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VMware Grows Through Acquisitions

Posted on Tuesday, Nov 27th 2018

According to a recent report published by Market Research Future, the global server virtualization market is estimated to grow 7% annually through to the year 2023. Another report published by Computer Profile last year pegs VMware (NYSE:VMW) as the market leader with over 75% market share, with Microsoft at a distant second with 17% market share. VMware has been in the news recently due to Dell’s interest in the organization. But first, the financials.

VMware’s Financials
Second quarter revenues grew 13% over the year to $2.17 billion. The Street was looking for revenues of $2.14 billion for the quarter. It ended the quarter with non-GAAP earnings of $1.54 per share, which was also ahead of the Street’s forecast of $1.49. It reported a net income of $644 million or $1.56 per share.

By segment, license revenues grew 19% over the year to $900 million, and services segment generated $1.2 billion for the quarter.

For the current quarter, analysts expect revenues of $2.16 billion with an EPS of $1.49. VMware forecast revenues of $2.17 billion with an EPS of $1.50 for the quarter.

VMware’s Acquisitions and Partnerships

VMware has been expanding its reach through several acquisitions and partnerships. In August this year, it announced the acquisition of CloudHealth Technologies for an estimated $500 million. Boston-based CloudHealth was founded in 2012 to deliver cloud service management for enterprises to effectively optimize cost, usage, performance, and security. CloudHealth’s platform works with multiple cloud providers including AWS, Microsoft Azure, and Google Cloud and allows its users to manage their cloud environment from a single tool. Prior to the acquisition, CloudHealth had raised $87 million at an undisclosed valuation. The acquisition is expected to help VMware improve its capabilities to address multi-cloud environment-related problems for its customers.

More recently, VMware announced the acquisition of Heptio, a Seattle-based Kubernetes player. Founded in 2016, Heptio was set up by the founders of the Kubernetes project to support and advance the open Kubernetes ecosystem. It provides professional services for organizations that are using or planning to use Kubernetes. The acquisition will help VMware expand its market reach into the Kubernetes segment. Prior to the acquisition, Heptio had raised $33.5 million in funding with its last funding round valuing it at $117 million. The terms of the acquisition were not disclosed.

Besides acquisitions, VMware has been driving market growth through several tie-ups. Earlier this year, it announced a partnership with Microsoft to connect and protect applications. Its solutions will be integrated with Microsoft Azure Virtual WAN to enable customers with resources in Azure to gain simple and automated connectivity to the branches. Earlier this month, it also expanded its tie-up with IBM. As part of the expansion, VMware announced new offerings to accelerate enterprise hybrid cloud adoption and extend mission-critical VMware workloads to the IBM Cloud. It entered into a similar agreement with Amazon to enable customers to better protect and secure applications and virtual desktops.

Dell and VMware

VMware has also been in the news more recently due to Dell’s announcements. Earlier this year, Dell Technologies proposed buying VMware’s tracking stock that trades under the symbol DVMT, for $109 a share. The tracking stocks were issued in 2016 when Dell bought EMC for $67 billion. EMC owned a majority stake in VMware at the time of the acquisition. The tracking stock was issued because Dell could not pay for the entire deal in cash and did not want to add to its debt. The security is known as a tracking stock because it relies on the financial performance of VMware. It has been trading at a discount of more than 35% to VMware’s stock.

The new deal proposed by Dell would not only make Dell public but also allow Michael Dell and Silver Lake to cash in on the difference between the value of VMware’s tracking stock and VMware’s stock itself. When the deal was proposed back in July this year, the difference was valued at $13 billion. Since then, Dell has increased its offer price to $120 a share. As a result, DVMT holders will get $14 billion in cash and newly issued Dell equity worth $7 billion. Initially, Dell’s offer had attracted criticism, with investors including activist Charles Icahn suing Dell over the deal. The investors believed that Dell was undervaluing the tracking stock. But with the new offer, the investors appear to be coming around. Icahn has even dropped the lawsuit. Dell’s offer has clearly sparked interest in VMware’s stock as investors are watching closely how VMware performs.

News stories aside, I am sure the users appreciate the moves VMware is making to expand its market share. With 75% market share, VMware is clearly the market leader in the industry. But I would like to know from you how do you view the competition? What other features would they like to see VMware add to its portfolio? How do you compare VMware’s products to those of its competitors, like Nutanix, for instance?

Its stock is trading at $152.99 with a market capitalization of $62.5 billion. It touched a 52-week high of $165 in September this year. It was trading at a 52-week low of $108.46 in February this year. Like other stocks, October had seen the stock tumble, but the stock has managed to recover this month.

Photo Credit: sporst/

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