VMware ups the ante on its cloud computing software bet with appointment of new CEO

1:09PM ET 5/12/2021

VMware (VMW) had positive news to share today, but its stock is a victim of a tech-heavy sell-off induced by rising inflation fears. After former CEO Pat Gelsinger left the company in January to head up Intel (INTC), VMW filled the vacated role today by promoting COO of Products and Cloud Services Raghu Raghuram to CEO. Additionally, the company lifted its 1Q21 guidance higher, forecasting EPS of $1.76 versus its prior outlook of $1.48, and revenue of $2.994 bln versus its former $2.91 bln estimate.

Raghuram is taking the helm at a pivotal time for the company. In mid-April, Dell Technologies (DELL) confirmed its intention to spin-off its 81.8% VMW stake in a transaction that should net DELL around $9.5 bln in proceeds. The possibility of a split has simmered in the background for many years with many investors advocating for DELL to pull the trigger. A separation will simplify the corporate and cost structures for both companies, while freeing each to fully pursue their growth objectives. For VMW, that means that it will accelerate its transition away from virtualization software for on-premise servers to continue expanding its cloud-based offerings.

As an 18-year veteran of the company and as a leader of VMW's Cloud Services unit, Raghuram fits the bill in terms of advancing the cloud-centric strategy. In fact, the decision to heighten its focus on cloud computing opportunities goes back to Gelsinger, who prioritized making VMW's software compatible with major cloud vendors like Amazon (AMZN), Microsoft (MSFT), and Google (GOOG). Raghuram's mission will be to build upon those achievements by selling more software that helps enterprises run, manage, connect, and protect apps on any cloud. Fortunately, that type of software is in the sweet spot of the accelerating digitization trend.

VMW's enhanced guidance suggests that its current approach is working. While the company didn't provide details regarding the specific catalysts behind its improved Q2 outlook, commentary from VMW's earnings conference call in late February pointed towards growing momentum for its cloud software.

For instance, Interim CEO Zane Rowe commented that VMW continues to further its multi-cloud strategy and that customers are choosing VMW to help align app requirements to the cloud model of their choice (private, public, or hybrid). Additionally, he stated that large enterprise demand strengthened during the quarter, driven by improvements in the macro environment and the desire of customers to build out digital foundations to power their apps, security, and user experiences. 

Although it's not reflected in the stock action, today's developments are another promising step in the right direction in VMW's pursuit to become a higher-growth, cloud-centric enterprise software company.