Bach Seat

Updated 09/16/2020 – Layoffs are coming to Dell Technologies. Bloomberg reports that during it’s last quarterly all-staff meeting, Dell workers were told that company-wide workforce reductions were coming. A Dell spokesperson announced,  “… we’re addressing our cost structure to make sure we’re as competitive as we should be now and for future opportunities … we’re doing what’s best for the long-term health of our company and our team.”

Dell has already taken a number of people cost-cutting measures. It has suspended 401(k) matching, bonuses, and promotions for the fiscal year. The firm had previously announced that 60% of its workforce will WFH or be in the office one or two days a week. Dell will provide a one-time stipend of $400 for home-office equipment.

However, over at VMware, which is 81% owned by Dell, there is a different pain. VMware has told its employees they can move away from Silicon Valley and work remotely on a permanent basis. However, VMware may cut their pay should they chose to move to a less expensive location. Employees who move could face salary cuts of 8% -18% Bloomberg reported.  A VMware spokesperson emailed SDXcentral,

…VMware is building a dynamic, global workforce of the future where our people have choice and flexibility to work from any location … VMware is dedicated to equitable pay for its workforce, not by only race and gender, but also work location or geography.

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The rumor mill is grinding on Dell and VMware again. Back in June 2020, the WSJ reported that Round Rock, TX-based Dell Technologies (DELL) was exploring the idea of spinning off its $50 Billion – 81% ownership stake in VMware (VMW). But the dust settled on that speculation until recently

During the 08/27/2020 Q2 earnings call, VMware CEO Pat Gelsinger said his company was in discussions with parent-owner Dell about a possible spin-off. According to a Seeking Alpha transcript, CEO Gelsinger said,

I want to acknowledge the recent Dell Technologies 13D filing about their considerations of a potential VMware spin-off … our Board has formed a special committee … and we are in discussions with Dell.

Potential spin-off

CEO Gelsinger sought to assure current VMware customers. “We have over a year to go as any potential spin-off would not occur prior to September 2021.” The potential spin-off would be designed to “unlock the full value of Dell’s hardware business and VMware’s software business.” As of 09/01/2020, VMware’s market cap ($59.2B) overshadows Dell’s ($49.17B) market cap.

In June 2020 statement Dell said:

Dell Technologies believes a spin-off could benefit both Dell Technologies and VMware shareholders, team members, customers and partners by simplifying capital structures and creating additional long-term enterprise value. …  Any potential spin-off would …  be intended to qualify as tax-free for U.S. federal income tax purposes.

VMware Solid second-quarter results

Fierce Telecom reports that VMware posted solid second-quarter results in the face of headwinds from the COVID-19 pandemic. On-premise revenues were down to the pandemic. However, VMware’s subscription and software-as-a-service (SaaS) revenue was up 44% from a year ago. SaaS revenue was $631 million and accounted for 22% of its total revenue in Q2.

VMware reported second-quarter earnings of $447 million, or $1.06 per share, on revenue of $2.88 billion. The results were an increase of 9% year over year from $2.63 billion. VMware CEO Gelsinger commented, “I do think, as we’ve indicated, that COVID has been a bit of a headwind for on-premise, growth … particularly in the Americas.”

Looking forward, Mr. Gelsinger foresees uncertainties into 2021 due to COVID-19.

We do think that the environment remains a pretty uncertain. … we expect Q3 to still be challenging with recovery in Q4 and Q1 and into next year … we still think that (there are) several quarters of recovery until we’re back to a more normal economic environment.

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The deal makes sense for the big-wigs. Big-wigs that will profit from the venture include Dell CEO Michael Dell and his venture capital backers. PE firm Silver Lake owns about 100 million shares of Dell, worth over $5 billion. CRN suggests that the deal could shift Dell’s $48 billion in long-term debt elsewhere, potentially to VMware.

What are the risks to VMware’s enterprise customers? CEO Dell claims he expects to formalize agreements between the step-children. The agreements would allow “ongoing strategic benefits and continued support for customers of both companies following any spin-off.” 

The firms have tightly integrated Dell hardware with VMware software. In the face of a COVID-19 recession well into 2021 enterprise customers are going to be pretty risk-averse. Customers are going to have to take whatever price increases VMware imposes to cover the new debt.

There are lots of people available with strong VMware skill-sets. Moving a firm’s infrastructure off VMware to a private or hybrid cloud environment as a managed service would require different IT operating models and skill sets that would probably cost a lot to set up and support. 

Stay safe out there!

Related article

• More than 70% of economists think a US recession will strike by the end of 2021 (Business Insider)

Ralph Bach has been in IT long enough to know better and has blogged from his Bach Seat about IT, careers, and anything else that catches his attention since 2005. You can follow him on LinkedIn, Facebook, and Twitter. Email the Bach Seat here.