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

>> live from Las Vegas. It's the queue covering del Technologies. World twenty nineteen. Brought to you by Del Technologies and its ecosystem partners. >> Hello and welcome to Del >> Technologies with Cubes Coverage Our tenth year covering DMC World del World Here >> Pat Kelsey who test Not your time yet, but you're going to be coming on later. >> Great key note. Thanks for coming by. >> I appreciate it. Explored back tomorrow. You later. All right. >> Not Kelson. You're kicking off the cube coverage. Three days. The wall, the wall colors. Got two sets. Shotgun of content. We got to cube cannons blowing out the content. I'm John Force to minimum David. Want a key note? Uh, really kind of the tectonic plates in the industry. Kind of coming together you had on stage is something. The Tele CEO of Microsoft, Michael Dell, CEO of Down, founder of Del Technology and Pat Gayle Sr. Legends in the industry Captains of the industry. Really a critical juncture for Del technology worlds and a slew of other announcements. But the Del Cloud unified workspace but showing Microsoft on stage. This is a game changing move for Del technology world sure del del Technologies. But also of'Em. Where. Bm where in bed with eight of us. We know that cover that relationship now, going multi cloud all the way with Azure and seeing the CEO on stage Pretty incredible days. >> I think you nailed it. It's a V m wear story, John, and the numbers tell it. VM wears market value's eighty three billion Del owns eighty percent of it. That's sixty >> six billion. What's left. Dell's market value is forty seven billion. That says, the Del Cores worth negative nineteen billion. If it weren't for VM, where Satya Nadella wouldn't be here and you're seeing Michael Dell really drive the integration? He said that several times on stage today. How much collaboration? I love the collaboration across the divisions. You saw Jeff Clarke with Pack yell Sigur talking about new desktop management, talking about VM wear Cloud on del. It's of'Em were story You're right on >> and pack. Kelsey is to really key message up their simplicity, simplifying I t. The Common operate. I felt like we were in a Cube interview four years ago because that's was the basis of hybrid cloud now kind of coming to fruition. Clear visibility, at least on the tech stack side on the operating side, this is an operator world in a developer world, and simplicity and ease of operations is going to be the critical differentiated for the winners. >> Yeah, so So, John. First of all, I think we're getting some clarity on this multi cloud world. Look, one of the things that Veum where did so? Well, not just that wave, A virtual ization, but V Centre was the centre of I t management. And the question is, can they extend that into multi cloud world? When Veum where made the partnership with a W s. It's like, Oh my gosh, what does that mean to Del We got the answer today. What? That means Adele Veum were cloud on Del AMC hardware for me personally. That relationship between VM Rendell I think it's closer from the top executive all the way on down to the field go to market than it ever was. I was one of the first people working with VM where a DMC I watched that relationship emcee always kept them is kind of the way own you, But you're gonna be independent work across the board across the board. You hear. You know V s right. V X, Ray Allen and XX and P. K s and all these wonderful products Dell and VM work developing together, going to market together. It has ripples, but Amazon likes it. Microsoft like that big deal to see Veum wear and Microsoft partnered together. There are some challenges with some other partners Visa vi, Cisco And you know, some of some of the others, like IBM and HB that, if historically partner a lot with the anywhere but a lot of exciting news and definitely on >> and cha gi ve m were knocked down Google last month. >> So, guys, this is the theme we're seeing. We see Zoom went public. That was a videoconferencing disrupting an existing industry people thought would never be disrupted. You heard something and tell a stay on stage. Say on stage here that the new generation of new APS need new infrastructure. So a re vamp, a reset revitalisation of infrastructure to power APS via cloud. It's kind. The same game computing resource is software APS but with a whole new distributor architecture. A boom is coming. We see the stock market is up huge. You see the tech earnings last week across the board. Solid results. This is now a game change. This is not a bad business to be in. You know what was once could be. A declining business sees more remote workers, people working from multiple locations, mobile unification with cloud computing, a complete renaissance across the board game. I mean, this is a big revenue opportunity. >> Well, Mike Michael Dell's Kino wasn't just about products. It was about innovation. He talked about solving world problems, a big picture stuff on. Then he let Pat and Jeff get down a little bit more into the