from the silicon angle media office in Boston Massachusetts it's the queue now here's your host David on tape hi everybody welcome to this breaking analysis this is Dave Volante and VMware announced yesterday its quarterly results and it also announced the acquisition of two companies pivotal which was the news was broken before of the earnings announcement but also carbon black a Walton Massachusetts based security company and you may be wondering what the hell is VM we are up to what are they doing and I want to sort of unpack that and explain it to you from my perspective so pivotal and carbon black are getting paid 2.7 billion and 2.1 billion dollar respectively is the value of those deals so VMware is paying an enterprise value to sales ratio of 3.8 and 7x respectively for pivotal and carbon black the motivation here in my view is really to clean up pivotal I'm going to explain that in a second and also to increase VMware's cloud multi cloud and recurring revenue contributions today the SAS business of VMware is only about 12% of the company's revenue so they want to increase that because they want to have a cloud like model and recurring revenue the challenge for a company like VMware who's largely based on perpetual license models upfront get paid for the whole license and then you do some maintenance is it's like a heroin injection you get the big rush of cash whereas with the recurring revenue model you're streaming out over and deferring it over a twelve or thirty six month or 24 month period and so the revenue impact is somewhat negative on the income statement and that's putting a little bit pressure on the stock but VMware management understands that that long term it's a much more predictable and attractive business model to be a SAS company than it is to be a traditional license based perpetual license based software company now the pivotal deal is somewhat complicated and of course when Michael Dell's involved we tend to have these complicated transactions as organization is very savvy in terms of from a financial standpoint we saw that remember when Michael Dell and Silverlake bought a EMC for 67 billion dollars they shelled out only only four billion dollars of their own cash now they took out a lot of debt but it was a very interesting and complicated financial transaction so part of this is cleaning up some of that transaction that all I'll explain in my opinion VMware is getting a pretty good deal for both pivotal and a decent deal for carbon black so so let me explain first of all Alex if you would bring up the the chart on pivotal let's take a look at it now you can see here you know pivotal did its IPO you know last year a when IPO is I think that we know close to a four billion dollar valuation and you can see the stock is not performed well subsequent to that it you know it was never able to get back to its IPO price it had a you know decent uptick you know in in March of this year as the market was running up and you can see the earnings miss in in the late spring early summer back in the June announcement date big hit there the company's been struggling in the marketplace you know it's got a lot of assets remember pivotal was originally put together as a collection of what I used to call misfit toys some of the EMC assets some of the VMware assets they put together at Palmer its you know created this entity to try to create a platform for application development Michael Dell saw this as an opportunity to take it public and actually you know create another asset in part of the Dell family but you can see here post June you know the the decline in the stock price and then you see the announcement from VMware or the rumor that came out actually was an announcement that came out in the press this week and the stock jumped over 70% on a day when the Dow dropped 800 points but you can see now the the today's price it was fourteen eighty eight when I took this snapshot about 50 cents on the dollar from the IPO price and so you can see that that VMware and Michael Dell are kind of doing the top cat they did the IP that pulled the coin back and now they're gonna repurchase the stock so kind of interesting but here's what the interesting part is VMware is only paying nine hundred million dollars in cash to the public shareholders how can that be so here's the deal vmware already owns about 15% of pivotal where dell owns about 70 percent of the company so what's happened l controls 95 percent of the voting shares which is why you know one of the reasons why this stock really never took off it's one of those one of those ownership structures and governance structures where you know a single individual really controls the stock so that often times keeps stock prices down but nonetheless Dells 70% is being exchanged for VMware stock for pivotal stocks that are owned by Dell so let me read you the statement Alex if you could bring up that statement from the earnings call this is from the VMware a CFO explaining the mechanics with regards to pivotal VMware has agreed to acquire a pivotal at a blended price per share of eleven dollars and 71 cents comprised of $15 per share in cash to public stockholders that's why the stock is trading at 14 dollars and 88 cents today and a little bit of arbitrage flowed in there and VMware's Class B common shares exchange for pivotal Class B common shares held by Dell technologies in an exchange rate of point zero five five VMware shares for each pivotal share the transaction has an excuse me enterprise value of 2.7 billion Dell technologies will receive approximately 7.2 million shares of VMware Class B common stock and now drew aggregate this results in an expected net cash payout for VMware of 0.8 billion I said I said point nine billion the impact of the equity issue to Dell technologies would increase its ownership stake in VMware by approximately 0.34 percentage points to a total of 81 0.09 percent based on the shares currently outstanding as it said VMware currently holds 15 percent of outstanding shares pivotal ones clothes will update blahblahblah so Michael Dell's buying VMware stock he's increasing his share of VMware which is also a kind of an interesting side note but now let's look at the pivotal fundamentals does this make strategic sense yes in my opinion