VMware VMW recently reached a settlement with the U.S. Securities and Exchange Commission (SEC) to resolve a previously disclosed investigation related to VMW’s backlog disclosures in public filings for its 2019 and 2020 fiscal years.
The SEC charged VMware late on Monday for misleading investors about its order backlog management practices, which helped VMW to push revenues into the coming quarters by delaying the delivery of products. This helped the company to conceal its slowing performance growth relative to its projections.
Per the SEC order findings, VMware shifted tens of millions of dollars in revenues into future quarters, building a false statement of growth in the reported quarters of fiscal 2020.
Without admitting or denying the findings in the SEC’s order, VMware consented to a cease-and-desist order to pay an $8 million penalty
VMware, Inc. Price and Consensus
VMware, Inc. price-consensus-chart | VMware, Inc. Quote
VMware Faces Top-Line Woes
VMW’s revenues grew 3.01% year over year in first-quarter fiscal 2023 to reach $3.09 billion, which however lagged the consensus mark by 3.08%. The suspension of business operations in Russia and unfavorable forex negatively impacted the first-quarter top line.
Rising competition from providers of public cloud infrastructure and SaaS-based offerings, including Microsoft Azure and vendors like Oracle and Cisco, was also a reason behind the slowdown in top-line growth. Increased competition from open-source companies that are targeting data center virtualization and private cloud, including Red Hat, now part of IBM, and Nutanix, hurts VMware’s pricing ability, which impacts profitability.
For the second quarter of fiscal 2023, the Zacks Consensus Estimate for sales is pegged at $3.38 billion, indicating 5.95% growth from the year-ago reported figure. The Zacks Consensus Estimate for earnings is pegged at $1.65, indicating a 4.07% decline from the year-ago quarter. Rising operating costs are expected to slow down bottom-line growth.
Further complicating the situation for VMW is its highly leveraged balance sheet, which restricts its ability to invest in growth opportunities. Long-term debt as of Apr 29, 2022 was $11.93 billion against cash & cash equivalents of $3.72 billion.
Even though VMW’s latest earnings report reflects slowing growth, its shares have returned 2.4% in the year-to-date period against the Zacks Computer - Software industry’s decline of 23.6%.
VMware is set to be acquired by Broadcom AVGO that has benefited the share price movement largely in recent times.
Through this deal, Broadcom aims to benefit from strengthening its presence in the corporate software market as demand for cloud computing drives the top line.
Moreover, in order to deal with its slowing operational growth VMware is pursuing megatrends such as automation, multi-cloud, hybrid work and big data, which are at the forefront of the fourth industrial revolution.
To cover most aspects of the IT infrastructure, VMware is strategically building partnerships with companies like Amazon AMZN and Advanced Micro Devices AMD to provide various services.
VMware recently announced that it is expanding its partnership with Amazon’s Amazon Web Services (AWS) by launching capabilities in the jointly-engineered VMware Cloud on the AWS marketplace.
VMware’s latest cloud innovations on AWS will help improve the cloud infrastructure performance and better protect enterprise workloads. This is attracting major customers, such as LOTTE, Quality Bicycle Products and Schibsted to VMW’s cloud platform.
This Zacks Rank #3 (Hold) stock recently selected AMD’s Pensando Distributed Services Card as the first data processing unit (DPU) solution to support its vSphere 8, available from leading server vendors like Dell Technologies, HPE and Lenovo.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
AMD Pensando is helping VMware vSphere Distributed Services Engine to reduce operational costs of customers by using its platforms to free up CPU resources. It is also providing extra security by separating infrastructure services from server tenant workloads.
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