Steady As A Rock: VMWare's Pat Gelsinger Leads The CRN 2018 Top 100 Executives Pack

As VMware CEO Pat Gelsinger prepared last month to raise funds for charity by climbing one of the world's highest peaks, he had already been scaling another mountain of sorts in his efforts over the past two years to transform the company.

Like Mount Kilimanjaro, which Gelsinger successfully hiked to help fund the construction of a girls' school in Kenya, the summit he was aiming for was high: reshape the company's public cloud strategy, transition its go-to-market strategy and solidify its relationship with parent company Dell Technologies.

The pieces were already falling into place last August at VMworld 2017, where Gelsinger spent much of his time talking with partners, both in keynotes and private sessions, about how VMware's transformation strategy would set a path for their practices to thrive in the years ahead.

While that event marked the hard launch of a long-debated plan, Gelsinger and other VMware leaders were confident that risky decisions made over the previous two years were about to pay off for the company and its channel.

Wall Street was also starting to catch on, with Palo Alto, Calif.-based VMware's stock having recovered from the losses of previous years.

"We knew the company was on the right track a year ago. It just took awhile for the market to necessarily recognize some of that," Gelsinger told CRN in an exclusive interview.

The goal was within sight: New alliances, products and channel programs started delivering tangible wins in the months that followed, sending VMware's stock to its all-time high near the end of January. These were all signs that Gelsinger and his team had adeptly navigated the disruptive threats to the company's core business from two game-changing technologies -- cloud and containers.

Then the climb got steeper.

At the end of January, word spread through various news reports that Dell was seeking a path back to the public market and might utilize VMware to do it. Suddenly VMware found itself a chess piece in Dell's bid to go public (a game now poised to end later this year when Dell acquires VMware's publicly traded tracking stock.)

Amid the uncertainty about VMware's future as an independent company, Gelsinger and team buckled down and fought to maintain "business as usual" despite the distractions. Those efforts paid off in May when VMware reported 14 percent year-over-year sales growth to $2.01 billion for its first fiscal quarter, ended April 31.

The company also raised guidance for its second fiscal quarter earnings to $1.49 per share, above consensus estimates of $1.34.

VMware channel partners credit Gelsinger not only with the bold decisions that sparked the company's turnaround, but also the steady leadership that stayed the course amid that corporate uncertainty.

BEYOND VCLOUD AIR

Partners peg the start of VMware's transformation to a decision of the sort that's often most difficult for a corporate leader to make -- retreating from an initiative that's already soaked up major capital investment.

But abandoning its public cloud, vCloud Air, and instead enabling infrastructure partners through the VMware Cloud Provider Program, made possible the success VMware has shared of late with its channel, said William Bell, executive vice president of products at PhoenixNAP, a VMwarealigned managed services and cloud operator based in Phoenix.

"Think about the immense bravery that it took to say, 'We're not going to do this. We've invested a ton of money, but instead, we're going to double down with our partners, everyone from Amazon and Google to PhoenixNAP,'" Bell said.

Shuttering vCloud Air tested the CEO's resolve.

"It's always hard to go back," Gelsinger said. The tendency after committing to a project is "sort of burrowing in."

But exiting the public cloud business "made it possible to simultaneously build these big critical partnerships," he said, including with the cloud's largest juggernaut, Amazon Web Services.

"The AWS deal was really the one that captured the attention of the industry," Gelsinger told CRN.

That earth-shifting agreement to build a VMware hybrid cloud service with Amazon Web Services, and other alliances with IBM, Microsoft and Google, were the most striking indicators that VMware was implementing a major strategic shift, VMware partners said.

"You begin down a journey, start down vCloud Air, and it doesn't work. Well, some CEOs would say, 'This has to work,'" said C.R. Howdyshell, president of VMware partner Rolta AdvizeX, based in Cleveland.

