VMware Earnings: 5 Big Stock, AWS And Dell Spin-Off Takeaways

From VMware’s stock drop to an official timeframe when it will become an independent company following Dell Technologies’ spin-off, here are five big things investors and channel partners should know following VMware’s second quarter earnings report.

5 Big Takeaways From VMware’s Earnings

VMware’s nearly double-digit quarterly sales growth is continuing as the virtualization and hybrid cloud software superstar reported total revenue of $3.14 billion for its second fiscal quarter, up 9 percent year over year.

“Our customers are evolving their strategies from a ‘cloud-first’ to a ‘cloud-smart’ philosophy where they are picking the right clouds and cloud services for the right workload, and turning to a multi-cloud environment,” said VMware’s CEO Raghu Raghuram (pictured) during the company’s second quarter earnings report last week.

VMware’s top executives discussed not only financial numbers, but took a deep dive on important cloud partnership and major upcoming changes to the company such as providing for the first time an official timeframe for VMware’s spin-off from Dell Technologies.

CRN breaks down five of the biggest takeaways from VMware’s earnings results, the subsequent stock drop, and the most important executives remarks that investors, channel partners and customers need to know.

Dell’s VMware Spin-Off Will Close In ‘Early November’

For the first time since Dell Technologies and VMware officially unveiled plans in July 2020 to make VMware an independent company, there is now a timeframe when the spin-off is expected to take place.

VMware’s CEO Raghuram said the two companies are on track to spin off from each other in “early November” of 2021.

“As a standalone company, we will have increased strategic, operational and financial flexibility to drive VMware‘s growth strategy while also strengthening our long-standing strategic relationship with Dell, a partnership we expect will continue to benefit our customers and partners as well as both the Dell and VMware,” said Raghuram.

Dell acquired an 81-percent majority stake in VMware via its historic $67 billion acquisition of EMC in September 2016. If all goes as planned, Dell will spin-off its majority stake in VMware to help Dell achieve investment-grade credit rating and provide the company with funding to reduce its core deb stemming from its EMC acquisition.

As part of the deal, VMware will pay a special cash dividend of between $11.5 billion to $12 billion to the company’s shareholders, which includes around $9.5 billion for Dell Technologies.

VMware CFO Zane Rowe said in its second quarter, the company repurchased 2.2 million shares in the open market at an average price of $160 per share, utilized $2.2 billion from its current repurchase authorization trust, and successfully completed a $6 billion bond offering in preparation for the special dividend payout to all stockholders “associated with our planned spin-off from Dell Technologies in early November of this year.”

The Takeaway: VMware will officially become an independent company in early November for the first time since 2004.

SaaS Jumps 23 Percent, But Sees An Uptick In Licenses

VMware is striving to make the majority of its revenue eventually be via subscription and software-as-a-service (SaaS) sales, compared to its traditional software enterprise licensing agreements (ELAs.) The company has successfully increased SaaS and subscription sales quarter-after-quarter over the past several years, which didn’t slow down in the second quarter.

SaaS and subscription revenue reached $776 million in the second quarter, up 23 percent year over year. Subscription and SaaS sales now represent 25 percent of VMware’s total revenue, compared to single digits just a few years ago.

However, one interesting trend in the second quarter is that VMware’s license revenue climb from $719 million in second quarter 2021 to $738 million in second quarter 2022.

“It turns out that in certain geographies and in certain verticals, given the choice, customers prefer licensed software business model over subscription and SaaS business model,” Raghuram.

“We provide customers with the choice and flexibility on their cloud journey, and many of them start their cloud journey on-premise at that time using our term license,” VMware’s CEO said. “As they move to the cloud, they use our subscription offerings. But if you step back and if you actually look out over the next year or so, we are very bullish about our overall subscription and SaaS portfolio. This is a big focus of mine.”

The Takeaway: SaaS and subscription sales are still on fire while traditional licensing sales growth shows VMware’s key ability to offer flexible pricing options, which bodes well in the hybrid cloud era.

VMware Stock Drops 9 Percent

Although VMware hit Wall Street’s total revenue estimates of over $3 billion for its second quarter, it appears investors were disappointed with the company’s mix of revenue as well as potentially net income as VMware’s stock dropped 9 percent to $144.49 per share on Friday following its earnings report Thursday evening.

