VMWare (VMW, Financial) announced strong earnings and revenue growth, but shares fell after disappointing investors with weak revenue and EPS growth expectations for 2016.
The big problem was in revenues, with 2016 sales expected to be between $6.8 billion and $6.9 billion, although analysts had expected $7.21 billion for the year. Additionally, VMWare will cut 800 employees, including former CFO and COO Jonathan Chadwick, who will be replaced by Denis Cashman, current CFO of EMC Corp. (EMC, Financial).
The company is looking for ways to kick-start growth, and one solution has already caused angst among customers. To kick-start sales, VMWare has changed its licensing agreement to vSphere, removing the vSphere Enterprise solution and introducing the vSphere Plus. While this new solution offers more features, it’s also more expensive –Â and users will need to upgrade to keep using the product.
The move isn’t just about offering better products; for VMWare, it’s about kick-starting growth and getting revenues back to analysts’ targets. VMWare has seen vSphere sales fall significantly for a long time as the company admitted in its most recent 10-K:
"Historically, the majority of our license sales have been from VMware vSphere, which is included in our compute product category within our SDDC product group. However, over the last two years, VMware vSphere license sales have declined. As the transformation of the IT industry continues, we expect that our growth will be increasingly derived from sales of our newer products, suites and services solutions across our three product groups."
The vSphere Enterprise Plus is one of those newer products, but the company has urged investors to focus on its other hypergrowth revenue streams, including its cloud computing and software-defined data center (SDDC) enterprise solutions.
While these are high profile high growth areas, VMW will be competing with Amazon (AMZN, Financial), Microsoft (MSFT, Financial), Arista Networks (ANET, Financial) and HP (HPQ, Financial). It’s a crowded sector with a lot of investment behind it.
Still, investors should ask themselves why VMWare is potentially alienating its client base by removing a popular and reliable product with a more expensive offering. While the new features of the new vSphere product are in demand, users who don’t want or need them have lost a more inexpensive offering; and if sales for vSphere are declining, why can’t VMWare simply offer the legacy product for customers who rely on it, building goodwill that they can then leverage into selling more cloud and SDDC services?
On Reddit, one user called the move a “hostile money grab,” which was echoed by several. If VMWare cannot communicate its intentions more clearly and market its products in a way that doesn’t seem unfair to users, it could find itself unable to compete in new areas. If that happens, the short-term gain from some extra revenue from the more expensive vSphere Enterprise Plus will be more than offset by lowered demand for the company’s other services from customers who no longer trust the firm.
Disclaimer: I have no positions in any of the stocks mentioned in this article and no intention to initiate a position within the next week.
