Broadcom and VMware – Divergent Views

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All right, we're on time Dan, break it out. You're listening to and watching the CTO Advisor Studio from the Venetian in Wall State. As I have with me, good friend of the industry and one of the better financial analysts that I've, I'm gonna call you a financial analyst because I always see you on CNBC, you're quoted in the Wall Street Journal all the time. We have this thing, you're the CEO of Futurum Brew, principal analyst. We have this thing running between us, we're at VMware Explorer, about this merger between VMware and Brock.

It's an acquisition for that. Exactly, and we're gonna finally have it out. Yeah, let's do it. We're gonna do this. Let's do this. Can I just say something to the audience really quickly? Sure. Okay, this is not financial advice. I'm not technically a financial analyst. Let me explain what I am as an industry analyst. But when I founded the Futurum Group, what I did find was there was one thing that inspired the tech vendors more than anything else.

You know what that is? Their stock price. So when you're an industry analyst, you kind of talk about the product, the service, the go-to-market, the strategy, and all that stuff's good. But the question the executives ask when they invest in partnerships with analysts or influencers or thought leaders or they do paid media is, how do I move my stock price? 5, Patrick and I call it the ground truth. The performance, the quarterly performance of a stock is the ground truth of, you know, is that vSphere upgrade landing in the marketplace?

Are people getting behind NSX? I'm just using the examples from VMware here, of course. But whatever it is, so all things considered, I think knowing those, the market and the price and the stock and the products and the services really shows a holistic understanding of the business. And I really appreciate that clarification because we're both industry analysts and I look at it primarily from the customer list. And this is where both of us, let's talk about where we agree with. The band comps, Shen was it.

Neither one of us are financial analysts, but I absolutely believe this is a brilliant move by Brock. From a, just extracting value from an asset like VMware, I think Hot Pod will do a fantastic job of meeting his commitment to his investors and returning them back. The question becomes where we, I think, start to differ is, is this a net good for customers? Is that a question? That's the same question. Is this a net good for customers? So I'm scratching my head.

Broadcom, I look at all the hardware acquisitions that they've made and they've extracted value and moved the needle on the hardware side. So from a track record, from a software, from a hardware side, from a chip and semiconductor perspective, I've seen it happen on the networking side. Their network products are some of the best in the industry and they continue to lead the way on just the network side, for instance. The software side, well, let me chime in there because I think there is some underestimating of how successful the Symantec acquisition has been or the CA acquisition has been.

Hawk Tan has shown his cards. In fact, he's one of the more transparent CEOs and I've had the chance to spend some time with him that I've met. Does that mean he's not shrewd? Does that mean he hasn't karate chopped the companies? And he has. If it was Elon Musk, it would be a bigger story, but because he's in enterprise and he's in enterprise tech, it barely makes the news because there's barely any enterprise tech press left. But here's the thing, a company's responsibility, when I did my MBA, I don't remember learning much, but I remember on the first day of one of my classes, the professor said the number one job of a manager is to return value to shareholders.

VMware's growth has been pretty anemic comparatively with most high growth software companies. You know, you're talking at best 10%. The company has made, and we heard Sumit talk, and he showed some pretty encouraging numbers with larger growth to SaaS, but overall the business in terms of the outputs, which is the equity, means there's limited dollars to return to shareholders. It means that there's limited dollars to invest in product development. You know, where I think, you know, multi-cloud, you know, and we talk cross-cloud, you corrected me.

We can debate that at another time, but being the next wave, we've seen a pretty substantial growth vector in Red Hat's direction at the expense of VMware sitting on that opportunity. Tanzu did not land. Right. And so I think Hawk is looking at this thing going, yeah, it's a good company. It's got loyal, you know, you see it here. You're at the event. You see how loyal the people are that are here, but are they loyal because this is the best or, you know, go back a decade or two to the early era of Cisco certifications when people were really knowledgeable about Cisco and they had their CCIEs and their CCNAs, and they would have installed anything Cisco because they were like the Cisco warriors.

