Virtustream Grows, Broadens Application Reach

June 21, 2016 Jeff Ferry

In recent months enterprises have been moving more aggressively to use public cloud services

With customers like Intel, Heinz, Domino Sugar, and Kawasaki, Virtustream has been at the forefront of those public cloud providers trying to get large enterprises to embrace the cloud.

According to Virtustream president and CTO Kevin Reid, in recent months enterprises have been moving more aggressively to use public cloud services and are broadening the range of applications they are moving to the cloud. “In the early days, customers would move test/development or cloud-native applications, like websites, to the cloud. Now, many enterprises are looking at the rest of their apps, because the cloud has reached a point of maturity, reliability, and acceptance in the executive boardroom,” Reid told the Daily Cloud. “As a result of that, we’ve had incredible growth, and that is continuing quarter on quarter. We’re not seeing any slowing of our growth.” Reid declined to disclose revenue figures, but in a February press release, Virtustream said its aim was to book revenue of “multiple hundreds of millions of dollars”

Virtustream: Ripe for IPO?

MAY 9, 2014 BY CECELIA DEMAREST
Virtustream targets the key issues that concern large enterprises about the public cloud: security and performance

Virtustream is one cloud service provider focused on the enterprise sector and doing well enough to consider an IPO as soon as next year. But it’s also hedging its bets by marketing its proprietary software to other service providers. Virtustream, based in Bethesda, Maryland, provides a taste of what the “cloud” might look like once it goes truly mainstream in the enterprise world.

“We took a look at the public cloud model and knew we wanted to adapt it for the enterprise,” explains chairman and co-founder Rodney Rogers, referring to the founding of Virtustream in 2009. “We asked ourselves: what kind of product could we build, such that Fortune 500 companies would buy it and use it? We wanted to combine the elasticity and economics of the public cloud with the performance and security attributes of the private cloud.” Where most founders of cloud service providers come from the engineering side of the business, Rogers has been a consultant providing services to large enterprises for most of his career: after starting at Accenture, he founded Adjoined Consulting in 2000, built it up to more than $100 million a year in revenue and sold it to Chicago-based consulting firm Kanbay for cash and stock worth $235 million in 2006. Rogers became COO of Kanbay, which less than a year later was itself acquired by Capgemini for $1.25 billion. Like most companies in the cloud infrastructure business, Rogers is cagey with financial data, but he claims that serious enterprise interest in cloud took off in 2012 and Virtustream is currently seeing triple-digit growth in its business. He says Virtustream could do an IPO next year, which suggests he’s confident annual revenue should be running at tens of millions of dollars next year. “We could be ready to write an S-1, if we wanted to, sometime next year, but we also want to maintain our independence,” he says. With 700 customers and a strong reputation, Virtustream would be an obvious acquisition, so an early IPO might not be the best way to build a large company for the long term.

The key features that make Virtustream different from most cloud providers are built into its proprietary cloud software layer, xStream. xStream delivers increased security, performance guarantees, and a resource/pricing model that is more flexible than that of most other cloud providers. The security protections include so-called BIOS integrity, checking that the input/output functions on the processor chips haven’t been altered or compromised. Performance guarantees, known as SLAs or service level agreements, include guarantees as to the response speed of applications running on the Virtustream cloud. Many cloud providers offer no guarantees at all and those who do typically guarantee the availability of certain resources, not their performance level. According to Rogers, the Virtustream resource model charges customers by the resources they actually use, and also allows greater flexibility in combining varying levels of resources like compute, storage, etc. Although most cloud providers feature the rapid scalability or elasticity of the resources they offer, they typically require the customer to reserve a certain level of resources and then bill for what is reserved, not what is actually used.

“For I/O intensive apps, we offer subsecond latency SLAs,” Rogers says. “We’re the only company in the world that does that.”

