The bright spot in VMware's numbers: NSX's virtual comms networks

VMware
Source: VMware

The headline numbers for VMware are troubling, but the company's hefty investments are paying off.

Sales growth is slowing - VMware's fourth-quarter revenue increased 10 percent to $1.87 billion, a slide from 15 percent growth in the same period a year earlier - and its stock price is down 40 percent over the past year. On Tuesday VMware announced the "realignment" of about 800 positions and the departure of chief financial officer Jonathan Chadwick.

There's an emerging growth driver, however.

NSX, the business focused on virtualizing communication networks so they can be controlled and managed with software, more than tripled over the past year and now generates revenue at a $600 million-a-year run rate.

VMware entered the network virtualization market in a big way in 2012 with the $1.2 billion acquisition of Nicira. At the time, Nicira had about 100 employees. Now, the NSX group stands at 700 and the company is staffing up to meet demand.

"The new model of compute is the software model," said Martin Casado, who co-founded Nicira and now runs NSX. The product "gives completion to this massive shift to fully virtualized infrastructure."

VMware's biggest challenge is that businesses are increasingly moving their data centers to the cloud, offloading more of the heavy lifting to Amazon Web Services (AWS) as well as cloud offerings from Microsoft and Google.

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When companies opt for servers in the cloud, they no longer need the virtual machines that VMware provides. In effect, VMware's technology begins to look like a bridge from the traditional on-premise world to the cloud.

It's no surprise then that NSX is working with AWS so that it can play a role in the transition to cloud—VMware previewed the integration at its VMworld conference in October.

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Can NSX's expansion also serve to boost growth in VMware's core server virtualization product? In the fourth quarter, nine of VMware's top 10 deals included NSX, and the number of paying customers for the product tripled year over year to 1,200.

"This is a true adjacency that complements compute virtualization," Casado said. "It not only adds a massive new business, but it adds value to the entire platform."