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Pat Gelsinger and Michael Dell VMware
Pat Gelsinger, CEO, VMware (left), speaking with Michael Dell, CEO of Dell Technologies, on stage at VMworld 2016.

Dell Merger Speculation Swirling, VMware Reports 14% Sales Growth

Data center software company's future being evaluated second time in less than three years

Nico Grant and Dina Bass (Bloomberg) -- VMware Inc., the software company whose future is being evaluated for the second time in less than three years by parent Dell Technologies Inc., said sales continue to grow despite the uncertainty and competitive pressures. 

Sales in the fourth quarter rose 14 percent to $2.31 billion, the Palo Alto, California-based company said in a statement Thursday. Profit, excluding some items, was $1.68 a share. Analysts had projected $1.63 a share on sales of $2.26 billion, according to data compiled by Bloomberg.

VMware, the leading maker of virtualization software that combines multiple workloads on a single server computer, is trying to adjust as customers move to the cloud and other newer technologies. It has struck a deal with leading cloud vendor Inc. to combine the two companies’ offerings and is relying on growth in its networking software business. In the meantime, parent Dell is looking for ways to return to the public markets and is considering a combination with VMware as part of those options.

The stock has been buffeted by reaction to various formulations of a deal with its primary shareholder, Dell. Some of the options are viewed as unfavorable to VMware’s investors, who own a small minority of voting rights. The shares fell as much as 7.4 percent Thursday, after CNBC reported Dell was considering an equity exchange with VMware to create one publicly traded company. 

VMware didn’t comment on Dell’s deal deliberations, but executives said they’ve seen benefits from the existing close partnership between the two companies.

“We are experiencing broad momentum from our Dell partnership,” Chief Executive Officer Patrick Gelsinger said on a conference call with analysts following the results.

Gelsinger said the partnership will yield $700 million in cost savings and other benefits this fiscal year. Dell sales teams pitch their clients on VMware’s products and services. VMware has also partnered with Dell subsidiary Pivotal. 

VMware’s software works with servers and storage hardware made by Dell EMC, helping corporate customers run a so-called hybrid cloud with some data on their premises and some on public clouds hosted by Amazon Web Services, Google Cloud Platform and Microsoft Corp.’s Azure. VMware has prioritized sales of its hybrid-cloud software.

VMware shares slid 1.3 percent in extended trading, after closing at $123.66 in New York.

Revenue from licensing software totaled $1.1 billion in the quarter, while services, including software maintenance and some cloud offerings, was $1.2 billion, VMware reported.

The company’s unearned revenue, a measure of future business, totaled $6.25 billion as of Feb. 2. Software maintenance remained the top source of unearned revenue, accounting for $5.14 billion of total, the company said.

VMware estimated it has to pay $970 million as part of the U.S. tax overhaul approved in December, including $800 million in tax on international earnings.

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