VMware, Inc.

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VMware, Inc.

3145 Porter Drive
Palo Alto, California 94304-1224
U.S.A.
Telephone: (650) 475-5000
Toll Free: (877) 486-9273
Fax: (650) 475-5005
Web site: http://www.vmware.com

Public Company
Incorporated: 1998
Employees: 3,000
Sales: $703.9 million (2006)
Stock Exchanges: New York
Ticker Symbol: VMW
NAIC: 511210 Software Publishers

VMware, Inc., is a Palo Alto, California-based provider of virtual machine and management software for x86-based servers and personal computers (PCs). The descriptor x86 is a generic name for a group of Intel microprocessors found in PCs. VMware software allows multiple operating systems and applications to run independently and simultaneously on a single computer. (This concept contrasts sharply with so-called software emulation, which allows programs written for one operating system to be used on a computer using a different operating system.)

VMware software allows a computer to run multiple operating systems on virtual machines within a single physical machine. In essence, then, VMware software imposes a layer of software on the computer hardware (or a host operating system) to carve out multiple virtual, independent computers that can run on their own operating systems, each taking advantage of the central processing unit (CPU), random-access memory (RAM), hard disk, and network controller without interfering with one another. Individual users are able to toggle between applications running on Linux, Windows, or other operating systems, an extremely helpful ability for help desk workers helping people on multiple platforms, or corporations making the transition from one operating system to another but wanting to have both old and new platforms operational for a period of time.

More than just providing versatility for single computers, however, VMware software is able to tie together hundreds of networked computers in a virtual infrastructure that can more efficiently and effectively harness the collective power of the individual machines. VMware maintains more than 40 offices in seven states, Canada, Latin America, and throughout Europe and the Asia Pacific region, serving more than 20,000 organizations, including all of the Fortune 100. Although VMware is a public company listed on the New York Stock Exchange under the ticker symbol VMW and operates independently, EMC Corporation holds a controlling interest of about 86 percent.

COMPANY FOUNDED: 1998

VMware was founded in 1998 by its President and Chief Executive Officer (CEO) Diane Greene; her husband and the company's chief scientist, Dr. Mendel Rosenblum, a computer science professor at Stanford University; a friend from the University of California at Berkeley, Edward Wang; and a pair of Rosenblum's Stanford graduate students, Eduard Bugnion and Scott Devine, who became VMware's principal engineers.

Greene was the only one of the group to have business experience, and she possessed a technical background as well. Her father an engineer, her mother a teacher, she was raised in Annapolis, Maryland, home of the U.S. Naval Academy, where she fell in love with the water. After receiving a mechanical engineering degree from the University of Vermont, she went on to the Massachusetts Institute of Technology to earn a degree in naval architecture. Greene then went to work designing offshore oil rigs but soon tired of that and relocated to Hawaii to design equipment for windsurfing, one of her passions. She returned to school to take a master's degree in computer science at the University of California at Berkeley, where she also met her husband. Greene launched a technology career in 1986 at Sybase, and then moved on to Tandem and Silicon Graphics before leaving in 1995 to found VXtreme, a company that delivered streaming video on the Web. She served as that start-up's CEO. Less than two years after its launch it was sold to Microsoft for a reported $75 million.

By 1998 Greene was married to Rosenblum, an associate professor of computer science at Stanford who focused on operating systems and was involved in some exciting research regarding virtualization. The use of virtual machines dated back to the 1960s when IBM developed virtual memory hardware. In the 1970s virtualization was employed to take advantage of the power of mainframes to run multiple business applications, and it was a technology dismissed by the 1990s because of the proliferation of desktop computers and the distributed computer model that made computing power far less expensive. Rosenblum, however, realized there were other benefits to virtual machines and began working with his graduate students to bring an old concept to the Intel and AMD platform of microprocessors, called x86-based systems. Excited by the commercial application of the virtualization software the research team had developed, VMware founders developed a business plan and launched the company in 1998.

The only one of the group to have ever shipped a software product, Greene became CEO of the start-up. She attempted to drum up venture capital, but initially attracted little attention. Not only did investors not understand the value of virtualization in a PC world, they were more focused at the time on Internet ventures than on what they perceived as an old-fashioned software company. In time, Greene would raise a small amount of venture capital, but the company would never need to tap into it. Not beholden to investors, the company was able to chart its own course without interference.

In 1999 VMware made a beta version of its VMware software and made it available on the Web for users to try, allowing them simultaneously to run the Linux, Windows 95, and Windows NT operating systems. It quickly found a following, especially among the community of Linux users and software developers, who were now able to design and test different programs on one machine without having to juggle removable hard drives, each containing a different operating system. About 75,000 users around the world downloaded the product in about two months, providing valuable feedback. By the end of 1999 the company introduced a commercial version of the software, VMware Workstation, priced at $299 for the corporate market and $99 for consumers. It was only available over the Web, thereby providing income while eliminating the cost of maintaining a sales force. As a result, the company was cash neutral and had enough resources to open its first international office in 2000.

COMPANY PERSPECTIVES

VMware is the world's leading provider of virtualization solutions for x86-based servers and desktops. Through a pioneering approach to virtualization, VMware technology works to separate the software from the underlying hardware. This allows a single computer to run multiple operating systems and applications, delivering significant improvements in efficiency, availability, flexibility and manageability.

