All right. Thank you everyone for joining us. For those of you who don't know me, my name is Keith Weiss. I run the Morgan Stanley Software Research effort here in the U.S., not global. I'm very pleased to have with us kicking off the TMT conference for me, CEO from VMware, Raghu Raghuram. Raghu, thank you so much for joining us again. Glad to be here. Now, as CEO. Before we get started, Paul's gonna yell at me if I don't read the safe harbor statement. Statements made in these discussions which are not statements of historical fact are forward-looking statements based on current expectations. Actual results could differ materially from those projected due to a number of factors, including those referenced in VMware's most recent SEC filings, Form 10-Q, 10-K and 8-K. All right, with that out of the way. Raghu, thank you so much for joining us again, now as CEO of VMware. Mm-hmm. I think the last time you were here was prior to that new role for you. Looking back, 2021 was a pretty formative year for VMware. A lot of pretty significant structural changes. You had the spin-off from Dell. We have a new CEO- Yep. coming on board, but also an expansion of the focus of the company, right? Both in terms of expanding that focus towards the cloud, but now a much more significant player in the security space, a much more significant player in application development, with the acquisition of Pivotal and then the whole project Tanzu. How do you like from your perspective, what are the most important elements of what happened in 2021 in terms of setting the foundation for how we should think about VMware into the next 2, 3, 4 years? Yeah. No, that's a great question. If you think about where customers' priorities are going and then map it to where VMware is, right? One of the key things that we did last year, customers are spending heavily on and focusing on digital transformation and modernizing their portfolio of applications. Yes. For us, the progress we made in Tanzu is a real, foundational building block- Right. In terms of our growth over the next several years. Towards the end of last year, we introduced the Tanzu Application Platform. Earlier in the year, we beefed up our Kubernetes offerings. I think that's something that was pretty important for us last year, right? The second area that we see customers spending a lot of time is accelerating their path to cloud, right? This is not just about the first 15% of their applications, it's really about taking the next set of applications. We saw multi-cloud becoming a reality, right? During the year, I must have quoted this stat about 100 times. We saw 75% of our customers using two or more public clouds, 40% using three or more. Pretty much it became accepted in the industry that that's how customers are gonna operate. That was, I think, a big milestone for us, maturing our VMware Cloud offering on AWS, getting the Azure and Google and Oracle cloud offerings underway. Right. The third is that we saw on the end user and security, the pandemic gave a big boost to our VDI efforts, but really gave a boost to our security efforts. Carbon Black Cloud did well- Sure. Our Anywhere Workspace. Those are the three areas that we are focusing on going forward. Also, of course, we started accelerating the subscription and SaaS transformation of our on-prem license product. Right. What we call our Software-Defined Data Center stack, compute, storage, network. We put a lot of work in. This year, we'll start to see the result of that. Got it. That's a great starting point. I want to start on the cloud and the cloud strategy, both internally and externally. Sure. I'll start with the external one first, because not only are you enabling your customers to go to the cloud, the core components of VMware are moving to the cloud as well. I think one of the really interesting things about VMware is you guys talk about the multi-cloud strategy. Yep. You talk about operating in a hybrid environment. I think when I talk to CIOs, that matches up, in large enterprises, that matches up to the world that they see on a go-forward basis, right? We're gonna have on-premises data centers for the foreseeable future. We have mainframes still, right? We're definitely gonna have. Yeah. -on-premise data centers for a very long time. You're gonna need solutions that can work in both landscapes. Can you talk about how that benefits VMware? How you guys look to leverage that sort of architectural advantage? You're already in the on-premise data center. You have these agreements in the cloud. How do you guys work with that advantage to ensure that you guys become that multi-cloud winner that you guys should be? Yeah, I think that's a great point. I think if you think about the distribution of a customer's application portfolio, right? It is across these cloud environments for sure. Right. It is on premise, and it's at the edge. The thing that dictates the use out of these is the type of application. At any medium to large customer, you have applications of various types. Applications built for the cloud, applications that were built for traditional environments that may or may not get modified, right? Then completely new applications as well as emerging patterns in the edge. The advantage of our technology approach is that it is ubiquitous. It literally can host any