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Rating Action:

Moody's assigns Baa2 rating to VMware's senior unsecured note issuance

14 Aug 2017

New York, August 14, 2017 -- Moody's Investors Service ("Moody's") has assigned a Baa2 senior unsecured rating to VMware, Inc.'s ("VMware") proposed notes offering. The rating outlook is stable. The net proceeds from the debt issuance are expected to be used for general corporate purposes, including share repurchases and acquisitions.

RATINGS RATIONALE

The Baa2 rating reflects VMware's very strong market position in its core compute virtualization and data center management product lines, consistently strong cash balances (greater than $10 billion following the debt issuance) and substantial free cash flow approaching $2.5 billion over the next year. Moody's expects at least high single-digit annual revenue growth as VMware extends its software-defined data center (SDDC) capabilities from on premise data centers to public clouds through newly formed partnerships with Amazon Web Services and IBM, and continues to expand its product portfolio from traditional compute into networking, storage, mobile workspaces, and security. Although the market for server virtualization continues to mature as many companies have largely virtualized their data centers and shift a greater portion of their workloads into a public cloud, Moody's believes VMware will maintain its leadership position given its significant scale and resources, long-term customer relationships, and ongoing investments in emerging products. VMware also maintains very high renewal rates for maintenance contracts which generate recurring revenue, leading to a very stable and predictable revenue and cash flow base.

While Moody's considers VMware's credit metrics and business profile to be comparable to that of Adobe Systems Incorporated (rated A3), VMware's ratings are limited by the concentrated ownership structure. Pro forma for the debt issuance, Moody's expects VMware's adjusted debt to EBITDA will be about 2x times with a net cash position of more than $6 billion. As of May 5, 2017, Dell Technologies ("Dell") controlled 81.8% of VMware's outstanding common stock and 97.6% of the combined voting power of VMware's outstanding common stock. Dell can effectively control and direct VMware's board of directors and could prevent VMware from taking actions that might be in the subsidiary's best interest. While Dell has publicly stated that it plans to leave VMware's cash at the subsidiary level so that it can be used to invest in the VMware business, the risk exists that Dell could attempt to transfer VMware cash upstream in the event that additional liquidity is required at the parent level. Alternatively, VMware could increase leverage to accelerate share repurchases.

Despite these risks from Dell's ownership, the Baa2 unsecured rating is one notch higher than the Baa3 secured debt rating of Dell and reflects Moody's expectation of a lower probability of default at VMware. VMware is an unrestricted subsidiary of Dell which does not guarantee any of Dell's debt. Moody's expects that Dell, which is much more highly leveraged than VMware, will need to commit a sizable portion of its cash flows over the next several years to service its debt.

The stable outlook reflects Moody's expectation that VMware will continue to maintain and defend its strong market position in the compute virtualization industry with at least high single-digit annual revenue growth, EBITDA margins of more than 25%, and free cash flow of nearly $2.5 billion over the next year. Moody's anticipates that management will adhere to conservative financial policies with Moody's expectation of gross leverage maintained at 2x or lower with a net cash position greater than $5 billion.

Given the concentrated ownership, VMware's ratings are constrained by Dell's ratings. However, the ratings could be upgraded if VMware continues to grow, successfully diversifies its product lines, and maintains its conservative financial policies. The ratings could be downgraded if VMware were to experience meaningful revenue, profit, cash flow, or net cash declines, or if the company materially changes its disciplined financial policies.

The principal methodology used in these ratings was Software Industry published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

VMware, Inc., with projected annual revenues approaching $8 billion, is a leading provider of software-defined data center solutions, including compute virtualization.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stephen Sohn
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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