VMware will lay off a little less than 7 per cent of its workforce and perform a bit of a restructuring in light of the fact that it expects some headwinds in the first half of 2013.
Pat Gelsinger, the new sheriff in VMware town, wants to slim the company down and get it focused on its core server virtualization and cloud business, and get it moving to capitalize on the software-defined data center that is the company's Holy Grail.
That the company can sell $1.29bn of software to create and control virtual servers running on top of x86 physical servers will probably be lost on the growth-minded Wall Street moneymen, but that's what VMware has just done in its fourth quarter.
For the year, VMware's business was larger than any single server product line in the world, including IBM's System z mainframes – and that's quite an accomplishment. But net income grow hardly at all in the quarter, so you can bet that when Wall Street opens up for business on Tuesday morning VMware's shares are going to get a bit of a haircut.
Tuesday likely won't be a fun day for Gelsinger.
Maybe being CEO is not all it is cracked up to be. Maybe being the CEO at VMware is still a bit easier than being the CEO at Intel, which was probably Gelsinger's other career path – and could still be if Intel can't find a better replacement for the outgoing Paul Otellini.
VMware doesn't give much guidance in terms of product sales, so we can't see what is costing the company so much to have adversely affected its bottom line. But research and development costs jumped 23.7 per cent to $268.3m in the December quarter, and sales, marketing and other administrative costs were up 24.2 per cent to $478.4m – together they took a big bite out of profits.
This is what happens when you have to market against Microsoft in the Windows server space that it owns after it finally delivered a credible hypervisor in Hyper-V 3.0 and a credible management tool in System Center 2012.
In the fourth quarter,'s software license sales – which are presumably dominated by its vSphere server virtualization tools and its vCenter management console for those tools – rose 16.2 per cent to $596.7m.
VMware COO and co-president Carl Eschenbach said on a call with Wall Street analysts that vCloud Suite, the bundle of VMware's server virtualization and cloud management tools that was announced last August and enhanced in December, exceeded VMware's booking plans, and that 75 per cent of those bookings were for enterprise license agreements (ELAs) rather than individual license transactions.
Nearly 1,000 customers took advantage of the upgrade offer that VMware put out to encourage vSphere customers to move up to vCloud Suite. Average selling prices for vCloud Suite (blended across the various editions) were more than a factor of 3X over blended ASPs for the vSphere editions. Moreover, for customers who stayed with vSphere, the ASPs were up sequentially from the third quarter, too
Eschenbach said that vCenter Operations Management Suite was one of the fastest growing products in VMware's history, and that vCloud Automation Center (formerly known as DynamicOps before VMware acquired it) was up sequentially. But, he added, bookings in the United States were not as high as anticipated for either transactional or ELA sales, and while VMware had strong demand in Japan and China, it had weakness in Australia.
The good news in Q4 was that European bookings were higher than expected thanks to a budget flush, but the bad news is that this budget flush was pent up demand that VMware does not think will hold because European customers are skeptical about 2013.
VMware's transactional business in general did not grow as much as expected, and Eschenbach said that the company was working to help its channel partners push more products and do more cross-selling.
Software maintenance on its 400,000-strong customer base (which must cover many millions of servers) rose a much more impressive 27.5 per cent to $591m. Professional services revenues rose about the same, up 26.7 per cent to $105.5m. License revenue growth is not keeping pace, however, but that could just be the limit of large numbers at work.
Add it all up, and VMware's revenues in the final quarter of 2012 came to $1.29bn, up 22 per cent. But net income was only up 2.7 per cent to $205.8m. That works out to 16 per cent of revenue, which is perfectly respectable for any software company, but it is lower than the 18.9 per cent from the year-ago quarter.
For all of 2012, VMware had $4.61bn in revenues, up 22.2 per cent, with software license sales up 13.4 per cent to $2.09bn, and services revenues up 30.8 per cent to $2.51bn. The company exited the year with $1.61bn in cash, another $3.02bn in short-term investments, and another $2.2bn in deferred revenues; VMware's only debt is a note for $450m due to parent company EMC.
That's plenty of fuel for growth, but Gelsinger doesn't want to waste a penny of it and wants VMware to focus on the data center and not wander off.
Keep your eyes on the prize
"Our aspirational goal is to become the greatest infrastructure software company of the decade," Gelsinger said on the call, adding that this would mean having revenues of "$10bn and beyond."
But VMware has done a lot of acquisitions that do not fit in with its core data-center business. Many of these, including the Cloud Foundry platform cloud, will be spun off along with EMC's Greenplum data warehousing and Hadoop business into a new EMC unit tentatively called the Pivotal Initiative.
EMC let it be known that Pivotal Initiative was in the works back in December, and VMware did not talk about it today except to point out that the plans would be revealed in mid-March at an EMC and VMware event held in New York City, and that any guidance it gives now does not include the effect of any spinouts of people or products.
Gelsinger said that the new top brass at VMware, including CFO Jonathan Chadwick, who started in November, is going through the VMware and rationalizing its portfolio of products, and that some products would be "de-emphasized." He named SlideRocket, which was to be part of VMware's cloud application portfolio, as an example. VMware expects to cut around 900 people from its payroll and take a charge of between $90m and $110m, most of it in the first quarter of 2013, to cover the cost of those layoffs.
VMware had 13,800 employees as 2012 came to an end, and added 2,600 people last year through the combination of acquisitions and hiring. Over the past three years, Gelsinger explained, VMware has added 6,700 employees, which is a large number for such a relatively small company.
That said, Gelsinger told the analysts on the call that VMware will also be hiring, boosting overall employment by 1,000 in 2013 as it chases its core opportunities in server virtualization and software-defined data center, end-user computing, and hybrid cloud. So the company, not including acquisitions, will add 1,900 new employees in 2013, and Gelsinger said that VMware would be looking for acquisitions that flesh out its products in the three key areas he mentioned.
VMware is counting on its core server virtualization business to keep growing, and Gelsinger said that on x86 platforms, analysts estimate that somewhere between 60 and 65 per cent of x86 iron has been virtualized and that this could be pushed up to 90 per cent and beyond.
"Even in core virtualization, we are far from over," said Gelsinger, and that once customers virtualize, they need more sophisticated management tools and then they want to start building clouds and linking them out to public clouds.
Looking ahead, VMware has some headwinds. In the first quarter, it doesn't have two killer deals worth $40m that are going to come in – as far as Chadwick knows anyway, but some VMware salesman could get lucky before March 31. In addition, the company is cautious about Europe, and a little worried about the United States with the fiscal issues the government is facing.
With the uncertainty around the Pivotal Initiative in the mix as well, VMware is projecting its first quarter sales will be somewhere between $1.17bn and $1.19bn, which is an increase of 11 to 13 per cent year-on-year, with license revenues of between $480m and $490m. That would represent anywhere from a four-tenths of a point decline to a 1.7 per cent increase in software license sales compared to Q1 2012, when VMware brought in $481.9m in software license sales.
For the full year, VMware says to expect sales of between $5.23bn and $5.35bn, which is 14 to 16 per cent growth over 2012, and look for software license sales to rise between 8 and 11 per cent for the year. The second half is going to be better than the first half, Eschenbach said.
None of these projections include the transfer of people or products from VMware to the Pivotal Initiative company that EMC is setting up, or any revenue impacts. VMware will update its guidance in March once the details for Pivotal Initiative are divulged. ®