Investors in VMware (VMW) are not impressed with the announcement of the acquisition of AirWatch on Wednesday which seems fair and makes perfect sense within the wider company strategy.
The deal, aimed to boost mobile security offerings completes the company's ambitions as outlined by CEO Gelsinger. At the same time VMware offered a solid outlook for 2014. Shares continue to trade at premium multiples, as the company continues to deliver. I believe shares are roughly fairly valued at this point in stage.
VMware spent $1.175 billion in cash to acquire AirWatch, a leading provider of enterprise mobile management and security solutions. The company will spend another $365 million in installment payments and unvested equity. As such, the total deal tag could increase towards $1.54 billion.
The company will become part of VMware's End-User Computing group. The deal has been approved by the board of both firms and could be closed as soon as the first quarter of this year.
No financial details regarding revenues of earnings by AirWatch have been released. Analysts have estimated that the company could report annual revenues anywhere between $75 and $150 million.
Strategic Implications Of The Deal
CEO Pat Gelsinger applauds AirWatch's secure, enterprise-mobile management solutions. The deal adds a foundational element to the end-user computing portfolio enabling customers to turbo-charge the mobile workforce, without having a detrimental impact on the security.
The deal fits perfectly with VMware's third pillar of its released strategy to "Empower the multi-device era".
AirWatch has over 10,000 customers and 1,600 employees across the globe. The strategic platform offers increasingly more mobile workforces to work safely on mobile devices. This complements VMware's offerings in desktop. The company is a competitor of the likes of [[SAP]] and Citrix Systems (CTXS) in its field.
Note that WMware has access to more than $5.8 billion in cash and equivalents and holds little below half a billion in debt. Despite the strong financial position, VMware will finance the deal through $1 billion in debt provided by EMC Corporation (EMC) and the remainder with cash at hand. Therefore, the buyback program will not be impacted.
Preliminary Fourth Quarter Results
Fourth quarter revenues are expected to increase by 15% to $1.48 billion, essentially in line with consensus estimates at $1.47 billion. Excluding revenues attributable to Pivotal Software and divestitures, revenues were up by 20% on an annual basis. CFO Chadwick notes that revenues will exceed the high end of the guidance range.
Non-GAAP operating margins are seen around 35.6%, with GAAP margins seen around 25.2%. Note that the final results will be announced on Tuesday the 28th of January.
Review Of Last Year
Based on the preliminary results, VMware is on track to generate annual revenues of $5.2 billion for 2013. GAAP earnings could come in close to a billion. This marks significant growth despite divestitures and the Pivotal initiative.
Shares continue to trade at historically high levels, despite flat returns over the past year. At $97 per share, the market is valued at roughly $42 billion. This values the business at over 8 times annual revenues and roughly 40-45 times GAAP earnings.
Continued Growth In 2014
For the current first quarter, revenues are seen between $1.33 and $1.37 billion, in line with consensus estimates at $1.34 billion. Full year revenues are seen between $5.94 and $6.1 billion, up 16.0% on the year before. The full year guidance is solid, with consensus estimates standing at $5.95 billion.
Takeaway For Investors
CEO Gelsinger has held the top job at VMware for roughly 15 months now. The company focused on internet-based cloud, software to replace traditional networking equipment, and tools for safely managing computers and devices in a virtual world. With the acquisition of AirWatch, VMware has now a complete offering in each of these three areas.
Mobile security is obliviously a big market, and continues to gain importance for the virtualization software producer. These deals add just a small drop in current revenues but are important for the strategic relevance and future revenue growth. As such investors probably don't mind paying 10-20 times annual revenues for the company, compared to a multiple of 8 times for the own firm.
In October I checked the prospects for the company following the third quarter earnings report. At the time shares gained more than 10% towards $92 per share on the back of solid earnings. The virtualization software made the spin-off of EMC which still is a major shareholder in the firm, hugely successful. Hybrid cloud offerings with cost and notably security become increasingly more important.
The prospects might still be interesting. Valued at $42 billion, with earnings seen around $1.2 billion in 2014, the company is valued at 35 times annual earnings. While not cheap, growth is impressive as the company still holds a stake in a difficult to value Pivotal project. Shares don't come cheap, but the performance of the business has been very strong. Despite the strong and solid track record, the current valuation is not appealing enough for me.