VMware Sees Trouble Ahead

| About: VMware, Inc. (VMW)

Shares of VMware (NYSE:VMW) will be in the spotlight today as the software maker gave a cautious outlook for 2013 due to a decline in orders from federal government customers and the likelihood of tougher economic times in Europe.

The company reported Q4 EPS of $0.81 vs. consensus of $0.78. Revenue increased 22% to $1.29 billion. In October, the company forecasted revenue between $1.26 billion to $1.29 billion. The operating margin narrowed to 19.5% from 20.2%, while overhead costs climbed 32%.

But VMware now sees Q1 revenue of $1.17B-$1.19B vs. consensus of $1.25B. It also sees 2013 revenue between $5.23B-$5.35B below current consensus of ~$5.42B.

The company's shares fell more than 14% in after-hours trading.

It also plans to cut about 7% of its workforce as part of a restructuring and expects to take a charge of $90-$110M, with the majority taken in Q1.

VMware Chief Executive Pat Gelsinger said on the earnings conference call with analysts that the company would now focus on its most popular products and would scale back in some areas of the business.

I'm sure you get a real sense today that we're taking decisive action to focus our innovation and business operations around key high growth opportunities that VMware is uniquely positioned to lead across the IT sector. Our strategies are laser focused on what our customers and prospects value most from VMware.

Source: Earnings Call Transcript - Seeking Alpha

Despite the workforce cuts, Gelsinger said that they will continue to hire in 2013 in support of their focused growth priorities. The company expects headcount to be up approximately 1,000 by the end of the year:

John DiFucci - JPMorgan:

Pat, headcount reductions are typically dramatic measures for a company. But by the end of the year, I understand your headcount is going to be up a thousand. So it sounds like you're really getting the right people in the right places. But is that also something to do with the near term macro backdrop that you hope will improve throughout the year?

Pat Gelsinger - Chief Executive Officer:

Clearly, having added, as we said on the call, 6,700 people over the last three years, we're refining where those headcounts are located vis-a-vis those key priority areas.

Source: Earnings Call Transcript - Seeking Alpha

The company also noted Europe's relatively stronger performance in the last three months, mostly as a result of some pent-up demand preceding customer expectations of a tough 2013. However, it said it remained concerned about the region. In addition, foreign exchange rates were likely to be a revenue headwind at least for the first quarter.

Analysts have a mix of reactions on the company's outlook with FBR Capital Markets emphasizing that they delivered a strong quarter but investor eyes are focused on the outlook. They noted that VMware tends to be conservative in its forecasts and that it had underpromised and overdelivered in the past.

But Mizuho Securities analyst Abhey Lamba said that management's 1Q13 outlook is significantly below normal seasonality, which could raise doubts about the company's longer-term growth potential.

Shares of EMC Corp (EMC), which owns a majority of VMware, also slid ~4% after hours to $24. EMC reports its earnings today before market open.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Technical & System Software, Earnings
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