On Feb. 27, 2020, VMware (VMW) reported $10 billion of revenue for the first time in its history, reflecting double-digit top-line growth.
"Our results demonstrate the power of our broad-based portfolio and a strategy that continues to resonate with our customers," Pat Gelsinger, then the chief executive of the former cloud-computing division of Dell Technologies (DELL), said in a statement.
But the Securities and Exchange Commission charged that during its 2019 and 2020 fiscal years, VMware was misleading investors about its order-backlog-management practices.
Settlement and Penalty
Now, VMware has consented to a cease-and-desist order and will pay an $8 million penalty. The company didn't admit or deny the findings in the SEC’s order.
Beginning with the adoption of a new accounting standard for its fiscal 2019, the SEC said, VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so it could recognize revenue from the corresponding license sales in the following quarter.
VMware shifted tens of millions of dollars in revenue into future quarters, the SEC said, building a buffer in those periods and obscuring the company’s financial performance as its business slowed relative to projections in fiscal 2020.
While VMware publicly disclosed that its backlog was “managed based upon multiple considerations,” the company did not tell investors that it used the backlog to manage the timing of the company’s revenue recognition.
Obscuring Financial Results
The SEC order said that VMware’s backlog practices "had the effect of obscuring the company’s financial results and avoiding revenue shortfalls versus company financial guidance and analysts’ estimates in at least three quarters during [fiscal 2020], as well as" all of fiscal 2020.
Without its fiscal 2020 quarter-end backlog reductions, the SEC said, VMware would have missed guidance and analyst consensus estimates for total revenue in the fourth quarter and full year, and guidance for license revenue, the SEC said, "by substantially larger percentages than disclosed.'
"As the SEC’s order finds, by making misleading statements about order management practices, VMware deprived investors of important information about its financial performance," Mark Cave, associate director in the SEC's Division of Enforcement, said in a statement. "Such conduct is incompatible with an issuer’s disclosure obligations under the federal securities laws."
The SEC’s order finds that VMware violated antifraud provisions of the Securities Act of 1933 as well as certain reporting provisions of the federal securities laws.
VMware said in a statement that the SEC order did not include any findings that the company failed to comply with generally accepted accounting principles.
"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 company statement said.
VMware said that it believes the 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."
In May Broadcom (AVGO) agreed buy VMware in a cash-and-stock deal that valued the company at around $61 billion.
VMware had completed its spinoff from Dell in November.
