VMware Forecasts Darken Bright Spot in Dell's Deal to Buy EMC

  • Profit, sales forecasts for 2016 fall short of estimates
  • EMC acquisition by Dell fueling investor, customer concern

The shine is coming off VMware Inc., the crown jewel in the sale of parent company EMC Corp. to Dell Inc.

VMware shares fell as much as 13 percent after the biggest maker of virtualization software forecast profit and sales for 2016 that may miss estimates, hurt by a transition to new products that’s moving more slowly than anticipated.

While VMware managed to exceed projections for the fourth quarter, it also announced 800 job cuts and a new chief financial officer. The changes follow a turbulent period for VMware’s stock, following the October announcement of Dell’s plan to purchase EMC, which triggered some anxiety about VMware’s independence and led some customers to hold off purchases. VMware shares have slumped more than 40 percent in the past year.

“Clearly they’re going to have to explain what’s happening,” Abhey Lamba, an analyst at Mizuho Securities USA Inc. “Are the layoffs a shift in the growth opportunity? Is it something being pressed by Dell and EMC to get costs down?”

Sales for the year will be $6.79 billion to $6.94 billion, VMware said on a call with analysts, below the average analyst estimate of $7.21 billion, according to data compiled by Bloomberg. Profit, excluding some items, will be $4.07 to $4.16 a share, compared with analysts’ projection for $4.17. The first-quarter profit forecast of 83 cents to 85 cents a share was also short of the prediction for 92 cents.

The shares of VMware initially rose after the Palo Alto, California-based company reported fourth-quarter profit, excluding some costs, of $1.26 a share on sales of $1.87 billion. Analysts on average had projected profit of $1.25 a share and revenue of $1.85 billion. Net income was $373 million, or 88 cents a share, up from $326 million, or 75 cents, a year earlier.

For the past few years investors have worried that the software market for virtualization was maturing and that too many companies already had all the VMware products they needed. Now that scenario has come to pass, as Chief Executive Officer Pat Gelsinger predicted 2016 would be a year of transition as the company looks to newer products to pick up the slack. As that happens, bookings, a measure of future growth, will increase 3 to 5 percent faster than revenue, he said.

VMware is cutting about 800 positions under a restructuring plan that will result in a charge of $55 million and $65 million. EMC is also in the middle of a cost-reduction program. Executives at EMC have said the deal with Dell makes financial sense because it will boost revenue, rather than enabling them to cut costs.

Executive Changes

Separately, VMware said Zane Rowe, EMC’s chief financial officer, will move to VMware to replace Jonathan Chadwick as CFO from March 1, the company said. EMC promoted Denis Cashman, a 28-year EMC finance veteran, to CFO.

EMC, which owns more than 80 percent of VMware, in October agreed to be acquired by Dell Inc. in the biggest technology merger ever. The personal-computer maker will pay for the $67 billion deal, in part with newly issued VMware tracking stock.

The 2016 forecasts were affected by changes related to the accounting of EMC’s $1.2 billion purchase of Virtustream. In October, the company said that business would add hundreds of millions in sales this year and lose money. Investors were spooked soon after on news that the acquisition would be considered half-owned by VMware, a move that would generate losses for VMware. That decision was later reversed, resulting in the new outlook for the year.

“Virtustream was meant to address some of the weaker spots in their cloud business so now they are going to have to back that out and address their own business,” Lamba said.