why is that this is all about containers and it's all about next-generation application development for cloud it's also a hedge for VMware everybody said containers are gonna kill VMware well it's it's a hedge in the instance that that that containers start to impact VMware's traditional virtualization business now as I showed yesterday on the video where I was looking at ETR research there's no evidence today that it containers are slowing down the spending on VMware you deploy containers in many many ways certainly they're deployed in in bare metal and that's somewhat of a risk to a VMware but they're also they're also deployed on top of virtual machines on top of VMware so you know right now it's not been a negative for for VMware and by acquiring pivotal it can bring those synergies into the VMware mothership which is Dells a software mothership I call it and there's also synergies in sales and marketing and R&D and it kind of cleans up pivotal and consolidates the assets now let's look at carbon black this is a security play and it's really a different story than pivotal first you got to remember the Pat Gallagher told John Fourier in me several years ago in the cube that security is a do-over and I'll tell you right now Pat Gail singer and VMware are architecting a security do-over you've got on pram you've got hybrid you've got cloud you've got multi ply cloud traditional security models aren't gonna cut it so let's look at this clip by pat gyal singer and he'll it'll give you a sense of how he and VMware are thinking about the future watch this and we'll come back and talk about it Steve Herod on our Crouch at pre game on Friday with the hot opportunities are for startups he said security or mainly not getting caught at this perimeter basically what's your view on that well you know the krusty you know the hard crust the exterior and the soft gooey inside as I described it this morning my morning breakfast every day and you know with it right this whole idea of micro segmentation and nsx really redefines how you build networks and that's gonna allow us to refactor every aspect of security every aspect of routing and load balancing etc okay so what Pat was saying is he's talking about micro segmentation nsx the critical acquisition from nice Syrah refactoring security and everything security is a do-over okay Alex let's bring up the chart of carbon black I wanna I want to look at that and explain to our audience kind of what's going on there so you can see it's a it's a little bit of a different picture from from pivotal you've got that kind of bathtub look to it so you see at the IPO it was a hot company but it underperformed and and it was struggling there you know coming into at the end of last year and then into 2019 you could see it was kind of bouncing around at its lows and then what happened was you saw it earlier this year the company guided down so you can see that you know big drop after into February announced you big spike downwards they guided down the CFO resigned and there were several down grades from Wall Street analysts and that really crushed the stock but then you sort of bouncing back through May and then what happened is you know you had this growth company they've grown at 25 to 30% a year and they beat earnings estimates in May so they guide it down in in February but then they beat and you had a new CFO you just kind of had this new renewed emphasis on on the company and then this summer they hired morgan stanley and so the acquisition rumors started and that you can see you know into august it starts to pick up again so i have no doubt that this was a competitive bid of vmware wanted it so so here's another comment that i want to share with you from last year at VMworld and again it'll give you an additional insight as to how Pat Gallagher is thinking about the future go ahead and play the clip and then we'll come back what together into my application and in that sense the application is a network of these different services data sources etc and we believe in that you're bridging across silos isn't important it is essential to do that yeah because as you say security models across that you know how does the you know when that application isn't performing like I expect it to how do I go even debug it so think about what Pat said the application is a network of services services it's not as such it's not important it's essential that we deliver that in a consolidated model including security models okay so you got VMware looking to make its platform the place to run modern apps you got carbon black at 250 million dollar company trading at a discount of about 5.5 X revenue they got strong growth at the time but 25 to 30 percent of years it's consistent and then nearly 40 percent of its business is coming from the cloud and the cloud business is growing at 70 percent a year so VMware remember jettisoned its cloud business vCloud air but it still has a desire it covets participating in cloud at least in the form of multi cloud and on-prem cloud like experiences Carbon Black is a modern endpoint security company you heard John's question about the perimeter and you know you can't build moats anymore you you really endpoints are really the the new vulnerability especially when you start thinking about IOT so VMware is desirous of cloud revenue multi cloud and recurring revenue you got a growth company that's looking to sell they've got leading technology as I said this it was a competitive bid and VMware wanted it so now the other thing is VMware knows carbon black they've they've integrated carbon black into its app defense offering and VMware has been expanding its portfolio not so quietly lately app defense NSX has a you know with its micro segmentation is really a security use case AirWatch has a security component cloud choreo ee8 security was another acquisition bracket intrinsic was you know these little tuck-ins you sort of draw a picture of how Dell senior and VMware are starting to build out its portfolio again making vmware the software mothership security is a critical component of that it also gives VMware much more of a strategic entrance into the c-suite particularly with the chief information security officer we've talked many times on the cube that security is now a board