What To Expect From VMware’s Second Quarter Earnings

by Trefis Team
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VMware (NYSE:VMW) is scheduled to announce its Q2 fiscal 2018 earnings on Thursday, August 24. The virtualization and cloud computing provider had a solid end to fiscal 2017 and Q1’18, demonstrating strength in its business and seemingly unaffected by the acquisition of its parent company. VMware’s license business and services business have grown at a steady pace in recent years due to strong performance by the company’s fast-growing segments such as NSX, AirWatch and vSAN.

We maintain our $90 price estimate for VMware’s stock, which is slightly lower than the current market price.

See Full Analysis For VMware Here

Guidance For Q2’18 & FY 2018

For the second fiscal quarter, license and services revenues are both expected to rise double digits to $730 million and just under $1.2 billion, respectively. Additionally, its operating profit margin is expected to improve by around 70 basis points, as shown below. The company expects the resulting net income per share (non-GAAP) to be over 20% higher on a y-o-y basis at $1.17.

Last week, VMware’s management announced revised guidance for the fiscal year, with net revenues expected to rise 10% to $7.8 billion. Both license and services revenues could be up 10%, as shown below. Similarly, its operating profit margin is expected to continue to improve through the year due to disciplined expense management from the company. The resulting non-GAAP diluted earnings per share is also expected to be up to $5.08 for the full year, compared to the Reuters’ consensus estimate of $5.01.

It is important to note that all year-over-year comparisons made by the company in its press release and in this note compare Q2 FY’18 (May to July 2017) with Q2 of last year (which was April to June 2016). Similarly, all full year comparisons involve FY’18 (February 2017 to January 2018) and previous fiscal year (January to December 2016) due to the company updating its fiscal calendar earlier this year.

Key Growth Areas

VMware’s net revenues have witnessed strong growth in recent quarters, driven by strength in fast-growing areas such as network virtualization, hybrid cloud, hyper converged software and end-user computing. Hybrid cloud and SaaS revenues were up almost 30% on a y-o-y basis in the most recent quarter, while total vCloud Air hybrid cloud license bookings grew at around 40%. Similarly, the total number of paying customers for network virtualization platform NSX were up from 1,400 last year to 2,600 at the end of the first fiscal quarter this year. Correspondingly, the total bookings for NSX were up 50% on a y-o-y basis. Furthermore, hyper-converged software suites including VSAN and VxRail also demonstrated strong growth in the most recent quarter. At the same time, Virtual SAN license bookings were up 150%, while total paying customers rose from 5,500 last year to 8,000 this year.

vmw_q1e4

In recent years, VMware has gradually transformed from primarily a software license vendor to a services-based model. Over the last five years, the contribution of software licenses revenues to net revenues has fallen from around 50% in 2010 to 40% last year. In addition, economies of scale led to an improvement in gross margins (non-GAAP) for both the licenses and services businesses last year.

In addition to an improvement in gross margins, VMware’s operating income has also grown at a similar pace. While R&D expenses remain fairly high, the company has taken measures to reduce SG&A expenses in order to improve its operational efficiency. This could help the company to meet its targeted operating profit margin range of almost 33% through the end of the year.

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