VMware Earnings On-Deck, Analyst Lowers Rating as Broadcom Close Nears

With the latest VMware earnings on deck this week, and the Broadcom purchase looming, one investment firm on Monday downgraded its rating of the multicloud provider.

CNBC

Monness, Crespi, Hardt’s Brian White

Brian White, analyst at Monness, Crespi, Hardt, shifted his VMware rating to neutral. He previously had the company listed at buy.

While the pending, $61 billion purchase of VMware by Broadcom is making significant regulatory progress, White expects VMware earnings on Aug. 31 to indicate slowing growth. He expects results of $1.64 per share and around $3.4 billion in sales.

According to Seeking Alpha, though, analyst consensus assesses VMware earnings at $1.72 per share on about $3.5 billion in revenue.

If White’s predictions come to fruition during VMware earnings this week, they will mean the vendor has lost some traction.

White arrived at his calculations through modeling that shows weaker sales. For channel partners, the most interesting results might come when looking at older licensing revenue versus its new, modern counterpart.

VMware has continued to shift from its legacy products reliant on licensing to one focused on recurring subscriptions for its software as a service. As such, White forecasts a 21% drop in year-over-year licensing revenue, down to about $626 million. But he thinks VMware earnings this week will reflect a 34% jump in subscription and SaaS sales, reaching about $1.3 billion. Amid that news, though, White also expects services revenue to decrease 5% to $1.5 billion.

With the Broadcom buy expected to close on Oct. 30, White is anticipating some short-term constraints on VMware’s growth — hence his view on VMware earnings this week.

Broadcom’s Hock Tan

That’s also despite Broadcom CEO Hock Tan’s promise last week to immediately invest $2 billion into VMware (even as the company reportedly will enact a lot of non-engineer layoffs at VMware).

“Half of that investment will be focused on R&D,” Tan said last week during a surprise appearance at VMware Explore. “The other half will focus on helping to accelerate deployment of VMware solutions through VMware and partner professional services.”

As Channel Futures reported earlier today, Tan says he came away from VMware Explore 2023 “even more excited” about the Broadcom-VMware deal.

What’s Wall Street’s Take on VMware Earnings?

Even though VMware’s multicloud strategy is paying off, Wall Street has been somewhat wary of the Broadcom-VMware combination. As such, White is scaling back his advice for clients. That comes as VMware’s stock sees some ups and downs, though shares on Aug. 28 at midday had risen by $1.49.

Of course, not all investment analysts see VMware earnings as slowing. Over at Zacks, experts are calling for per-share earnings of $1.66 when VMware reports on Aug. 31. That would mean 1.22% growth. Zacks has a hold rating on VMware. The firm is upbeat on VMware’s Cloud Provider Program, End-User Computing initiative, the Carbon Black portfolio, and the recent expansions to Tanzu and Aria.

VMware earnings will coincide this week with the latest from its likely new owner, Broadcom. Broadcom is slated to report on Thursday, just like VMware.

Broadcom anticipates closing the $61 billion acquisition of VMware on Oct. 30 now that it has secured regulatory clearances from the UK’s Competition and Markets Authority, as well as the European Union. U.S. authorities have not challenged the deal, and the waiting period for them to do so has expired.

Now the biggest hurdle for the Broadcom-VMware pairing may come from China. Officials in that country have taken to turning down mergers tied to U.S. companies as Washington tries to keep China from accessing technologies here, according to reports.