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VMware Says Newer Products Selling Well, But Weak Guidance Spooks Investors In Q4 Earnings

VMware executives say products like NSX software-defined network and Airwatch mobile management are selling like hotcakes, but investors are apparently not thrilled by potential impacts of a Dell-EMC deal.

VMware said it beat Wall Street's profit and revenue estimates during its fiscal fourth quarter earnings call Tuesday, as executives said growth in newer products is offsetting slowing sales of its vSphere server virtualization cash cow.

For the quarter ended Dec. 31, VMware saw net income grow more than 14 percent year over year, to $373 million, or 88 cents per share. Non-GAAP earnings came in at $1.26 per share.

VMware's overall revenue rose 10 percent, to $1.87 billion, during the quarter. Wall Street analysts were expecting $1.25 per share and revenue of $1.85 billion.

[Related: Turmoil-Weary VMware Partners Hoping For Signs Of Stability Amid Dell-EMC Uncertainty]

For its fiscal 2015, VMware's total revenue was $6.57 billion, up 9 percent compared with the year before. Net income was $997 million, or $2.34 per diluted share, up more than 11 percent from fiscal 2014.

Despite the earnings beat, ongoing uncertainty about the impact of Dell's $67 billion bid to acquire VMware parent EMC, combined with fiscal 2016 guidance that fell short of Wall Street's expectations, continued to weigh on the Palo Alto, Calif.-based virtualization vendor's shares, which fell more than 5 percent in after-hours trading.

For its fiscal 2016, VMware is expecting revenue between $6.8 billion and $6.9 billion, and net income of $4.16 per share. Wall Street analysts were expecting revenue of $7.2 billion and earnings of $4.20 per share.

VMware has seen its shares fall more than 40 percent since reports of the Dell-EMC deal first surfaced in early October. EMC shares have fallen around 15 percent since then.

On the call, VMware revealed that it's laying off about 800 employees, most of them in its vCloud Air hybrid cloud unit, and that it won't be making additional capital expenditure investments in the service. VMware said the layoffs are expected to cost between $55 million and $65 million during the first half of fiscal 2016.

VMware also said COO and CFO Jonathan Chadwick, who joined the vendor in 2012, will be leaving the company.

Zane Rowe, who has been CFO of EMC since October 2014, will be taking over the CFO role at VMware on March 1, CEO Pat Gelsinger said on the earnings call.

Gelsinger said vCloud Air will now have a more "narrow" focus in the future as the vendor looks to develop "specialized cloud and software services that are unique and distinctive to VMware."

Although VMware backed out of its planned joint venture with EMC's Virtustream unit in December, Gelsinger said Virtustream will remain a member of its vCloud Air network of service providers.

VMware's cloud strategy will also focus on using NSX software-defined networking to provide "secure, encrypted overlay networks" for Amazon Web Services and Microsoft Azure, according to Gelsinger.

As part of this effort, VMware is expanding its vRealize cloud management software to manage apps running in Azure and AWS, said Gelsinger.

Meanwhile, President Carl Eschenbach said Enterprise Agreements -- a volume licensing metric that VMware often uses to show customers' commitment to products other than vSphere -- accounted for around 42 percent of the vendor's overall bookings during the quarter, compared with 39 percent last quarter.

VMware's end-user computing business, which includes Airwatch, saw total bookings growth of 30 percent compared with last year's quarter and is now on a $1.2 billion annualized run rate, according to Eschenbach.

NSX software-defined networking is now on an annual bookings run rate of more than $600 million, up from $200 million at this time last year, said Eschenbach.

"It is obvious that our investment in a specialized networking and security sales force [for NSX] is paying off," Eschenbach said.

Gelsinger said VMware's VSAN storage virtualization business grew around 200 percent year over year, and is now on an annual bookings run rate of more than $100 million.

As for vSphere, Gelsinger and Eschenbach acknowledged that the trusty old cash cow has reached maturity, but said VMware's newer products are making up for the slowdown.

"We're seeing strong growth across the full portfolio of emerging products," Gelsinger said on the call. In 2016, "the effects of the new products will begin to outweigh the decline in our compute products."

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