Sustained Revenue Growth, Disciplined Expense Management Drive VMware’s Results
VMware (NYSE:VMW) announce its Q1 FY’18 earnings on Thursday, June 1, reporting a 9% annual increase in revenues to just over $1.7 billion. [1] However, VMware reported a fall in gross margins attributable to lower margins of the services revenue stream. The company-wide gross margin (non-GAAP) for the quarter was around 70 basis points lower to 85.9%. Despite the lower gross margin in the quarter, the company was able to limit the increase in operating expenses leading to an 11% increase in its non-GAAP operating income to $495 million. As a result, VMware’s diluted earnings per share soared by 15% over the prior year quarter to 99 cents per share, slightly higher than the guidance given at the end of the previous quarter.
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Strong Growth From NSX, End-User Computing, Hybrid Clouds
VMware’s net revenues were up 9% with both services (11%) and licenses (7%) segments uniformly driving growth. According to management, hybrid cloud and Software-as-a-Service (SaaS) revenues were up 30% y-o-y to almost $160 million. The company particularly witnessed strong demand for its vCloud Air hybrid cloud offerings, with total license bookings growing at around 40% on a y-o-y basis. [2] In addition, total bookings for network virtualization platform NSX were up 50% over the prior year period. Correspondingly, the total number of paying customers for NSX were up from 1,400 last year to 2,600 at the end of the first fiscal quarter this year. Similarly, hyper-converged software suites including VSAN and VxRail also demonstrated strong growth during the quarter. Virtual SAN license bookings were up 150% as shown below while total paying customers rose from 5,500 last year to 8,000 this year.
VMware’s license revenues were 7% y-o-y to $610 million while gross margins for the license business continued to improve gradually, as shown below. Within the services segment, software maintenance revenues rose 9% to $974 million, while professional services revenues were up 21% y-o-y to $151 million for the quarter. Revenues generated by hybrid cloud and SaaS offerings were largely responsible for strong growth in services revenues. VMware’s company-wide gross margin were down on a y-o-y basis since services typically have lower gross margins than the licensing business.
While gross margins fell, VMware’s operating income was up by around 11% y-o-y to $495 million for the quarter. A key contributor was a limited increase in operating expenses during the quarter. While R&D expenses were up 18% to $421 million, SG&A expenses were flat over the previous year at $737 million. As a result, the company’s operating profit margin (non-GAAP) expanded by 40 basis points to 28.5% for the quarter. Consequently, non-GAAP earnings per share rose 15% to $0.99 as shown below.
Guidance For Q2’18 & FY 2018
After a successful first quarter, VMware’s management has revised guidance for the fiscal year, with net revenues expected to rise 7% to $7.6 billion. License revenues could be up 6% to almost $3 billion as shown below. For the second fiscal quarter, license and services revenues could both rise double digits to $710 million and $1.2 billion. Additionally, operating profit margin could continue to improve through the year due to disciplined expense management from the company. Resulting non-GAAP diluted earnings per share could also be up in double digits for the current quarter as well as full year.
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- VMware Reports Fiscal 2018 First Quarter Results, VMware Press Release, June 2017 [↩]
- VMware Q1 2018 Earnings Call Transcript, Seeking Alpha, June 2017 [↩]