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VMWare’s Shopping Spree Fails to Impress the Stock Market

Posted on Wednesday, Aug 28th 2019

Virtualization infrastructure provider VMWare (NYSE:VMW) has gone on a massive shopping spree to expand its cloud portfolio. Within the last few months, VMWare has made several big acquisitions to continue to drive product and market growth. The company recently also announced its second quarter results that surpassed all market expectations, but the stock fell 9% after the result announcement.

VMWare’s Financials
VMWare’s Q2 revenues grew 12% over the year to $2.44 billion, ahead of the market’s forecast of $2.43 billion. It ended the quarter with non-GAAP earnings of $1.60 per share, which was also ahead of the Street’s forecast of $1.55.

By segment, Services revenues grew 12.1% to $1.43 billion and license revenues improved 12.3% to $1.01 billion. Hybrid Cloud and SaaS accounted for more than 12.5% of total revenues. VMWare reported that more than half of its product bookings were now sold as SaaS.

For the third quarter of the year, VMware expects revenues of $2.405 billion with license revenues at $950 million and an adjusted EPS of $1.42. It expects to end the year with revenues of $10.03 billion, license revenues of $4.215 billion, and an adjusted EPS of $6.54. The market was looking for revenues of $2.45 billion with an EPS of $1.57 for the quarter and revenues of $10.03 billion for the year with an EPS of $6.52 for the year.

VMWare’s Acquisitions

VMWare announced plans to acquire two software companies to expand its product portfolio and market reach. It announced the acquisition of Pivotal Software for an estimated $2.7 billion and Carbon Black for an estimated $2.1 billion.

Pivotal Software is a leading cloud-based platform that helps companies with software development by transforming how they build and run their important applications. Its offers a developer-centric platform along with additional tools and services that help accelerate app development. Pivotal is also increasing focus on Kubernetes and VMWare plans to leverage these tools with its own infrastructure capabilities to deliver a comprehensive Kubernetes portfolio to build, run, and manage modern applications.

Prior to the acquisition, Pivotal had raised $1.7 billion through private funding and $555 million through an IPO. It went public last year at a valuation of $3.8 billion. Pivotal had ended 2018 with revenues of $657.5 million and a net loss of $141.9 million.

Carbon Black is a leading next-generation security cloud provider with over 5,600 customers and 500 partners globally. Its cloud-native security platform leverages big data and behavioral analytics to provide comprehensive endpoint protection against advanced cyberattacks. 

VMWare plans to integrate Carbon Black’s solutions with its security offerings, including AppDefense, Workspace ONE, NSX and SecureState, to offer a modern security cloud platform that can secure any application, running on any cloud, or on any device. The integrated service will provide advanced threat detection and in-depth application behavior insight to stop attacks and accelerate responses.

Prior to the acquisition, Carbon Black had raised $191.7 million in private funding and $152 million through an IPO. It went public in April last year at a valuation of $1.3 billion. Carbon Black had reported revenues of $209.7 million and a net loss of $82 million in 2018. The acquisition will help VMWare make its presence felt in the endpoint security market.

Earlier this month, VMWare also announced plans to acquire Intrinsic, a San Francisco serverless computing startup. Intrinsic was set up in 2015 and was formerly known as GitStar. It was operating in a stealth mode and was an application security startup that applied the principle of least privilege to web applications. It was working to help software developers tap into serverless computing. Terms of the deal weren’t disclosed.

The acquisition was aimed at expanding VMWare’s AppDefense platform capabilities into the public cloud. Intrinsic had only raised a seed round and its valuation and financials were not known.

In May this year, VMWare had announced the acquisition of Bitnami, an application packaging solutions provide that offers the largest catalog of click-to-deploy applications and development stacks for major cloud and Kubernetes environments. Terms of the acquisition were not disclosed.

Bitnami offers a library of popular server applications and development environments that can be installed easily on premise or on a virtual machine or hosted in the cloud. It manages the task of compiling and configuring applications and their dependencies to allow the apps to work out-of-the-box. Prior to the acquisition, Bitnami had only raised an undisclosed sum through a seed fund round. Owler estimates its revenues at $5 million per year.

VMWare’s acquisitions in the recent past are all geared towards expanding its cloud presence while ensuring a more robust security service is available to its customers. But despite the acquisitions, the market was not too pleased with the company’s outlook for the immediate quarter. I think the decline in the stock price is a short term view and that it will soon recover. Its stock is trading at year low levels of $132.80 with a market capitalization of $54.4 billion. It touched a 52-week high of $206.80 in May this year.

Photo Credit: sporst/Flickr.com.

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