EMC (Symbol: EMC) filed a registration statement with the SEC this morning for spinning off a 10% stake in its VMware unit, which helps companies reduce the number
of computer servers they need by "virtualizing" hardware with software. It's no surprise that VMWare's revenue has tripled in the past two years. More surprising -- and disappointing -- expenses have
skyrocketed, too. This is sure to be a hot IPO but be wary of picking up shares at a sky-high valuation on the first day of trading.
Last year, VMware reported $704 million in revenue, operating income of $121 million and net income of $87 million, equivalent to 26 cents a share. Back in 2005, VMWare had $387 million of revenue, $94 million of operating income and net income of $67 million or 20 cents a share. So revenue was up 82%, operating income 29% and net income 30%. Looking at expenses, several line items grew even faster than the rapid rise in revenue, including R&D (up 104%), sales and marketing (up 91%), G&A (up 126%) and costs of servicing revenue (up 158%).
So a key question of VMware's deal will be whether the pace of expense increases will continue. Perhaps some of the expenses related to one-time or unusual items. If not, it's certainly a warning flag on this otherwise hotly anticipated IPO. With only $100 million worth of shares being offered, demand is likely to far outpace supply. And that's usually a recipe for a turbo boost as soon as the IPO shares hit the open market.
It also means ordinary Joe and Jane investors are unlikely to get much of the action here. Best bet is having an account with one of the lead underwriters, in this case Citicorp, JP Morgan, Lehman Brothers, Credit Suisse, Merrill Lynch or Deutsche Bank Securities. But with so little stock being made available, I wouldn't hold my breath waiting for an allocation even with a connection into the deal.
Other tidbits: The company hasn't decided whether to list on the New York Stock Exchange or the Nasdaq yet so no trading symbol in this first filing. VMware's post-IPO capital structure is also up in the air in this filing. Stay tuned.