VMware moves deeper into data centres with Nicira buy

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VMware Inc. made its largest deal ever Monday, pushing deeper into the data-center business by agreeing to acquire networking company Nicira Inc. in a deal valued at $1.26 billion.

The maker of so-called virtualization software that more efficiently uses computing power also reported its full second-quarter results and provided third-quarter revenue guidance in which the midpoint fell short of analysts’s views. Shares of VMware, up 7.3% thus far in 2012, fell 3.4% to $86.21 in after-hours trading.
Nicira makes virtual networks that can be built rapidly on unused network capacity, similar to the approach VMware has taken to create virtual computers on a single computer server. Combining the companies is an attempt to quicken VMware’s goal of creating software-defined data centers to replace the hardware-dominated model used by most companies.
“Just as we have done with computer virtualization, Nicira has done for the network space,” said Steve Herrod, VMware’s chief technical officer.”It advances the ability to define and configure networks on the fly.”
VMware said it will acquire Nicira for $1.05 billion in cash and about $210 million of assumed unvested equity awards. The acquisition is expected to close in the second half of the year, VMware said.
Both companies are based in Palo Alto, Calif., and it is the third recent acquisition for VMware, which also acquired DynamicOps, a provider of cloud automation, and Wanova, which manages desktop virtualization.
Nicira’s approach to networking is leading enterprises to re-evaluate how they buy and deploy network hardware by such vendors as Cisco Systems Inc. and Juniper Networks Inc. Hardware-based router and switching technology limits companies’ ability to rapidly deploy virtual networks. Nicira helps address that by virtualizing the network, too.
The virtual networking market is expected to grow to $2 billion in annual sales by 2016, according to researchers at IDC. VMware’s vCloud networking software and vShield security are already aimed at the market. By adding Nicira to the portfolio, Mr. Herrod said, investors should “expect us to move more decisively on it.”
Existing hardware doesn’t create bottlenecks, he said. Rather, Nicira’s method of using software to create networks “is really about using the networking technology companies have more nimbly,”said Mr. Harrod.
Virtual networks contain security and intrusion detection systems just as secure as their hardware cousins, he said. And because every virtual network is a precise replica they can even be more secure because there is less chance for human error.
As for the purchase,”this wasn’t a deal that was sitting on its own,” said Constellation Research analyst Ray Wang.”There was some competition for it.”
VMware is majority-owned by storage vendor EMC Corp., which reports its earnings Tuesday. Last week, VMware confirmed that Pat Gelsinger, president and chief operating officer of EMC’s information-infrastructure products segment, will become its chief executive on Sept. 1.
Meanwhile, VMware CEO Paul Maritz will move to EMC and take a job as its chief strategist, responsible for the company’s technology strategy, with a focus on Big Data and the next generation of cloud-based applications.
For the second quarter, VMware reported a profit of $191.7 million, or 44 cents a share, down from $220.2 million, or 51 cents a share, a year earlier. Excluding stock-based compensation, tax adjustments and other items, per-share earnings rose to 68 cents, above the comparable year-ago figure of 55 cents and the 66 cents projected by analysts polled by Thomson Reuters.
International revenues climbed to a record $572 million, led by strength in the Asia-Pacific region, the company said. Results in Europe were mixed, with the U.K., France and Russia strongest of the group. Brazil was the strongest market in the Latin American region.
International investment is paying off and the company plans to “continue investing in these markets in the second half of 2012,” Chief Operating Officer Carl Eschenbach said on the earnings call with analysts.
Last week, VMware said its revenue grew a better-than-expected 22% to $1.123 billion. Both U.S. and international revenue grew 22%. International revenue made up 51% of total revenue for the period.
For the current quarter, VMware projected revenue of $1.11 billion to $1.15 billion. Analysts polled by Thomson Reuters had predicted revenue of $1.14 billion. The company affirmed its full-year revenue guidance, which it had raised last week.