VALUATION HIGHLIGHTS
- Maintenance and Professional Services constitute 39% of the Trefis price estimate for VMware's stock.
- Software License constitutes 35% of the Trefis price estimate for VMware's stock.
- Subscription and SaaS constitutes 26% of the Trefis price estimate for VMware's stock.
WHAT HAS CHANGED?
- Q2 2023 Earnings
VMware reported a relatively tough set of Q3 FY'23 results. Revenue for the quarter grew by under 1% year-over-year to $3.21 billion, while adjusted earnings stood at $1.47 per share, down from $1.72 per share in the year-ago quarter.
However, the company's subscription and SaaS revenue, a key metric tracked by investors, grew by 20% year-over-year to $988 million.
Note: VMware's FY'22 ended on January 28, 2022. Q3 FY'23 ended on October 28, 2022.
- VMware's deal with Broadcom
In late May 2022, VMware entered into a definitive agreement to be acquired by semiconductor and infrastructure software major Broadcom in a deal valued at $61 billion in cash and stock. Under the terms of the agreement, VMware shareholders can opt to receive either $142.50 in cash or 0.2520 common shares of Broadcom for each VMware share. The deal price was about 40% higher than VMware's stock price before reports of a deal began to surface. The deal is expected to be completed in Broadcom's fiscal year 2023, ending in October 2023.
- Impact of Coronavirus
IT software and Services industries are suffering from a fall in demand for software and web services as consumers focus solely on essentials, not discretionary products. That said, the industry has seen companies with a portfolio of software and 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 homes. The company reported revenue growth, with the 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:
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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.
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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 rapidly. This could happen due to increased competition from Citrix, Microsoft, Dell, IBM, and HP. If growth slows down to low single digits, there could be a downside of 10% to the Trefis price estimate.
BUSINESS SUMMARY
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:
Cloud-based revenues
- 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 independent of the underlying operating system required to execute the application.
End-user Computing
- 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
KEY TRENDS
Increasing Virtualization Software Competition
Microsoft, Citrix, Oracle, and many others have created 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's 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.
