Software company VMware Inc promised annual revenue growth as high as 20 percent by 2016 and, with parent company EMC Corp, announced a new venture with a $1 billion revenue target, sending shares of both companies higher.
Pivotal Inc will include VMware's Cloud Foundry application service, as well as EMC's Greenplum data analytics software and other products. EMC, the world's biggest maker of data storage equipment, owns 80 percent of VMware.
Both companies are hoping that the new Pivotal will cash in on an expected jump in demand for data analytics software as companies like telecom service providers want better tools to analyze masses of data from multiple different technology platforms.
The venture, which will be majority-owned by EMC and eventually plans to go public, is expected to generate $1 billion in revenue by 2017 and will require investments of $400 million this year and next year, according to EMC.
VMware said the creation of Pivotal, a combination of both companies' data analytics and cloud application assets, would raise VMware's 2013 operating margins.
Growth in VMware's remaining businesses will increase to a range of 15 to 20 percent in 2014 to 2016 from its expected growth rate of 11.2 percent to 13.8 percent in 2013, according to the company. It cited new technologies such as software-defined networking, the use of software to manage networks, and cloud computing for the growth acceleration.
FBR Capital Markets analyst Daniel Ives said it "appears the company is on the cusp of seeing a reacceleration of growth" and that 2014-2016 growth targets were "front and center" for investors, pushing VMware shares up as much as 9.6 percent on Wednesday.
VMware shares had fallen more than 21 percent on January 29 after investors were disappointed by its outlook for 2013. It had also announced late on January 28 that it planned to cut 7 percent of its workforce.
WORKING 'LIKE A FATHER AND SON'
At the same event on Wednesday, EMC Chief Executive Joe Tucci gave some details about the Pivotal venture.
EMC will initially own 69 percent and VMware will own the remaining 31 percent, but the eventual plan is to take Pivotal public and create its own equity so that it could attract some strategic investors.
Tucci also said that EMC will contribute money to the venture, which EMC and VMware first announced in December, when they gave no financial details.
Tucci suggested that the structure would be similar to that of VMware, a spinoff from EMC that is publicly traded but still largely owned by EMC.
FBR's Ives said this was the right structure for Pivotal, which is the "right strategy at the right time" for the pair.
"It's like a father and son (EMC and VMware) working together on an initiative," he said. "The companies have worked very closely together, which is a positive in terms of execution risk going forward."
Pivotal is expected to have about 1,250 employees from both EMC and VMware.
EMC strategy executive Paul Maritz said he has some hope that the $1 billion revenue target proves to be "conservative." He gave examples of how companies such as telecommunications service providers could use Pivotal's technology.
He said it could be used to create a link between network performance data and customer service information so that operators could immediately tell if a specific customer had been suffering from dropped calls.
Maritz said carriers will be able to use Pivotal to analyze such data on the fly, whereas existing systems "would take them days to answer that question" because network data systems and customer data systems "don't talk to each other today."
Pivotal will be made up of EMC's data analytics division, Greenplum, and its Pivotal Labs group, along with VMware's vFabric, SpringSource and Gemstone units. Included in the new venture are VMware's data analytics company, Cetas, and CloudFoundry, a cloud computing platform.
VMware shares were up 9.2 percent at $82.21 on the New York Stock Exchange on Wednesday afternoon. EMC shares were up 2.2 percent at $25.01.
(Additional reporting by Nicola Leske in New York,; editing by Gerald E. McCormick, Nick Zieminski, Jan Paschal and Matthew Lewis)