VMware revenue plunges $600M, but Broadcom assures investors growth plan is on track VMware's quarterly revenue appears to have fallen by $600 million during its first full quarter of ownership by Broadcom, which revealed strong growth in forward bookings and huge cost cuts at the virtualization giant. Speaking on Broadcom's Q2 2024 earnings call, CEO Hock Tan announced VMware revenue for the quarter came in …
A sign that the sheepies, sorry, investor community, apparently couldn't see given the market reaction to the quarter's performance, which apparently exceeded the herd"s expectations.
I'm so hoping Broadcom become the poster boy for acquisition accounting hiding tanking underlying performance.
I doubt it; more likely is that instead of booking a single sale of $1200 the customer switches to subscription and is paying $300 for the quarter, so instant quarterly revenues will appear to be down but, as the article quotes:
"annualized booking values – a metric of commitment to long-term contracts – which rose from $1.2 billion last quarter to $1.9 billion this time around."
If the long term contracts are near enough guaranteed, then converting quarterly to recurring is a fabulous thing. If it's not so certain, then it means little. Such subscription figures can easily be manipulated by offering businesses a big discount to sign up for a long term contract that has a break clause - few downsides for the customer. In the longer term though, those discounts might not be so good the vendor, added to the dubious reliability of the revenues.
Forward sales commitments in software businesses are always a very movable feast, and the accounts can be made to say almost anything, often without breaking any laws and from the outside we can't really tell that much. Problem for Broadcom is the usual one of corporate acquisitions that they paid top dollar for VMware (more than 40% above the previous market valuation) and now need to extract that from users. There's other solutions for VMware's offer, and as Broadcom try and ream out customers to pay for their own largesse, customers will start looking to other providers.
Overall, how good was the combination of deal logic of "chipmaker buys market leading but single trick pony software company" and the underlying financials of the deal "we paid so much money we'll need to double revenues"? My view is that most big deals are simply executive toys, conceived when a board can't see growth in their own core business, and this one will eventually go the way of most M&A between dissimilar companies. But with VMware reasonably entrenched in enterprise architecture, it'll take a good few years for any negative impacts to show; The advisors have already been paid their fees, and by the time any underperformance is clear those in Broadcom who dreamt this up will have trousered their bonuses and moved onto pastures new. The former shareholders of VMware have done very nicely, and the people who pay the price are the staff who are dumped to reduce costs, and the shareholders of Broadcom who sat and watched as the usual M&A fiasco plays out.
Typical post-takeover accounting. He's talking about operating costs being lower, due to layoffs, but also Tan declared, noting that $2 billion has already been spent on restructuring and integration costs. "Restructuring" is the term usually used to cover things like compensation and legal costs associated with sacking people.
Whether we like it or not, Tan has a proven record in takeovers. If there is a number that will alarm investors, it will be that not even a third of the "whales" have signed long-term deals and this might suggest that that "forward revenue" is a little ambitious. But the real success story remains the silicon side of the business. So that even if things all go titsup with VM Ware, there's still plenty of cash coming in.
"And yet $600 million less revenue.
I'd say that's a sign . . ."
And quarterly costs down $700m ($2.3bn to $1.6bn) and expected to reach $1.3bn by end of 2024.
Which puts net profit at between $400m and $1bn (assuming and addition $100m/quarter) if the revenue loss remains similar.
Only 30% of large customers have signed a new or interim deal so those revenue figures may look even better by the end of 2024.
I'm not saying this is good for VMware customers - if anything, taking $4bn out of annual costs should show exactly what future VMware sales and support has to offer if you are on the fence about moving to a competitor...
Only 3000 of the largest 10k customers is a very poor result and $600m down in one quarter is also disappointing (for Broadcom) when you look at the massive price hikes many customers have had to suffer.
But I suspect doing down the route of even more layoffs and cost reductions will worry the 7K remaining customers who haven't signed up yet. Do I really want to sign up to a long term relationship with a company which is destroying the product they are being asked to buy into ? VMware is a massive product and given it sits at the core of business, needs constant development and support from motivated, well paid and supported teams and Broadcom might just be breaking that 'deal' with the staff they rely on.
Sadly it's normal in M&A to buy a golden goose and then strangle it.
The board sign off the deal based on a warped strategic logic and financial founded on non-credible assumptions, neither of which board members are bold enough to question. When they've overpaid for said asset, they put the "investment" on the balance sheet, and that immediately threatens to destroy all of the return on assets/debt/equity ratios that the equity markets study. To avoid that, the acquirer has to pull the levers of cost reduction and price rises, often in ways that damage the acquired business. They cruise on for a while, and eventually writedown the assets to remove it from the balance sheet, citing some external trigger that they can claim is not their fault, or shoving the majority of the cost of the acquisition into "goodwill" where it can be quietly amortised or "impaired".
A search for "worst mergers and acquisitions" will pull up multiple examples of cack-handed M&A, and the tech sector feature big in those lists, for example Microsoft/Nokia, HP/Autonomy, Google/Motorola, Microsoft/aQuantive, Musk/Twitter, Yahoo/Tumblr, AOL/Time Warner, Terra/Lycos, Ebay/Skype, etc etc.
Sadly it's normal in M&A to buy a golden goose and then strangle it.
Exactly.
Far too many people still seem to think that companies are bought to grow, but the reality is they are bought to be scavenged, strip mined and discarded.
We live in a world where billion dollar companies are now considered disposable. And have for some time.
See: LBO (leveraged buy out)
"3,000 of the 10,000 largest VMware customers have signed for multi-year deals."
A likely internal conversation that took place at many of those 3,000:
"Can we transition all of our virtual-based systems over to a competitive product before we're forced to agree to Broadcom's new VMWare licensing terms?"
'No, we're not positioned for that. This caught us off guard.'
"Has the engineering team worked up a worst-case estimate for achieving a full transition?"
'Yes, looks like it would take us 3 to 4 years to fully transition everything we have to another virtual operating system.'
"Notify legal and accounting to include the significant increase in licensing costs as a risk to investors in our next 10-Q and 10-K filings with the SEC. Have legal agree to a 4 year contract with Broadcom with a fixed date for termination and no automatic renewal. Once that's signed and in force, give project Breakaway the green light."
The Register 
Biting the hand that feeds IT
Copyright. All rights reserved © 1998–2025