And so are the VMware folks the people that refused to fully embrace cloud? Are they the people that missed the, you know, again, debate Red Hat and even open source at this moment, but the open source move to the Kubernetes, and this is where I think you're great, by the way, but what I can tell you immediately is at 37,000 employees, Hawk Tan's looking at that and saying too many people. He's saying too much expense. He's already pretty much more or less publicly said or come out and said, you know, that there's some billions of additional profit opportunity here.

And how can that then be reinvested in the products he believes, this is what he does. I realize I'm talking a while. He believes in picking the, he'll pick pieces of the portfolio and we don't know for sure what he'll do. I think he's gonna change the portfolio. So here's what I'm excited about. And this is part of I'm excited. There's stuff, I'm not a VMware employee. At VMware, I were six years ago, and I were, and I were.

That's proper English for you, English makers. I was a VMware employee. And I don't invest in VMware. They're not even a customer. So I talk pretty freely about VMware. There's businesses VMware has no business being in anymore. The EUC business can just go. They have it innovated in there. They obviously haven't, they've under-invested in that business. It's more and less on maintenance. There's a bunch of different areas VMware just shouldn't be playing in. I don't think they should have security products, especially compared to Symantec.

God, if you look at the two portfolios, you're like, ah, there's some justification that can go on in there. 37,000 employees is a lot of employees for a purely software. Their cost of acquisition for a customer, the cost of sales, relatively hot for a pure software business. They have a challenge developing this team for telling the customer story for cross-file. The, when the customer, when I talk to customers, the sales folks are still leading with the vSphere message where VMware has a pretty decent cross-file story.

That's the free advice. Get out to the channel and focus on developing that skillset. VMware has proved they've earned the right to be acquired by Broadcom. They've come to the point that they've earned the right to be acquired by Broadcom because they are sitting in pole position. They, I think a great example of that was the conversation with Nvidia and Jensen on stage. They have a legit gen AI store. I was actually surprised. They just repackaged stuff that they've done in the past to present it as gen of AI.

So VMware has a opportunity or Broadcom rather has an opportunity to execute VMware's vision. Well, he's going to do that because one, he's going to remove the unnecessary costs. He's going to do it quickly, which a lot of people, it's created a lot of stress. It's created a lot of anxiety. It doesn't help to have, if you have 37,000 and you can say, he's probably looking at this and saying, I can do it with under 20. Realistically, that's probably based on history.

That's probably where Hawk's head is at right now. You look at the income of the company, you look at what he's paying for the company and the multiple on it. He has to have looked inside of those financial statements. This is where being astute financially makes sense. Looked into those statements and said, I can take this from one or 2 billion in EBITDA and a quarter, I can take it to eight or I can take it to, he believes he can take a lot of costs out and grow it quickly.

Otherwise the shareholders wouldn't support him. And if you do look at the performance of the company stock, a Broadcom, it is beloved by its shareholders. The company for being somewhat seen as a little boring, a little bit, the chips they're in aren't the most advanced in many cases. The software they've bought, I mean, mainframes, security, they've bought into industries that have longevity, that have dedicated customer bases, that have margin expansion. And he's gotten rid of everything that doesn't make money. He'll sunset what doesn't make money.

He'll find products that are needed to be sunset that have very little competition. He'll maximize margin and he'll run them until they're no longer necessary. And he'll invest. And I spent some time studying the innovation patterns, and he'll invest heavily in the parts of the business where there's money to be made. He sees parts of the VMware business as an opportunity to make money. He believes in the hybrid cloud. And I think that in a year or two, it will be very different.

But I spent a lot of time with Greg Latko. He runs their mainframe business, Broadcom mainframe. And when I came in the first time to do any work with Broadcom, I literally thought they must be the most hated company on the planet. I never heard outsiders say many good things. When you talk to insiders, it's a totally different thing. The people that work there work very hard, but they genuinely see the vision, they buy into it, and they seem to be excited about it, which is interesting, because in these other companies where we kind of hear that they're cool and hip, when you actually get people off the record, you sometimes get the opposite.

Like they look very cool on the surface, you get them underneath the coverage, Keith, and they're like, yeah, it's a facade. I'm not running to Broadcom employee, generally speaking, that aren't happy. You read the reviews, people love working there. They get well compensated, they work hard. When I talk to the VMware employees who believe they have a future at Broadcom, they don't know, you can't know, but they are excited. They are open to the opportunities. I think if you're in different parts of the business that are obviously struggling or not really what they perceive as core, they're a little worried.