different type of application. Modern cloud-native applications, traditional applications, edge applications. That's one big architectural advantage that we got. The second is the cost of operating your mission-critical applications and delivering a mission-critical SLA is meaningfully high and meaningfully complex. Mm-hmm. in a native cloud environment, right? Right. That's where our full stack comes in. Then we put our compute storage network and management together, right? The customers have told us that it takes 25 cloud services to be assembled in order to get the meaningful environment that they get with the VMware stack. Right. You can see that it's a dramatic simplification. There is a dramatic cost advantage as well, right? If you think about moving to the cloud, there are three buckets of costs. One is the stranded costs you leave behind, right? Right. Unused maintenance, et cetera. Right. Second is the cost of moving the applications. Third is the cost of operating. Right. We win in each one of them because customers are used with our tooling, right? With our universal business model, we offset some of the stranded costs. Right. Because it's the same platform back and forth, the cost of moving it is half the cost of moving it any other way, right? Or half the time. Right. The cost of operating it is dramatically simpler than anywhere else to get the same level of SLA. Right. That is fundamentally the enduring architectural advantage, because at the end of the day, if you want to do serious business in the cloud for an enterprise applications, you want these applications to be running all the time across multiple availability zones and regions and this, that, and the other. We take care of all of that automatically. Got it. That is the advantage. Just to dig into that a little bit. The universal business advantage, that's licensing model. Yep. That's where you're giving your existing customers credit. Yep. You could use it in on-premise environment or the cloud. The getting rid of the frictions on the transition. Yep. This is because it's the same underlying architecture in both. Can you dig in a little bit on sort of the operational costs? 'Cause that, I think that's where we kind of get the most pushback. You've told us before, Pat told us before you, that it's gonna be cheaper to run these workloads on VMware in these cloud environments than it is yourself. Can you talk to us sort of why is that? Why is adding another layer on top of these native cloud environments actually cheaper than running it natively in the cloud itself? That's the first misperception. People think it's a second layer. Mm-hmm. It is not. What we are doing with AWS, or for that matter, Microsoft, is, they give us actual physical servers. Right. On top of which, I mean, it's their technology servers, of course. On top of which we run the VMware stack. No different than it is in a data center. Right. There are no two layers of software. That's point number one. 'Cause you're running on bare metal. I'm running- Right. We are running on bare metal. The advantages come from three places. The first one is we can pack, especially these traditional applications, more to a server than on a native cloud environment, because a native cloud is built for cloud-native applications. The native cloud is not built for traditional applications. Right. Right? Because our business model is based on a single server, we can pack more applications and workloads to a server. This is the age-old VMware advantage. Right. that carries forward in the cloud. Okay. That's the first one. Better use of the underlying resource. Right. The second is, if you think about running a production application, right? You want Amazon's best practices, or for that matter, any cloud provider's best practices, is you wanna run it across multiple availability zones. Okay. Multiple regions. Now, in a normal, if you had to do it in a cloud-native environment, you as a customer organization would have to put it all together, right? That requires more cost, and it requires more operational expertise. Okay. Not everybody is Netflix, right? Right. The way we have set up our architecture in the cloud, all that is taken care of automatically. It's built in. Okay. If an application fails, it automatically moves over to in an availability zone, or automatically moves over to another one. Okay. To a region. Same thing with DR. It's automatically built in. Okay. The third thing is security, right? How do you protect each application? On an AWS environment, you not only use the AWS services, but you also use third-party services. You don't have to do any of those things. Right. The fourth is cost management and operational management tooling, right? You're not investing in extra because most of these customers are using our tooling anyway. Right. If you put it all together, you get a pretty significant cost advantage. Right. in operating costs. I'm sure the customer has an advantage of looking at everything in their environment on a single pane of glass. Exactly. Both on-premise and in the public cloud. If we think about that environment, the customer's making an initial kinda choice between do I wanna go with the hyperscaler themselves and sort of run it natively in the cloud and build out those- Yeah. 26 services, if you will, or use a third