While stock market news isn't something that usually gets us excited, the sharp slide in the price of VMware shares warrant attention.

In the past 5 days, the stock has slid as many as 21 points (and that’s after the company reported better than expected earnings for Q4) and they have yet to recover. What pray God is going on at this company? It seems that investors know something that’s not being reported or that they’re just plain spooked.

(It should be noted that no part of this article should be misconstrued as investment advice, we don’t have SEC licenses and we aren’t stock market analysts.)

So Far, So Good

First a little backstory: After the close of the market on Monday, VMware released its Q4 earnings. They were better than expected. And the outlook on the future, according the company’s top boss, CEO Pat Gelsinger, isn’t bad.

Here’s what he said during the earnings call:

2012 was a strong year for VMware, with solid Q4 results despite a tough economic environment. We see a tremendous market opportunity in 2013 and beyond, as we focus on what our customers value most: VMware's role as a pioneer of virtualization technologies that radically simplify IT infrastructure from the data center to the virtual workspace."

He also announced that VMware’s poorer performing assets, which he saw as distraction from VMware’s main line of business, would be “handed” to Pivotal Initiative, a virtual EMC company that’s still in the process of being formed.


Metaphorically speaking, what Gelsinger said, is that VMware is taking a few surfboards off of the top of its race car -- leaving the car in a better position to go fast and to react to curves in the road.

Seems like a good move, right?

Gelsinger also said that the company would be cutting 900 workers but hiring as many as 1000 others, with different skill sets, by the end of the year. This again should be seen as good news (unless you’re one of the 900 laid off) because the surfboard waxers’ contributions won’t be needed once the surfboards are gone, and the budget will be available to have race car specialists to come on board.

Gelsinger’s last bit of news, and this warrants cause for a little dis-ease, is that projected revenue for Q1 of 2013 won’t meet previous analyst projections;more specifically, he expects first quarter revenue to come in between US$ 1.17 billion to US$ 1.19 billion, short of consensus estimates of US$ 1.25 billion.

OK, that is bad news, but does it warrant that the stock price fall so drastically?

Slight of Hand

What worries me more about VMware, and it has for a while, is what former VMware CEO, Paul Maritz said shortly before he left his post:

Learning Opportunities

The story of the Software Defined Data Center (SDDC) (SDDC’s are much of what VMware is all about) has been written. We are not going to be the only vendor of a SDDC, but all of us who are going to provide one, understand how this is going to end.”

Why didn’t the market react to that? Consider that the quote comes from VMware’s annual pep-rally-like user conference at which there were many analysts present.

It’s perhaps because it was Maritz who was speaking, he’s the kind of charismatic leader who sounds as if he could (and maybe even does) pull rabbits out of magical hats. (Maritz will now be heading up EMC’s Pivotal Initiative).

Gelsinger is more of a tactical guy whose approach is: cut the fat, focus on your competencies, and you’ll surely win that way.

Maybe VMware-watchers aren’tused to that.

But that’s a difficult strategy to swallow hook, line and sinker when VMware has Microsoft’s Hyper-V technology and Red Hat’s KVM chomping at its heels. Their pitch to customers is “we can get the same results as VMware for less.” That’s not an easy argument to sell against (or to retain current clients with).

So Gelsinger’s challenge is to offer better technology that is cheaper to run (versus sells for less). He has a solid track record at that.

Still, for the customer, it’s like being sold on a Prius when you’re used to being sold a Tesla.

It’s a tough adjustment for everyone in the mix.

Image courtesy of Luiz Rocha (Shutterstock)