Bloomberg News

VMware Sales Forecast Misses Estimates as Demand Slumps

January 29, 2013

VMware Inc. (VMW:US), the biggest maker of software that lets computers run multiple operating systems, fell the most since mid-2008 after forecasting sales that were less than estimates amid cutbacks from corporate customers.

The stock fell 22 percent to $77.14 after the company said yesterday that first-quarter revenue will be $1.17 billion to $1.19 billion. Analysts anticipated $1.25 billion, the average of projections compiled by Bloomberg. EMC Corp. (EMC:US), which owns a majority of VMware, also slumped.

VMware, which surged after its 2007 IPO on booming demand for programs that make data centers run more efficiently, is facing accelerating competition as software companies, including Microsoft Corp., introduce low-priced alternatives. That’s pushing Chief Executive Officer Pat Gelsinger to expand into a broader range of cloud-computing tools, including networking, the area dominated by Cisco Systems Inc.

“Microsoft is gaining ground as a good-enough and lower- cost option,” Jayson Noland, an analyst at Robert W. Baird & Co. who has a neutral rating on VMware, wrote in a research note. “We continue to see VMware as in-between past success and future growth.”

The company said it’s facing a tougher first half because of a weak economy and sluggish federal government demand, which had an impact on bookings, a measure of future sales. An expected increase in contract renewals won’t occur until later in the year, the Palo Alto, California-based company said.

‘Wayward Child’

“The company’s guidance was clearly disappointing,” Abhey Lamba, an analyst at Mizuho Securities USA Inc. who recommends buying the shares, wrote in a note to clients. “In particular, management’s license growth expectations of 8 percent to 11 percent for the year are materially lower than expectations, as investors expected revenue growth acceleration in 2013.”

EMC, the world’s biggest maker of storage computers, slumped 4.1 percent to $24.18. VMware has dropped 16 percent in the past 12 months, while and EMC has declined 6.4 percent. Both have underperformed the 15 percent increase in the Standard & Poor’s 500 Index.

EMC also provided a 2013 forecast that fell short. Sales will be $23.5 billion, the company said today in a filing. Analysts projected $23.6 billion on average.

The shares are down because of “poor guidance provided by their wayward child VMware,” Brian Freed, an analyst at Wunderlich Securities Inc., said via e-mail. He cut his rating on VMware to hold from buy today.

Eliminating Jobs

VMware will cut 900 jobs, exit some lines of business and consolidate facilities this year, resulting in charges of $90 million to $110 million, according to a filing. Even with the job cuts, the company is still hiring and plans to end the year with head count up by about 1,000, Gelsinger said on a conference call.

VMware, bought by EMC for $625 million in 2004, went public in 2007 in an initial public offering that made it one of the world’s most valuable software companies. It created a market niche essentially from scratch, letting servers powered by Intel Corp. chips perform more efficiently by running multiple operating systems and applications, saving companies money on hardware and labor.

As many businesses adopted the approach -- and Microsoft included its own virtualization software in the versions of Windows it sells for server computers -- VMware under former CEO Paul Maritz and current CEO Gelsinger has been branching out. The company agreed in July to buy Nicira Inc. for $1.26 billion to manage networking equipment, and it has been pushing management tools to help companies deliver cloud computing applications to users.

Microsoft Pressure

So far, those initiatives haven’t delivered the rapid growth that VMware realized from earlier products.

Fourth-quarter profit, excluding items such as stock-based compensation and a tax adjustment, was 81 cents a share, exceeding the average estimate (VMW:US) of 78 cents, according to data compiled by Bloomberg. Sales rose 22 percent to $1.29 billion, compared with a $1.28 billion average projection.

Net income climbed 2.7 percent to $205.8 million, or 47 cents a share, from $200.4 million, or 46 cents, a year earlier.

VMware is signing more agreements with smaller businesses because many large corporations already have its software, said Rick Sherlund, an analyst at Nomura Holdings Inc. Competition from Microsoft and Oracle Corp. (ORCL:US) also may have forced VMware to reduce prices, he said.

“Growth has been slowing,” Sherlund wrote in a research report before the results were released. “Microsoft is having some impact on pricing, more so than any significant shift in market share so far.”

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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Companies Mentioned

  • VMW
    (VMware Inc)
    • $94.14 USD
    • -2.20
    • -2.34%
  • EMC
    (EMC Corp/MA)
    • $29.53 USD
    • -0.19
    • -0.64%
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