UPDATED 18:10 EDT / FEBRUARY 27 2020

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VMware earnings fall short partly from missing late-quarter deals

VMware Inc. beat expectations on revenue for its fiscal 2020 fourth quarter, but it wasn’t enough to avoid a disappointing profit that sent its shares south late today.

The computing virtualization software company, majority owned by Dell Technologies Inc., reported a fourth-quarter profit before certain costs such as stock compensation of $868 million, or $2.05 a share, up 9% from a year ago. Revenue rose 11%, to $3.07 billion.

Analysts had been reckoning a $2.14-a-share adjusted profit on $2.95 billion in revenue. Overall, net profit came to $321 million, or 76 cents a share, a significant drop from $496 million or $1.17 a share in last year’s fourth quarter.

“Revenue came in a bit short,” Chief Executive Pat Gelsinger (pictured) said on an analyst conference call. He attributed the shortfall partly to a higher mix of subscription and SaaS revenue, which means less short-term revenue. VMware’s software is used to “virtualize” computing hardware and connect enterprises to cloud computing services.

However, Gelsinger also admitted “late-quarter execution challenges” on some big deals. “We didn’t have as good execution at the end of the quarter,” he said. “We simply had too much to get done at the end of the quarter. One very large deal came in an hour after our bookings cut off.” He said executives are working on improving its ability to close more deals quickly.

“It cannot afford execution issues on closing sales as it happened at the end of Q4, otherwise things could turn ugly quickly for VMware,” said Constellation Research Inc. analyst Holger Mueller.

After closing down 6%, to $135.63 a share, in regular trading on another coronavirus-ravaged day for broader markets, VMware’s shares were falling another 6% in after-hours trading.

VMware made progress on subscription and software-as-a-service sales — previously called hybrid cloud and SaaS revenue — which collectively jumped 52% from a year ago, to $556 million.

“VMware keeps staying relevant in difficult overall market environments, with more and more workloads moving to the public cloud and off VMware,” said Mueller. “The good news for shareholders is that VMware keeps innovating and participating in the next-generation compute platform market, partnering with infrastructure-as-a-service vendors for on-premises workload automation.”

However, that progress also hurt results in some ways. License revenue fell short because of a higher SaaS mix and the company also saw a stronger-than-expected mix of subscription and SaaS revenue, Chief Financial Officer Zane Rowe said on the earnings call.

That said, VMware reported a record number of enterprise deals worth more than $10 million — 31, up from 23 a year ago — included a “significant increase” in the value of subscription and SaaS offerings in the top 10 deals. That’s more than double the level a year ago, according to Rowe.

And the company can take credit for boosting its parent significantly. “I still see VMware as the percent growth and profit driver for Dell Technologies,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy. “VMware enables growth in solutions like Unified Workspace and the Dell Technologies Cloud. Not only are these solutions higher-margin, they are where the growth will come from.

Although Moorhead said Dell has many opportunities in the on-premises piece of hybrid cloud computing, “VMware is how the company will drive revenue in the public cloud.”

VMware said it expects first-quarter revenue to rise 11.4%, to $2.73 billion, with subscription, SaaS and license revenue to rise 15.9%, to $1.225 billion, and an adjusted profit of $1.27 a share. For the full year, it’s forecasting 11.5% revenue growth, to $12.05 billion, with subscription, SaaS and license revenue up 15.9%, to $5.86 billion and an adjusted profit of $6.55 a share.

Gelsinger said the company expects “some moderation” of growth from the impact of the coronavirus, but “the bigger picture is unchanged.”

In mid-February, the virtualization software firm reportedly was planning to lay off more than 200 workers in April, including workers at the executive and director level. The company said in a statement that the job cuts are part of a “regular workforce rebalancing.”

Still, the company has been on something of an acquisition spree in the past year. In January, it acquired networking analytics startup Nyansa Inc., less than a month after closing its $2.7 billion purchase of enterprise application development platform Pivotal Software Inc. Last August, it also spent $2.1 billion to buy cybersecurity firm Carbon Black Inc.

Photo: SiliconANGLE

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