VMware (NYSE:VMW), the leading desktop virtualization company, is set to announce its Q3 earnings on October 23. The previous quarter’s earnings showed the effect of growing virtualization demand. The company reported 22% y-o-y growth in revenues which came in at $1.12 billion. Free cash flows were up 29% y-o-y at $2.01 billion. U.S and international revenues grew 22% y-o-y to $551 million and $572 million, respectively. Enterprise license revenues experienced growth of nearly 30% y-o-y and license revenues came in at $517 million and services revenue was $605 million. Management had raised its outlook for 2012 expecting virtualization and cloud computing to drive growth.
We expect mobile desktop virtualization, the bring-your-own-device (BYOD) movement, Big Data analytics and enterprise social networking will be the main revenue drivers for Q3 and the subsequent quarters. We highlight some important business drivers below and what we expect from VMware in the rest of 2012.
The BYOD Opportunity
VMware leads the BYOD revolution with its View Mobile Secure Desktop offering which provides a safe and secure environment for mobile virtualization. The product addresses security and storage of virtual desktop networks by providing secure snapshots of the desktop which can be monitored and controlled by IT staff. It also addresses storage issues by adopting a hybrid storage combining Flash and legacy storage to provide speed as well as cost efficiency. The VMware View Mobile Secure Desktop is a fully validated design that provides users access to their employers’ networks, applications and data, irrespective of the device and data network.
The Enterprise Social Network Opportunity
Enterprise networks are of two types: The Intranet, or an internal social network for use by employees, and an enterprise network for customer service, which doubles as a platform for companies to engage customers via social networks. The social Intranet is used for collaboration on projects and leading in this space is Salesforce.com (NYSE:CRM) with its Chatter service.
VMware is primarily a virtualization company and this division accounts for 90% of its current Trefis price estimate. It is looking to move into the enterprise social networking space with its latest offering, Socialcast. Though this division does not contribute significantly to the company revenues currently, it is a big opportunity for VMware.
If Jive Software, which reported annual revenues of ~$80 million in 2011, is used as a benchmark, enterprise social network can become a major source of revenue for VMware, going forward, as it can leverage its institutional client network to cross sell Socialcast. The company is also moving into mobile phone virtualization and can provide a mobile social network easily.
The Big Data Analytics Opportunity
VMware recently acquired Cetas, a Big Data analytics company. The Cetas software is designed to run on virtual resources like Amazon Web Services and VMware’s vSphere, making it easier to scale and cheaper to use. This acquisition makes sense for VMware as its applications that are deployed on vSphere provide another opportunity to cross sell. The cost efficiency and the Analytics-as-a-service model will open up the market for small and medium enterprises, satisfying the unmet need in the analytics space.
Software Defined Datacenters Key To Virtualization
VMware has been making acquisitions in the software-defined data center space and has acquired companies such as Nicira and DynamicOps in the past few months. These companies use software to abstract hardware resources and pool it into aggregate capacity which can be used efficiently, as needed. Customers gained through these acquisitions include AT&T, DreamHost, eBay, Fidelity Investments, NTT and Rackspace. Software-defined data centers are a key innovation in the virtualization space, and we can expect this to boost VMware’s revenues in the coming quarters.
We have a $112 Trefis price estimate for VMware, which is nearly 30% above the current market price.