VMware Cautious On Slowing U.S. Demand Despite A Strong 2012

by Trefis Team
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VMware’s (NYSE:VMW) stock took a tumble in the market post its Q4 earnings announcement as the company issued lowered guidance for 2013. The company cited slowing demand in the US market and announced that it will trim its workforce by about 900. The stock was down nearly 20% despite the fact that it had a solid FY 2012 in our view. The earnings showed the effect of strong virtualization demand as revenues grew 22% in 2012 to $4.6 billion despite slight weakness in Q4.

The company expects Q1 2013 revenues to be affected by weak demand in the U.S business due to macroeconomic conditions as well as declining federal business contracts. In Q4, it reported a 22% y-o-y revenue growth with revenues of $1.3 billion. Operating income was $252 million, an increase of 15% y-o-y while net income was $205 million, or $0.47 per diluted share, compared to $200 million last year. Trailing twelve months operating cash flows were $1.9 billion, a decrease of 7% y-o-y. [1] We examine some key trends driving its business below.

See our full analysis on VMware

Guidance For 2013

The company has guided that for full year 2013, it expects total revenues to be within a range of $5.23 billion to $5.35 billion with full year license revenues expected to grow 8%-11%. For Q1 revenues are expected to range from $1.17 billion to $1.19 billion, a growth of approximately 11%-13%. [2] We believe that the stock is worth $101 based on the following opportunities.

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.

We have a $101 Trefis price estimate for VMware, which is nearly 30% above the current market price.

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Notes:
  1. VMware SEC Filings, www.sec.gov. 28 Jan 2012 []
  2. VMware earnings call transcript, www.seekingalpha.com, Jan 28 2013 []
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