VMware’s Services Division To Benefit From Sustained Growth In Global Cloud Computing Market

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Cloud computing and virtualization provider VMware (NYSE:VMW) has been one of the fastest growing companies in its domain over the past few years. Much of its growth in the early part of this decade came from virtualization software for servers that allowed users to better utilize their servers by allocating the virtualized resources of server hardware across multiple applications. Over the years, the increasing adoption of cloud-based services led VMware’s product offerings to include software-defined storage, and networking solutions over the cloud. The cloud computing market is expected to grow at a CAGR of 15% from 2014 through 2016, according to an estimate by Gartner. [1] Within the cloud computing market, Infrastructure-as-a-Service (IaaS) is one of the fastest growing sub-segments with a CAGR of 35% in the same period.

main1IaaS is cloud computing solution that provides virtualized computing resources over the cloud to customers, which is broadly the market that VMware operates in. Although VMware’s software license sales growth has slowed down in the last couple of years, its maintenance and services revenues have outpaced overall company growth in the same period. Much of the growth is primarily attributable to an increase in customer demand for hardware resources (networking, storage or server) on the cloud as compared to investing heavily on hardware infrastructure. As a result, IaaS appeals to large enterprises as well as small to mid-level businesses.

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VMware’s services division consists of maintenance contracts offered by VMware, which form a large chunk of services revenues. These contracts are crucial for the smooth functioning of VMware software, and require renewal after an average period of 2 years. Additionally, the division includes professional services which include design, implementation and training services offered by VMware to clients purchasing software licenses. We forecast VMware’s services division to continue to grow at a steady pace over the next few years, with maintenance revenues driving much of the growth.

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According to a report by research firm Markets and Markets, the global Infrastructure-as-a-Service market is expected to grow at a CAGR of 29% over the next five years. [2] Correspondingly, the growth rate for VMware’s maintenance revenue stream is likely to stay at near-historic levels owing to the market leading position for the company in its domain. We forecast VMware’s maintenance revenue to grow at a CAGR of over 7% to $4.5 billion by 2020.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to  Our Full Analysis For VMware.

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Notes:
  1. Gartner Says Worldwide Public Cloud Services Market Is Forecast to Reach $204 Billion in 2016, Gartner Press Release, January 2016 []
  2. Infrastructure as a Service (IaaS) Market forecast, Markets and Markets, November 2015 []