VMware (NYSE:VMW), the leading desktop virtualization company, is set to announce its Q4 earnings on Jan 28. The previous quarter’s earnings showed the effect of growing virtualization demand. 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 Q4 and the subsequent quarters.
VMware has also become a top player in enterprise email market with its product Zimbra. The hosted email market size is $7 billion for 2012-2013 and VMware has been making inroads into this market by winning key federal government contracts. In Q3, it reported a 22% y-o-y constant currency revenue growth with revenues of $1.13 billion. Operating income was $190 million, an increase of 5% y-o-y, while net income was $157 million, or $0.36 per diluted share, compared to $178 million last year. Trailing twelve months operating cash flows were $1.97 billion, an increase of 5% y-o-y.  We examine some key trends driving its business below.
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Guidance For Q4 2012
The biggest indicator that virtualization is becoming an integral part of IT operations is the fact that U.S. revenues for Q3 grew 25% y-o-y to $554 million while international revenues grew 16% y-o-y to $580 million despite weak macroeconomic conditions. License revenues in Q3 were $491 million, an 11% y-o-y increase and service revenues, which include software maintenance and professional services, were $643 million a 29% y-o-y increase.
The company has guided for Q4 revenues in the range of $1.26 to $1.29 billion. Annual 2012 revenues are expected to be in the range of $4.57 and $4.60 billion, an increase of 21.4% to 22.2% y-o-y. Annual license revenues are expected to grow between 12.8% and 13.8% y-o-y.
The Pivotal Initiative Provides New Growth Opportunities
In an attempt to gain a share of the $2 billion and rapidly growing hosted web services market, EMC and VMware have announced the Pivotal Initiative led by Paul Maritz, Chief Strategy Officer of EMC. The companies will commit key technologies, people and programs to focus on Big Data and Cloud Application Platforms. This market is currently dominated by Amazon (NASDAQ:AMZN) with its Amazon Web Services and Microsoft‘s (NASDAQ:MSFT) Azure Cloud and Google Cloud Platfrom. ((The Pivotal Initiative, blogs.vmware.com, Dec 4, 2012)) This will enable EMC and VMware to focus on their core competencies while pursuing the growing cloud services market.
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 Big Data Analytics Opportunity – Analytics-as-a-Service
VMware’s Big Data initiative is driven by its acquisition of Cetas in 2012, 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 $109 Trefis price estimate for VMware, which is nearly 30% above the current market price.Notes: