VMware: Virtual Insanity in the Clouds

 | Apr 23, 2013 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

vmw

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emc

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amzn

VMware (VMW) will report earnings today after the close. The Street is expecting  $0.70 in earnings per share on $1.183 billion in revenue. I believe there are significant questions regarding VMW's future growth prospects.

I believe the company could cut guidance, since it took down the CFO's March presentation from its website. I doubt that's a mistake, since I can download the rest of the company's analyst presentation. (Maybe it's turbulence in the cloud!)

At the end of January, investors were struck with a thunderbolt when VMware cut fiscal 2013 guidance. Management implied that growth would be less than expected. The company also announced a plan to cut 7% of its workforce. The news didn't go over well. Investors hit the eject button and the stock sank 21% in a flash.

In early March, the company held a joint analyst meeting with EMC (EMC) where the company tried to clarify investors' expectations by talking about how growth would magically come back in the second half of the year based on new products. Management said the market for its vCloud Hybrid product would accelerate the company's growth since vCloud addresses a market that is estimated to be growing at 30% per year.

The "trusted cloud" provider business is expected to be a $14 billion market by 2016.  VMware believes it can shift a big chunk of its 480,000 customers to the cloud. Right now, VMW competes with several cloud service providers, with Amazon's (AMZN) EC2 elastic cloud computing service the largest.

After the feel-good analyst meeting, the stock popped 21% higher. Since then, the stock has dropped on fears that enterprise customers will abandon VMware for one of the open source cloud projects. Open Stack and Cloud Stack are the two most widely-known open source enterprise-worthy cloud projects. Anyone can download these projects for free and deploy them across multiple servers to become a cloud provider.

That's the problem. It's hard to compete against free. While I'm sure a lot of VMW's customers will use vCloud, it is certainly enticing for technically-advanced enterprise customers to deploy their own cloud service. The other worry is Amazon's EC2 pricing. Amazon set the bar rather low when it priced its cloud service. To compete, VMW will have to demonstrate to customers a solid use case as to why they should pay more for vCloud rather than Amazon.

According to ThomsonReuters, the consensus thinks VMW will earn $5.21 billion in revenue for fiscal 2013, which is an increase of 13% over last year. That forecast may be overly optimistic, because the company removed the CFO's March 13 presentation from the company's website. I doubt that's an "accident". At the very least I would stand aside and watch for fireworks after the close. Right now, I'm short VMware.

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