party vendor like VMware. If they make the decision to go for a third-party vendor, the competitive environment is gonna be VMware, Red Hat, and that's now part of IBM. Who else should be thinking about in that competitive scope? Yeah. That's where the application architecture comes into play. Mm-hmm. Right? If you're writing a new application or you're modernizing the application to be based on what the industry calls as microservices and so on. Right. It is run typically on Kubernetes. Right. That's when Red Hat comes in. Right. The cloud provider's own Kubernetes. Right. offering comes into play. Right. If it is an application that's written to a traditional model, right? Right. The customer decides to run it in the VM, very often it's either run it on the VMware environment or run it on the native cloud provider's environment. Okay. There's no other choice. Got it. Right? That's the fork in the road, if you will. Got it. When it comes to the cloud-native applications and the Kubernetes environments, do you start to see like a vendor like HashiCorp in there? Is that where like Terraform is gonna start to come into the equation? Terraform, what Terraform does. It helps you automate the process of setting up the infrastructure. Right. in order to run the application. Right. It does not run the application by itself. Okay. Right? It is equivalent to, in our management portfolio, we have got a tool called vRealize Automation. Right. What vRealize Automation does is it sets up the VMware infrastructure to run an application. Terraform does the same thing, but on the public cloud. Got it. It is a very useful tool. In fact, a lot of our customers use it. Right. Right? Along with our own tools. Right. Because you still need to have the management and automation. Exactly. of those workloads running. Yeah. It is a piece of the puzzle, not the major piece of the puzzle. Got it. Then, last question on this. We talked about this from the customer's perspective, in terms of sort of the value proposition they get. I'm always remiss if I don't ask from the investor's perspective. From a VMware perspective, in terms of the monetization of that opportunity, how should we think about, how monetizable, these cloud opportunities are versus what you would see in traditional on-premise in terms of are you getting in more solutions? Does the price point change, considerably? Like, is this as robust or a more robust opportunity? Yeah. than what you had in the cloud Yeah. in on-premise? The short answer is it's a very robust opportunity for a couple of different reasons. One is a customer that's today, if you look at the VMware install base, the vast majority of the customers are just using vSphere. Okay. Right? We've got all these other products. Right. Obviously, a smaller subset of them use those, many of the remaining products. Okay. When they move to the cloud, we don't sell those individual things separately. The customer gets the whole stack, right? That's a big difference. You go from buying just vSphere to buying compute and storage and networking- Right. Very often management all put together, and we are adding security and all these other things. Right. That's one. The second is because the customer is no longer operating the data center and managing the data's infrastructure, we are managing it, therefore, they feel comfortable paying us a premium for that. Right. Right? The third is, of course, it's a subscription business model, right? Over the lifetime of the customer's journey with us on the cloud, we have the opportunity to upsell and cross-sell things more easily. Right. Got it. Just to sort of help us understand that first point in our head a little bit better, I have this number stuck in my head in terms of on-premise environments, like the management and automation suite is being like high teens penetrated into the number of VMs. Is that approximately kind of where you are in terms of like the max penetration you've seen in on-premise environments? We count in terms of the percentage of vSphere nodes that are- Right. -using additional, not- Yeah. percentage of VMs. Okay. Yeah, the number roughly is right. Okay. Perfect. I wanna switch gears a little bit and drill into the AWS relationship in particular. Back in 2016, you guys, it was a really groundbreaking event for VMware. I know it definitely turned around the stock in terms of people's perception of like, VMware now has a real play in the cloud when you guys rolled out VMC on top of AWS. Can you talk to us about how that relationship has evolved over the past five years? And then the second to that, we'll dig into sort of the other vendors that have layered on since then and sort of how those relationships compare. Yeah. Yeah, definitely. The announcement was made in 2016, and we brought the service to market in the first geography, which was the U.S., in 2017. It took us another year or so to get it to all the major geographies. The relationship works really well. They are our preferred supplier. Mm-hmm. I'm sorry, preferred partner on the cloud. We work with them in the field, obviously. There are lots of joint customers now. More importantly or equally importantly, we work with them in the R&D side. Okay. on figuring out. They take our input into determining what new hardware instances they're coming out