Jan 29, 2013 (08:01 AM EST)
VMware Earnings, Examined
Read the Original Article at InformationWeek
VMware will soon eliminate 900 jobs among the 13,800 employees with which it ended 2012. But the layoffs will not amount to a reduction in force; it will also add a total of 1,000 more employees this year, as it brings its workforce in closer alignment with its key business objectives.
VMware CEO Pat Gelsinger, COO Carl Eschenbach and CFO Jonathan Chadwick didn't specify where the layoffs would occur, other than to single out VMware's SlideRocket division, an application unit whose software allows Web-based presentations to be updated in real time. Dazzling in its potential, it nevertheless left some VMware watchers scratching their heads as to how it would be used as part of a virtualization specialist's repertoire.
VMware has made six acquisitions over the past three years -- iTHC, Wanova, Pattern Insights, Cetas, DynamicOps and Nicira -- and added 6,700 employees.
The pending layoffs were one surprise as VMware reported on its fourth-quarter earnings and 2012 fiscal year results Monday. A second was the continued strength of its revenue, which grew 22% in 2012 to $4.6 billion. Inside that figure was a 13% increase in new license revenue; license revenues amounted to $2.1 billion. The 22% figure, however, marked a decline from the 32% rate of revenue growth recorded in the previous year.
Nevertheless, the 22% growth on a larger revenue base belied to a great extent the dark predictions that VMware is getting close to saturating the market for virtualization products, with a precipitous fall pending in the near future. An analyst at Craig-Hallum Capital Group, an institutional investment firm, suggested Microsoft was beginning to cut into VMware's turf.
[ Want to learn how Microsoft has strengthened its hand vs. VMware with Hyper-V? See Microsoft Enhances System Center For Hybrid Cloud Work. ]
VMware's services revenue, including existing license maintenance fees, amounted to $2.52 billion, up 31%. Unearned revenue, which has been booked in advance through multi-year license agreements or maintenance agreements, was one of VMware's strongest indicators that many of its customers do not have plans to migrate elsewhere. New customers typically signed up for two years of maintenance in their license agreements, VMware said.
CFO Chadwick forecast 2013 revenue of $5.23 to $5.35 billion, an increase of 14-16% over 2012; new license revenue will slow to 8-11% growth, he said during the call.
At $4.6 billion in revenue, VMware is nearly halfway to CEO Pat Gelsinger's stated goal of making the company a $10 billion infrastructure management software company. "We see a tremendous market opportunity in 2013 as we focus on what our customers value most, VMware's role as a pioneer of virtualization technologies that simplify IT infrastructure," said Gelsinger in the earnings call, after the close of trading.
That revenue came at some difficulty. VMware reported that its bookings in Australia "showed weakness" last year, while federal government purchases fell in 2012 over the previous year. European sales lagged those in the U.S. through much of 2012, then caught up in the fourth quarter as delayed capital budget spending occurred.
Total revenues are now neatly split between U.S.-based, $2.23 billion, and international, $2.38 billion, with both growing at a rate of 22%. VMware has $4.63 billion in cash and short-term investments on hand, or more than total 2012 revenue.
Gelsinger noted that the fourth quarter was the first full quarter in which VMware has offered its vCloud Suite, which includes the ESX Server hypervisor, vSphere virtual machine management environment and cloud operations software. In one of the few product call-outs, Gelsinger focused attention on the suite's standard, advanced and enterprise versions and said VMware had sold more enterprise editions, at $11,495 each, than either of the two lower-cost versions. Furthermore, 75% of vCloud Suite sales were part of an enterprise license agreement, where many VMware products are rolled up into one large, simplified agreement.
Customers are buying into VMware's vision of the software-defined data center, he said, with its "virtualized servers, storage and networking."
VCloud Enterprise also includes management products acquired with DynamicOps, for provisioning workloads across both public and private clouds, allowing an enterprise vCloud operation to have a compatible partner in a public cloud service. VMware has a long list of channel partners mounting vCloud infrastructure-as-a-service offerings, and Amazon Web Services will now accept VMware-based workloads.
COO Eschenbach cited eBay as a long-term VMware customer and user of the full breadth of VMware's product set. EBay is leveraging VMware's new network virtualization capabilities to deliver self-service clouds to its application developers. Provisioning the network used to take a week or more and now that time has been reduced to 30 seconds, he said.
Likewise, Rackspace, the second largest public cloud, has run an OpenStack cloud with Nicira-based virtualized networking since last August, "a real testament to the scale and production quality of OpenStack and our network virtualization platform," Eschenbach said. (Nicira is now owned by VMware.)
Eschenbach said, in addition to these examples, VMware is seeing many "proof of concept" experiments on customer sites, indicating the vCloud Suite is at a take-off stage "very similar to where we were in the early days of server virtualization."
Networking thus far has been a VMware Achilles heel. It first achieved virtualized networking through close cooperation with Cisco Systems and even formed a Virtual Computing Environment subsidiary with EMC and Cisco to sell combined virtualized storage, servers and networking in the form of VBlocks racks. Monday's earnings call, for the first time, emphasized how VMware is now a standalone supplier of virtualized networking through its vCloud Suite.
In a move that props up its earnings per share, VMware bought back 5.1 million shares in 2012 at an average price in the fourth quarter of $87.83, and a total cost of $468 million.
The earnings call was a first appearance for CFO Chadwick, who joined VMware in November from Microsoft. He became part of that firm when it acquired Skype, where he was also CFO.