In a research note by BMO Capital Markets analyst Keith Bachman, he noted the 23 percent increase in SaaS and subscription wasn’t enough. “VMware reported some modest upside to revenues and solid results for operating profits,” wrote Bachman. “However, the mix of revenues, with more license and less subscription and SaaS, was disappointing.”

Another reason for the potential VMware stock drop is the company reported $739 million in non-GAAP net income for the second quarter, down 3 percent year over year compared to $766 million.

However, VMware’s stock has been slowly rising over the past several days.

VMware’s stock is currently up 1 percent Monday after, trading at $150.12 per share, meaning the company’s stock is only down roughly 5 percent since last week. One year ago, VMware’s stock was trading at $144.44 per share on Aug. 30, 2020.

The Takeaway: The drop in VMware’s stock could be a knee-jerk reaction from investors regarding VMware’s licensing sales mix versus SaaS, which likely won’t have any major impact on VMware’s stock going forward as seen in the company’s stock rebound.

VMware’s ‘Cloud Smart’ Strategy And AWS Momentum

The company’s VMware Cloud on AWS offering is making inroads with enterprises across the globe. In the second quarter, VMware Cloud on AWS customers continued to expand their usage as VMware delivered, “key engineering capabilities and footprint expansion, including a new AWS Milan region,” said Raghuram.

VMware executives said the Palo Alto, Calif.-based company will continue to strengthen its go-to-market relationship with AWS, including the ability to offer additional products such as vRealize Cloud via the AWS resale channel.

“Our largest contributors to subscription and SaaS [sales] were … modern applications, EUC, Carbon Black and VMware Cloud on AWS, which grew revenue nearly 80 percent year-over-year,” said Rowe.

However, Rowe and Raghuram said VMware will continue to prioritize flexibility and choice for customers around hybrid cloud. VMware said businesses are evolving their cloud strategy from not just being cloud-first, but becoming “cloud smart.”

“Customers are evolving their strategy from a cloud-first to a cloud smart philosophy where they are picking the right clouds and cloud services for the right workload, including private cloud and even on the edge. … We are industry neutral,” Raghuram said. “We have a great set of cloud partners, but when customers want to select cloud, when they want to be cloud smart, they want an industry neutral player to help them figure out which applications go where. And we are uniquely set up to do that. With our [Dell spin-off], that position also gets strengthened as we become the Switzerland of the industry.”

The Takeaway: Although VMware will deepen its technical ties to AWS, the company plans to be public- and private-cloud neutral to be able to provide customers with the best possible hybrid cloud solutions.

VMware’s Current Third Quarter Guidance; FY22 Sales To Hit $12.8 billion

VMware unveiled its revenue guidance for both its current third fiscal quarter as well as its entire fiscal year 2022, which ends February 2023.

VMware expects to generate a total of $12.8 billion in fiscal year 2022, which would represent a 9 percent increase compared to fiscal year 2021. The company predicts to generate $6.27 billion in SaaS, subscription and license revenue, representing a 11.5 percent increase year over year. More than 51 percent of the $6.27 billion is expected to come via SaaS and subscription.

“We‘re still very encouraged by the trends we’re seeing on our subscription and SaaS business, and we’re seeing good growth there,” said VMware’s CFO Rowe. “We have actually increased our license guidance as you look at just the pure license element of the forecast to reflect that. And then, of course, maintenance, we’ve also had some good strength in PSO throughout the year. So we think the combination still warrants the $12.8 billion guide that we’ve put out there. We’re encouraged by it. We think it’s still a good growth year-on-year.”

In its current third fiscal quarter, VMware is expecting to generate $3.12 billion in revenue, up 9 percent year over year. The company predicts to generate $1.47 billion in SaaS, subscription, and license revenue, representing a 12 percent increase year over year.

The Takeaway: The big takeaway from VMware’s guidance over the next two quarter is that license ELA revenue will be slightly higher than initially projected. Although Wall Street wants a better mix of SaaS and subscription sales versus license revenue, VMware is still in great shape for the remainder of the year.