level discussion to the extent that VMware can be the platform for multi cloud security and of course you know that's not assured right there battling cisco who's coming at it from a network position they're battling google who's coming you know announced anthos they're certainly battling Microsoft certainly IBM and Red Hat have similar designs and as we've said watch this space Amazon ultimately we think is going to get into this area but any rate VMware's making security a fundamental part of its platform it's bridging those silos is what what Pat Gayle singer talked about in the video and giving you access to sets of infrastructure so with pivotal it's building out you know in cloud native application development and and tooling container technology and that's clearly strategic to its multi cloud strategy helps VMware stay relevant VMware doesn't own a cloud so it's got to move fast and be first in this multi cloud space ok so let me summarize VMware's gonna spend 2.7 billion on two key acquisitions they're gonna add it's gonna add a billion dollars in two points of revenue growth that's largely in SAS and hybrid cloud and recurring revenue for VMware and three billion dollars in year two now let me do some Volante math for you VMware trades at about five to six times revenue so essentially they just added five to six billion dollars in market value in year one and by the way the stock is off eight percent today so because of these acquisitions so and it's got upside in my view assuming that you know there's not some big economic downturn but we're talking about 15 to 18 billion in market cap in year two so this acceleration VMware's transition to SATs ass it's a cash flow positive and the creative acquisitions in year two according to vmware vmware throws off nearly four billion dollars in annual and operating annually and operating cash flow to me this is a good use of cash balancing acquisitions and to continue growth and tuck in your ability to be that platform for cloud and multi cloud services and hybrid cloud is a good use of cash I like it better than stock buybacks frankly so a combination of stock buybacks organic Rd which VM was very strong engineering culture and acquisitions in this case using your stock as currency I like the deals we're gonna watch him very closely and we're gonna be talking about this this next week at vmworld so watch the cube at vmworld the cube net will be there myself john fourier stu minimun Jeff Rick the entire team celebrating our 10th year at vmworld if you have any questions on this or comments please tweet me at diva want a thanks for watching everybody we'll see you next week

from Las Vegas it's the queue covering VMworld 2018 brought to you by VMware and its ecosystem partners and we're back here at the Mandalay Bay in somewhat beautiful Las Vegas where we're doing third day of VMworld on the cube and on Peterborough and I'm joined by my two lead analysts here at Ricky bond with me Jim Camilo's who's looking at a lot of the software stuff David floor who's helping to drive a lot of our hardware's research guys you've spent an enormous amount of time talking to an enormous number of customers a lot of partners and we all participated in the Analyst Day on Monday let me give you my first impressions and I want to ask you guys some questions here you thought so I have it this is you know my third I guess VMworld in or in a row and and my impression is that this has been the most coherent of the VM worlds I've seen you can tell when a company's going through a transition because they're reaching to try to bring a story together and that sets the tone but this one hot calendar did a phenomenal job of setting up the story it makes sense it's coherent possibly because it aligns so well with what we think is going to happen in the industry so I want to ask you guys based on three days of one around and talking to customers David foyer what's been the high point what have you found is the most interesting thing well I think the most interesting thing is the excitement that there is over VMware if you if you contrast that with a two three years ago the degree of commitment of customers to viennois the degree of integration they're wanting to make the degree rate of change and ideas that have come out of VMware it's like two different companies totally different companies some of the highlights for me were the RDS the bringing from AWS to on site as well as on the AWS cloud RDS capabilities I think that's a very very interesting thing that's the relational database is services the Maria DB and all the other services that's a very exciting thing to me and a hint to me that AWS is going to have to get serious about well Moore's gone out I think it's a really interesting point that after a lot of conversations with a lot of folks saying all AWS it's all going to go up to the cloud and wondering whether that also is a one-way street for VMware Casta Moore's right but now we're seeing it's much more of a bilateral relationship it's a moving it to the right place and that's the second thing the embracing of multi-cloud by everybody one cloud is not going to do everything they're going to be SAS clouds they're going to be multiple places where people are gonna put certain workloads because that's the best strategic fit for it and the acceptance in the marketplace that that is where it's going to go I think that again is a major change so hybrid cloud and multi cloud environments and then the third thing is I think the richness of the ecosystem is amazing the the going on the floor and the number of people that have come to talk to us with new ideas really fascinating ideas is something I haven't seen at all for the last last three four years and so I'm gonna come back to you on that but it goes back to the first point that you make that yeah there is a palpable excitement here about VMware that two-three years ago the conversation was how much longer is the franchise gonna be around Jim but now it's clear yeah it's gonna be around Jim how about you yeah actually I'm like you guys I'm a newbie to VM world this is my very first remember I'm a big data analyst I'm a data science an AI guy but obviously I've been aware of VMware and I've had many contacts with them over the years my take away