Earnings Preview: VMware Inc. - Analyst Blog

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VMware Inc. ( VMW ) is set to release its fiscal first quarter 2012 results after the closing bell on April 18, 2012. In the run up to the earnings results, no substantial movement in analysts' estimates for the quarter was noticed.

Prior Quarter Recap

VMware reported an outstanding fourth quarter 2011 with its earnings per share ( EPS ) surging 59.2% year over year and handily beating the Zacks Consensus Estimate by 9 cents. The better-than-expected results were driven by solid revenue growth on the back of strong global demand for VMware products.

Revenues increased 26.9% year over year to $1.06 billion, in line with the high end of management's guided range of $1.03 billion to $1.06 billion and surpassed the Zacks Consensus Estimate of $1.05 billion. The upside was primarily driven by strong Enterprise License Agreement ( ELA ) growth, strong demand in the U.S. and across the Asia-Pacific markets during the quarter.

Moreover, operating income (including stock-based compensation) in the reported quarter jumped 62.7% year over year to $257.3 million. Operating margin was 24.3% in the quarter compared with 18.9% in the year-ago quarter. The upside was primarily driven by strong revenue growth and strict cost-control measures.

For further details please read: VMware Posts Strong 4Q

Current Quarter Expectations

For the first quarter 2012, VMware expects total revenue to range from $1.015 billion to $1.040 billion, reflecting an increase of 20.0% to 23.0% from the first quarter of 2011. The Zacks Consensus revenue estimate is pegged at $1.03 billion, marginally higher than the lower end of management guidance.

VMware continues to increase investments in emerging markets and product innovation, which will hamper the company's operating margin expansion for 2012. Management expects first quarter 2012 operating margin to exceed the full-year operating margin growth. Non-GAAP operating margin for the first quarter is expected to be within a range of 30.0% to 31.0%.

For fiscal 2012, total revenue is expected in the range of $4.475 billion to $4.6 billion, an increase of 19.0% to 22.0% from fiscal 2011, primarily driven by strong license revenue growth, which is expected to increase within 11.0% to 16.0% range.  Operating margin is expected in the range of 29.5% to 30.5% in the upcoming quarter.

For 2012, VMware expects capital expenditure in the range of $325.0 million to $350.0 million.

Estimates Trend Revision

Over the past 30 days, none of the 12 analysts covering the stock revised their estimates for the quarter. Thus, the Zacks Consensus Estimate for the first quarter have been pinned at 42 cents per share.

Likewise, for fiscal 2012, none of the 13 analysts covering the stock revised their estimates over the last 30 days. The Zacks Consensus Estimate remained at $1.86.

Analysts expect VMware to report solid results on the back of continued demand for server virtualization and cloud computing technologies, as its commands a dominating position in this area. Moreover, analysts are optimistic about the prospects of the company benefiting from the data center upgradation in the near term.

Our Take 

We note that VMware has performed consistently during the last 4 quarters with its average earnings surprise being 18.94%. For the to-be-reported quarter we expect the company to beat the Zacks Consensus by the same magnitude.

We believe that VMware's strong and innovative product pipeline will enable the company to drive its top-line growth over the long term. Moreover, the company's increasing focus on emerging markets will also be a crucial factor over the long term, in our view.

However, we believe that a sluggish North American and European market coupled with modest IT spending environment will be an overhang on the stock over the next 12 to 18 months.  Moreover, increasing competition from Microsoft Corp. ( MSFT ) and Citrix Systems Inc. ( CTXS ) will be a deterrent factor going forward.

We have a Neutral recommendation on VMware over the long term (for the next 6 to 12 months). Currently, VMware has a Zacks #3 Rank, which implies a 'Hold' rating on short-term basis.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CTXS , ELA , EPS , MSFT , VMW

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