First let us break down the facts around the deal:
As has been analysed threadbare the deal reduces the total debt Dell is carrying and will even reduce the ratio of Dell debt to EBITDA. As a result, it is highly likely that Dell’s credit rating will move up from their current BB+ level to investment grade – which can have a lot of implications for future capital raising. There is also a buzz in the market that Dell Technologies may also sell off Boomi soon and write down another USD 3 Billion approximately in debt.
It is interesting to note that the company has been willing to let go off VMware even though it will dilute their profitability ratios – VMWare business being obviously more profitable than Dell’s traditional businesses which are heavily based on products.
The last few years has seen Dell reselling a fair amount of VMware products. From a number of perspectives Dell has been a key reseller for VMware and now contributes almost 34% of VMware’s revenues.
This chart is a testament to the power of execution that is inherent within Dell. This performance was aided by market growth – but even then it is remarkable how Dell has been able to scale up taking VMware to their customers. The two companies have very different sales cycles. A VMware sale typically has a longer cycle with a completely different set of touchpoints from the boxes that Dell is so good at selling – which have shorter cycles. The sales cycle for EMC products is closer to VMware’s which would have helped. The sales of the VXRail hyperconverged appliance have also jumped in recent times and this would have driven an equivalent spike in VMware revenues. It is still a remarkable achievement to be able to bring these three diverse groups together and grow revenue.
Market Impact of the Spin-Off
Does it make sense then for VMware to part with their largest reseller? Would it not be better for VMware to continue to drive this and use Dell’s execution skills to drive more growth? Data suggests that there could be another twist to this story.
VMware has been growing impressively as a company when one looks at the black line and while the growth has slowed in percentage terms, this is on a much higher revenue base. FY2021 revenue is close to 2x the revenue in FY2014. However, when one considers it without the Dell reselling revenue (the red line) it looks a lot less impressive especially in the last couple of years when it is an anemic 3%. When comparing this growth we also see a slowdown of sorts in recent years for VMware.
Anecdotal evidence suggests that vendors such as HPE became more cautious and tried to diversify their business. It is entirely possible that if we looked at VMware as two separate businesses – one with Dell and one independent – the independent business has been losing share in the last few years.
The optical separation from Dell may then help VMware in rebuilding stronger relationships with the other players in the market including the hyperscalers. This may fuel further VMware growth. To do that VMware will have to manage a balancing act:
On the one hand keep growing their reseller revenue with Dell. They are on a good wicket so far and need to make sure this continues. While the revenue from appliances – which come loaded with VMware – is a sure-fire proposition, other growth needs to be harvested carefully. Dell has a multitude of offerings and taking their eyes of the VMware ball is super easy.
Build trust and closer ties with the other vendors to keep driving revenue. VMware’s leadership in the market means they already have ties with other industry leaders like HPE, AWS and so on. These will need to become much deeper; VMware will need to build the trust that they will give these vendors equal status even as they are building new appliances with Dell.
The one complicating factor here is that Michael Dell remains the Chairman of the Board of VMware. This may give other vendors pause and they may still want to keep their options open instead of putting all eggs into the VMware basket.
VMware is at a fairly critical inflection point in their business. The growth of cloud technologies still bodes well for virtual machines which has been their mainstay, but this is also likely to drive growth for more containerisation. They have great products for that part of the business also. However, as container adoption is likely to explode VMware would not want vendors to shift, to say Red Hat, and develop deeper partnerships with them or other competitors. They would like to keep the vendors on VMware – be it a virtual machine or a container. One does feel the future battle for VMware really rests on how well they will be able to grow in the container space. This will have to be done while continuing to innovate to keep the lead in the virtual machine space. Doing it will be quite a feat!!
Finally, what then of Dell? The company seems to have a talent for running businesses which are in long-term secular decline – but running those businesses well. Their PC business is delivering almost 7% operating income and has continued to show growth. The PC market last year was on fire thanks to the pandemic which dramatically increased the demand for devices – growth was double digits for a market which has declined almost every year since 2011. As Dell is fond of saying the PC industry has sold over 5 billion machines since the PC was declared dead!
