VMware’s Fourth Quarter and 2012 Financial Results

VMware has announced financial results for the fourth quarter of 2012 and for the entire year of 2012. Fourth quarter revenue came in at $1.29B growing 22% over the fourth quarter of 2011. Full year revenue came in at $4.61B also growing 22% over 2011. The full results are detailed in the table below:

Summary of the VMware Financial Results

Q4/2011 Q4/2012 Growth Rate Full Year 2011 Full Year 2012 Growth Rate
Total Revenues $1.060B $1.293B 22% $3.767B $4.605B 22%
Net Income $206M $200M 3% $724M $746M 30%
Earnings per Share $.46 $.47 2% $1.68 $1.72 2%

 VMware Accomplishments for 2012

VMware listed the following major accomplishments for 2012

  • The introduction of the vCloud Suites
  • The addition of vCloud Automation Center (fomerly DynamicOps) to the Enterprise Edition of the Suite
  • The newly formed Pivotal Initiative to be lead by Paul Maritz
  • The establishment of the Network and Security Virtualization group to be lead by Stephen Mullaney, formerly CEO of Nicira

Analysis of VMware Results and Actions

The financial highlight of the year was certainly the 22% growth in top line revenue across the year which was continued in the fourth quarter of 2012. This is an impressive accomplishment for a company of VMware’s size since as companies get larger it becomes progressively more difficult to grow in double digit percentages. However the growth in revenue far outstripped the growth in Net Income and Earnings per Share indicating that expenses grew much faster than did revenue. This puts VMware’s new CEO, Pat Gelsinger in a very interesting and challenging position. Investors are going to demand that earnings growth (which is what drives the price of the stock) rise to match the growth in revenue. There are only two ways to accomplish this. One is to hold down the growth of expenses, and deliver robust growth in revenues. And the other is to cut expenses to the point where growth in net income matches growth in revenue. At VMworld 2012, Mr. Gelsinger said that he was going to tilt towards more of an “operational focus” in contrast to Paul Maritz who was more strategically focused. We are about to see what that means.

Challenges for VMware

While these results are indeed impressive, VMware faces a set of significant strategic challenges that must be addressed while it rationalizes is expenses:

  • While the vCloud Suites are impressive bundles of functionality, the products that comprise them are hardly integrated at all. There are too many consoles and databases in each suite and a long and painful integration process will be needed to make these suites as well integrated as is, for example, Microsoft Office. If you remember the days when Word, Excel and PowerPoint were all separate products you will remember how many releases of Microsoft Office it took before all three products seamlessly combined into one suite with one cohesive user interface.
  • VMware has clearly articulated a management strategy that spans multiple hypervisors and multiple clouds. While vCloud Automation Center is certainly capable of provisioning workloads across multiple hypervisors and into Amazon as well, the support for other hypervisors and clouds is not as broad for the other components of the suite yet. For example in the case of vCenter Operations Manager, VMware faces that fact that it must collect operational metrics differently for platforms that it does not own, than it can from platforms (vSphere) that it does own. Customer acceptance of the vCloud Suite as a cross platform management offering will depend greatly on exactly how this cross platform support is implemented over time.
  • VMware now faces competition in the data center from Microsoft whose product, Hyper-V is widely viewed as having achieved functional and performance parity with vSphere. Microsoft has made significant inroads with Hyper-V in the SMB and SME segments of its own customer base many of whom only have Windows admin expertise on staff. In enterprise accounts many CEO’s are choosing to tier hypervisors much like they tier storage – moving workloads that were virtualized three years ago from vSphere to Hyper-V and using those freed up licenses to virtualize the next set of business critical applications. This is a strategy that is significantly enhanced by Hotlink who makes managing pools of disparate hypervisors into a seamless experience for the vSphere Admin team.
  • VMware has lost the first round of the public cloud computing war. Amazon has run away with the early lead, and both Microsoft and Google have positioned themselves as strong alternatives. It is important to note that Amazon, Google,and Microsoft all have complete control of their cloud software stacks and can therefore practice DevOps based agility in rolling out new functionality. Cloud providers who license vCloud from VMware face the dual challenge of having to wait for VMware to release new features, and having to pay license fees to VMware that makes their offerings uncompetitive with Amazon.
  • Price pressures in the public cloud computing market are fueling the adoption of open source KVM and the open source CloudStack cloud management platform. This is currently the only way that a cloud provider who wants to compete with Amazon can field a price competitive offering. This dynamic along with the one listed directly above will likely force VMware to revisit its entire public cloud computing strategy.
  • While the Pivotal Initiative holds great promise to revolutionize how big data applications are built with multiple languages, deployed and operated, this alone will not suffice as VMware’s answer to its public cloud computing dilemma.
  • Finally, the most important challenge is hiring and retaining great people. Many people who have been at VMware for years have made significant sums of money. Once this happens to a terribly bright and capable person like Steve Herrold (who left to join a venture firm) these people become more willing to accept the risk of working for a startup. Since VMware is located in Silicon Valley, the number one place for startup software companies in America, retaining key talent is a tremendous challenge. This is an especially significant challenge since most of the work that needs to be done at VMware consists of integrating things (Nicira with vSphere, the components of the vCloud Suite with each other), and making things work across platforms – work that is not likely to stir the passions of developers who want their code to change the world.

Late Evening Update – Investors are Not Impressed

VMware’s stock is down more than 20% on the news of the less than lackluster profits and the guidance going forward.



Clearly investors in VMware expected more. VMware now faces the “fly the airplane through the tunnel” problem of how to placate investors who want earnings per share to rise every quarter, while also investing in things that financial analysts have no hope of ever understanding.


VMware has delivered impressive growth in revenue, and lackluster growth in earnings. Growing earnings while addressing VMware’s numerous strategic challenges will prove to make 2013 a demanding year for Pat Gelsinger and his team.