And as they should be, but I think if you're a customer, this is an opportunity to clearly see the signal from the noise. VMware has a lot of products, a lot of products that they put marketing dollars behind, but not necessarily R&D behind. And we will see that shift over the next few quarters of what's really important to VMware. Where should I look? I pointed out EUC. Where should I look to VMware for EUC innovation versus where should I go look to another partner or software vendor for innovation around EUC?

And overall, you're gonna get a clear picture of where does VMware fit in your IT portfolio over the next few quarters? And that is not a bad thing. No, absolutely. Look, I actually always appreciated your assessment. You had both the inside view and a little bit more of an outside as the advisor to technologist view. I will not proclaim to have ever spun up the technology, which is something that you are uniquely prepared to talk about. What I will say is you have to understand the health of a company long-term provides the opportunity for those that work within it.

As an industry analyst, we need to analyze the tech, but you also need to analyze the business health and wellness. When a company stops growing at a certain pace, it's limiting its growth. And you mentioned some of them in either under-investing, getting into too many things, not necessarily properly understanding customer trends and shifts. And so there was a little bit of this that had been happening. There's been some changing at the top, changing of the guard. And then of course, we've come into a period with generative AI technology where things are changing so fast that don't know is one of our biggest competitors any given day.

VMware still is showing what I would call a little bit of vulnerability right now. The statement that went up today when you, I don't know if you had a chance to watch the keynote, but at the keynote, there was this disclaimer that basically said, we're gonna show a bunch of things, but we make no promise to actually build them. To me, what that says is we don't know what we're going to become yet. And until this acquisition is done, we don't wanna fully commit to what we're going to become yet.

And of course, products can always get killed along the way but there's just this, the company's ready. The transition is happening. You saw my tweet yesterday, getting the US approval, even if it's by expiration of date was the big hurdle. I know people think it's China. I think it's the US. There's a joke that runs around about how many licenses of VMware has been bought in China. I know the answer to that joke. It's a riddle. That's not actually the case, but you know, but what I mean is, when you have a, unlike hardware where Hawk is very experienced in China and they have a very important relationship with China's ambitions to compete, especially right now with all the chip controls and everything that's going on with, no ASML, no EUV, no leading edge nodes.

You have literally dependency on being able to get either legacy or at least good enough, seven nanometer and above to be able to even play in the AI sandbox right now. Broadcom's in a really interesting, unique and strong position. In the end, I wasn't, I started off kind of being the way I was almost to be contrarian because everyone was, when, when, when, when? I was like, let's wait and see. As I got to know the situation more, I feel better and better and better about where I stand on the situation.

And I think those that were really, came out really slamming the deal are gonna be chewing their words for quite a long time. But I like, I like to be wrong occasionally, but you'll never see me post about it. So we'll see where we're at. Now, for the record, I've always said, I think financially an amazing deal makes a lot of sense. I question, and I still question, the innovation for customers who've invested in the VMware stack over the past, whether it's Tanzu application platform, all 12 of you, we really appreciate you investing in the VMware vision, or if it's the EUC, the security stuff, NSX, which I don't think is going anywhere, vSphere not going anywhere, small customers, large customers, VMware cloud on AWS, this technology list goes on and on and on.

And again, we've seen a lot of bells and stops from VMware in the past. Can Hotime focus VMware? That's the bet that Dan, I think, is making. And the bet that I'm making is that he can focus on VMware. The question that I'm focusing on is, does he have the intuition to know what VMware customers, or more important, the cloud market wants from VMware in the future? I'm rooting for VMware slash Broadcom because I think a healthy VMware Broadcom is good for the industry.

You want to find out more about either of our companies, Dan, where can they find Futurum? com, or check out my Twitter. I put pretty much everything out there. It's at Daniel Newman, UV. Hopefully he can throw that along the bottom there, but if he didn't, it's easy. Daniel Newman, spelled just like the Seinfeld Newman, and UV at the end, and I will explain why that's there some other time on a different show. com, at CTO Advisor. Do it.

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