EMC execs spent a good chunk of the company’s third-quarter earnings call trying to reassure VMware stakeholders that everything will be okay in the wake of Dell’s debt-laden $67 billion bid for EMC. Storage giant EMC, in case you forgot, owns about 80% of VMware.
First the earnings for the quarter ending September 30: EMC (EMC) logged a profit of $480 million, or 25 cents per share. That was down from $587 million, or 28 cents per share, from the year-ago period.
VMware (VMW), which announced its earnings Tuesday night, saw its share price tumble 5% in after hours trading, reflecting uneasiness about EMC’s decision to combine VMware’s cloud assets into a new cloud unit under the Virtustream brand. VMware shares have already been in a sort-of swoon since the Dell deal was unveiled a week ago. So VMware shareholders seemed very much on EMC chairman Joe Tucci’s mind on the EMC call Wednesday morning.
Tucci defended the decision to add another joint venture to the EMC federation roster of affiliated companies. The cloud business will be jointly owned by EMC and VMware, and he denied that Dell was involved in the decision to build a sort-of separate cloud business.
“I can absolutely guarantee everyone on this call that Dell had nothing to do with this transaction which was driven primarily out of VMware with us,” Tucci said, adding that it makes no sense for the combined company to have two cloud businesses.
But one thing that the new joint venture does is increase complexity and make it hard to figure out just how profitable (or not) the combined cloud business will be going forward.
On the VMware call, that company’s chief financial officer Jonathan Chadwick said:
“We estimate Virtustream will have an operating loss of approximately $200 million to $300 million in 2016. It’s important to note that net earnings or losses relating to the 50% minority interest owned by EMC will be reported below operating income on our income statement. In the initial loss-making reporting periods, this will be a benefit to net income and earnings per share. We currently expect that approximately $100 million after-tax will be reflected as a benefit in minority interest and have a positive impact on earnings per share in 2016.”
Tucci reiterated that VMware remains a key priority for EMC now and the combined Dell-EMC going forward.
“A thriving VMware is vital to the strategic success of this combination with Dell,” Tucci said. “No VMware cash flows or debt capacity will be used to finance this transaction.”
And, he fell on his sword regarding some of the negative reaction.
“I don’t think we’ve done as good a job as we need to do in explaining this combination,” he added, promising a road show and continued discussion. “Every fiber in my body believes this is good both for EMC and VMware shareholders and other stakeholders as well. ”
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