VMware Shares Fall Further, CEO Acknowledges 'Volatile' Time For Investors

VMware shares fell another four percent in after hours trading Tuesday after the virtualization market leader guided the sales forecast downward for the current quarter and formed a new jointly owned cloud services business with parent EMC.

The drop brought VMware's share price to $66 in after hours trading, down a whopping 16 percent since VMware was thrust into the bright lights of Dell's $67 billion acquisition of EMC in the largest technology merger ever. Under the deal, VMware shares will remain a publicly traded corporation but as a "tracking stock" linked to EMC's 80 percent ownership stake.

VMware said it had seen softer bookings in the current quarter and guided results for the current quarter to $1.83 billion to $1.88 billion. Analysts were expecting $1.88 billion.

[Related: EMC, VMware Fire Shot Across AWS Bow With New Cloud Services Business Unit]

The downward guidance came as VMware surprised investors by announcing that it was forming a new 50-50 jointly owned cloud services business unit with EMC, which just three months ago acquired enterprise-grade cloud services superstar Virtustream for $1.2 billion.

"We expect these transactions to accelerate our growth across all of our businesses," said VMware CEO Pat Gelsinger in a conference call with Wall Street analysts on Tuesday, commenting on the new cloud services unit and the Dell-EMC deal's impact on VMware. "At the same time, we appreciate this has been a volatile time for our investors."

A top executive for one of VMware's largest partners, who did not want to be identified, said his VMware sales were down double digits in the last quarter.

"VMware is feeling the effects of an IT revolution that has given customers over the last three years a wide range of tools and functionality well beyond the VMware vSphere hypervisor," he said. "The competitive products like KVM, Microsoft HyperV and Linux, have matured and gone mainstream."

VMware CFO Jonathan Chadwick acknowledged that the company saw "softer bookings" for software licenses than it anticipated during the current quarter. "We didn't quite see the performance we were expecting coming out of Q3," he said. "That obviously had an effect on bookings."

VMware President and COO Carl Eschenbach said even with the softer bookings the average length of VMware enterprise licensing agreements (ELA) is not coming down. "We have not seen any change in duration of our enterprise agreements," he said.

The downward guidance ironically came after the virtualization market leader posted results for its third fiscal quarter ended Sept. 30 in line with Wall Street expectations. VMware posted non-GAAP net income of $433 million, or $1.02 per diluted share, on a 10 percent increase in sales to $1.67 billion. The Wall Street consensus was $1 per diluted share on sales of $1.66 billion, according to Thomson Reuters.

The financial impact of the new cloud services business unit, which will be consolidated into VMware's financial statements beginning in the first quarter of 2016, was also an issue for investors.

Even with EMC-VMware predicting that the new business will drive multiple hundreds of millions of dollars in recurring revenue in 2016 growing at a double digit clip, the new business will post an operating loss of $200 million to $300 million in 2016.

Gregg Moskowitz, an analyst for Cowen & Co., an investment banking and research firm, pointed out that VMware's market capitalization fell by more than $1.2 billion in after-hours trading on Tuesday. He urged company executives to offer more guidance on the new cloud services business unit.

"I think it is important to have a baseline for the cloud services business," Moskowitz told VMware CEO Pat Gelsinger and other top VMware executives on the earnings call Tuesday evening. "I am wondering if you can tell us what the revenue run rate is on a combined basis today, second how fast those assets are growing and third what percentage of that revenue is owned by VMware today?"

VMware CFO Chadwick, who would not break out the run rate or specific VMware-EMC percentages, defended the decision to form a new cloud services business with Virtustream as the mainstay of the new business.

"Let's not forget that EMC and the whole [EMC] Federation were always thinking about our position in the cloud overall," said Chadwick. "They were able to move very quickly to acquire Virtustream, leveraging the capital strength of the Federation as a whole. As we think about the shift to the hybrid cloud, it is highly strategic for both companies, and we have been very consistent for a number of years with respect to our position with the hybrid cloud."

The new cloud services unit puts all the cloud assets under one unit headed by Virtustream CEO Rodney Rogers with its own board of directors comprised of executives from both companies with EMC CEO Joe Tucci as the chairman.

Chadwick said EMC and VMware will be "investing heavily" in the new cloud services business as it sees the "opportunity to be pretty significant over the next several years." He said the new unit provides a strong alignment between "mission critical applications and what the EMC sales force is able to drive and the hybrid cloud story that we have and we are bringing this together for a very, very powerful story going forward."

Sam Haffar, CEO of Computex Technology Solutions, a Houston-based solution provider and channel partner to EMC, VMware, and Dell, said it remains to be seen whether the new joint venture will become a partner with or a competitor to solution providers.

"Is this something we can partner with? If not, we'll compete with it.," Haffar said. "A lot of times our professional services team competes with our OEMs' professional services teams. Will this be the same? We'll have to see the [terms and conditions] of the program."

Jason Myers, regional vice president of FusionStorm, a San Francisco-based solution provider and partner with both Dell and EMC, said the cloud services business looks like a move to triangulate the various cloud assets before Dell closes its EMC acquisition.

"This leaves VMware free to work with any vendors it wants to work with in the future," Myers told CRN. "And it creates new competition with AWS, HP, and Microsoft Azure clouds."

Joseph F. Kovar contributed to this story

PUBLISHED OCT. 20, 2015