Dell and VMware (again) mull spin-off but nothing imminent

On Thursday's Q2 earnings call, VMware CEO Pat Gelsinger said his company was in discussions with parent-owner Dell about a possible spinoff, but don't hold your breath.

Stemming from Dell's blockbuster deal to buy EMC in 2016 for a $67 billion, VMware is 81% owned by Dell. A spinoff has been an on again, off again discussion over the years. Dell also mentioned the possible spinoff of VMware on its second quarter earnings call Thursday afternoon.

"I want to acknowledge the recent Dell Technologies 13D filing about their considerations of a potential VMware spin-off," Gelsinger said, according to a Seeking Alpha transcript. "As we stated previously, our Board has formed a special committee of Independent Directors, and we are in discussions with Dell. We have over a year to go as any potential spin-off would not occur prior to September 2021.

"While we believe that a spin-off may be value enhancing to VMware and its stockholders, we will continue a mutually beneficial partnership with Dell supporting our customers, regardless of any outcome. Meanwhile, we remain focused on enabling customer success. We do not plan to comment further on these discussions."

Dell filed its 13D document on July 15 in regards to the potential spin-off of its ownership interest in VMware to Dell Technologies stockholders or maintaining the status quo. A spin-off could reduce the current corporate complexities between the two companies while still maintaining their partnerships.

By most measures, VMware posted solid second quarter results in the face of headwinds from the COVID-19 pandemic. While on premise revenues were down to the coronavirus, VMware's subscription and software-as-a-service (SaaS) revenue was up 44% from the same quarter a year ago to $631 million, and accounted for 22% of its total revenue in Q2.

Within subscription and SaaS, the largest revenue contributors included VMware Cloud Provider Program, modern applications, end-user computing, and Carbon Black.

VMware's on-premises perpetual license revenue for the quarter was $719 million, which was down 7% year-over-year.

"I do think, as we've indicated, that Covid has been a bit of a headwind for on-premise, growth," Gelsinger said. "And that affected us in Q2 and we clearly saw that particularly in the Americas."

Gelsinger said he expected the subscription and SaaS services would continue their momentum, and that there will be more SaaS-related announcements at next month's virtual VMworld conference.

VMware reported second quarter earnings of $447 million, or $1.06 per share, on revenue of $2.88 billion, which was an increase of 9% year over year from $2.63 billion.

Wall Street analysts surveyed by FactSet had predicted earnings of $1.45 per share on revenue of $2.8 billion. VMware's non-GAAP earnings were $1.81 a share, which easily exceeded analysts' forecast of $1.45 per share.

"Turning to our outlook for Q3 and the remainder of the year, due to the impact of Covid-19 on the global economy and on our business, we continue to have limited visibility and a higher level of volatility than we've seen historically," said VMware CFO Zach Rowe, on the earnings conference call. "With that in mind, we expect Q3 total revenue to be $2.8 billion, up 5.4% year-over-year. We expect combined subscription and SaaS and licensed revenue to be $1.265 billion up 5.6% year-over-year, with subscription and SaaS contributing just over half of this revenue.

"We expect non-GAAP operating margin to be 27.5% for Q3 with non-GAAP earnings per share of $1.42 on the diluted share count of 423 million shares."

RELATED: VMware to buy Kubernetes security startup Octarine

In Q2, VMware closed its deal to buy Kubernetes security vendor Octarine, which was first announced in May. Gelsinger said the Octarine technology would be embedded into the VMware Carbon Black Cloud.

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Gelsinger touted VMware's multi-cloud strategy with Google Cloud and Oracle, the launch of the next generation of the Azure VMware solution earlier this quarter, and its ongoing cloud partnership with Amazon Web Services as highlights.

Gelsinger also said VMware inked an “eight-figure commitment to the Tanzu platform" by the U.S. Space Force. Gelsinger said VMware had exceed its overall bookings for the Kubernetes-based Tanzu platform in the quarter.

Gelsinger also provided a rough outline for the remainder of the year in the face of uncertainties due to Covid-19.

"We do think that the environment remains a pretty uncertain one," he said. "As we indicated, we're in this Nike 'swoosh' kind of recovery cycle as we see it with Q2 and Q3 being the bottom quarters. So we expect Q3 to still be challenging with recovery in Q4 and Q1 and into next year. (There are) a lot of remaining uncertainties as countries start to go back into second waves

"But as I've indicated in the past, we expect that, IT is comfortably better than the GDP, and that software and cloud are comfortably better than IT overall. We see that continuing to be the case, but we still think that (there are) several quarters of recovery until we're back to a more normal economic environment."