 From theCUBE Studios in Palo Alto in Boston, connecting with thought leaders all around the world, this is a CUBE Conversation. On June 23rd, the Wall Street Journal reported that Dell is exploring strategic options for its approximately 81% share in VMware. Both Dell and VMware stocks popped on the news. We believe that Dell is floating this trial balloon to really gauge investor, customer, and partner sentiment and perhaps send a signal to the short sellers that, you know what? Michael Dell has other arrows in his quiver to unlock. In case you want to squeeze me, I'm going to squeeze you back. Who knows? Hello, everyone, and welcome to this week's Wikibon CUBE Insights powered by ETR. In this breaking analysis, we'll unpack some of the complicated angles in the ongoing VMware saga and assess five scenarios that we think are possible as it pertains to this story. As always, we're going to bring in some ETR customer data to analyze what's happening with the spending picture. Let's take a look at what happened and just do a quick recap. The Wall Street Journal story said that Dell was considering spinning off VMware or buying the remaining 19% of VMware stock that it doesn't own. The journal article cited unnamed sources and said that a spin-off would not likely happen until September 2021 for tax reasons. That would mark, of course, the five-year anniversary of Dell acquiring EMC and would allow for a tax-free transaction. Always a good thing. What's going on here? And what options does Dell really have? What does it mean for Dell, VMware, customers and partners? We're going to try to answer those questions today. So first of all, why would Dell make such a move? Well, I think this tweet from your own name mark, he's a portfolio manager at one main capital. It kind of sums it up. He laid out this chart, which shows Dell's market cap. Prior to the stock pop, it's closer to 38 billion today and the value of its VMware ownership, which is over 50 billion since the stock pop. But let me cut to the chase. Investors value the core assets of Dell, which accounts for around $80 billion in revenue when you exclude VMware. Somewhere south of negative $10 billion. Why? It's because Dell is carrying more than $30 billion of core debt when you exclude Dell financial services. And it looks like a conglomerate owning the vast majority of VMware shares. Michael Dell has something like a 97% voting control. Core Dell is a low-margin, low-growth business. And some have complained that Michael uses VMware as his piggy bank and many investors just won't touch the stock. So the stock, generally Dell stock, has underperformed. I've often said, even going back to the EMC days, that owning the stock of VMware's owner is actually a cheap way to buy VMware. But that's assuming that the value somehow gets unlocked at some point. So Dell is perhaps signaling that it has some options and other levers to pull. As I said, maybe trying to give pause to the shorts. Now let's have a look at some of the ETR spending data and evaluate the respective positions of Dell and VMware in the marketplace. This chart here uses the core ETR methodology that we like to talk about all the time. For those not familiar, we use the concept of net score. Net score is a simple metric. It's like net promoter score, sort of. The chart shows the elements of Dell's net score. So each core ETR goes out and asks customers, do you plan to adopt the vendor new? That's the lime green at 4%. Spend more relative to last year, more meaning more than 6%. That's the forest green and you can see that's at 32%. Flat spend is the gray, meaning plus or minus 5%. And then decrease spending by 6% or greater. That's the pink and that's 11% for Dell. Or are you replacing the platform? See that, that's the bright red there at 7%. So net score is a measure of spending momentum and it's derived by adding the greens and subtracting the reds. And you can see Dell in the last ETR survey, which was taken at the height of the pandemic has a net score of 18%. Now we colored that soft red. It's not terrible, but it's not great either. Now of course, this is across Dell's entire portfolio and it excludes VMware. So what about VMware? So this next graphic that we're showing you, it applies the exact same methodology to VMware. And as you can see, VMware has a much higher net score at 35%, which of course shouldn't surprise anybody. It's a higher growth company. But 46% of VMware customers plan to spend more this year relative to last year and only 11% plan to spend less. That's pretty strong. Now, what if we combined Dell and VMware and looked at them as a single entity? Hmm, wouldn't that be interesting? Okay, here you go. So there were 975 respondents in the last ETR survey when we mashed the two companies together. And you can see the combined net score is 27%. With 42% of respondents planning to spend more this year than they did last year. So you may be asking, well, is this any good? How does this compare to Dell and VMware competitors? Well, I'm glad you asked. So here we show that in this chart, the net score comparisons. So we take the combined Dell and VMware at 27%. Cisco, as we often reported, consistently shows pretty strong relative to the enterprise data center players. And you can see HPE is kind of a tepid 17%. So it's got some work to do to live up to the promises of the HPE split. We also show IBM Red Hat at 14%. So there's some room for improvement