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A Quick Catch-Up on VMWare
Saturday, August 31, 2019

Once upon a time — two years ago, to be precise — Calcbench spent a lot of time writing about the then-new accounting standard for revenue recognition.

In particular, we warned that software firms with subscription-based sales models might see more volatility in their quarterly results, because the new standard would require them to recognize more revenue from a long-term contract immediately. So the revenue for any specific quarter might increase (yay!) but fluctuations from quarter to quarter would be more pronounced (boo!).

The firms most at risk for this phenomenon would be those with large amounts of deferred revenue relative to current liabilities. Back in August 2017 we wrote a white paper on the subject, and even identified 11 software firms where deferred revenue exceeded current liabilities by 100 percent or more. They would be the firms most prone to what we’re talking about.

OK two years later, that new revenue recognition standard is now in cemented place. So what happened?

We decided to take a fresh look at VMWare ($VMW) to get a sense of things.

In 2016 VMWare had a deferred revenue-to-current liabilities ratio of 123.5 percent. That was far above the industry average of 47.7 percent, and placed VMWare second on our list of 11 firms. (Web.com was first, but it went private in 2018.)

Figure 1, below, shows VMWare’s quarterly revenue from 2015 through Q2-2019. The new accounting standard went into effect at the start of 2018, when revenue landed pretty much at $2 billion on the nose.



That revenue flow does look more jagged after Q1 2018 than prior to it. Sure enough, in the disclosures VMWare made for its 10-K filed on March 29, 2018, the company said: “Under Topic 606, VMware would generally expect that substantially all license revenue related to the sale of perpetual licenses will be recognized upon delivery.”

We don’t know how much those perpetual licenses account for all licensing revenue; VMWare doesn’t report that separately. And whatever those effects of the standard might be, the market has digested them. VMWare’s share price rose from $96 two years ago to a high of $200 in May, although it’s dropped to around $132 lately.

Still, let it never be said that Calcbench forgets its roots. The new lease accounting standard may be the sexy thing now, but we try to revisit old issues (like revenue recognition) from time to time.)


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