VMware’s Partnership With Amazon Should Have Driven Q1 Results

VMware (NYSE:VMW) reports its fiscal Q1 2020 results later today. In the previous quarter, the company reported an earnings as well as revenue beat. We expect the momentum in its business to continue, as hybrid cloud management is becoming an important category with enterprises having to deal with multiple clouds. Also, VMware’s partnership with Amazon Web Services (AWS) late last year should have meaningfully boosted the company’s revenues for the quarter.

We have a fair value estimate of $164 for VMware’s stock. Our interactive dashboard on VMware’s Q1 Earning Preview outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation. Also, you can see more Trefis technology company data here.

A Quick Look At VMware’s Revenue Sources

VMware makes money from the sale of software and services for data center management, hybrid cloud computing, remote access and desktop virtualization. The company’s fiscal year ends on the Friday nearest to January 31 of each year.

VMware reports its revenue ($9 billion in Fiscal 2019) in two segments:

• Software License (2019 revenue of $3.8 billion, 42% of total revenue): Segment revenue is derived from the sale of licenses and subscription for the company’s products.
• Maintenance and Professional Services (2019 revenue of $5.2 billion, 58% of total revenue): Segment revenue is derived from software maintenance and support, professional services and an allocated portion of subscription revenue.

Revenue trends over recent quarters, and expectations for fiscal Q1 and full-year 2020

• Software License revenue grew by $588 million to $3.8 billion (+18% y-o-y) in 2019. We expect Q1 revenues to grow to $892 million (+15% y-o-y versus Q4 revenue growth of +21% y-o-y). For fiscal 2020, we expect revenue to grow to $4.2 billion (+13% y-o-y)
• Maintenance and Professional Services revenue grew by $524 million to $5.2 billion (+11% y-o-y) in 2019. We expect Q1 revenues to grow to $1.4 billion (+10% y-o-y versus Q4 revenue growth of +13% y-o-y). For fiscal 2020, we expect revenue to grow to $5.8 billion (+12% y-o-y)
• Total revenue grew by $1.1 billion to $9 billion (+14% y-o-y) in 2019. We expect Q1 revenues to grow to $2.3 billion (+12% y-o-y versus Q4 revenue growth of +16% y-o-y). For fiscal 2020, we expect revenue to grow to $10.1 billion (+12% y-o-y)

VMware has greatly benefitted from its wider VMware Cloud Provider Program (VCPP), through which the company collaborates with cloud providers to sell their joint product offerings in the hybrid computing space. VMware’s partnership with AWS deserves special mention, given the focus of both companies on this initiative. Also, the recently-inked partnership between VMware, Microsoft (Azure) and Dell should have a positive impact on the company’s top line in the near future.

We forecast VMware’s EPS figure for full-year 2020 to be $5.70. Taken together with our forward P/E multiple of 29x for the company, this works out to a $164 per share price estimate for the company’s stock, which is about 15% below the current market price.

Do not agree with our forecast? Create your own price forecast for VMware by changing the base inputs (blue dots) on our interactive dashboard.