He adds that in a 2013 Gartner report on public cloud providers, Virtustream ranked first in security and compliance with 5 out of 5. Verizon Terremark ranked second. AWS came in at 6th, IBM SoftLayer was 8th, and Rackspace was 11th. Virtustream runs its cloud operations in five data centers, including three in the U.S. and two in Europe. As a result of the enterprise focus, it claims multibillion dollar corporate customers including Coca-Cola, Kawasaki, Equifax, Domino Sugar, Yum Brands, and several federal government agencies. As an example of a Virtustream deal, he cites a recent contract with the Department of the Interior by which Virtustream is migrating Interior’s SAP enterprise resource planning system into the Virtustream cloud. Although Unisys is lead contractor on the deal, and Virtustream is the sub-contractor, Rogers says this deal is worth $40 million to Virtustream over the next 7 or 8 years. Revenue of a cool $5 million a year indicates the potential for cloud providers when dealing with large-scale organizations and mission-critical applications like ERP.

Rogers says that Virtustream’s revenue breakdown is currently running at about 80% enterprise, 10% government, and 10% tech companies. (Many of the largest cloud providers would appear to have a customer split in the opposite direction, with the vast majority of revenue coming from the tech industry and only a small minority from the enterprise sector.) The government sector is currently growing fastest, Rogers adds. ERP is a rich application area for cloud providers to mine. Virtustream is helped by the fact that its investors include leading ERP provider SAP. Other investors are Intel Capital, and several mostly east-coast-based venture capital firms. In its recent Q1 earnings announcement, SAP emphasized its strategic focus on shifting business to the cloud, citing 30%+ growth figures for its cloud revenue, and forecasting that cloud-based revenue this year would be in the range of 950 million to 1 billion euros—still small but growing five times faster than its traditional software and service revenue which is forecast to total around 15 billion euros this year.

From Service to Software Provider?

Last year, Virtustream added a new line of business to its arsenal when it productized its xStream software and began offering it to large service providers as their technology platform for offering cloud services to their enterprise customers. Rogers cites Middle Eastern service provider Etisalat as a customer. He says that Virtustream won’t market the software to competitive cloud service providers, but with Virtustream only offering cloud services in the US and UK, there are plenty of parts of the world where he can market the software. On the software side, Virtustream’s competitors include companies like Joyent, Eucalyptus, and Flexiant.

Today, Virtustream’s revenue is 70% IaaS and 30% software. Software is an attractively high-margin business. Virtustream’s growing interest in selling software to service providers recalls another startup, more than a decade ago: Loudcloud. Loudcloud was founded by Marc Andreessen and Ben Horowitz as an “application service provider” to enterprises. It was a precursor of today’s cloud and 15 years ahead of its time, but when Loudcloud’s market did not materialize, they transformed the company into a software developer/marketer called Opsware, which was soon after acquired by HP for $1.6 billion.

Today, if the enterprise cloud grows quickly enough, Virtustream could reap big rewards in the IaaS business. The enterprise world contains thousands of customers who don’t mind paying good prices for IT, if they believe they are getting value. With many of Virtustream’s competitors focused on tech customers ,Virtustream has an opportunity to emerge as a leader in offering a cloud for larger enterprises.

“We think the private cloud vs. public cloud debate is silly,” Rogers says. “There will always be sectors, like financial trading firms, where the governance and compliance requirements mean the IT needs will be handled inside a big bank’s data center. But in the spaces where we focus, such as the retail industry and the product industry, the advantages of a 50%-70% total cost of ownership reduction combined with a guaranteed subsecond response time are compelling.”

virtustream
Iron Mountain, Virtustream Partner to Develop Backup Cloud Storage

Backup and archiving storage leader Iron Mountain is partnering with cloud & software provider Virtustream to add cloud capabilities to Iron Mountain's storage infrastructureRead More

Apollo Education Group
Why Apollo Education Chose a Private Cloud

Apollo Education Group (APOL), parent company of the University of Phoenix, may be the largest privately-owned for-profit university system in the world. Read more

8x8
8×8 Wins Watershed Deal With Regus

UC provider 8×8 announced a deal to provide communications systems to Regus plc, the world’s largest provider of temporary office space. Read More

autoeurope 8x8
Auto Europe Saves $700K a Year With 8×8

International car rental agency Auto Europe expects to save $700,000 a year by moving to a cloud-based unified communications and contact center system from 8x8.Read More