my prime and I like Pat Gail singers I agree with you Peter they're really coherent take and I like that phrase even though it sounds clucking impact kind of apologize they are the dial tone to the multi-cloud if the surgery really gives you a strong sense or who else can you character is in this whole market space cloud computing has essentially a multi cloud provider who provide the unifying virtualization glue to help their custom to help customers who are investing in an AWS and maybe in a bit of you know you're adopting Google and Microsoft Azure and so forth providing a virtualization layer that's the above server virtualization network virtualization VDI all the way to the edge nobody can put it all is putting it all together and quite the way that VMware is one of the my chief takeaways is similar to David's which is that in terms of the notion of a hybrid cloud VMware with its whole what's it's doing with RDS but also projects like this project dimension which is in project in progress taking essentially the entire VMware virtualization stack and putting it onto an appliance for deployment on the edges and then for them to manage it VMware of this their plans as an end-to-end managed edge cloud service and so forth Wow the blurring of public and private cloud I don't even think the term hybrid cloud applies it's just a blurry the common cloud yeah it's moving to the workload the clouds moving to the data which is exactly what we say they are halfway there in terms of that vision halfway in a sense that RDS has been announced the you know on the VMware and this project dimension they're well along with that if there was a briefings for the analyst space I'm really impressed for how they're architecting this I think they've got a shot to really dominate well I'll tell you so I would agree with you just to maybe provide a slightly different version of one of the things you said I definitely agree I think what's VMware hopes to do and I think they're not alone is to have AWS look like an appliance to their console to have as you look like an appliance of their Khan so through free em where you can get access to whatever services you need including your VMware machines your VMs inside those clouds but that increasingly their their goal is to be that control point that management point for all of these different resources that are building and it is very compelling I think that there's one area that I still think we need more from as analysts and we always got to look through no and what's yeah what was more required and I hear what you say about project dimension but I think that the edge story still requires a fair amount of work oh yeah it's a project in place but that's going to be an increasingly important locus of how architectures get laid out how people think about applications in the future how design happens how methodologies for building software work David what do you think what when you look out what what is what what is more is needed for you so really I think there are two things that give me a small concern the the edge that's a long term view so they got time to get that right but the edge view is very much an IT view top-down and they are looking to put in place everything that they think the OT people should fit in with I think that is personally not going to be a winning strategy you you have to take it from the bottom up the world is going to go towards devices very rich devices and sensors lots of software right on that device the inference work on those devices and the job of IT will be to integrate those devices it won't be those devices taking on the standards of IT it'll be IT that has to shape itself to look after all those devices there so that's a that's the main viewpoint I think that needs adjustment and it will come I'm sure over time but as you said there's a lot of computer science it's going to be an enormous amount of new partnerships are gonna be fabricate exactly to make this happen Jim what do you think yeah I agree terms of partnerships one big gap from both VMware and Dell technologies partnerships and romance and technology proposes AI now they have a project VMware call from another project called project Magna which is really AI ops in fact I published a wiki about reports this week on AI ops AI to drive IT Service Management and to and they're doing some stuff they're working on that project it's just you know the beginning stages I think what's going to happen is that vmware dell technologies they're gonna have to make strategic acquisitions of AI solution providers to build up that capability because that's going to be fundamental to their ability to manage this complex multi called fabric from end to end continuously they need that competency internally that can't be simply a partner providing that that's got to be their core competencies so you know I'm gonna push it I'll give you the contrarian point of view okay we actually had Khamsin VMware we've had a lot of conversations about this does that is that a reflection of David's point about top-down buying things and pushing it down as opposed to other conversations we've had about how the edge is going to evolve where a lot of OT guys are going to combine with business expertise and technology expertise to create specialized solutions and is and then VMware is gonna have to reach out to them and make VMware relevant to them do you think it's going to be VMware buying a bunch of stuff or an a-grade no solution or is it going to be the solutions coming from elsewhere and VM at VMware I just becoming more relevant to them now you can still be buying a bunch of stuff to get that horizontal in place but which way you think it's going to go I think it's gonna be the top-down they're gonna buy stuff because if I talk to the channel one of the channel people this morning about well you know but they've got an IOT connected bundle and so forth they announced this show you know I think they agree with me that the core AI technology needs to be built into the fundamentals like the IOT stack bundle that they then provide to the channel partners for with you know with channel specific content that they can then tweak and customize to their specific needs but you know the core requirements for a I are horizontal you know it's the