VMware Tanks Over Cloud Concerns
VMware stock was down more than 20% Wednesday, a day after the company announced it was forming a new enterprise cloud joint venture with EMC and reported customer caution over “secular change” in the cloud market.
VMware Inc. (NYSE: VMW)'s shares were trading at 54.72, down 20.33%, mid-afternoon today.
In its third-quarter earnings call Tuesday, VMware said it's launching a joint venture with EMC Corp. (NYSE: EMC) to pursue a hybrid enterprise cloud. The new company will be called Virtustream, based on the assets of a company of the same name that EMC bought in May, and jointly owned in a 50–50 split by VMware and EMC. While VMware expects Virtustream to be one of the top five cloud providers, becoming a “multi-billion dollar profitable business” over several years, it will produce $200 million to $300 million in losses next year, Jonathan Chadwick, VMware CFO, COO and executive VP, said on the earnings call. He said those losses will be carried on VMware's income sheet. (See VMware, EMC Launch Cloud Partnership Amid Dell Acquisition – Confused Yet?.)
That follows an announcement last week that Dell Technologies (Nasdaq: DELL) is buying EMC, which owns 80% of VMware. (See Dell Buys EMC for $67B in Biggest Tech Deal Ever and Dell-EMC-VMware Merger Could Push Comms to Kids' Table.)
Revenues for the third quarter were $1.67 billion, up 10% year-over-year and 14% in constant currency. Adjusted earnings were up 18% to $1.02 per diluted share, slightly exceeding analyst expectations.
Analysts, however, are worried about weak forward guidance and VMware's uncertain future, which drove the decline, according to Motley Fool. Several analyst firms downgraded the company, according to The Street.
Bookings in the third quarter were "slightly softer than we planned," Carl Eschenbach, VMware president and COO, said on Tuesday's call. He blamed the decline on "three primary factors: customer uncertainty due to secular shifts that we are seeing in the industry, speculation about VMware’s future, and continued economic weakness in China, Russia and Brazil" affecting the entire industry overall.
VMware was "pretty pleased with [its] results," Eschenbach said. However, in 2013 and 2014 it saw accelerated bookings in the second half, which were weaker than expected this year.
Customers are "more cautious about how they're going to engage with technology partners" over questions like whether to use a private, public or hybrid cloud, Eschenbach said. Similarly, customers are deciding whether to use VMware's proprietary cloud software or an OpenStack technology such as VMware Integrated OpenStack. These concerns are industry-wide, Eschenbach said.
Customers were also concerned about VMware's future. "The good news is the ambiguity is now gone, because we know we'll remain an independent company under the current operating model that was announced with the Dell acquisition -- or intended acquisition -- of EMC," Eschenbach said. But customers will still have questions, he added.