Cloud computing and virtualization technology specialist VMware (NYSE:VMW) received a clear directive that accounting tricks don’t pay, contributing to volatility in VMW stock during the Tuesday early afternoon session.
On Sept. 12, the Securities and Exchange Commission (SEC) announced that it charged VMware for misleading investors. Specifically, the SEC alleged that the tech firm distorted its backlog management procedure, enabling VMware to “push revenue into future quarters by delaying product deliveries to customers, concealing the company’s slowing performance relative to its projections.”
The regulatory agency added that “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.”
Notably, 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.
According to a Reuters report, without admitting or denying the SEC’s order, VMware consented to a cease-and-desist order. It also agreed to pay an $8 million penalty.
On Monday, VMware issued the following statement:
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.
Not a Great Look for VMW Stock
Although VMware got off relatively easy for what could have been an uglier situation, the reputational damage to VMW stock still presents concerns. Moving forward, investors may question the integrity of future financial disclosures.
According to TechCrunch, “analysts who inquired about the continued trend in backlog reduction – with VMware’s investor relations staff or with VMware executives at organized IR events – were kept in the dark.” While the case is now officially closed, it may not be in the eye of public opinion. Therefore, VMW stock may attract scrutiny moving forward.
The matter couldn’t have come at a more awkward time for the cloud-computing specialist. Per TechCrunch, in late May, Broadcom (NASDAQ:AVGO) “announced that it is buying VMWare in a blockbuster $61 million cash-and-stock deal that has yet to close. Presumably, it knew about these charges and moved ahead anyway, but the company hasn’t yet responded to our request for more information.”
Also, the tech-based publication notes that the allegation and settlement news may affect Pal Gelsinger, VMware’s former CEO. Currently, Gelsinger heads tech juggernaut Intel (NASDAQ:INTC).
Adding to the intrigue, the tech-centric Nasdaq Composite Index suffered a steep loss in the early afternoon session. A key August inflation report came in hotter than expected, implying that the Federal Reserve will be aggressive in raising interest rates. It’s just one more distraction that VMW stock doesn’t need.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
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