ability to run neural networks to do predictive analysis anomaly detection and so forth this is all cross-cutting across all domains it has to be in the core application stack they can't be simply something they source for particular channel opportunities it has to be leveraged across you know the same core tensorflow models for anomaly detection for manufacturing for logistics for you know customer relationship management whatever it's or are you saying essentially that then VMware becomes that horizontal play even though even if the solution providers are increasingly close to the actual action where the edges III I'm gonna disagree we can gently on that but we'd still be friends [Music] no it's you know I'm I'm an OT guy of hearth I suppose and I think that that is going to be a stronger force in terms of VMware but there will be some places where you it will be top-down but other places that where it's going to be need needed to adjust but I think there's one other there very interesting area I'd like to bring up in terms of of this question of acquisition what what we heard about beforehand was excellent results and VMware has been adding a you know a billion dollars a year in terms of free cash there and they have thirteen billion in short term cash there and the the refinancing from Dell is gonna take eleven of that thirteen and put it towards the towards the the company now you can work towards deltek yes well just Dell Dell as a hold and and silver later towards those partners I I personally believe that there is such a lot of opportunity that's going to be out there if you take NSX for example it has the potential to do things in new areas they're gonna need to provide solutions in those new areas and aggressively go after those new areas and that's going to mean big investments and many other areas where I think they are going to need acquisitions to strengthen the whole story they have the whole multi-cloud story about this real-time operating system in a sexy has a network routing virtualization backplane I mean it needs to go real-time so sensitive guaranteed ladies if they need that big investments guarantee yeah they need to go there yeah so what we're agreeing on that and I get concerned that it's not going to be given the right resources you know to be able to actually go after the opportunities that they have genuinely created it's gonna mean from you see how that plays out so I think all drugs in the future I think saying though is that there is going to be a solution a set of solution players that VMware is going to have to make significant moves to make them relevant and then the question is where it's the values story what's the value proposition it's probably gonna be like all partnerships yeah some are gonna claim that they are doing it also some are gonna DM where it's gonna claim that they do more of it but at the end of the day VMware has to make themself relevant to the edge however that happens I want to pick up on NSX because I'm a pretty big believer that NSX may be the very special crown jewel and a lot of the stuff this notion of hybrid cloud whatever we call it let's just call it extended cloud let me talk of a better word like it is predicated on the idea that I also have a network that can naturally and easily not just bridge but truly multi network interoperate internet work with a lot of different cloud sources but also all different cloud locations and there's not a lot of technologies out there that are great candidates to do that and it's and I look at NSX and I'm wondering is that gonna be kind of a I want to take the metaphor too far but is that gonna be kind of a new tcp/ip for the cloud in the sense that you're still gonna run over tcp/ip and you're still gonna run over the Internet but now we're gonna get greater visibility into jobs into workloads into management infrastructures into data locations and data placement predictive movement and NSX is going to be the at the vanguard of showing how that's gonna work and the security side of that especially to be able to know what is connected to what and what shouldn't be connected to what and to be able to have that yeah they need stateful structured streaming others Kafka flink whatever they need that to be baked into the whole nsx virtualization layer that much more programmable and that provides that much better a target for applications all right last question then we got a wrap guys David as you walk out the door get in the plane what are you taking away what's your last impression my last impression is one of genuine excitement wanting to work wanting to follow up with so many of the smaller organizations the partners that have been here and who are genuinely providing in this ecosystem a very rich tapestry of of capability that's great Jim my takeaway is I want to see their roadmap for kubernetes and serverless there wasn't a hole last year they made an announcement of a serverless project I forgot what the code name is didn't hear a whole lot about it this year but they're going up the app stack they got a coop you know distribution you know they're if they need a developer story I mean developers are building functional apps and so forth you know you can and they're also containerized they need they need a developer story and they need a server list story and they need to you need to bring us up to speed on where they're going in that regard because AWS their predominant partner I mean they got lambda functions and all that stuff you know that's that's the development platform of the present and future and I'm not hearing an intersection of that story with VMware's a story yeah my last thing that I'll say is that I think that for the next five years VMware is gonna be one of the companies that shapes the future of the cloud and I don't think we would have said that a couple of names no they wouldn't I agree with you so you said yes all right so this has been the wiki bond research leadership team talking about what we've heard at VMware this year VMworld this year a lot of great conversation feel free to reach out to us and if you want to spend more time with rookie bond love to have you once again Peter burrows for David floor and Jim Kabila's thank you very much for watching the cube we'll talk to you again [Music]