with, right? Right. How do we take advantage of the capabilities that they're building. One new phenomenon in the last year is they've got a separate partnership with NetApp, for example. Okay. Right? We've got a three-way engagement to say, "Okay, how do we make the NetApp offering work great with the VMware Cloud offering, just like it does on-premises, but in an AWS context? Right. It's starting to expand from that point of view. Got it. Subsequently, you also have partnerships now with IBM. Yep. Microsoft. Yep. With Google, with Oracle. Should we see these guys as kind of on equal footing in terms of like, do you have the same type of R&D relationships, the same type of go-to-market relationships with the other hyperscalers that you do with AWS? Yeah. I would separate IBM. In fact, we had the IBM partnership even before the AWS partnership. Right. That's a pretty mature partnership. With the other hyperscalers, it's a little later. I think, depending on the hyperscalers, primarily 2019, 2020 that we started working with them. Okay. It's younger. We have a lot more things that we could build with them. The partnerships with AWS is more long-standing and a lot more product capabilities. In the case of these other vendors, one big difference is they are taking our enterprise technology, and they are operating it. Okay. In the case of AWS, we are just getting hardware from them, and we are operating the service. Okay. We are more like a true SaaS vendor on top of AWS. Okay. In the case of Microsoft or Google, we are a technology supplier to their cloud. To what they're providing. From an investor perspective, that's a richer value proposition for VMware when it's running on AWS? It's comparable, but I would say slightly richer, yeah. Okay. Got it. Switching gears a little bit. One of the topics that have been very popular among investors is the idea of edge compute. VMware has been talking about edge for a while. Microsoft's been talking about edge for a while. But now you have vendors like Cloudflare or Fastly talking about edge as a kind of a new compute environment for low latency, very geo-specific workloads. I always thought VMware could be very interesting in this because you guys have very tight relationships with telcos. Can you talk about the VMware edge, and I think you guys recently introduced. What's the opportunity here for VMware? How do you think about the go-to-market for VMware edge? Yeah. It's a very exciting concept, and it's a very exciting opportunity for us. If you think about the edge, the first thing to realize about the edge opportunity is it's primarily vertical centric. Okay? Because the way a manufacturing company uses the edge of their network is very different than a retail, right? Yeah. In many ways, the first edge investment area for us was the service provider/telco. Right. Right? Where telcos were building out their 5G networks. We have put in a lot of effort into that in the last few years. We've made significant progress. The first all 5G network based on open standards is built on top of VMware technology by DISH and will be operational this year. We have since then won design wins at a lot of the major global telcos, right? Those are all early trials and so on and so forth. As time goes on, it'll grow pretty rapidly. The second area where we have been winning deals is in retail. For example, we won one of the largest retail shops, sorry, retail companies in Europe that is building cashierless stores, right? They got all these cameras, and they're processing images from those cameras. That has some low latency requirements. It has to live right next to the store. Okay. They're putting VMware there, right? Similarly, we've won some significant deals with manufacturing and logistics. In all of these areas, the common tenet is customers are trying to blur the distinction between the physical and the digital. It's a combination of existing VM-based applications, but also a lot of new container-based applications. Okay. that use machine learning and so on and so forth. It is this combination that's driving this new set of application development, and that's where we are focusing. As opposed to a Cloudflare and Fastly, which are more focused on a B2C type of compute. Okay. like gaming, you pointed out. Our focus is more on the enterprise applications. Right. that are being deployed at the edge. Got it. You mentioned the telcos that you rolled out with first. Do they become go-to-market partners in this? Yes. Okay. Because for the telcos, there is within the telco industry, they call themselves the service provider edge, and they also are suppliers to the enterprise edge, right? Right. Think of two sides of the same coin, if you will. They are a big go-to-market partner for us. For example, AT&T or British Telecom. Right. All those guys are all taking our technology and taking it to their enterprise customers. Right. Got it. That makes a ton of sense. Paul warned me I had way too many questions, and he was right. We only have seven minutes left, so we're gonna go into fast-forward mode. Yeah. I'm gonna hit some key topics that I think are very important. Shifting internally to VMware's shift to the cloud. You talked about you aim to make all major products available as a SaaS offering in FY 2023 or by FY 2023. SDDC this year. Yeah. vSAN