The server market seems to have stagnated over the last couple of years which is a bit of a surprise given the growth in cloud. Dell’s revenue has declined two years in a row pointing to possible issues which need fixing in that part of the business.
As the company focuses on these key challenges in the market it probably makes sense for them to lower their debt and earn more freedom to operate. One never knows – given the number of surprises that Michael Dell has engineered over the last decade such as taking Dell private, acquiring EMC, stabilising it, then going public again, making a windfall in the process – if he has some other rabbits yet to be pulled out of his hat!!!
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5/5 (2) Recently IBM and Vodafoneannounced a new strategic commercial agreement, as a joint venture, to provide their clients with the ability to integrate multiple clouds that have a need to access emerging technologies such as 5G, AI, Edge Computing and Software Defined Networking. Under an eight-year engagement valued $550 million (€480 million), IBM will provide managed services to Vodafone Business’ cloud and hosting unit.
Businesses are becoming more and more challenged to run their operations and business processes in a seamless manner as data is distributed and managed across more and more clouds. Together, Vodafone Business and IBM aim to remove these complexities to support the basis of any digital transformation and enable a company to share data freely and securely across its organization.
On the surface, this announcement makes sense if you are a Vodafone business customer who wants to take the next step in a digital transformation journey. The convergence of multi-clouds has the ability for companies to enrich their own data management systems with external sources. With the purchase of Red Hat late in 2018, IBM now has the ability and credibility to offer that capability. However, as many IoT-based solutions create the data to fuel these cloud processes, IBM has not had a clear Edge Computing or network connectivity strategy. This is where Vodafone can help IBM connect the edge of the network to the enterprise systems. This announcement seems like a complimentary win-win situation for both sets of IBM and Vodafone customers.
However, this market is still shaking itself out and there are many other competitive offerings to Red Hat. There are startups such as RightScale and Morpheus who can offer up multi-cloud management. Alternatively, as a mature company, VMwarecompetes head to head with Red Hat and has had a long-standing partnership with Vodafone. In particular, VMware and Vodafone have partnered in telco specific functions such as NFV and 5G.
To understand the importance of VMware in the midst of this announcement is to appreciate the end-to-end customer experience that VMware can bring to telco customers such as Vodafone. As 5G rolls out and NFV-based network slicing becomes a valuable onboarding differentiator VMware could offer its vCloud NFV solution to Vodafone’s customers. Vodafone’s customers could have access to the same multi-cloud services from VMware and not IBM while obtaining AI, cognitive and ML services available from the major public cloud providers (such as AWS, Google and Microsoft). VMware’s position at the edge of the network would, therefore, appear to leapfrog IBM’s position. Vodafone Business’ customers could bypass IBM and its cloud services strategy. At the end of the day, IBM could be left with only the managed services contract while missing out on analytics and cognitive business services.
To negate this scenario, IBM will have to lead more and more with Red Hat and be willing to downplay the cognitive and machine learning services. Business solutions in vertical markets such as agriculture are extremely price sensitive and customers will look closely at the cost of connectivity followed by the cost of data acquisition to enrich their business outcomes. We believe that if the cost to run data science and cognitive services are too expensive, then Vodafone customers will seek the same tools and services from other cloud service providers and not IBM.
Our advice to tech buyers who are in the midst of business transformation should consider how they fuel their decision-making engines for analytics, machine learning, and cognitive computing. Real-time processing and dissemination of business outcomes is one of the table stakes for a successful digital company. As a result of that, seamless end-to-end processing across a complex and distributed enterprise infrastructure is a challenge that needs to be overcome. Tech buyers should ask if IBM’s edge computing strategy and Vodafone’s connectivity are mature enough to funnel IoT-data generated smart data to a broad inter-cloud infrastructure.