UPDATED 18:35 EDT / FEBRUARY 25 2021

CLOUD

VMware stays course through executive transition with rock-solid financial results

Losing its dynamic chief executive to the top job at Intel Corp. hasn’t slowed VMware Inc.’s momentum, at least not yet.

As it does nearly every quarter, the virtualization giant posted fourth-fiscal quarter results that exceeded Wall Street expectations on strong growth in its subscription and software-as-a-service revenues. It’s a sign that it continues a successful path from license fees to a more predictable recurring revenue stream.

Quarterly earnings of $2.21 per share were 17 cents better than consensus estimates and the $3.29 billion in quarterly sales were 7% higher than the same quarter a year ago and handily beat Wall Street forecasts of $3.22 billion.

Software subscription and license revenue rose 8%, to $1.7 billion, and the subscription and SaaS element of that total grew 27%, to $707 million. Growth in that number is closely watched by financial analysts because it indicates how successfully the company is shifting to new ways of doing business.

For the full fiscal year 2021, VMware booked $11.8 billion in revenue, up 9% from a year earlier, with subscription sales jumping 38%.

Despite the strong results, VMware shares slipped nearly 2.5% in after-hours trading following a dismal day on Wall Street that saw the tech-heavy Nasdaq tumble more than 3.5%.

Big deals

Executives shook off investor nervousness. “We feel very good about our subscription and SaaS portfolio,” said Zane Rowe, VMware’s chief financial officer and interim CEO while the board of directors searches for a replacement for the departed Pat Gelsinger. “Great renewal rates continue and we’ve seen significant enterprise account growth on deals above $10 million.” VMware closed 35 such deals in the quarter, compared with 28 in the same quarter a year ago.

“It was yet another good quarter,” yawned Glenn O’Donnell, vice president and research director at Forrester Research Inc. “They continue to execute, which I expected.”

Executives said they are “making progress” on VMware’s long-anticipated spinoff from Dell Technologies Inc. but declined to elaborate. “We believe it could be value-enhancing to VMware and our stockholders,” Rowe said.

With its cloud partnerships and core markets performing well, the company is focusing its strategy on its new Tanzu portfolio for building and managing environments that use software containers, which encapsulate applications to run on many kinds of computers. Tanzu is critical to establishing the company’s beachhead in the rapidly growing market around the Kubernetes container orchestrator, O’Donnell said.

“It’s critical for VMware to be synonymous with everything that’s going on with Kubernetes, and if you want Kubernetes to work, you have to be with VMware,” he said.

Raghu Raghuram, the company’s chief operating officer of products and cloud services, called Tanzu “a significant and massive market for customers doing their transformations,” the success of which will drive sales of the company’s other infrastructure products. “We are unique in both the breadth of our portfolio as well as being multi-cloud,” he said.

The other new thrust is into packages of applications that combine elements of its infrastructure, end-user computing and security products, a demand that Rowe said is being fueled by the COVID-19 pandemic.

“Customers are increasingly coming to the conclusion that many employees will be working from home for a long time,” he said. “The ways to manage that today are ad hoc and not very fully formed.” The combination of  VMware’s endpoint management, security and software-defined wide-area network products “we think will drive significant customer interest and growth.”

O’Donnell said he saw no red flags in the company’s results. The big question is who will succeed Gelsinger. VMware’s board has given no indication whether it is leaning toward internal or external candidates.

“Whoever takes over has to have that dynamic personality, be technically savvy and also a good CEO,” he said. “Those are three things you don’t usually find together, and this is a hypercompetitive world.” In the meantime, he added, VMware’s solid management bench should keep the ship on course until the succession issue is resolved.

Photo: Dell Technologies/Flickr

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