But Gelsinger wisely "course-corrected so he can execute on the bigger picture, which is the whole software-defined journey," Howdyshell said, "including server, storage, networking, and now the whole edge."

John Blumenthal, vice president and founder of Santa Clara, Calif.-based CloudPhysics, a VMware cost-optimization software partner, said cutting losses on vCloud Air allowed VMware to start "colonizing the public cloud."

The company leveraged its market strengths to "carve out territory" in AWS and other cloud operators, he said.

Those partnerships, stemming from a recognition of "what wasn't being successful," Gelsinger told CRN, have played "the most-defining role as to where we are today."

By VMworld 2017, VMware Cloud on AWS was ready for a regional launch.

Potential market adoption for that high-profile offering was still a big question mark. But other parts of the business already were accelerating, thanks in part to synergies with Dell Technologies, owner of 82 percent of VMware from its acquisition of EMC, a record-breaking deal that saddled Dell with more than $50 billion in debt.

The AWS service wasn't the only product being pitched to partners at the company's annual conference last August -- VMware had just introduced AppDefense, a novel security service, and was encouraging partners to broaden their virtualization practices with products like the Workspace ONE device management platform, vRealize multi-cloud monitoring and management, and Pulse IoT.

VMware was also preparing a thrust into the container market with PKS, a Kubernetes service built in partnership with Pivotal and Google.

The company saw two other game-changing products, vSAN virtualized storage and NSX virtual networking, as "rocket ships that were going to catapult us into new markets," Gelsinger said.

"It just took awhile for the numbers to get big enough that they really started to drive the financial metrics," he told CRN.

MERGER ANXIETY

By the end of January, the financial picture was clearer, and VMware stock, which two years earlier was at $45 a share, hit $150 for the first time in its history.

Then dropped a news report that Dell was contemplating a buyout of VMware, followed by another of a potential reverse merger. VMware could provide Dell a route to the New York Stock Exchange, alleviating debt trouble, sans IPO.

Shareholders, partners and the larger industry feared a deal that could undermine VMware's independence, growth strategy, net cash picture, and software-derived valuation multiple.

As his multi-cloud strategy was gaining traction, Gelsinger found himself between disgruntled VMware shareholders, activist investors, two advisory commissions, and Dell Chairman and CEO Michael Dell as well as his private equity partner, Silver Lake.

For Gelsinger, CFO Zane Rowe, and VMware's finance and business development leaders, it was impossible not to be distracted by the process that ensued, Gelsinger acknowledged.

The CEO looked to compartmentalize operations, determined to prevent the turmoil from impeding progress. He told his lieutenants, "Your job is to keep us executing. Anything other than great execution by you weakens our position as we go through this period of uncertainty."

In May, VMware reported results for the previous quarter, and guidance for the next, that soundly beat analyst expectations.

"Q1 was a great example of the team staying highly focused, even as Zane and I were somewhat distracted as we had to spend a fair amount of time working through it," he said.

Gelsinger deserves credit for averting "a severe brain drain" across the executive, management and engineering ranks during that period, CloudPhysics' Blumenthal said.

"It would have been a disaster of the first order. The fact that [Gelsinger] somehow avoided that was remarkable and probably saved the company," Blumenthal said.

In July, Dell reached a plan to go public by buying up its VMware tracking stock, keeping VMware independent, at least for the time being.

That was "a very good outcome," Gelsinger told CRN.

THE DELL RELATIONSHIP

When Dell took the reins of VMware in 2016 -- well before all the merger and buyout speculation -- Gelsinger recognized shepherding the relationship was going to be a tightrope that would test his leadership.

The CEO saw his mission as maintaining VMware's independence while capitalizing on synergies with its powerful new parent.

Before the acquisition, as a subsidiary of EMC, "there was clear contention in the system," Gelsinger said. (At a Dell leadership meeting, Gelsinger once displayed a picture of himself on a psychologist's couch tagged "recovering [EMC] Federation addict.")

