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VMware's plan for countering dwindling sales of older technology includes a new version of NSX that creates a network overlay for application traffic between an enterprise's data center and the Amazon and Microsoft public clouds.
The new virtual networking software will provide "connectivity, security and visibility across multi-cloud IT resources regardless of whether the underlying infrastructure is VMware-based or not," VMware CEO Pat Gelsinger told financial analysts this week during a conference call.
The software, which is scheduled for release this year, is undergoing testing with Amazon Web Services as the cloud provider, Gelsinger said. To complement the new product, VMware plans to add support in the vRealize Suite, which will manage workloads hosted on AWS and Microsoft's public cloud, Azure.
This year will be a "key transition year" for VMware, as revenue from the company's new technologies, including NSX, vSAN and AirWatch, is expected to supersede declining growth in the company's traditional data center virtualization products, Gelsinger said. VSAN dynamically adjusts storage to changes in VMware-based virtualized computing environments. AirWatch is the company's enterprise mobility management software.
"We've recognized that our blockbuster compute products are reaching maturity and will represent a decreasing portion of our business going forward, even as they continue to be a powerful springboard for building our new businesses," Gelsinger said, according to a transcript of the call on the financial site Seeking Alpha.
VMware has built a multibillion-dollar business on the tools it sells for virtualizing applications in the data center. With growth in that business falling, VMware is redesigning its technology as enterprise customers reduce data center infrastructure costs by migrating applications to the cloud.
In 2015, worldwide spending on public cloud services grew at a rate six times that of overall IT spending, according to IDC. The money enterprises spend on public cloud services is expected to increase from $70 billion last year to $141 billion in 2019.
VMware challenges in the cloud
VMware's cloud-focused NSX virtual networking software will land in a crowded market of traditional vendors, such as Cisco; startups and even the cloud providers themselves. Amazon and Microsoft are developing interconnect technology to integrate their services with customers' data centers.
Some analysts believe that most enterprises don't need to connect their virtualized environments with public clouds.
"Trying to build a layer between the two may seem like a great idea but the need is really small because customers typically don't see these areas overlapping as much as VMware does," said John Fruehe, an analyst at Moor Insights & Strategy based in Austin, Texas. "Things are either in the cloud or the data center -- rarely both."
Also, NSX is more expensive than many alternatives, Fruehe said. "There are other less complicated options for optimizing that data center to cloud connection."
What VMware is promising to do -- align storage, computing and networking between enterprises and public clouds -- is "easy in concept, but actually delivering it in production is extremely difficult," Andrew Lerner, an analyst at Gartner, said. "It is a complicated and tedious problem to tackle, and no single vendor has nailed it down yet, although many vendors are trying."
Nevertheless, VMware is pinning sales growth on the success of its virtual networking software and its other new technologies. The company will spend more money this year on its specialized network and security sales force for NSX, executives told analysts.
Also, to develop and sell its new products, VMware intends to tap resources freed up from a restructuring that led to the elimination of 800 jobs. Executives announced the cuts while releasing earnings for the fourth quarter of 2015.
vCloud Air pared down
"The service will have narrower focus providing specialized cloud software and services unique to VMware and distinct from other public cloud providers," Gelsinger said.
The reduction in plans for vCloud Air and the NSX product strategy "suggests that VMware acknowledges that others dominate public cloud," Brad Casemore, an analyst at IDC, said.
Technology aside, VMware's biggest problem will be navigating the turmoil brought on by Dell's pending $67 billion acquisition of parent company EMC. Announced last fall, the deal has contributed to a more than 40% drop in VMware shares over the last year.
For 2016, VMware forecast revenue that fell below analyst estimates. The company expected revenues between $6.785 billion and $6.935 billion, a 2% to 4% increase over 2015. Analysts had expected revenue of $7.2 billion, a jump of 9% over last year, according to Thomson Reuters.
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