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VMware (VMW) Earnings & Revenues Beat in Q3; Guides Well

Zacks Equity Research
Updated

VMware, Inc.VMW reported better-than-expected third-quarter 2016 results. Adjusted earnings of 84 cents surpassed the Zacks Consensus Estimate of 80 cents. Revenues of $1.78 billion also topped the consensus mark of $1.76 billion. On a year-over-year basis, revenues grew 6% driven by strong performance of offerings like NSX, AirWatch, virtual SAN, VxRail and vCloud Air network.

Quarter Details

Revenues from services rose 9.7% year over year to $1,087 million driven by strength in both its sub-segments. The company’s hybrid cloud and SaaS offerings grew in the double-digits in the quarter contributing nearly 8% of total revenue in the third quarter.

License revenues increased 1% year over year to $691 million.

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The company reported non-GAAP operating income of $592 million quarter, an increase of 12% year over year. Non-GAAP operating margin was 33.3%.

Other Financial Details

VMware exited the quarter with cash and cash equivalents (including short-term investments) of $8.3 billion compared with $7.5 billion as on Dec 31, 2015. For the quarter, the company reported operating cash flow of $620 million. Free cash flow was $590 million.

The company repurchased 14 million shares in the third quarter for approximately $1 billion.

Guidance

The company provided guidance for the fourth quarter and increased its guidance for 2016.

For fourth-quarter 2016, the company expects the mid-point of its revenue range to be $1.990 billion and that of License revenues to be $850 million. Non-GAAP earnings per share are expected to be $1.39 at the midpoint. Non-GAAP operating margin is expected to be 36%.

For the full year, the midpoint of its revenue range is expected to be $7.5 billion (earlier expectation was $7 billion) while that of License revenues is expected to be $2.757 billion compared with $2.734 billion projected earlier. Non-GAAP earnings per share are expected to be $4.36 at the midpoint, up from $4.30 guided earlier. Non-GAAP operating margin is expected to be 32.1% compared with 32% expected earlier.

Transition Details

This is the first quarterly result after VMware’s parent-company EMC Corporation was acquired by Dell Inc. for $67 billion in September.

The company declared that it will be undergoing a transition between Jan 1, 2017 to Feb 3, 2017. This apart, from Feb 4 onward its calendar will be aligned with Dell fiscal 2018 calendar wherein its first quarter will be from Feb 4 to May 5, 2017. The company will report the results of the transition period in the first 10Q of fiscal 2018.

The new company called Dell Technologies holds approximately 80% of VMware shares, which were earlier held by its parent EMC. The remaining 20% of the shares are held by shareholders and continue to trade. Dell created a tracking stock from 53% of the value of total VMware shares. Following the acquisition, Michael S. Dell took over the role of Chairman of VMware’s board of directors, replacing Joseph M. Tucci.

Our Take

VMware remains one of the leading companies in the virtualization and cloud computing market.  The company’s innovative product pipeline, continuous contract wins and robust international sales are expected to drive overall results. Additionally, the company continues to make strategic acquisitions and partnerships, which is a positive.

The company recently unveiled its cross cloud architecture and VMware cloud foundation, which further boosts its product portfolio. In addition, VMware has formed strategic partnerships with the likes of Amazon.com’s AMZN Amazon Web Services (AWS) and International Business Machines Corporation IBM, which are expected to be long-term drivers for its hybrid cloud business.

Despite these, the company has been seeing weakness in its core business for a while. In order to overcome it, VMware has increased its focus on developing cloud services like vCloud Air and vCloud Air Network. Also, increasing competition from players like Microsoft MSFT also remains a concern.

Currently, VMware has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

VMWARE INC-A Price and EPS Surprise

VMWARE INC-A Price and EPS Surprise | VMWARE INC-A Quote

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