VMware shares slump despite soaring sales

Investors spooked by drop in closure of larger deals

A sales spike at VMware in Q1 was not enough to satisfy investors last night as the vendor's share price slumped after it owned up to problems it faced closing enterprise licence agreements (ELAs) during the quarter.

In extended trading yesterday evening, Reuters reports that VMware's share price fell six per cent despite the vendor posting better-than-expected financial results.

For the three months to 31 March, net income jumped 14 per cent annually to $199m (£118.3m) on revenue which also rose by 14 per cent to $1.36bn over the same period, beating analysts' expectations of $1.35bn. Excluding divestitures relating to Pivotal – a big data startup part funded by VMware and EMC – the virtualisation giant's revenue was up 18 per cent on last year.

But on its earnings call, VMware admitted that the closure rate on its ELAs was down 15 percentage points compared with the previous quarter.

"As customers look to incorporate more of our expanding product base into ELAs, some of the deals took a little longer to close," said VMware's chief operating officer Carl Eschenbach on the call transcribed by Seeking Alpha.

"These factors impacted our ELA closure rate in Q1, with ELAs representing approximately 25 per cent of total bookings as compared to 40 per cent in Q4. As a result, both licence and total bookings grew less than 10 per cent year over year, excluding Pivotal and divestitures."

Eschenbach was quick to add that none of the deals which failed to close last quarter were lost to competitors.

Earlier this year, VMware splurged $1.18bn (£701m) on mobile management and security firm AirWatch as it looks to boost its end-user computing business.

VMware chief executive Pat Gelsinger said the firm had enjoyed a "strong start" since joining the company and said the channel should be able to cash in on its tech soon.

"As we go towards the second half of this year, we're going to leverage the vast channel that VMware has around the world to extend the reach of AirWatch as we bring their products and solutions on to VMware's price list that will then be available through our distributors and channels around the globe," he said.