--EMC, VMware plan to give equity to some of their cloud-based businesses
--VMware shares jump on upbeat long-term revenue forecast
--EMC sees potential 9% revenue growth through 2016
(Includes additional details throughout, starting in the first paragraph.)
By Drew FitzGerald
NEW YORK--EMC Corp. ( EMC ) and VMware Inc. ( VMW ) executives detailed plans to separate a disparate group of businesses
into a new Web-focused software company that they could eventually take public, illustrating both companies' push to
help manage more online information.
The Pivotal group--which includes VMware's Cloud Foundry application platform service, EMC's Greenplum data analytics
software and other products--will create its own equity aimed at "potentially" attracting strategic acquirers or driving
an initial public offering, EMC Chairman and Chief Executive Joseph Tucci said, though he noted such goals are far away.
"We're not thinking of anything even close to an IPO," Mr. Tucci cautioned analysts gathered for the two companies'
joint financial update. "That is in the back of our mind, but we've got to execute."
Pivotal Inc., which will become its own company April 1 and employ roughly 1,250 people, is expected to generate $300
million this year. EMC will own 69% of the company and contribute cash to the new venture, which will need about $400
million of investment through next year, executives said. VMware will own the rest of Pivotal's equity. EMC holds more
than 80% of VMware's stock.
Executives estimated that Pivotal's businesses operate in an $8 billion market that could reach $17 billion by 2016.
"Some would say that that's a very conservative view of this world," said EMC strategist Paul Maritz, who will lead
the new company. "We believe if we're successful that we can grow this into a billion-dollar business within three
VMware, meanwhile, tweaked its top-line estimate this year to reflect its plan to separate Pivotal into a new entity,
predicting $5.12 billion to $5.24 billion of revenue excluding sales from the organization's components. VMware's
downbeat view in January called for $5.23 billion to $5.35 billion from its entire business.
VMware Chief Financial Officer Jonathan Chadwick also said the company expects its subscription and services to expand
about twice as fast as revenue from licenses, driving a 15%-20% annual increase over the coming three years.
FBR Capital analyst Daniel Ives called those long-term revenue targets "healthy and much better than feared heading
into today's event." The targets imply VMware's expansion will pick up steam next year.
VMware shares closed up 8.1% at $81.37 Wednesday, leaving the stock off 14% so far this year. EMC shares added 1.8% to
close at $24.90.
The new initiative comes at an especially sensitive time for VMware, after its cautious January guidance caused some
financial analysts to question whether the software company's brisk expansion over the past few years was set to cool.
The Palo Alto, Calif., company has grown to a more than $4 billion business making software that creates virtual
computers inside a single host server, allowing users to get more power out of each machine. Yet its latest projections
called for slower than expected growth in license fees.
Wednesday, VMware Chief Executive Pat Gelsinger said he expects the company's total addressable market to surpass $50
billion by 2016, generating growth in large part from tools for a "software defined data center."
The company said it plans to offer a new "hybrid" cloud-computing service now in testing to all customers by the
middle of the year, setting its sights on a massive market for shared computing resources now dominated by Amazon.com
Inc.'s ( AMZN ) Web Services division.
VMware named Bill Fathers, the former president of computer-hosting provider Savvis Inc. (SVVS), to head its new
hybrid cloud-services unit.
Storage and security provider EMC said it expects spending on the overall information-technology market to grow 3%
through 2016, though the company expects to outpace the broader sector with 9% compound average revenue growth,
excluding contributions from acquisitions, by gaining share in its core markets. Analysts were calling for 8% top-line
expansion this year and next.
EMC in December tapped Mr. Maritz, its chief strategy officer and VMware's former chief executive, to lead the Pivotal
initiative, though management left the organization's formal place within its parent companies an open question until
The new group will include VMware's vFabric, Cloud Foundry and Cetas organizations, all of which will rely on VMware's
sales force while contributing little to VMware's top line aside from commissions.
The Pivotal group also will carry Greenplum, a software company that EMC offers to customers seeking faster ways to
analyze massive and often disorganized troves of data. Other software providers such as San Francisco-based Splunk Inc.
( SPLK ) have cashed in on soaring demand for the service with revenue growth that regularly tops 50%.
"Few public 'pure-play' Big Data companies exist today, but valuations are high for those that are public, like
Splunk," Bernstein Research analysts Toni Sacconaghi and Mark Moerdler noted ahead of Wednesday's event.
Perhaps more importantly, combining the smaller businesses offers the Pivotal group's new management a chance to
devote more attention to the software providers, which aren't part of either company's core business, the analysts said.
Write to Drew FitzGerald at email@example.com
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