Shares of VMware (VMW) are lower on Friday morning after the company reported earnings for its second fiscal quarter and provided guidance for fiscal 2020. VMware also announced the acquisition of software companies Pivotal Software (PVTL) and Carbon Black (CBLK) in separate deals. Dell Technologies (DELL) is a controlling shareholder in both Pivotal and VMWare. Following the report and acquisition announcements, an analyst at Barclays told VMware investors that they will "continue to need patience" in the near-term, while a Mizuho analyst said he does not find the Pivotal deal "compelling."
Q2 EARNINGS BEAT ESTIMATES: On Thursday after the market close, VMware reported second quarter adjusted earnings per share of $1.60, beating analysts' consensus estimate of $1.55. Revenue of $2.44B also slightly exceeded the $2.43B consensus. License revenue for the quarter increased 12% year-over-year to $1.01B. "We are pleased with our strong financial performance in Q2, which reflected broad-based strength in all three geographies," Chief Financial Officer Zane Rowe said in a statement.
Looking to the third quarter, VMware, on its earnings conference call, forecast adjusted EPS of $1.42 on revenue of $2.44B. This compares to analysts' estimates of $1.57 and $2.45B, respectively. For fiscal 2020, VMware raised its adjusted EPS view to $6.54 from $6.49, against the $6.52 consensus.
CARBON BLACK, PIVOTAL SOFTWARE ACQUISITIONS: Separately, VMware said Thursday afternoon that it is acquiring Carbon Black, a cybersecurity company that went public in 2018. VMware is also moving ahead on its recently disclosed plan to acquire outstanding class A shares of Pivotal. Both Pivotal and VMware are majority-owned subsidiaries of Dell. VMware will acquire Carbon Black for $26 per share, representing an enterprise value of $2.1B. It plans to acquire Pivotal Software for a blended price per share of $11.71, comprised of $15 per share in cash to Class A stockholders, and the exchange of shares of VMware's Class B common stock for shares of Pivotal Class B common stock held by Dell Technologies, at an exchange ratio of 0.0550 shares of VMware Class B stock for each share of Pivotal Class B stock. The Pivotal transaction has an enterprise value of $2.7B, VMware stated.
On the company's earnings conference call, VMware management said they are "thrilled" with the acquisitions. The company said the Pivotal acquisition makes the company the best infrastructure and developer company and that Carbon Black has created an "innovative" cloud-based security platform.
WHAT'S NOTABLE: Carbon Black hired bankers to help it explore a sale as IBM (IBM) and Cisco (CSCO) evaluated the company, according to media reports this month. In its most recent quarter, Carbon Black reported a loss per share for Q2 of (20c) on revenue of $60.86M, compared to analysts' estimates of (17c) and $59.67M, respectively. Carbon Black competes in a crowded field with peers Crowdstrike (CRWD), Cylance, Fortinet (FTNT) and Symantec (SYMC). Cylance was acquired by Blackberry (BB) in 2018.
Pivotal Software was created from assets spun out of VMware and Dell, VMware’s controlling owner, in 2013. VMware said last week it was proceeding with an agreement to buy all outstanding Class A shares of Pivotal. As a result of the deal, Dell will now own 81.09% of VMware.
INVESTORS WILL NEED 'PATIENCE': Barclays analyst Raimo Lenschow said he "fears VMware investors will continue to need patience in the near-term" despite the company's "healthy" Q2 results as it also confirmed the previously-discussed Pivotal transaction and took a major step into the security market with a deal to buy Carbon Black. The move "seems to make sense," but investors will need time to understand the company's approach and vision, said Lenschow, who likes the long-term story at VMware but lowered his price target on the shares to $178 from $190 as he assumes a lower multiple.
Analysts at Oppenheimer, Jefferies, Raymond James, Credit Suisse and RBC Capital also lowered their respective price targets. Raymond James analyst Michael Turits told investors that the acquisitions of Pivotal Software and Carbon Black may not be "transformative" but are "logically incremental" and made with "reasonable valuations." Jefferies analyst John DiFucci said that the company's Pivotal Software acquisition "makes sense" and comes at an "attractive" value, while the deal for Carbon Black comes with some "execution risk" because of the high level of competition in the corporate endpoint security sector. Oppenheimer's Ittai Kidron said he has "mixed feelings" and is "less constructive" on Pivotal's deal merits, but understands VMware's efforts to complement its infrastructure-oriented portfolio with modern application development and endpoint security assets.
Meanwhile, Mizuho analyst Gregg Moskowitz also lowered his price target for VMware to $145 from $160, telling investors that he does not find the Pivotal deal "compelling." The analyst maintained a Neutral rating, adding that it is "difficult" to see where the value is in the deals.
PRICE ACTION: In morning trading, shares of VMware are down nearly 8% to $136.80. Shares of Carbon Black and Pivotal, meanwhile, are up 6.25% and 8.5%, respectively.
Acquired by AVGO
-10.97 (-7.40%)
Pivotal Software
+1.18 (+8.62%)
Carbon Black
+1.49 (+6.08%)
Dell Technologies
-1.94 (-3.96%)
IBM
-0.76 (-0.57%)
Cisco
-0.41 (-0.85%)
Crowdstrike
-4.04 (-4.34%)
Fortinet
+0.42 (+0.51%)
SYMC
+
BlackBerry
+0.11 (+1.56%)