Rising Service Revenues Benefit VMware
VMware (NYSE: VMW), majority owned by EMC (NYSE:EMC), sells desktop and server virtualization software and cloud-based software to corporate customers. VMware competes with Microsoft (NASDAQ:MSFT) and Citrix (NASDAQ:CTXS) in the virtualization market, which it leads with around 46% share globally.
VMware posted strong results for the second quarter of 2010, driven to a great extent by rising maintenance and service revenues. We expect that VMware will continue its strong performance for the remainder of 2010. Accordingly, we have upgraded the Trefis price estimate for VMware’s stock from around $63 to $75. Following are the reasons for our upgrade.
Service revenues rise
VMware, like many software companies, generates revenue primarily by selling new software licenses to its customers. When the license period expires, customers can sign up for maintenance and service contracts at a lower fee.
VMWare recently released its Q2 2010 earnings report. For the first six months of 2010, the company’s consolidated revenues grew by 41% to $1.3 billion. License revenues were $324 million for the quarter, a 42% increase compared to the same period a year ago. Services revenues, which include software maintenance and professional services, were $350 million during the quarter, an increase of 54% compared to Q2 of 2009.
VMware’s maintenance and service revenues as a percentage of total licensing revenues increased from around 91% in December 2009 to 106% in June 2010. We expect this ratio to stay at around 105% for the remainder of 2010. You can modify the forecast below to see how changes in VMware’s maintenance & service revenues impact the company’s stock price.
Guidance upgrade for 2010
VMware has raised its 2010 annual revenue guidance to a range between $2.725 and $2.8 billion, an increase of 35% to 38% from 2009. We have raised our service revenue forecast in line with this guidance.
Margins widen
VMware’s gross margins for the first six months of 2010 stood at 82.7%, higher than our previous estimate of 80% for all of 2010. Accordingly, we are changing our gross margin forecast to 82% for the full year. You can modify the forecast below to see how gross margin fluctuations impact VMware’s stock price.
You can see our complete Trefis estimate of $75.46 for VMware’s stock price here.