SEC charges tech company with revenue manipulation

The Securities and Exchange Commission said that the California tech company VMware manipulated revenue reporting through a license key-based accounting scheme.

VMware, which specializes in cloud and virtualization software, is said by the SEC to have, starting 2019, delayed the delivery of license keys on some sales orders until just after the quarter-end, which allowed it to recognize revenue from those sales in the following quarter. The company is said to have done this enough times that tens of millions of dollars worth of revenue were shifted into future quarters. This had the effect of providing a buffer in these periods that obscured the company's actual performance for a given fiscal quarter. While VMware did disclose that it had a backlog, which is managed based on what it said was multiple considerations, smoothing out revenue was not among those mentioned.

The SEC complaint said that during the course of 2020, VMware's business continually slowed partially due to macroeconomic factors but also due to the company accelerating its move to subscription-based license sales, which had the effect of slowing license revenue, as on-premises license sales could be booked upfront versus cloud-based offerings, which require ratable revenue recognition over the term of the contract. However, the company's revenue booking practices obscured this fact, and allowed the company to meet analyst estimates it would ordinarily have missed.

While people who asked about this were told the delays represented only a small part of quarterly revenue, the SEC said that the maneuver actually increased reported license revenue by a quite-material 11% in the first quarter of the 2020 fiscal year. As time went on, though, the tactic became less effective because, due to slowing business, there was less revenue to project into the future quarter. The SEC said that, by year end, "VMware's business had slowed to such an extent versus expectations that it was essentially no longer generating any perceived excess sales to 'hold' [to next quarter]." At the same time, the company's stock price fell by 37%.

The SEC noted that the company continued to sell stock during this time, despite the fact that it would not have met analyst expectations quarter by quarter if not for moving revenue into the future.

"As the SEC's order finds, by making misleading statements about order management practices, VMware deprived investors of important information about its financial performance," said Mark Cave, associate director in the Division of Enforcement 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. Without admitting or denying the findings in the SEC's order, VMware consented to a cease-and-desist order and to pay an $8 million penalty.