and NSX on a go-forward basis. Why is that so important to take these products that had traditionally run in on-premise environments and make them cloud versus what you've been doing already with VMC and the like and those types of efforts? Yeah. I mean, it's important for a couple of reasons. One is, a lot of our larger customers want this software running in their data centers, right? Right. For lots of different reasons, because it's running workloads that need to be in the data center for lots of different reasons, right? However, they do not want the burden of having to operate the infrastructure by themselves, right? They want to take their talent and have them utilized in other ways. Okay. Especially in an age where the operational costs of running these large fleets, it's non-trivial, right? That is the customer problem it is solving. Secondly, by managing all of these applications, sorry, infrastructure from the cloud, we are able to drive faster innovation. Okay. Thirdly, for like we started talking about at the beginning of this talk, almost every one of these customers wants to be hybrid or multi-cloud. Right. They wanna have parts of the application workload running on premise. They wanna have some other parts of the portfolio running on the cloud. They want all of this common. By having one control plane in the cloud, we can help customers manage their infrastructure and their workloads. Right. wherever they are, and that is your single point. Got it. the theme that you talked about. Yes, definitely. From an investor perspective, we've been watching a slow and steady rise in terms of- Yeah. subscription SaaS revenues as a percentage of total. With these solutions coming out, should we expect that to inflect higher in terms of, like, the pace of shift to inflect higher? Okay. Yeah. This year is the year we are making them all available. By the time we get done with networking, it'll be towards the end of the year. Next year, you'll see the results of that. Okay, perfect. Shifting gears to Project Tanzu. This is something that we talked about as one of the foundational elements. I'll be honest, it's one that I've looked at with a little bit of skepticism in terms of this is a big shift for VMware to be able to not just be the key provider for systems administrators, but also to focus on developers. The skepticism comes from there's a lot of people trying to get the attention of those developers and focus on developers, including big guys like Microsoft and Amazon and Google. How does VMware attract that developer community to your platform, to say that Tanzu is what should be your key tooling on a go forward basis? Yeah. The, there are two audiences that are involved. One is the core developer building the application. Mm-hmm. The second is what they call the platform operations teams, which are running the applications. Right. managing them, right? For the developer, especially the enterprise, right? The enterprise, Java developers use Spring a lot. Yeah. Right? We are the stewards of the Spring open source community, and we've been nurturing the innovation in Spring. We've got a big community that's already predisposed to using VMware developer technologies in the form of Spring Boot and so on, Spring Cloud and so on. In fact, we recently announced a partnership with Microsoft to run a Spring-based cloud environment. Right. on Azure, right? That's that. On the platform operators, they all rely on a Kubernetes-based environment and tools that work in a Kubernetes environment. That's a singular focus for VMware. We are the number 2 contributor to the Kubernetes community- Mm-hmm. Through our CNCF engagement and so on and so forth. It is these two communities that we have got a distinct offering for. In both of these, the common element is that it's cloud agnostic, which is what they want, right? They don't want to learn particular. Secondly, it is tuned to the needs of the enterprise as opposed to a gaming developer. Got it. some other developer. Got it. Okay. That makes sense. I would assume that you guys have also a latent advantage in sort of the merging towards DevOps, since you're already very strong on the operations side of the equation. As more and more of the focal point of these environments are not just developing but also operating, having that tie-in within VMware is probably an advantage. Yeah. That is a pretty significant advantage for us in the enterprise, and because it's a continuum. Our goal is it's one thing for a developer to write the code- Right. which we don't do much to help there other than Spring, right? Everything that happens after that, we see a significant opportunity to play. Right. Right? Especially you talked about lots of different tools. Who's pulling them all together? Right. Customers want us to pull it all together. Right. Because it all is critical to operating. Got it. I want to touch on security. VMware became a much bigger presence in the security world with NSX and on the network security side of the equation with micro-segmentation and then some firewalling capabilities and broader kind of network security capabilities. Carbon Black got you onto the endpoint side of the equation with EDR now into the XDR. Where does this come together? What's the next step for the security evolution in VMware? You have some