there also. And you can see IBM in the danger zone as we break that down and Red Hat much stronger. But you know what? It's softened somewhat in the ETR survey since last year. So we'd like to see better momentum from IBM and Red Hat. It's kind of unfortunate that COVID hit when it did. As IBM was just kind of ramping up, it's Red Hat go to market. Now, just for comparison purposes, for kicks, we include Nutanix. Nutanix is a much smaller company, but it's one that's fairly mature. And you can see at 52%, it's net score is much higher than the big whales. Now, we've been reporting for months on high flyers like automation anywhere, CrowdStrike, Octa, Rubrik, Snowflake, UiPath. These emerging companies have net scores north of 60% and even in the 70% range. But of course they're growing from a much smaller base. So you would expect that. Now let's put this into context with a two-dimensional view that we'd like to show. Now, as you know, in addition to net score, that metric, we like to use so-called market share. Market share is a measure of pervasiveness in the dataset or essentially market share in the survey. And it's a proxy for real market share. So what this chart here does, it plots several companies with their net scores on the y-axis and market share on the x-axis. And you can see that we combined Dell and VMware together and we plotted them in that red highlighted box just for comparison purposes. So what does this tell you about the competitive landscape? Well, first, everyone would love to be AWS. You know, Microsoft too, we didn't plot Microsoft because they're so bloody dominant, they skew the chart somewhat, but they would be way, way out to the right on the x-axis because they have such a huge number of products and mentions in the dataset. So we left them out. Now you can see VMware and Cisco are kind of right on top of each other, which is sort of ironic as they're, you know, kind of increasingly overlapping with their offerings in the marketplace, particularly NSX. And you can see the other companies and for context, we've added a few more competitors like Veeam and Commvault. And, you know, they're in a pretty strong position as well as the combination of Dell and VMware. So let's start there. Steful analyst, Brad Reeback, was quoted in the MarketWatch publication as saying the following. We have long believed Dell would ultimately buy in the approximately 19% or 12.5 billion of VMware that it does not own in order to gain full control over VMware's substantial free cash flow, which is about $4 billion annually. And we still expect this to be the ultimate outcome. Huh. You know, I don't know. I'm not sure about this. On the one hand, you can see from the previous chart this would be a better outcome for Dell from a competitive standpoint. What it did is it pulls Dell up and to the right. Yeah, but perhaps not so much for VMware as it went down and to the left. And Dell would have to raise a bunch more cash to do this transaction. And what, take on even more debt? You know, maybe it could get Silver Lake to finance the deal. You know, then essentially, Dell would become the Oracle of infrastructure. You know, it certainly would make Dell even more strategic to CIOs. Would that be good for customers? Well, on the one hand, I guess it would bring better integration between Dell and VMware. You know, but I wonder if that's the critical issue for customers. And on the other hand, I think it would stifle VMware's innovation engine and a little bit further. And I wonder how Pat Gelsinger would react. I mean, my guess is he would call it a day. And what about Sanjay Poonan, who is the obvious next in line for the CEO job at VMware? What, he becomes the president of Dell's software division? And what about the rest of the team at VMware? You know, they're a Silicon Valley stalwart and that would slowly morph into Austin-based Dell. With the debt burden growing, you know, it's going to mean more of VMware's cash would go to paying down the debt, meaning less money for R&D or even stock buybacks, which you know I'm not a huge fan of. And I'm not a huge fan of this scenario. For sure, the technology partner ecosystem would be ice cold on such a deal. You could argue they're already less than lukewarm. But here, I want to explore some other options. So the next on the list is Dell could sell VMware to a private equity firm or a strategic. It could basically wipe out its debt and have some cash left over to sail into the sunset. That would be a big pill for someone to swallow. Even though Michael Dell has 97% voting power, I think there's fine print that says he has a responsibility to protect the interest of the minority shareholders. So to get approval, it would have to sell at a premium. You know, that could be as high as, you know, almost $70 billion. Microsoft has the cash, but they don't need VMware. And Amazon, I guess, could pull it off, but that certainly is not likely. Even if Google, who has the cash, were interested in buying VMware, Google would be the most likely candidate. You know, it would give Google Cloud Instant access to the coveted enterprise, but it's really hard to conceive. I mean, same for a PE company. 