Cloud costs - and VMware's about to start paying
- Summary:
- The shift to a cloud-centric revenue stream comes with a price tag as VMware has just warned its investors.
VMware’s fourth quarter numbers were solid, but the company’s set to pay the price of an accelerating shift to the cloud in 2015 that’s going to eat into revenue numbers.
For the fourth quarter, the company reported profit, excluding certain costs, of $467 million on revenues that rose 15% to $1.7 billion.
But what gave Wall Street the jitters was the projection for 2015 of full year revenues in the range of $6.64 billion to $6.76 billion, compared with analyst estimates of $6.84 billion.
CFO Jonathan Chadwick warned:
An increasing percentage of our revenue is being driven by hybrid cloud and SaaS revenues which are growing at a very high rate. While this is a positive development for VMware, it also has the impact of recognizing less revenue upfront than otherwise will be recognized as part of a multiyear license deal.
We estimate that this will have a negative impact on total 2015 revenue growth of up to 1 percentage point and on license revenue growth of at least 2 percentage points.
Taken together, the impact of a stronger dollar and the growth of hybrid cloud and SaaS are expected to reduce our 2015 total revenues by approximately 3 percentage points of growth and are expected to reduce our 2015 license revenues by approximately 5 percentage points of growth from what we would otherwise report.
To which Wall Street responded with an ‘ouch!’ as shares fell 2.2% by close of play in New York.
VMware President Carl Eschenbach insisted that the firm remains “encouraged” by the shift to the cloud models:
Let me just clarify what's in our hybrid cloud and SaaS. Business and how we classify it. Obviously it's vCloud Air which is our hybrid cloud platform that we've built out, that we own and operate. It's our vCloud Air network which is greater than 4000 partners around the world that are leveraging our platform to deliver public cloud services. It is a portion of the AirWatch revenue that is recognized as a service, as you know we sell AirWatch both on premise and in perpetual license manner, as well as we sell it in our public cloud on top of vCloud Air as a service.
We're also starting to see a pickup in other as a service offering specifically like desktop as a service, which is VDI hosted in the public cloud and our vRealize suite we as a service which is our management products that have historically been sold as a perpetual license as on premise we now deliver through the public cloud. So they are all the components of hybrid/SaaS revenue model going forward. As we think about the mix, we continue to see these as big growth opportunities for us and it's reflected in the guidance we're providing.
But it’s a tricky balancing act, as Andrew Smith at Technology Business Research observes when he talks of VMware’s future:
greater mix of software defined and cloud solutions within its bookings mix in order to drive more ratable, subscription based revenue moving forward.
This shift in revenues is becoming critical for software vendors to adapt to across the systems management industry, reflected by portfolio shifts and aggressive investments in new cloud products and services by competitors like IBM, CA, and HP.Stabilizing the bottom line during this transition will be critical to VMware’s long-term success, as the company continues on its journey of enabling seamless and secure infrastructure management.
This shift requires adapting to more complex, subscription based sales cycles as customers seek services-based solutions for their infrastructure needs, particularly in the mid-market where companies can quickly integrate data and analytics workloads into existing cloud and hybrid cloud IT infrastructures.
He adds:
2015 will remain an uphill battle of transition for VMware, as its cloud and SaaS solutions account for approximately 5% of total revenue despite high growth rates. Moving forward, the vendor must contend with both the evolution of its traditional ELAs to include more long-term, subscription revenues as well as the financial headwinds created by increased operating expenditures, leaving VMware reliant on its traditional virtualization portfolio and on premises license agreements for the foreseeable future.
Hanging over the firm remains the shadow of activist shareholder Elliott Management Corp which has been putting pressure on parent EMC to spin—off VMware in the interests of the parent firm. While EMC and Elliott agreed a form of armistice earlier this month, the matter remains far from resolved. We may hear more on this subject tomorrow (Thursday) when EMC is due to report its own numbers.
My take
A price worth paying, but a cost that needs communicating to twitchy shareholders.
All eyes on EMC tomorrow.
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