"Making that a successful partnership with Dell while simultaneously keeping the health of our partner ecosystem and our other OEM partners, there's hard decisions in that," he told CRN.

That goal has been realized.

"Collectively our sales relationship is strong, our channel relationship is strong, our strategy is strong, and the ecosystem is being turbocharged by the Dell relationship," Gelsinger said.

And now with Dell's future more certain, and VMware's accordingly, Gelsinger is ready to move past the distractions once and for all and accelerate efforts to leverage VMware's bulked-up portfolio and partnerships to deliver on a new vision.

The "any cloud, any device, anywhere mantra," said PhoenixNAP's Bell, "is effectively saying we think our future is our ability to manage, orchestrate, secure and automate platforms and compute infrastructure, whether on-prem, off-prem, or in the cloud."

"You're starting to see bits and pieces of that really come forward hard core," Bell told CRN.

REVITALIZING THE CHANNEL

VMware shares have nearly doubled over the last year. But stock price is only a second-order indicator of success, Gelsinger said.

"First the company has to be healthy," he said. That's measured by internal metrics of culture, people, attrition rate; and external ones involving product strategy, customer satisfaction, and bookings growth rate.

Another important bellwether is the success of channel partners, Gelsinger said.

"VMware is a partner-, channel-centric company," Gelsinger said. "Five years ago, we had sort of lost that focus a little bit."

Rolta AdvizeX's Howdyshell said VMware's turnaround, anchored on "integrating the channel into their growth model," has validated a channel strategy for enterprise software.

"What [Gelsinger has] provided us over the last year is a true clear path for partners to build hybrid cloud practices and monetize the cloud," Howdyshell said.

As VMware looks to grow from an $8 billion run rate to $11 billion over the next year, and $15 billion in three, it needs the channel, which accounts for roughly 80 percent of all sales, Howdyshell said.

Rolta AdvizeX wants to double down on its VMware strategy because the conversation with customers has changed from tactical to strategic, Howdyshell said.

PhoenixNAP, likewise, is investing in scaling VMware services after a year of significant growth.

"Over the last 18 months it's been a night-and-day experience for us," Bell said.

FARM BOY TO TECHNOLOGIST

Gelsinger, who grew up on a Pennsylvania farm far across the country from Silicon Valley, has in his garage the first IBM 32-bit computer. That model No. 001 box is a prized souvenir from his years at Intel, where he was legendary CEO Andy Grove's protégé.

Partners say those contrasting traits of grounded farm boy and avid technologist have made Gelsinger uniquely well suited to lead a software company through unprecedented technological disruptions and corporate distractions.

His personal attributes -- discipline, stability, leading by example -- are almost a "manifestation of the product you want to buy as an enterprise consumer," Blumenthal said.

In turbulent waters, the CEO's down-to-earth style has steadied the ship, and made an industry starting to contemplate the demise of virtualization, and VMware with it, take notice of how a legacy company could adapt to the modern IT landscape.

Gelsinger sees VMware's transformation as one that both fundamentally changed the posture of the company and brought it closer to its roots.

"VMware was always this good, disruptive, innovative company. It always had that," Gelsinger said. "These secular shifts in cloud and containers have definitely challenged us. But we have demonstrated the ability to navigate through the changes while not fundamentally changing our business model, even as we're adjusting it to the new realities."

The transformation project is a work in progress. The next goal, he said, is shifting to subscription and cloud-based delivery models, which now account for 10 percent of revenue.

"You need to make these agile moves to these new environments, even as it risks your current business, disrupts your own organization," Gelsinger told CRN.

After successfully scaling the 19,341 feet to the summit of Mount Kilimanjaro, it’s clear that Gelsinger embraces risk, an attitude he undoubtedly brings to his leadership at VMware.

"Being uncomfortable has to become part of your corporate approach to the market if you're going to succeed in an environment that is only going to be changing faster going forward than it has been in the past," Gelsinger said.