65 to 70 billion, you know, they get their money out in 15 to 20 years. So I just don't see that as viable. All right, what's next? How about the scenario of spinning off VMware that the journal reported? So in this transaction, Dell shareholders would get a bunch of VMware stock. You know, there may be some financial wizardry that Tom Sweet, Dell's CFO, and his band of financial geniuses could swing. I can't even begin to speculate what that would be, but I've heard there's some magic that they could pull off to maybe pull some cash out of such a transaction. And this would unlock the value of both Dell and VMware by removing the conglomerate and liquidity hangover for Dell. And it would definitely attract more sideline investors into VMware stock. And Michael Dell would still own a boatload of VMware stock personally. So there's an incentive there. So this is interesting and certainly possible. You know, I think in a way it would be good for VMware customers. VMware would get full autonomy and control over its destiny without Dell bogarting its cash. So it could freely innovate. Dell would become probably less strategic for customers. So I don't think that for Dell EMC buyers, the technology ecosystem partners like HPE, IBM, NetApp, et cetera, they would like it more, but they were already kind of down the path looking to optimize VMware alternatives. So think about Cisco. But I think for VMware customers, okay. I think for Dell EMC customers, not so much. Now what about the do nothing scenario? You know, I think this is as possible as any outcome. Dell keep chipping away at its debt using VMware as a strategic lynchpin with customers. Sure, they continue to pay the liquidity overhang tax and they'll frustrate some shareholders who we're going to remain on the sideline. But, you know, that's been the pattern anyway. Now, what about delivering some of the VMware ownership? So the more I think about it, the more I like this scenario. What if Dell sold 20% of its VMware stake and let's say raised, I don't know, 10, 12 billion dollars in cash that it could use to really eat into its debt burden? A move like this combined with its historical debt pay down could cut its debt in half by, say, 2021 and get the company back to investment grade rating, something that Tom Sweet has aspired towards. This would drop hundreds of millions, if not a billion dollars to the bottom line. And it would allow Dell to continue to control VMware. What I don't know, I don't know if there are nuances to this scenario. In other words, does dropping ownership from roughly 80% to about 60% trigger some loss of control or some reporting issue? I'm sure it's buried somewhere in the public filings or acquisition docs, but this option to me makes some sense. It doesn't really radically alter the relationships with customers or partners, so it's kind of stable. If VMware maintains its existing autonomy, it even somewhat lessens Dell's perceived control over VMware and it attacks Dell's debt burden. Yeah, it's still a bit of a halfway house, but I think it's a more attractive and as I said, stable option in my view. Okay, let's talk about what to look for next. And it looks like the stock market is coming to the reality that we are actually in a recession, although it appears that NASDAQ is trying to ignore this. Or maybe the market's a little bit off because they're afraid Joe Biden's gonna win the election and he's not gonna be good for the economy. We'll see. We'll see what the economic shutdown means for tech companies in this earning season. ETR's next survey is in the field and they're gonna have fresh data on the impact of COVID going into the dog days of summer. Here's what I think. Let me give you my preview and we'll see in a few weeks how accurate it is. I believe that tech spending is gonna be soft broadly. I think it's gonna especially be the case for legacy on-prem providers and I expect their traditional businesses to deteriorate somewhat. I think there's gonna be bright spots in tech for sure, the ones we've reported on. Cloud, yes, absolutely. Automation, I'm really looking closely at the battle between the two top RPA vendors, automation anywhere in UiPath. I think there's a really interesting story brewing there. And the names that we've been pounding, like Snowflake, the security guys like CrowdStrike and Okta and Zscaler, I think they're gonna continue to do very well with this work from home pivot. We also expect Microsoft to continue to show staying power but because of their size, they're exposed to soft demand pockets but I think they continue to be very, very strong and threatening to a lot of segments in the market. Now for Dell, I think the data center business has continued to be a tough one despite some of the new product cycles, especially in storage. But I think Dell is gonna continue to benefit from the work from home pivot as I believe there's still some unmet demand in laptops. We're gonna see that I believe show up in Dell's income statement in the form of their client revenue. I'd love to know what you think. You can tweet me at D-Valante or you can always email me at david.valante at siliconangle.com. Please comment on my LinkedIn post, I always appreciate that. I post weekly on siliconangle.com and on wikibond.com, so check out those properties and of course go to etr.plus for all the survey action. As I say, ETR is in the field with the current survey, they got fresh COVID data so we're excited to report on that in the coming weeks. Remember, these episodes are all available as podcast wherever you listen. This is Dave Vellante for theCUBE Insights powered by ETR. Thanks for watching everyone. We'll see you next time.