At a time when vendor order backlogs are at an all-time high and scrutiny of them is as well, VMware has agreed to pay an $8 million fine for disingenuous backlog reporting practices in 2019 and 2020.
The Securities and Exchange Commission had charged VMware for misleading investors about its order backlog management practices, specifically stating that VMware had moved revenue into future quarters by delaying product deliveries to customers, concealing the company’s slowing performance relative to its projections, the SEC stated.
“The SEC’s order finds that, beginning in fiscal year 2019, VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so that it could recognize revenue from the corresponding license sales in the following quarter.
“According to the SEC’s order, VMware shifted tens of millions of dollars in revenue into future quarters, building a buffer in those periods and obscuring the company’s financial performance as its business slowed relative to projections in fiscal year 2020,” the SEC stated.
Although VMware publicly disclosed that its backlog was “managed based upon multiple considerations,” it did not reveal to investors that it used the backlog to manage the timing of the company’s revenue recognition, the SEC stated.
The SEC fiiling stated: “VMware’s statements and omissions regarding its quarterly revenue and revenue growth, without disclosing the impact that the company’s discretionary backlog practices and revenue management had on reported revenue, materially concealed a substantial FY20 slowing in the company’s recognized revenue growth versus expectations.”
VMware committed to ‘highest level of integrity’
For its part, VMware stated that under the terms of the settlement, it agrees to pay a civil monetary penalty of $8 million without admitting or denying the SEC’s findings about the company’s disclosures.
“The SEC’s findings do not include any findings that the Company failed to comply with generally accepted accounting principles,” VMware stated. “The SEC Staff has confirmed that it does not intend to recommend enforcement action against any current or former VMware officers or other member of management in connection with the investigation, and this settlement concludes the matter.”
The vendor went on to state: “VMware believes this settlement is the right course of action for the Company and continues to be committed to operating at the highest level of integrity, including with respect to its public filings and communications with investors.”
The fine is thought by many to be more of a slap on the wrist as VMware reported revenue for the second quarter of $3.34 billion, an increase of 6% from the second quarter of fiscal 2022.
Supply chain fueling backlogs
Product backlog orders are a hot topic as most vendors are reporting record-level of such orders.
Most recently Cisco execs said “our ending product backlog was a record for the year,” and its software backlog is still over $2 billion. In May, Cisco said its backlog was over $1.5 billion, so it had increased since then. Others such as Juniper Networks backlog of orders has increased more than $250 million on consecutive quarters leading to a grand total of about $2 billion.
Effects on the Broadcom deal?
It’s unclear the finding will have any impact on the impending deal, announced in May, for Broadcom to acquire VMware for about $61 billion.
At the recent VMware Explore conference, CEO Raghu Raghuram said the deal was on track.
“They’re going through all of the regulatory approvals, on the one hand. On the other hand, we are working with the Broadcom team and helping them understand the depth and breadth of our business and product portfolio,” Raghuram said. “And in the meantime, as we are required to, we are operating as a completely independent, standalone company with our own execution track and strategy.”
Broadcom expects the acquisition to close in its fiscal 2023 year, which begins in November and ends in October of next year.
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