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VMware Divests to Realign Biz

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Virtualization specialist and cloud infrastructure solutions provider VMware Inc (VMW - Free Report) has divested its corporate e-mail and collaboration software division, Zimbra, to Telligent for an undisclosed amount.

Zimbra, acquired by VMware from Yahoo! in 2010, currently manages more than 85 million mailboxes. The current divestiture is a part of the VMware’s realignment strategy, which included scaling back of investments in non-core businesses to increase investments in core operations.

As part of the non-core assets divestiture policy, VMware sold SlideRocket to ClearSide in March this year. Aprt from non-core divestments, the strategy also includes workforce reduction. The realignment activity aims at integrating the cloud application platform into pivotal organization.

These business realignments allowed VMware to focus more on the three key segments - the software-defined datacenter, hybrid cloud and end-user computing. The company expects maximum growth from these three segments over the long term.

Although these divestitures are expected to negatively affect the near-term revenues, they are likely to act as positive catalysts going forward.

At the end of the first quarter, management projected deferred revenues to decline by $100 million for full year of 2013. Of this, $70 million will be on account of the pivotal transaction and the rest due to the divestitures under VMware’s realignment plan.

VMware toned down its revenue guidance range from $5.23 billion – $5.35 billion to $5.12 billion – $5.24 billion for fiscal 2013. The company also lowered its growth expectations for its licensing revenues from 8% – 11% to 6% – 9%, primarily due to the expected reduction in revenues from the second quarter.

We believe that VMware’s strong and innovative product pipeline along with its strategic investments will enable the company to drive its top line over the long term.

However, we believe that sluggish North American and European markets coupled with modest IT spending environment and stiff competition from Microsoft Corp. (MSFT - Free Report) and Citrix Systems Inc. (CTXS - Free Report) are the headwinds going forward.

Saturation of the server virtualization market is another point of concern. Moreover, VMware’s continued investments in the emerging markets, product innovations and acquisitions are expected to weigh on the margins in the short term.

Currently, VMware carries a Zacks Rank #4 (Sell).

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