VMware Earnings Preview: New Products Drive Value as Core Market Saturates

by Trefis Team
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VMware (NYSE:VMW), the leading desktop virtualization company, is set to announce its Q3 earnings on October 21st. The company has seen its core vSphere business stagnate in recent years due to a weak business environment and a maturing virtualization market. As a result, its first-half licensing revenues grew by less than 2% y-o-y to just over $1 billion. However, the company continued to see strong growth in its services revenues, which increased by 20% in the first half driven by existing customers renewing their long-term contracts. The strong performance is likely to continue in Q3 as well, with the company’s revenue guidance this quarter being revised to a range of $1.27-$1.30 billion, a 15% growth over the same period last year.

One good sign for the company is that license and total bookings in Q2 were up 10% and 20%, respectively. [1] Also, 35% of these license bookings were from new products such as the vCloud suite – a positive sign that the company’s increased efforts at diversifying away from the largely mature market for vSphere are bearing fruits. During the earnings call, we will also be looking for management’s comments on the overall business environment which has recently shown signs of recovering in regions such as Asia despite still being fairly weak across geographies.

With the company announcing strong results in Q2 and revising its guidance upward for the full year, the stock has moved up by around 15% this quarter. VMware’s stock is now trading about 10% below our $93 price estimate.

See our full analysis on VMware

Network Virtualization and Hybrid Cloud a Priority

According to the latest Gartner report, close to two-thirds of x86 server workloads are now virtualized, trimming the growth opportunities for VMware. [2]. To offset the near-stagnant growth in its core business, the company has identified network virtualization and hybrid cloud for future growth.

In order to take advantage of the new trend of software-defined networking (SDN), VMware has launched a new product, the VMware NSX. This new solution merges the company’s existing vCloud networking product line with the network virtualization platform of Nicira (which it had acquired last year) into a single product family. This has been a successful move so far, with the company gaining around 30 new NSX customers, including JP Morgan.

The company has also been focusing on the Infrastructure as a Service (IaaS) vCloud hybrid service. Hybrid clouds are gaining traction as companies can have their own in-house private clouds to retain sensitive data and information while moving the rest to a public cloud. Having access to such a public cloud system, should help scale applications easily. The product, which was launched in May, has also attracted interest from several major companies in its early-access phase.

The company has been proactive in capitalizing on new trends, not hesitating to grow inorganically by making strategic acquisitions. Besides Nicira, VMware acquired DynamicOps and Cetas in 2012 with an eye on the software-defined data center space and cloud data analytics. More recently, the company announced that it has acquired Desktone, a company that provides virtual desktops from multitenant cloud servers.

Another new trend in the market is the demand for CRM and data services on the move, due to which the mobile desktop virtualization market is expected to see rapid growth. VMware has a partnership with Nimble to deploy virtual mobile desktops that enables employees to access company data securely through virtual snapshots, irrespective of the device used, and we expect this to pay off in the long term.

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Notes:
  1. VMware’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 23 2013 []
  2. Magic Quadrant for x86 Server Virtualization Infrastructure, Gartner, June 27 2013 []
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