VMware (NYSE:VMW), the leading desktop virtualization company, is set to announce its Q1 earnings on April 23. Despite some weakness in the U.S. demand, mainly due to a decline in federal business contracts in Q1, the company should continue to exhibit double-digit revenue growth on the back of growing virtualization demand in international markets including China and Japan. Mobile desktop virtualization, the bring-your-own-device (BYOD) movement, big data analytics and enterprise social networking will be the main revenue drivers for Q1 and the upcoming quarters. However, its operating margins are expected to decline, which should lead to slightly lower operating profits on a y-o-y basis.
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In Q4, at $1.3 billion, VMware reported a 22% y-o-y revenue growth. The operating income was $252 million, an increase of 15% y-o-y while net income was $205 million compared to $200 million last year.  We examine some key trends driving growth in its business.
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 the 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 Data Centers Key To Virtualization
Software-defined data centers are a key innovation in the virtualization space as it provides a solution to support both enterprise applications and new cloud services. VMware has been making acquisitions in the software-defined data center space and has acquired companies such as Nicira and DynamicOps in the second half of 2012. 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. We can expect this to lend support to VMware’s revenue growth going forward.
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 business does not contribute significantly to the company revenues currently – it is a big opportunity for VMware.
If Jive Software 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.
What To Look For
We will be closely watching the earnings to see if the management continues to face weakness in the U.S. Owing to these concerns, the company’s stock has plunged almost 30% in the last three months despite an upbeat Q4 2012 earnings. While we are bullish on the company’s future due to aforementioned factors, any expectations of further weakness in the U.S., can create more pressure on the stock in near term. The market contributes nearly 50% to total revenues of the company.
We have a $100 Trefis price estimate for VMware, which is nearly 30% above the current market price.Notes: