VMware Earnings Preview: Hybrid Clouds, Network Virtualization Key
Virtualization and cloud computing giant VMware (NYSE:VMW) is scheduled to announce its fourth quarter earnings on Tuesday, January 27. VMware has been one of the fastest growing companies in its domain, with a 16% year-over-year growth in net revenues to $4.3 billion through the first three quarters of 2014. The company reported a 14% increase in product license revenues over the prior year period to $1.8 billion. On the other hand, services revenues were up by 18% y-o-y to over $2.5 billion. [1] Management attributed much of the growth to fast-growing market segments such as hybrid cloud services, network virtualization – or software-defined networking (SDN) – and end-user computing. VMware has maintained its full year net revenues guidance at just over $6 billion, which is 15-16% higher than 2013 revenues. [2]
We have a $96 price estimate for VMware’s stock, which is over 15% higher than the current market price. VMware’s stock traded at a high of $110 in early April and fell to as low as $76 in mid-December.
See our complete analysis for VMware here
Key Areas Of Growth
Over the last few quarters, the company has seen a strong customer response for VMware NSX, its network virtualization platform launched by the company in late 2013. VMware’s software-centric approach to networking threatens to cannibalize Cisco’s (NASDAQ:CSCO) market share in the SDN market. What makes VMware’s SDN appealing to enterprises is that it allows them to put third-party software on cheap white-label networking hardware, making it potentially much cheaper to implement than installing Cisco’s hardware products that come with embedded software. Moreover, the NSX can be integrated with vSphere, VMware’s existing server virtualization platform. VMware made significant progress in Q3 this year through strategic partnerships and reseller agreements with technology and networking companies such as F5 Networks (NASDAQ:FFIV), Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL). At the end of Q3, VMware reported over 250 paying customers for NSX, up from 150 at the end of the second quarter. Management articulated that VMware’s infrastructure-as-a-service (IaaS) offerings would be built on open source platform OpenStack and would be made available integrated with NSX offerings going forward. Going forward, VMware’s NSX suite seems like an attractive option for new customers, especially small and medium enterprises (SMEs), as it cuts huge capital expenses required for hardware and equipment, while the company expects strong revenue growth in the coming quarters.
VMware’s hybrid cloud business grew by over 100% y-o-y in the first quarter, after which the company introduced its cloud-based disaster recovery services. The trend continued in Q2, with its business growing by nearly 80% y-o-y in the quarter. After Q2, the company rebranded its hybrid cloud business to vCloud Air. Subsequently, the company kept up the 80% growth rate through the third quarter. Hybrid cloud and software-as-a-service offerings combined currently form only 5% of VMware’s net revenues, up from under 3% in the year ago period. Although this is a small portion of VMware’s net revenues, it is one of the fastest growing sub-segments within the company. VMware management believes that the the company’s rapidly growing hybrid service offerings and a vast partner network could help raise the contribution of hybrid cloud revenues to the company’s top line in the coming quarters.
Impact On Margins
VMware’s software licenses gross margin (GAAP) expanded by over 2 percentage points to 92.1% in through the first three quarters. On the other hand, VMware’s cost of services rose by nearly 40% y-o-y to $519 million as the company generated higher service revenues from hybrid cloud services and end-user computing. As a result, the gross margin (GAAP) for the services division in the first three quarters was about 3 percentage points lower than the year ago period at 79.4%. Moreover, VMware’s cash operating expenses, including research and development, sales, marketing and other administrative expenses, were 25% higher than the year-ago quarter at nearly $3 billion in the period from January through September. Consequently, the company’s reported net income was 18% lower than previous year levels at $560 million. However, VMware’s non-GAAP adjusted net income was about 5% higher than prior year levels at $1.1 billion. VMware expects that the integration of technology from the AirWatch acquisition and related cost synergies could further enhance profitability in the coming quarters.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- VMware 10-Q3, SEC, November 2014 [↩]
- VMware Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 [↩]