VMware Earnings Preview: Fast-Growing Segments To Boost Revenues, Profits
VMware (NYSE:VMW) is scheduled to announce its Q1 fiscal 2018 earnings on Thursday, June 1. [1] The virtualization and cloud computing provider had a solid end to fiscal 2017, demonstrating strength in its business, with its revenues and profits seemingly unaffected by the acquisition of its parent company. VMware’s license business as well as the services business continued to grow at a steady pace through the year, with the company reporting healthier margins through the year. Strong performance by VMware’s fast-growing segments such as NSX, AirWatch and vSAN has helped the company report consistent revenue growth over the last few quarters.
We maintain our $84 price estimate for VMware’s stock, which is slightly lower than the current market price. VMware’s stock price has risen by over 20% since the beginning of the year.
See Full Analysis For VMware Here
Guidance For FY 2018
VMware has reported consistent high single digit revenue growth over the last couple of years. The trend is expected to continue with Q1 and full fiscal year net revenues likely to grow at 7% to $1.7 billion and $7.6 billion, respectively. License revenues are expected to increase at around 6% y-o-y while services revenues could increase by around 9-10%, as shown below. The company’s operating profit margin is expected to be roughly flat over the comparable prior year period at around 28% for the quarter and over 32% for the full year. As a result of consistent growth in revenues and limited increase in operating expenses, VMware’s EPS has grown at CAGR of around 11% over the last 4-5 years. Keeping up the trend, VMware’s management expects non-GAAP diluted earnings per share to be around $4.87 for the full year and just under $1.00 for the first fiscal quarter, as shown below. [2]
Revenue Growth By Segment
The strong growth in virtualization software sales has led VMware to report strong growth in revenues over the last few years years. VMware’s net revenues surged from around $2 billion in 2009 to $7.1 billion in 2016 – a compound annual growth rate of almost 20%. Although the growth rate has slowed down in recent years, the company reported an 8% annual increase in revenues last year. While software licenses revenues only grew at around 3% last year, services revenues continued to grow at around 9% y-o-y to $4.3 billion, as shown below.
Over the last few quarters, VMware has attributed strong revenue growth to fast-growing product lines including network virtualization platform NSX, hybrid cloud platform, end-user computing offerings and software-defined storage platform Virtual SAN.
Over the years, VMware has gradually transformed from primarily a software licenses vendor (over half of net revenues from license agreements in 2009) to a services-based model with software licenses revenues falling to around 40% of net revenues in 2015. As a result, VMware’s gross margin has compressed since services typically have lower gross margins than the licensing business. VMware’s gross profit margin has gone down from almost 88% in 2011 to under 87% in 2015. However, VMware reported an increase in Non-GAAP gross margins for both licenses and services division last year. The adjusted gross margin of the licenses division improved by 80 basis points to 98% for the full year while gross margin of the services division was around 50 basis points higher than the comparable prior year period to 80.4%. As a result, the company-wide gross profit margin was up by 50 basis points to 87.4%.
In addition to an improvement in gross margins, VMware’s operating income also grew at around 9% y-o-y to $2.3 billion through the year. A key contributor was a limited increase in operating expenses (particularly SG&A expenses) for the year. While R&D expenses were up 16% to $1.5 billion for the year, SG&A expenses were flat over the previous year at $3 billion. As a result, the company’s GAAP operating income was up 20% y-o-y to $1.4 billion and non-GAAP operating income rose 9% to $2.3 billion. VMware’s management mentioned that the company aims to further improve its operational efficiency by reducing operating expenses and headcount.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Q1 2018 VMware, Inc. Earnings Conference Call, VMware Investor Relations, May 2017 [↩]
- VMware Q4 2016 Earnings Call Transcript, Yahoo Finance, January 2017 [↩]