Broadcom To ‘Rapidly’ Shift VMware Software Licenses To Subscriptions

‘We are, in a sense, restructuring the contracts from perpetual to subscription. That’s why, depending on where you see it, you’ll see a slower growth at the beginning—if any—followed by a more rapid growth as we convert more to subscription,’ says Broadcom CEO Hock Tan.

If Broadcom completes its historic $61 billion acquisition of VMware, the company says it plans to “rapid transition” VMware contracts and customers from perpetual software licenses to subscriptions and software-as-a-service (SaaS).

“We are going to focus on going through a transition, and a rapid transition, from [VMware] perpetual licensing to subscription,” said Tom Krause, president of Broadcom’s software group, whose business unit will become part of VMware if the acquisition is completed. “With the software business, we’ve been totally focused on pretty much 100 percent recurring revenue.”

Broadcom CEO Hock Tan said his company plans to “convert” VMware’s on-premises licensing model to subscriptions over the next couple of years, which will likely slow revenue growth for VMware in the near term.

“From an economics point of view, whether it’s perpetual or subscription, frankly, it’s the same. But we want to make it very consistent with the way we run the model. Based on this, we are in a sense, restructuring the contracts from perpetual to subscription,” said Tan during a call with media and analysts today. “That’s why, depending on where you see it, you’ll see a slower growth at the beginning—if any—followed by a more rapid growth as we convert more to subscription.”

[Related: Broadcom’s $61 Billion Buy Of ‘Iconic’ VMware: 5 Big Things To Know]

Broadcom officially unveiled its plan today to buy VMware for a whopping $61 billion, making it one of the largest acquisitions in IT history.

If the deal is completed, Broadcom’s software group led by Krause will be rebranded and operate as VMware within the Broadcom umbrella. The new software unit will include VMware’s portfolio alongside Broadcom’s existing infrastructure and security software solutions.

VMware has already been striving to transition itself and its customers away from its traditional enterprise software licensing agreements and into SaaS and subscription.

In fact, when VMware reported its first quarter financial results today, the company grew subscription and SaaS revenue by 21 percent year over year to nearly $900 million. Subscription and SaaS accounted for 29 percent of VMware’s total $3.09 billion in revenue during the first quarter.

VMware subscription and SaaS sales are now generating an annual recurring revenue run rate of $3.14 billion.

“We are focused on accelerating growth of our subscription and SaaS portfolio as we provide customers the flexibility and choice they seek,” said VMware CEO Raghu Raghuram in a statement today.

One top executive from a solution provider that’s partnered with VMware for more than 10 years said it “will be critical to the future of VMware” and its channel partners that Broadcom does not immediately disrupt current customer contracts.

“They can’t come in and immediately change how we work with our customers. We simply won’t tolerate that,” said the top executive who declined to be named. “I get what Broadcom is doing, and in the long term, it is the correct thing to do. … Some customers are moving faster than others towards subscriptions, but there’s still many, many ongoing licenses out there that still have years left to go. So it will be important for them to take their time and not disrupt business for us.”

Hopefully, the executive said Broadcom will let VMware channel partners lead the way in transitioning VMware customers towards SaaS and subscription—when the time is right. “VMware has been pushing us to sell the SaaS and subscription model for years now. We know it. We get it. Some customers are doing it, some are still taking their time,” he said. “I like (Broadcom’s) idea here. VMware was already doing it. Maybe (Broadcom) will help us out with it, but it will take time.”

Broadcom To Invest In VMware vSAN, vSphere, vRealize

Broadcom’s acquisition of VMware for $61 billion has already been unanimously approved by the boards of directors of both companies. The deal is expected to close in Broadcom’s current 2023 fiscal year.

Once the acquisition is complete, Broadcom said it plans to invest money into VMware’s core offerings.

“In terms of R&D, we’re going to reinvest back in the core business, the core franchises,” said Broadcom’s Krause. “If you think about the three different pillars of this business, it’s really the core infrastructure business—vSAN, vSphere, vRealize—these are the businesses that are core to driving the bulk of the revenues. And that’s where the reinvestment is going to occur.”

Broadcom Plans To Grow VMware Profitability To $8.5 Billion

Broadcom said it plans to grow VMware earnings before interest, taxes and amortization (EBITA) from $4.7 billion annually as a standalone company to $8.5 billion within three years as part of Broadcom.

“As part of Broadcom, our target is for VMware to contribute approximately $8.5 billion of EBITDA once we have fully integrated the company onto our platform,” said Tan.

This profitability growth will be driven by sales and marketing efficiency gains through go-to-market investment and focus on existing customers; growing recurring revenue; and eliminating duplicative general and administrative functions across IT, finance, legal, human resources and facilities, according to Broadcom.

“Together, with Broadcom’s existing software portfolio, we are positioned to create a uniquely powerful value proposition for enterprises—enabling them to develop, deploy, and manage their applications securely, seamlessly, across every type of cloud and to accelerate the application lifecycle for their workloads,” said Tan.

Overall, Broadcom expects VMware to account for roughly half of its entire software business.

“With this type of scale, and continuing commitment to R&D and innovation, we will be able to significantly invest and fund new innovative solutions that will support our customer base,” said Tan.

In connection with the upcoming $61 billion acquisition, Broadcom was able to obtain commitments from a consortium of banks for $32 billion in fully committed debt financing. Upon closing, current Broadcom shareholders will own approximately 88 percent and current VMware shareholders will own approximately 12 percent of the combined company.