SEC Scrutinizing VMware’s Revenue Backlog

The virtualization software giant had at the end of January an $18 million backlog of orders waiting to be filled, compared to more than $10 billion in deferred revenue. VMware has been shifting from selling licenses to services in recent years—a model that can impact the backlog metric important to investors.

VMware’s revenue backlog has become the focus of an investigation by the U.S. Securities and Exchange Commission.

An 8-K form filed with the SEC Wednesday informed investors that the enforcement division of the same financial regulatory agency in December had asked for documents “related to VMware’s backlog and associated accounting and disclosures.”

“VMware is fully cooperating with the SEC’s investigation and is unable to predict the outcome of this matter at this time,” the company said in the filing. VMware declined to comment beyond that statement.

[Related: VMware Layoffs: 4 Top Execs Are Leaving, Including VP Of Operations]

A backlog, which constitutes unfilled purchase orders or executed agreements, is an important metric to investors, as it helps inform their predictions of future revenue.

In VMware’s fourth-quarter earnings call on Wednesday, CFO Zane Rowe said the company had commitments for future revenue as of January 31 — the close of VMware’s final fiscal quarter of 2020 — of $10.3 billion.

VMware’s revenue backlog was only $18 million—a tiny percentage of those binding commitments, with the rest comprised of deferred revenue not yet recognized.

The backlog “consisted primarily of orders held due to export requirements,” Rowe said.

Of the backlog, $5 million involved sales of licensed software, Rowe said. That leaves $13 million relating to fees and subscriptions that will ultimately be charged for services and maintenance.

Services are often a significant source of a company’s revenue backlog, as such deals that require delivering a software product on a recurring basis into the future.

VMware, a subsidiary of Dell Technologies, has been aggressively working to shift its business from selling large software licenses for its legacy products to subscriptions that realize recurring revenue around its ever-expanding Software-as-a-Service portfolio.

VMware CEO Pat Gelsinger has been pushing that rebalancing of licenses to services, which he again addressed in the fourth-quarter earnings call.

“We're very happy to see [Software as a Service] and subscription accelerating,” Gelsinger said. “Over 50 percent growth this quarter and that's something we've been talking about for quite a few quarters now as that's been building up and seeing good growth.”

Neither VMware nor the SEC has made any statements suggesting the investigation is related to a ramping of the services business and how that changing model impacts backlog reporting.

In the same month the SEC requested documents, VMware closed its $2.7 billion acquisition of Pivotal Software, which provided the company another significant source of services revenue.