VMware Continues Double Digit Revenue Growth With Strength Across Key Areas

VMware (NYSE:VMW) announce its fiscal Q2 earnings on Thursday, August 24, reporting a 12% annual increase in revenues to $1.9 billion. In addition, VMware reported an improvement in margins across segments. The company’s licenses and services gross margins expanded by 70-80 basis points, while its non-GAAP operating margin also expanded by 70 basis points to nearly 31%. As a result, VMware’s non-GAAP diluted earnings per share rose 23% to $1.19 for the quarter. Revenues and margins were in line with the revised guidance given at the beginning of the month.

We maintain our $90 price estimate for VMware’s stock, which is around 10% lower than the current market price.

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Key Growth Metrics

VMware’s license revenues were up 14% y-o-y to $732 million, while gross margins for the license business continued to improve gradually, as shown below. Within the services segment, software maintenance revenues rose 11% to just over $1 billion, while professional services revenues were up 14% y-o-y to $153 million for the quarter. Revenues generated by hybrid cloud and SaaS offerings were largely responsible for the strong growth in services revenues. VMware’s company-wide gross margin improved by around 80 basis points, as shown below.

According to VMware’s management, hybrid cloud and Software-as-a-Service (SaaS) revenues were up 26% y-o-y to $176 million. The company witnessed particularly strong demand for network virtualization platform NSX, for which total bookings for were up 40% over the prior year period. Similarly, hyper-converged software suites including VSAN and VxRail also demonstrated strong growth during the quarter. Virtual SAN license bookings were up 150%, while total paying customers rose from 5,500 last year to around 10,000 this year.

Guidance For Q3’18 & FY 2018

After a successful first half, VMware’s management has given positive guidance for the full fiscal year, with net revenues expected to rise 10% to $7.8 billion. Third quarter revenues are expected to be around 12% higher at just under $2 billion. Similarly, its operating profit margin is expected to continue to improve through the year due to disciplined expense management. Resulting non-GAAP diluted earnings per share could also be up in double digits for the third fiscal quarter as well as full year.

Please note that all year-over-year comparisons made by the company in its press releases and in this note compare Q3 FY’18 (August to October 2017) with Q3 of last year, which was July to September 2016, due to the company changing its fiscal calendar earlier this year.

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