VMware Earnings: Stock Plunges After Soft Q1 Guidance

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VMware (NYSE:VMW) announced its fourth quarter earnings on January 27, reporting 10% annual growth in net revenues to $1.87 billion. [1] In line with the company’s expectations, license booking revenues were up by 6% on a year-over-year basis to $825 million, while services revenues rose by about 13% to $1.04 billion. The company’s net revenues were up by over 13% on a constant currency basis, with significant growth coming from the Asia-Pacific region. ((VMware Q4 2015 Earnings Call Transcript, Seeking Alpha, January 2016))

The company’s software licenses gross margin (GAAP) expanded by over 110 basis points over the prior year quarter to 94.7% in Q4. Moreover, the cost of services rose by only about 9% y-o-y to $222 million for the December quarter, compared to the 13% growth in revenues. As a result, the gross margin (GAAP) for the services division was up by about a 70 basis points over the year ago period at 78.7%. VMware’s cash operating expenses – including R&D, sales and marketing expenses combined – were about 5% higher than the year-ago quarter at about $1.2 billion in Q4. Consequently, the company’s reported net income was up by 14% y-o-y to $373 million.

See our complete analysis for VMware here

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NSX, End-User Computing And Hybrid Cloud Drive Growth

VMware continued to witness a strong customer response for NSX, with the number of paying customers rising to over 1,200 by the end of Q4, up from only about 150 in June 2014. VMware released the NSX 6.2 during the September quarter, which contributed significantly to the 100% annual rise in revenue generated through license bookings during the December quarter. As a result, VMware generated roughly $150 million through NSX product bookings during the quarter. The company expects the solid demand for NSX implementation to continue in the long run, even as 2016 could be a transition period for the company. [2]

At the end of Q3, VMware announced the general availability of new hybrid networking capabilities including VMware Hybrid Cloud manager and Advanced Networking Services. VMware realized annual growth in the low teens in product bookings for vCloud Air Network. According to the company’s estimates, hybrid cloud and SaaS combined contributed over 6% of VMware’s net revenues through 2015, up from 5% in 2014 and under 3% of net revenues in 2013. Hybrid cloud and SaaS offerings witnessed an 80% growth rate on a year-over-year basis for the full year.

The other key area of growth for VMware has been end-user computing and mobile device management, which was boosted by the $1.5 billion Airwatch acquisition in early 2015. The company has since witnessed strong demand for mobility solutions in 2015, as evidenced by 50-60% year-over-year growth in end-user computing license bookings in Q1’15. The trend continued through Q2 and Q3, as VMware witnessed a 30% year-over-year increase in license bookings for AirWatch in Q2 and about 15% in the September quarter. The company sustained a 20% growth rate in total end-user computing license bookings through Q4, leading to roughly $300 million in revenues.

At the end of Q4’14, the total number of AirWatch customers stood at over 15,000, which has risen to about 62,000 end-user computing customers for desktop, mobile, identity and content collaboration solutions combined. VMware reported a 50% y-o-y growth in AirWatch license bookings to $370 million for the full year.

Soft Outlook For Q1, Growth Expected In Second Half Of 2016

VMware’s management anticipates a slowdown in product sales through the March quarter. Going forward, management expects Q1’16 revenues to be 3-5% higher than prior year levels (on a constant currency basis) at under $1.60 billion. VMware’s services revenue stream is likely to continue to witness a higher growth rate than the revenues generated through license bookings. The company has given guidance for license booking revenues to stay roughly flat over previous year levels at $570 million, while services revenues could rise by over 7%. [2] Moreover, the company is likely to invest in key growth areas such as the NSX through the first half of the year, which could lead to additional restructuring charges and capital expenditures. However, management expects the second half of the year to be much stronger in terms of top line and bottom line growth.

VMware’s shareholders reacted negatively to the idea of Dell acquiring parent company EMC (NYSE:EMC) and the introduction of a tracking stock related to VMware. As a result, its stock price plummeted by about 30% through the December quarter to about $55. Subsequently, VMware’s stock price fell by over 10% following the earnings call to about $44. We are in the process of revising our price estimate for the company.

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Notes:
  1. VMware Reports Fourth Quarter And Full Year 2015 Results, VMware Press Release, January 2016 []
  2. VMware Q4 2015 Earnings Call Transcript, Seeking Alpha, January 2016 [] []