Even as VMware was unveiling its PC desktop virtualization software, the company was taking steps to move the technology to the server, a market with far greater commercial potential because of the number of corporate clients. The company developed a way to partition servers to permit virtualization and found partners in IBM, Hewlett-Packard, and Dell to bring the product to market. In 2001 VMware released the initial version of its server software in two products: GSX Server 1.0 and ESX Server 1.0. To help market its products, VMware in 2002 forged deals with IBM and Fujitsu Siemens, who became distribution partners and resellers. The company also received a great deal of publicity and validation in 2002 when Merrill Lynch & Co. acquired 27,000 licenses of Workstation for their traders' desktops, part of an effort to manage the risk in making the switch from Windows NT to the new Windows XP operating system. Moreover, Merrill Lynch would use VMware solutions to reengineer its server infrastructure once the desktop project was completed, removing hundreds of servers and saving millions of dollars in hardware costs alone over the next few years.

COMPANY SOLD: 2006

For the fiscal year ending January 31, 2003, VMware generated sales of around $31 million, all derived from licensing. Business continued to flourish the following year when the company also began to derive income from services. Moreover, it turned the corner on profitability. VMware prepared to make an initial public offering (IPO) of stock to raise funds to expand the business, but it never made it to the market. Instead, several suitors lined up and the founders decided to sell the company, agreeing to a $625 million offer from EMC Corporation, a Massachusetts-based provider of storage systems. It was a quick transaction, announced on December 15, 2005, and closed less than a month later on January 9.

An acquisition for VMware made sense for several reasons. An IPO would have taken time to put together and likely would have required top executives to travel extensively to sell the offering to institutional investors, perhaps stunting the company's momentum. Moreover, EMC could provide the company with the kind of money needed for research and development and establish an international sales force to spur further growth. Why EMC wanted to buy VMware was a different matter, however. The company had been on something of an acquisition binge, having completed three other acquisitions in the storage area in recent months. According to the Wall Street Journal, industry watchers thought "the connections between [VMware and EMC] were few and the deal was a clear signal that EMC hopes to become a less parochial vendor with more offerings to spread across a large customer's technology infrastructure." One executive cited in the article commented, "I find in an unusual marriage."

In truth it was no marriage at all. For EMC the VMware deal was really an investment in a promising company. VMware was not integrated into EMC; its management team and operations were left intact and allowed to grow without interference. It proved to be a highly successful strategy as VMware grew its revenues at an exponential rate. In 2004, when the fiscal year was changed to coincide with the calendar year, VMware increased revenues to $218.8 million, a significant jump over the $74.2 million posted the prior year. Net income also improved from $4.6 million to nearly $16.8 million during this time. Some of that growth was due to the 2003 release of ESX Server 2.0 and an add-on called VMotion. The following year the VMware Technology Network (VMTN), a resource center for everything virtualization, was launched, and the company added Dell as a distribution partner and reseller.

Business continued to flourish in 2005 with total revenues topping $387 million and net income soaring to $66.8 million. VMware's success did not go unnoticed. The greatest threat to the company's position, of course, was Microsoft, which was gearing up to incorporate virtualization capabilities within its next version of Windows. To help offset that challenge, VMware announced in the summer of 2005 that it would share its code with its corporate partners like IBM, and later others, as a way to standardize the technology, a move that could accelerate market growth.

In 2006 more new products and services were added. Virtual Appliance Marketplace was launched, providing customers with prebuilt, preconfigured, ready-to-run enterprise applications and an operating system inside a virtual machine. As a result, installing, configuring, and maintaining enterprise software was greatly simplified. Also in 2006 VMware Infrastructure 3, the company's latest infrastructure virtualization software suite was released, as was Lab Manager to speed up enterprise software development. Sales grew to $704 million in 2006 and net income approached $87 million in 2006.

KEY DATES

1998:: Company founded.
1999:: First workstation product released.
2001:: First server product released.
2004:: EMC Corporation acquires company.
2007:: VMware completes public stock offering.

SPINOFF COMPLETED AUGUST 2007

The $1 billion sales mark appeared within reach in 2007, when the company released Workstation 6.0 and signed its 5,000th reseller. The company was estimated to have an 85 percent market share and a five-year advantage over the competition in terms of technology. The VMware acquisition had clearly been a tremendous success for EMC, yet investors failed to properly value VMware when calculating the price of EMC stock. To unlock that value and give a boost to its stock price, EMC elected to make an IPO of stock for VMware, although it was not willing to part with more than a 10 percent slice. Intel and Cisco also owned small stakes in VMware, but even after the IPO EMC expected to retain 86 percent of the company.

The offering also looked to benefit VMware, which would now have stock at its disposal to attract and retain talented employees. The offering, completed on August 14, 2007, raised about $1.1 billion. VMware's stock then began trading on the New York Stock Exchange and on the first day soared past its offering price of $29 to $51 per share, giving the company a market capitalization of $19.5 billion. The price continued to climb. Ten days later it topped $71. This was more good news for EMC, which enjoyed about a 50-cent increase in its own stock for every additional $1 billion VMware was worth. Moreover, EMC received a windfall in the form of a $800 million one-time dividend from VMware, paid in the form of a note payable within five years, considerably more than the amount EMC paid for VMware less than four years earlier.

Ed Dinger

PRINCIPAL SUBSIDIARIES

Akimbi Systems, SARL; Propero, Inc.; Propero Limited; VMware Australia Pty. Ltd.; VMware Canada Inc.; VMware Germany GmbH; VMware Global, Inc.; VMware International; VMware U.K. Limited; VMware, K.K.