VMware’s Growth Outlook Faces Hurdles In The Year Ahead

by Trefis Team
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VMware (NYSE:VMW) delivered strong y-o-y growth but flat q-o-q growth as we had guided in our pre-earnings note. Revenues grew 25% to $1.06 billion on a yearly basis but was down by about half a percent on a quarterly basis. [1] Q1 has traditionally been a slow quarter for VMware, and the company management has raised its outlook for 2012 expecting virtualization and cloud computing to drive growth. VMware competes with Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL) and Citrix (NASDAQ:CTXS) in the virtualization space.
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The numbers were very strong on a y-o-y basis as revenues grew to $1.05 billion and net income to $191 million, representing yearly growth of 25% and 52%, respectively. On a quarterly basis, however, revenues and net income dropped by 0.5% and 5%, respectively. Q1 has traditionally been a slow quarter for the company, and VMware has raised its earnings outlook of 2012. However, if Europe continued to serve as a drags on IT spending as expected, we may see lower revenues in 2012. Growth markets like BRIC nations may provide a way around a sluggish Europe.

Higher Outlook for 2012

The company has guided Q2 revenues in the range of $1.1-$1.12 billion and 2012 revenues between $4.52 and $4.62 billion, which represents an increase of about 20% from 2011. It hopes that the demand for virtualization and cloud computing will drive revenue. [2] We expect VMware to face pricing pressures as more companies push into the virtualization space. We estimate a market share of around 44% for VMware, and expect this to decline to 40% by the end of our forecast period.

We have a $98 Trefis price estimate for VMware, which is 14% below the current market price.

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Notes:
  1. VMware Q1 Filing, www.sec.gov, April 18, 2012 []
  2. VMware’s CEO Discusses Q1 2012 Results, www.seekingalpha.com, April 18, 2012 []
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