network capability, you have some endpoint capabilities. Where do you take it from here? Yeah. The reason we got excited about Carbon Black, right, was not the existing endpoint business of Carbon Black. Mm-hmm. Really Carbon Black Cloud and the architecture behind Carbon Black Cloud. Okay. Carbon Black Cloud, think of it as a giant machine learning and data pipeline in the cloud, to which you can feed all sorts of signals and it'll reason over that data, right? Now, the first part of Carbon Black Cloud, building it out, was primarily to take endpoint data from Windows. Right. Endpoints. Over the last 12 months, we expanded it to start collecting vSphere data, and now we are expanding it further to collect networking data and container data. Right. Our goal really. By the way, independent of whether the endpoint is on vSphere or not, if the application's on vSphere or not. Right. Our goal really is to use Carbon Black Cloud as this giant, cloud of security information guide. Got it. Pull it all together. The uniqueness of the Carbon Black architecture is the amount of data that we can process in a very short amount of time, and therefore use it not only to proactively detect threats, but also remedy them automatically, regardless of whether the source of the data is in the cloud on a native AWS or Azure, it's in a vSphere environment, it's a container- Right. It's in the network, it's in the Windows device that the user is using, right? Right. We get a holistic view, and so that's really where we're going with the cloud. Got it. With Carbon Black Cloud. It's really about pulling all the data back into this giant data correlation engine. Yeah. Yeah. Yeah. Yeah. As security becomes much more of a data problem than it is about. Exactly. It's a domain problem. In that, we've seen observability vendors go Yeah. in the opposite direction and say, "Hey, listen, we have a big data correlation engine. Let's start ingesting things and looking at it from a security perspective." Does the same hold true to VMware, that you could take that data correlation engine and you're bringing in so much operational data, like you become a de facto observability vendor because you see so much of what's going on in the environment? Yeah. Those are related, but those are separate, right? I mean, we can do both. Right. That is one of the advantages. Our management portfolio has an observability platform, and then we've got this. But the set of data that you need to collect to remedy or detect security threats is far more widespread. Right. For example, we all know a lot of attacks happen to start at the end user device. Right. click on something that you're not supposed to, or there's some process that's running on your laptop. The observability vendors are more application-focused on the cloud. Right. As opposed to having a universal view. They don't have the network view, for example. Right. Right? Carbon Black Cloud has an advantage over pure observability. Having said that, we have an observability platform, Tanzu Observability, that does exactly that. Got it. One last question. We're a little bit over time. Just wanna touch on margins, M&A, like two separate questions, actually. One is on margins. I joke with Zane a lot that every year he delivers better operating margins than he promises, but then he takes it all away with his guide. You guys have talked about getting back to sort of thirties over time. How should we think about that slope? Is this the year where we're gonna bottom out and then we could improve from there as that SaaS subs transition gets to some sense of normalization? Zane explained this as well, right? We expect some bounce back in expenses- Mm-hmm. As a result of the pandemic, that's one aspect of what's causing our margins to be at 28% this year compared to last year. Of course, the SaaS transition has its own implications on the margin. What I can say is we are comfortable with the long-range projections. The path to that, we wanna be flexible and give ourselves some flexibility. Right. Part of that flexibility, one of the things you guys talked about with the spin-off from Dell is it gives you guys more flexibility for M&A. Yeah. I get that sort of flexibility of M&A and the margin questions are gonna be integrally tied, depending on sort of that appetite for M&A. Yeah. I expect our M&A pattern to continue what it's been in the past. Okay. Which has been largely tuck-ins. Mm-hmm. Right? Like we have said publicly, our first priority is to do the subscription and SaaS transformation. As we finish that, and in the categories that we are in, they're all young categories when you look at multi-cloud. We'll continue to look for opportunities to tuck in after all, going along these categories that we are in. Got it. I could go on for another half hour. There's tons of stuff to talk about at VMware. Any last words you wanna leave us with before we wrap up the session? Yeah. I think we are at a very, very exciting time in the industry. I think it's becoming very clear that the customers want to have their application assets across all different locations, so that's what we call multi-cloud. Right. We think we are very well positioned as an ubiquitous platform player for multi-cloud. Outstanding. All right. Raghu, thank you so much for joining us. Thank you. It's been great.