Disappointing Outlook from VMware Triggers Investor Panic

VMware reported record performance in the fourth quarter of 2012, but a pessimistic guidance drove down its stock by as much as 22.4 percent on Tuesday.

The virtualization vendor said that it made a net profit of $206 million in Q4, an increase from the $200 million profit it posted a year earlier. Sales were up 22 percent at $1.29 billion, while full year revenue increased 13 percent to $4.6 billion.

VMware performed well in 2012 but its guidance for 2013 fell short of analysts’ expectations.  The company estimated Q1 revenue will range from $1.17 billion to $1.19, and that full year income should be $5.23 billion to $5.35 billion. Wall Street had higher ambitions with a forecast of $1.25 billion for the first quarter, and $5.42 billion for the year.

Another major but unfortunate highlight from this week’s earnings call is that VMware plans to let go of 900 workers in an effort to trim the fat around its core virtualization and cloud businesses.  Management singled out the SlideRocket division and said the company will bring in 1,000 new employees this year.

“The company, which had acquired a number of smaller private assets over the last three years, now requires a reset of personnel that could further lead to execution challenges in the short term,” Sterne Agee analysts Alex Kurtz and Amelia Harris says.

The weak outlook, coupled with word of the job cuts, caused VMware’s stock to drop by over 20 percent. The news also hurt EMC, which owns a majority stake in the company.

The storage giant’s shares fell 4 percent after it cited “poor guidance provided by their wayward child VMware.” The firm’s net income rose 4.6 percent to $869.9 million in the fourth quarter, on better-than-expected sales of $6.03 billion.

Here with more analysis on VMware’s surprising outlook, and an exploration of some potential reasons for the company’s recent market position shifts is Wikibon Senior Analyst, Stu Miniman.  He appeared on this morning’s NewsDesk show with Kristin Feledy.