product. Weeds and you'LL hear more of that. But Michael is laying out a huge vision. What a juxtaposition between that's what, four, five years ago, you had sort of Joe Tucci, the chairman, up on stage. Michael was there. You had. You had John Chambers there. Now Michael owns the whole kit and caboodle. He's calling the shots, and people want to do business with them. Veum, where again, As you pointed >> out to me and Lucia question, you've been following the emcee for a long time. When we interviewed Michael Dell years ago, when he was in private that he bought AMC one of things. He said a lot. People were pooh poohing the whole deal. Why they want to buy that boat anchor. He said, scale matters. So are we seeing a new generations do elected to weigh in on this too, of competitive strategy where scale matters because you look at what Del Technologies has done and is doing there essentially rolled up the global I t business and are competing at scale with synergies not even looked at before early on when we talked about it. But we started see from fruit off that scale Amazon prove scale cloud Uh, Microsoft moves of the clouds scale up now the earnings air up Thoughts >> Well, what strikes me, John, is that, you know, they always talk about end end cos talk about synergy. Synergy is a code word for cutting what you heard today. You had be ave up there, you know, talking about a video and talking about the end end capabilities that Del technology brings Del by acquiring the emcee. And of course, VM. Where is a much way more strategic partner for corporations way more than many of these startups? Khun B. so that is their linchpin. You could maybe criticize him on innovation and, oh, maybe they don't have the hottest product, but and end throw in financial services and other services. People want to do business with this company because they trust >> to scale clouds scale, delle scale, scale. >> So we heard Tom suite this morning. Talk about that, Del. Maybe I missed a couple of turns in the marketplace and they needed to go private to kind of rearrange things When they bought emcee. We knew that there are a couple of tail winds that they could arrive hyper converge infrastructure. Absolutely one. We've been watching that trend since day one that their outpacing the industry there. The leader. If you talk from a software standpoint, VM wears their. If you talk from a hardware standpoint, Dell's there who's number two in the space nutanix, which also is a complicated relationship. But Del sells that in Vienna, where still is the primary hyper visor on that environment, so they're still beating the market growth. But they're doing that by gaining market share on DH taking it. Michael always loves to talk about when he's taking market from the business So the question is the overall macro, you know, how long can they keep that double digit growth going? And Dave, I know you're looking to begin with Tom Sweet. A >> ninety billion dollar business grew fourteen percent last year. So this company, in order to grow it has to gain share because the market is not. You're not going that fast. You can't rely on repatriation. I'm sorry that people are going to just disappear from the cloud and come back. So you've got to gain share the other thing, I think, to their favours. Let's face it, they really did have their act together in storage. They were kind of missing the boat there and took their eye off the ball. PC stayed strong. They got their act together in storage, which helped with the product. Mitch mixed higher margins. So last year was a very, very strong year. Twenty twenties going to be a tougher compare, but it seems like they still have some knobs to turn >> just about competition. But, um, Nutanix, what do they do? VM where relationship with a W s. I'm sure. Andy Jackson looking distant, healing words like chaotic, complex, the bane of our existence. Kind of talking about cloud in general and you deal with multiple clouds were packed. Nelson, you say that, um kind of public cloud losing babe flavor here means to you got the public cloud dominating. Now, all this talk about on premise and you got nutanix out there. What? What happens in Nutanix here? >> Yes. Oh, look, Nutanix astute. Doing well on Dell is a very important O am. But way just on nutanix made a big partnership with Hewlett Packard Enterprise. Which, of course, I'm sure Michael doesn't like that happening. You know, Nutanix needs to keep growing their rice software company. It's interesting to talk about the other competitors I mentioned Cisco. Cisco is transforming themselves into a software company. Del Del Technology is the core business wants to be the leading infrastructure company they have VM wear. Bumi and Pivotal are their software branch with the core. Business is really around that scale that that that whole you know, infrastructure piece and it's a different chuck it the Mark >> Chuck Robbins that Cisco CEO Cisco's not yet made a big, bold move like a red at move. Well, could nutanix be that move game? >> Well, I don't know. I don't know. I think I play is