- Maintenance and Professional Services constitute 41% of the Trefis price estimate for VMware's stock.
- Software License constitutes 37% of the Trefis price estimate for VMware's stock.
- Subscription and SaaS constitutes 21% of the Trefis price estimate for VMware's stock.
WHAT HAS CHANGED?
- Latest Earnings
Revenue for Q2 2022 (ended Jul 2022) was $3.14 billion, up 9% y-o-y. Subscription and SaaS and license revenue for Q2 2022 was $1.51 billion, up 12% y-o-y. Subscription and SaaS revenue for Q2 2022 was $776 million, up 23% y-o-y. GAAP net income for Q2 2022 was $411 million, or $0.97 per diluted share, compared to $447 billion, or $1.06 per diluted share in the previous year.
- Impact of Coronavirus
IT software and Services industries are suffering from a fall in demand for software and web services as consumers are focusing solely on essentials and not discretionary products. That said, the industry has seen companies with a portfolio of software as well as services aimed at remote collaboration benefit due to the growing number of people globally. Many companies are also operating with employees working remotely from their own home. The company reported revenue growth with Subscription and SaaS segment leading the growth.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of VMware's value that present opportunities for upside or downside to the current Trefis price estimate for VMware:
Maintenance Revenue: We currently estimate that VMware's maintenance as a percentage of license revenues will continue to increase at mid single digits through the end of our forecast period.
VMware License Revenue: We expect the company to continue to be a market leader in the virtualization market. As a result, its product revenues could increase at nearly the industry-wide growth in the segments it operates in. As a result, we forecast mid to high single-digit growth in revenues. However, the company could lose share to competing players at a rapid pace. This could happen due to increased competition from Citrix, Microsoft, Dell, IBM, and HP. There could be a downside of 10% to the Trefis price estimate if growth slows down to low single digits.
VMware is the leading software virtualization company worldwide. Dell is the company's largest stakeholder, with an 82% share and almost 98% of voting rights. Dell acquired EMC, which previously was the largest stakeholder in VMware.
VMware's revenue channels can be categorized into the following segments:
- vCloud Suite allows customers to run a vSphere based private cloud. It provides application provisioning and automated operations management.
- Hybrid cloud services or vCloud Air aims to expand beyond private cloud virtualization towards hybrid clouds that include elements of both private and public clouds.
Server Virtualization Software
- Allows companies to increase the utilization of their servers by allocating the virtualized resources of server hardware to multiple applications in a manner that is independent of the underlying operating system required to execute the application.
- VMware offers Enterprise Mobility Management and Content Collaboration product offerings, primarily from the AirWatch acquisition in early 2014.
- Desktop virtualization allows users to run multiple operating systems on a single desktop or notebook. For example, by using VMware's desktop virtualization software, a user can run Apple's Mac OS X from within a Microsoft Windows machine
Increasing Virtualization Software Competition
Microsoft, Citrix, Oracle, and many others have come out with their own versions of virtualization software. Partnerships by competitors could reduce VMware's share gains; for example, HP's ProLiant servers now offer built-in support for Citrix' XenServer. Additionally, Citrix XenDesktop competes with VMware View.
Increasing Adoption of Cloud Services
Businesses are shifting from legacy systems to cloud-based systems, as this helps reduce costs by resource pooling and allows for easy scaling of applications. Cloud services drive virtualization, and as cloud services get popular, we expect the demand for virtualization to grow.