Robust Quarter Ends A Solid 2013 For VMware, Stock Worth $97

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VMware (NYSE:VMW) reported a strong set of results for the fourth quarter, with revenues of $1.5 billion, a 15% year-on-year (y-o-y) increase. The company’s annual revenues grew 17% y-o-y were slightly more than the upper end of guidance of $5.2 billion. VMware’s margins improved by 160 basis points to 34% for 2013 as the company’s bottom line grew by 36% for the full year. [1]

VMware’s management mentioned three key areas that led to the company’s strong growth – the industry keenly embracing the company-defined concept of software defined data centers, increasing adoption of VMware’s hybrid clouds among clients and the company’s increasing presence in the end-user computing market. Below we take a look at major focus points of VMware’s operations that made Q4 and in turn 2013 fruitful for the company.

We have a $97 price estimate for VMware, which is slightly higher than the market price.

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See our complete analysis for VMware here

Anticipated Growth In vCloud Hybrid Service and End-User Computing

According to a report by MarketsAndMarkets, the total hybrid cloud market is expected to reach ~$80 billion by 2018, growing at a CAGR of 30% from 2013 through 2018. [2] This estimate includes various delivery models such as Infrastructure as a Service, Platform as a Service and Software as a Service, Cloud Management as well as Cloud and Network Security.

VMware rolled out its vCloud Hybrid Service (VCHS) in the U.S. market in May 2013, and in the European markets at the end of 2013. The strong VCHS launch helped VMware’s overall hybrid cloud revenues in Q4 grow faster than industry, almost doubling over the same period last year. Consequently, the company believes it is better positioned than its competitors to tap this fast- growing hybrid cloud market. Moreover, almost half of the enterprise license agreements (ELAs) during the quarter were for the vCloud suite, indicating the shift towards cloud adoption.

On the end-user computing front, VMware’s licensed bookings grew by about 15% for the full year and by 30% y-o-y in the fourth quarter, indicating the gain in market share for the company. This was mainly due to VMware’s acquisition of Desktone, a pioneer in the Desktop-as-a-Service (DaaS) platform, early in the fourth quarter. The company observed a strong customer response with a growing need to move desktop infrastructure to the cloud.

To further bolster its end-user capabilities, VMware recently announced the acquisition of market leading enterprise mobility management company, AirWatch, for $1.54 billion. [3] On the back of the Desktone acquisition coupled with the recently announced addition of AirWatch to VMware’s offerings, the company believes that it is a clear leader in the end-user computing market. However, these developments are likely to draw a response from competing virtualization provider Citrix and a new entrant in the DaaS market, Amazon (NASDAQ:AMZN).

Network Virtualization Key For Software Defined Data Center

Since server virtualization is a maturing market, a primary area of focus for VMware has been network virtualization. VMware’s network virtualization platform, the NSX, became generally available last quarter and the product already has a host of top-tier clients including investment banks, telecommunication companies, healthcare companies and online retail companies.

Network virtualization is one of the three key aspects of the software-defined data center (SDDC) concept, defined and implemented by VMware; the other two are server virtualization and software defined storage. Network virtualization seems to be a stronghold of the company, as VMware has no major competitor in this domain. It is important to note that networking giant Cisco (NASDAQ:CSCO) has a hardware-centric approach for its future operations in networking rather than emphasizing virtualization like VMware. [4]

What 2014 Has In Store For VMware

Going forward, we expect VMware to independently excel on the network infrastructure front. However, VMware will likely be dependent on EMC‘s (NYSE:EMC) storage and security capabilities to help in integrating software defined storage in its SDDC vision. VMware is already the market leader on the server virtualization front, but has been increasingly facing stiff competition from Microsoft (NASDAQ:MSFT) and Citrix.

The company has given revenue guidance of around $6 billion for the upcoming year, which implies 16-17% annual growth. VMware’s anticipated robust growth, on the back of an already strong year, indicates how well poised the company is to capitalize on the growth areas in the virtualization market. It will be interesting to note VMware’s progress in both the hybrid cloud as well as the network virtualization markets in the coming quarters, while we expect the company to continue to deliver strong results.

See More at TrefisView Interactive S&P Capital IQ Analyses

Notes:
  1. VMware Q4 Earnings Call Transcript, Seeking Alpha, January 2014 []
  2. Hybrid Cloud Market Worth $79.54 Billion By 2018, PR Newswire, August 2013 []
  3. VMware To Acquire AirWatch, VMware Press Release, January 2014 []
  4. Cisco On Application Centric Infrastructure Network, Cisco Blog, August 2013 []