium-sized businesses that are expected to be Hyper-V's sweet spot.Still watching Hyper-V
Investors appeared to buy in to VMware's story, sending VMware stock up 7% overnight to $33.66, its highest price since September 2008.
But VMware's continued success among existing customers is by no means assured.
As the University of Plymouth in the U.K. prepares to design a new environment for when its servers come off lease, it has watched the evolution of Hyper-V closely.
If it had to choose today, the university would probably stick with VMware, said Adrian Jane, the infrastructure and operations manager there. "Has Microsoft done enough to displace VMware? Right now, I don't think so. But can it do so in the next six months to make it worth our while? I don't know," he said.
"Microsoft is still significantly behind vSphere, and that's technology we are likely to take advantage of in the next 12 months," Jane added, citing vSphere features such as fault tolerance and thin provisioning. "If Microsoft hasn't developed this technology to sufficiently address these concerns, we'll probably be looking at a similar decision: a single homogenous virtualization platform."
Still, Jane wouldn't count Microsoft out. Functionality and performance are important criteria in selecting a virtualization vendor, Jane said. "But we'll also look at the commercial relationship with the companies involved." Right now, "we have good relationships with both VMware and Microsoft."Enterprise license agreements in limbo
Investors were particularly concerned about the decrease in enterprise license agreement (ELA) sales, which they view as an indicator of customer loyalty. ELA earnings for Q2 were down to 15% of total bookings, compared with 20% a year ago.
In its defense, VMware cited the fact that in Q1, the company closed two extremely large ELAs, skewing the Q2 comparison.
"Q2 rode the tailwind of two large transactions with the U.S. military," said Mark Peek, VMware CFO. As a result, "we didn't have the same pipeline of large deals."
The real test will come next year, when the first wave of ELAs signed in 2007 come up for renewal. "We only really started selling ELAs in earnest in Q3 2007, and most were for three years," said Peek. ELA license renewals will begin to impact revenue one year from now, he said.
Farm Bureau Life Insurance Co. (FBL) in West Des Moines, Iowa, is one such VMware ELA customer. Kent Altena, an infrastructure architect at the firm, said it will carefully weigh the ELA renewal decision in 2010.
"It really depends," Altena said. "We're perfectly happy with ESX, but less happy with the Enterprise/Enterprise Plus issue," referring to VMware's decision to stop selling the Enterprise Edition next year, in favor of a costlier Enterprise Plus. The decision to renew will hinge on the sorts of consolidation ratios FBL can get out of vSphere, and VMware's willingness to throw in extras that aren't included in the vSphere bundle. "If they throw in a lot of these 'value adds,' that's how it will get through," he said.
One thing is certain: The all-you-can-eat nature of ELAs will make it difficult for existing VMware ELA customers to do a wholesale migration off the platform.
ELAs promoting vendor lock-in
VMware ELA customer CUDL, a credit union financing firm in Ontario, Calif., paid about $400,000 for an ELA in 2007 that entitled it to install as much ESX and Lab Manager as needed. "We figured out our break-even point was 21 hosts," said Dan Draper, CUDL's data center manager that manages more than 100 ESX and standalone systems. "We have some sprawl, but for people who really embrace virtualization, going down the ELA route is a lot easier than buying individual licenses."
Between now and next year when the ELA expires, Draper said he expects to expand his use of VMware. VMware engineered the ELA to allow CUDL to "install whatever we want," at which point it locks in the price, and the customer pays only the support cost for the next two years. By the time CUDL's ELA is up, "needless to say, every server we have will have ESX on it."
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