VMware Gains on Faster Sales Growth Outlook

VMware Inc. (VMW) rose the most in eight months after Chief Executive Officer Pat Gelsinger forecast accelerating revenue growth, easing investor concern that he’s not moving swiftly enough into new businesses.

VMware’s stock advanced 8.1 percent to $81.37 at the close in New York, the biggest gain since July 18. EMC Corp. (EMC), VMware’s majority owner, also issued an outlook for annual sales growth of at least 8 percent, lifting its shares by 1.8 percent to $24.90.

VMware’s revenue will increase 15 percent in 2014 and as much as 20 percent in the following two years, the company said today at a meeting with analysts. VMware also plans an initial public offering for Pivotal, a joint venture with EMC. Investors had been seeking evidence that Gelsinger, CEO since September, can boost growth after the acquisition of Nicira Inc., which stepped up VMware’s competition with Cisco Systems Inc. (CSCO)

“Today’s model conversation should allay investor concerns of any material fall-off in growth around the corner,” Rob Owens, an analyst at Pacific Crest Securities LLC, said in an interview.

Pivotal will be formed from assets from both VMware and EMC, and will seek to sell shares to the public, EMC CEO Joseph Tucci said. The venture will have about $300 million in sales this year, and be 69 percent owned by EMC, with VMware holding the rest. Tucci didn’t specify the IPO’s timing.

Restructuring Plan

VMware, based in Palo Alto, California, had plunged 25 percent in the past 12 months through yesterday, and was trading at its lowest value relative to the Morgan Stanley Technology Index on a price-to-earnings basis since December 2009, according to data compiled by Bloomberg.

The company had issued a forecast on Jan. 28 that first- quarter revenue will be $1.17 billion to $1.19 billion, below the range of analysts’ estimates, sending the stock down the most since 2008. VMware is known for past instances of issuing disappointing forecasts, only to soar above the reduced expectations when reporting results.

This time, the lower projections were accompanied by VMware’s first-ever companywide job cuts, part of a restructuring plan costing as much as $110 million. That’s a sign that VMware has matured from a growth company to one that must reduce spending to shore up profits amid tepid sales increases, according to Mark Moerdler, an analyst at Sanford C. Bernstein & Co. He has a market perform rating on the stock.

EMC Outlook

Parent EMC, the world’s biggest maker of storage computers, forecast that profit excluding certain costs will rise 10 percent annually through 2016 as it increases market share, Chief Financial Officer David Goulden said today at the meeting in New York.

The high-end storage market will expand 1 percent to 3 percent a year through 2016. The emerging storage market will jump more than 25 percent a year in the same period, he said.

EMC, based in Hopkinton, Massachusetts, has been making acquisitions, mainly in storage and security software, to fuel growth and fend off competition from former partners such as Dell Inc. and Oracle Corp., which are targeting the $70.1 billion storage industry.

The security market will increase by 10 percent to 14 percent annually, Goulden said.

Maturing Business

VMware is expecting a flush of contract renewals in its core businesses later this year. Gelsinger needs the size of those contracts to increase and for new businesses to take off in order to stave off the pressure that slowing revenue growth is exerting on the company’s shares.

Analysts project VMware’s sales will rise 15 percent this year, half as much as the rate two years ago, and the slowest since 2009.

One promising area is software-based networking, a plan jump-started by the purchase of Nicira last year. While VMware paid $1.26 billion for the startup, Nicira’s revenue is negligible, said Moerdler. The other area is management software, a space with plenty of competition from International Business Machines Corp. (IBM) and BMC Software Inc. (BMC)

VMware is the market leader for virtualization software, which runs multiple operating systems on a single server, letting companies to buy and operate fewer machines.

“VMware’s problem overall is where else can they make money?” said James Staten, an analyst at Forrester Research Inc. “They have to bring virtualization to other places like network and storage, which is why Nicira is important.”

Competing products by Microsoft Corp. (MSFT) and the freely virtualization software Xen Hypervisor are also taking some share and pushing down prices.

Pivotal Spinoff

Last year, Gelsinger moved to VMware from EMC, replacing Paul Maritz, who -- as the executive overseeing strategy and cloud initiatives at EMC -- will lead the Pivotal initiative.

VMware said today that Pivotal will have 1,250 employees and make its public market debut after about 12 months or more, VMware said today. Some investors are also concerned that the spinoff of Pivotal will rob VMware of future sales, according to Abhey Lamba, an analyst at Mizuho Securities USA Inc. He rates the stock a buy.

The Pivotal spinoff probably benefits parent EMC more than VMware, and is part of a series of steps to “make a more efficient EMC portfolio,” Staten said.

Investors will have to wait at least a quarter or two before deciding whether January’s sales forecast turns out to be a shift in the market environment or the new management team setting a low bar, said Mizuho’s Lamba.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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