Acquisition Strategies At EMC And VMware

Global spending on IT is slowly but steadily coming back, an increase that is evident from the results of the various tech companies that we have seen in the past two weeks. Microsoft did come out with a strong set of numbers driven by the Windows 7 uptake. Google, as always, did well. Forrester Research expects IT spending in the United States to rise by 6.6% to $568 billion in 2010, with smart computing and cloud computing expected to lead the way.

With tech spending coming back and talk of cloud computing gaining momentum, the virtualization space is set to see a lot of action this year, and the involvement of the who’s who of the tech world is only going to make it more interesting. Some major players in this industry are Microsoft, VMware, Cisco, Intel, Oracle, Amazon, and IBM. Such is the opportunity that major technology companies are entering into partnerships to drive their technologies and products. Cisco, EMC, and VMware have partnered to take advantage of the situation, and other vendors are also forming their own alliances.

VMware and EMC, two key players in virtualization, data center, and information infrastructure, came out with solid Q4 2009 results last week. Let’s take a detailed look at their Q409 performances.

VMware, Inc. (NYSE:VMW), which is an 80% subsidiary of EMC and operates in the virtualization space, declared its fourth quarter 2009 results on January 25. Revenues in Q409 were $608 million, up 18% Y-o-Y and 24% sequentially. GAAP operating income in Q409 was $71 million, down 30%, Y-o-Y. GAAP net income in Q409 was $56 million, or $0.14 per share, compared to $111 million, or $0.29 per share in Q408. Free cash flows for the quarter were $259 million, an increase of 45%, Y-o-Y.

In Q409, U.S. revenues increased 15% to $315 million and grew 28% sequentially. International revenues were $293 million, up 22%, Y-o-Y, and up 20% sequentially. International revenue growth was driven primarily by greater demand in China, Japan, Brazil, and throughout Europe. The company is finally seeing returns on its investments in geographic expansion, with EMEA and Asia-Pacific recording double-digit growth sequentially and Y-o-Y.

In the second half of 2010, VMware added approximately 20,000 customers and 3,000 partners. Services revenues, which include software maintenance and professional services, were $304 million in Q409, up 52% Y-o-Y. Renewal bookings grew approximately 67% in Q409 compared to Q408.

The good results were driven by strong demand for vSphere, a platform for data center virtualization, indicating that virtualization is an important technology for customers who need to save money yet invest in a strategy that is central to the emerging cloud computing model. During the quarter the company focused on upgrading customers to vSphere Enterprise Plus, which resulted in more than $100 million in total upgrade bookings, signaling the acceptance of the product.

In terms of strategy VMware is doing the obvious: expanding its product portfolio by investing in R&D and acquiring companies both to expand service portfolio and diversify. In August, VMware bought SpringSource for $420 million. SpringSource is a provider of Web application development and management services and an addition to VMWare’s infrastructure solution portfolio.

VMware recently snapped up Zimbra, a leading vendor of email and collaboration software from Yahoo!. Zimbra has over 55 million mailboxes and achieved 2009 mailbox growth of 86% overall and 165% among small and medium business customers. With this acquisition, VMware enters the email and calendar services business. Based on these two acquisitions, I expect that VMware will expand both in infrastructure and applications surrounding the cloud.

VMware expects Q110 revenues to be in the range of $580 million to $600 million, an increase of 23% to 28% from Q109. The stock is currently trading at $45.67, down slightly from its 52-week of $48.95 on January 26.

EMC Corporation (NYSE:EMC) reported fourth quarter 2009 results on January 26. Consolidated revenue for Q409 reached a record $4.1 billion, an increase of 17% sequentially and 2% Y-o-Y, and $100 million more than the outlook provided by EMC for Q409. GAAP net income for the period was $426.5 million, an increase of 43% sequentially and 58% Y-o-Y. GAAP EPS was $0.20, up 43% sequentially and 54% Y-o-Y.

EMC’s strong numbers are understandable. Throughout the recession, the company has been investing aggressively in its core technology. Even in a recessionary market EMC invested 12% of its annual revenue in R&D. EMC also focused on acquisitions to strengthen its market position and product offering, particularly in the area of cloud computing. In 2009 alone, the company acquired SourceLabs, which provides support for Linux and open source technology; FastScale Technology, a software management platform for next-generation data centers in the cloud; Data Domain, which has archiving and data deduplication storage systems; Configuresoft, which deals in enterprise server configuration management; and Varonis Systems, which has solutions for data governance and classification.

In January of this year, the company announced the acquisition of Archer Technologies, a privately-held, fast-growing provider of governance, risk, and compliance (GRC) software. Archer has over six million licensed users and counts 25 of the Fortune 100 companies as its clients. It delivers automated, integrated, and sustainable GRC solutions to manage the life cycle of corporate policies and objectives, analyzing and managing business risks, and demonstrating compliance.

The combination of Archer with EMC’s RSA Security Division should significantly extend EMC’s solutions portfolio for visualizing and managing risk, enabling customers to automate GRC visibility and policy enforcement across both physical and virtualized IT environments.

EMC recently beat NetApp and others for a large deal that included 1.4 petabytes of unified storage at a major New York-based stock exchange. EMC has been steadily taking market share in the mid-tier storage space from its competitors. In Q309, the company was number one in the market, with a 46% share according to IDC, and given the double-digit Y-o-Y growth in Q409, it is clear that the company gained market share in that quarter as well.

EMC expects 2010 consolidated revenues of approximately $16 billion, up 14% from 2009. The company also expects significant leverage, with non-GAAP operating margins up 20% and non-GAAP EPS of approximately $1.12, up over 24% from 2009. The stock is currently trading at $16.95. Its 52-week high of $18.44 was reached on October 15.

EMC is definitely on a roll, and with tech spending expected to recover further and virtualization gaining momentum, the company could establish its leadership position on the strength of its huge investments in cloud computing and core technology. Both EMC and VMware are a definite hold for the time being, as 2010 could be the year of virtualization.