VMware Earnings Preview: Services Remain Key To Long-Term Growth
VMware (NYSE:VMW) is scheduled to announce its Q3 results on Wednesday, October 26th. [1] VMware’s management expects the company to post 5% annual growth in revenues to $1.76 billion, with license revenues staying flat over the year-ago period at around $680 million. [2] Comparatively, services revenues are expected to grow at 9-10% to around $1.1 billion driving much of the top line growth. The table below lists VMware’s full year expectations for revenues, operating profit margin and fully diluted EPS.
VMware’s top line growth in Q3 and through 2016 is expected to be driven by maintenance and services revenues more than software licenses revenues. For the full year, we forecast maintenance and professional services combined revenues to grow at 9% year over year to just under $4.2 billion, while software licenses revenues could grow by only about 2% over the same interval = to $2.7 billion. VMware’s adjusted EBITDA margins for the year should be slightly lower than the previous year at around 36%, while the non-GAAP diluted EPS should be flat over the previous year at just over $4 per share. As the services revenues continue to grow more than license revenues, VMware’s margins could continue to compress slightly since licensing is a high-margin business.
VMware announced the acquisition of cyber security and software-defined data center operations company Arkin Net during Q2 to help customers adopt its NSX platform faster. [3] The company has demonstrated strong growth in network virtualization, storage virtualization and hybrid clouds. Below is a summary of certain key metrics for VMware in the most recent quarter, highlighting strong growth areas for the company. This growth spree is expected to continue in future quarters, driving license and services revenues for the company. 
Additionally, VMware’s $1.5 billion AirWatch acquisition has been instrumental in driving the company’s growth in the end-user computing market. According to IDC, VMware has been the largest enterprise mobility management vendor over the last two years with a share of 16.5% in 2015. Revenues generated by VMware in the enterprise mobility market grew at almost 85% from 2014 through 2015. [4] In the September quarter, VMware has built on its strengths to continue its growth spree in fast-growing domains. VMware launched AirWatch Express to simplify the process of configuring compatible devices with apps, email and Wi-Fi for Mobile Device Management end users. [5]
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- VMware to Announce Third Quarter 2016 Financial Results on October 26, 2016, VMware Press Release, October 2016 [↩]
- VMware Q1 2016 Earnings Call Transcript, Seeking Alpha, April 2016 [↩]
- VMware Announces Intent to Acquire Arkin Net to Help Customers Accelerate Adoption of VMware NSX and Software-Defined Data Centers, VMware Press Release, June 2016 [↩]
- Global Analyst Firm Ranks VMware AirWatch the Largest Enterprise Mobility Management Vendor in the World, VMware Press Release, June 2016 [↩]
- VMware Launches AirWatch Express to Speed Up and Simplify Mobile Device Management, VMware Press Release, August 2016 [↩]