an I o T. But But But to your point about your question about the cloud Cloud is not attenuating Amazons, with thirty billion dollar company growing forty one percent a year throwing off twenty five thirty percent operating margins. I mean, that's where the innovation is. That's where the scale is. Everybody wants to do multi cloud because they don't have a cloud. It's your only path if you don't have a cloud. So So I think Cloud's got a long walk >> look and they talk to you know, I tell you, you know, my community got all excited when Michael got up on stage and said, We're all in on Corin eh? Teas and what we're doing with multi cloud you're going to hear under the covers here. Everything is going from VM wear V M as that unit down to container ization, you know, talking about at that application modernization. That's where they're going to lean on VM wear modernizing some what they're doing. And you know, of course, pivotal in Bhumi are the ones that are the tip of the spear in that area. >> I don't think David, it's a suit point there. The Amazon growth will continue because if you look at what Del Technologies has rolled out today, certainly that Microsoft thing is well shot across the bow. Multi cloud, Nice checkbox. Great to see the committee of the CEO there. But everything benefits with sass in the clouds. SAS is a cloud game And if scale on the clouds gonna be there, I only see the public cloud getting stronger because the scales they're the economics cannot be ignored. Certainly the data equation will be interesting, but anon a premise infrastructure that's set up operating like a cloud. I think we'LL ultimately benefit because Amazons weak link, if there is one, is that they really don't have a sass business, right? So they have a series of customers that deuce ***. But that's going to be an opportunity for all those workloads to run on the clouds. And the question is >> going to be >> how how >> cloud like is what we here today. And I I'm a skeptic. I want to see it first, you know, Show me. >> Yeah. No, I mean, what do we hear? What are you know Veum works, you know, services on Azure. It's the STD sea stack. So we understand what that is. It is more than just virtualization. But we used to say Private Cloud just can't be virtual ization plus plus. So Veum wears, you know, expanding and changing that model. But, you know, is it cloud enough? I mean the David, you know? Oh, you want to finance it with an effects we could totally have That affects affects the two. It's great. But, you know, >> at the end of the day, innovation and economics winds and the cloud guys have the scale. I mean, look at the amount of money we heard from Google last month. They spent what, twelve billion dollars in Cap Ex through April. It would take Oracle six years to spend that much in Cap Exit would take IBM three and a half four years to spend that much in CAF X. They're cost structure is going to be so much lower. And ultimately, I believe that's going to win. >> Talk about the winners and losers because we heard at the Bank of America you mentioned also what you just said. They're the future has redefined not how you got here, how you move forward. What's the competitive positioning posture for a winning supplier in the modern era of Iranian Cloud? >> I think it's really smart that Adele is forcing these integrations and getting out ahead of this multi cloud thing, I guess said before. If you don't have a public cloud, you've gotto get into that multi cloud management business. VM wears their their their obvious linchpin. They're early in the game. This is Guest is going to play over the next five to seven years. But VM wear has knocked down eight of us. Google, now Azure. They've got a relationship with Alibaba. It's just a matter of time before you see that one happening. So they are in the pole position. The other one is IBM Red Hat. I mean, those are the two favorites in my >> and by the way, red hats here. And if you want to run, you know the latest greatest red hat solution on the Del Ready notes. You know, of course you can do that. So you know, we'd love to talk about competition, but at the end of the day, it's what's good for customers and can they pick and choose the option of their choice. How much do I get? A full stack. That's the same. And how much is their choice? And I didn't hear the word choice. Ah, lot because, you know, they were focusing on certain announcement day. But absolutely, Adele has done a good job in the space in the cloud space of laying out the top choices that customers want. >> The choice wasn't used because the choices del they'LL ship you VX rails. I'm not sure they'll be shipping other things in there. Maybe they will, too. Thanks for the analysis. Degraded. Al says, man, It's gonna be a great show. Three days of wall to wall comes to cube sets two cannons of content coming your way here A Dell Technology world. The Cube cannons stay with us for three days. I'm jumpers Do Minimum day Volonte Lisa Martin, Rebecca Knight All here in Las Vegas for Delta No stay with us We'LL be right back