Report: VMware (Legally) Changed SaaS Accounting To Bump Up Software Licensing Numbers

VMware, in its ongoing quest to show Wall Street that customers aren't just buying vSphere server virtualization, last year quietly changed its accounting to boost software licensing growth numbers, according to a new report.

Until the third quarter of its fiscal year 2014, ended September, VMware reported its Software-as-a-Service billings in the maintenance category. But since then, VMware has been reporting SaaS billings as half-maintenance, half-software licensing, according to a report from ASC Research, which Seeking Alpha published Tuesday.

While VMware's SaaS business -- mainly its Infrastructure-as-a-Service and Airwatch products -- accounts for only about 6 percent of its overall revenue, this shift added $30 million to last year's Q3 numbers, according to the report.

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As a result, VMware was able to report Q3 license growth of 8 percent, when it would have been just 1 percent without the added SaaS billings factored in, ASC Research said in the report.

VMware is trying to show Wall Street that customers are buying into its software-defined data center vision, in which storage and networking are virtualized along with servers, with newfangled management tools keeping all of this technology neatly organized.

VMware CEO Pat Gelsinger, on the vendor's fiscal second quarter earnings call last month, said license bookings "beyond standalone vSphere" were more than 60 percent of total license bookings, up from about 35 percent two years ago.

Yet ASC Research's report casts doubt on whether these claims are an accurate reflection of customer buying behavior.

"Without the halo of VMware's ramping SaaS sales efforts, a low-double digit growth rate for the emerging software product category gives a more muted impression of the company's prospects than the one management projects," according to the report.

A VMware spokesman declined comment.

Three VMware partners that focus primarily on midmarket customers told CRN on Tuesday that vSphere and associated products like vCenter Operations Manager and Site Recovery Manager still account for the vast majority of their VMware sales.

VMware also claims it has many large enterprise customers that are buying into its software-defined data center vision. Last month, the vendor said it now has more than 700 paying customers for NSX software-defined networking, and more than 2,000 for VSAN storage virtualization.

Although VMware's SaaS accounting change is not illegal, and was disclosed in SEC filings, ASC Research said in the report that it's something that investors should be aware of.

"VMware has rigged the numbers to make its enterprise software business look modestly healthy, and our concern is that Wall Street's outlook for future cash flow growth is baselined off of these misleading inputs," according to the report.