) reported first-quarter 2014 non-GAAP earnings (including stock
based compensation but excluding all one-time items) of 56 cents
per share, which remained flat on a year-over-year basis.
However, earnings per share managed to beat the Zacks Consensus
Estimate by a penny.
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Revenues increased 14.2% year over year to $1.36 billion and were
slightly ahead of the Zacks Consensus Estimate. Revenues were
toward the higher end of management's guided range of $1.33
The year-over-year increase in revenues can be attributed to
15.0% growth in license revenues and a 13.7% increase in services
revenues. Among services revenues, software maintenance jumped
15.9% from the year-ago quarter, while professional services
remained flat on a year-over-year basis.
Moreover, strong demand for VMware solutions across international
as well as U.S. markets helped revenues.
In constant currency, the Americas, Asia-Pacific and EMEA total
bookings increased less than 10% each on a year-over-year basis.
Relative performance wise, the Americas was the strongest region
followed by the Asia-Pacific and EMEA.
Amongst the product groups, End User Computing (EUC) license
bookings grew 35.0% on a year-over-year basis while Cloud
Management grew over 30.0% in the reported quarter.
During the quarter, VMware secured two deals, each worth more
than $10.0 million. Enterprise License Agreements (ELA) accounted
for approximately 25.0% of first-quarter bookings.
VMware's hybrid cloud solutions grew 100% year over year in the
reported quarter. In the reported quarter, the company unveiled
the Virtual SAN, which happened to be VMware's first software
defined storage product.
During the quarter, VMware formed an alliance with Google to
modernize corporate desktops for the Mobile Cloud Era by
providing businesses with secure, cloud access to Windows
applications, data and desktops on Google Chromebooks.
Also, the acquisition of mobile security firm, AirWatch for $1.54
billion was completed during the reported quarter. With AirWatch
having already contributed about $5.0 million to revenues in the
reported quarter, we expect this acquisition to be a major
catalyst going forward.
Some of the other products launched during the quarter include
the likes of VMware Horizon DAAS and VMware Horizon 6. Horizon
DAAS would enable simple and flexible delivery of desktops in the
cloud while Horizon 6 would deliver published applications and
virtual desktops in a single integrated platform.
Operating margin declined 80 basis points (bps) from the year-ago
quarter to 21.5%. Operating profit includes stock-based
compensation but excludes one-time items.
The decline in operating margin was due to higher general and
administrative expense (up 120 bps) and lower gross profit (down
80 bps), which was partially offset by lower research and
development expense (down 120 bps) and lower sales and marketing
expense (down 20 bps).
GAAP net income was $199 million, which when adjusted for the
following items (intangible amortization of $28 million,
acquisition and other related items of $24 million and tax of
$9.4 million), led to non-GAAP net income of $241.6 million.
Balance Sheet & Cash Flow
VMware exited the quarter with cash and cash equivalents
(including short-term investments) of $6.62 billion compared with
$6.18 billion in the previous quarter. Cash from operations was
$750.0 million versus $688.0 million in the previous quarter.
Free cash flow was $673.0 million compared with $590 million in
the prior quarter.
During the quarter, VMware repurchased approximately 1.8 million
shares for around $169.0 million at an average price of $96.0 per
For 2014, VMware forecasts revenues to be in the range of $5.94
billion to $6.10 billion. Excluding Pivotal and divestitures but
including $75.0 million from recently acquired AirWatch, revenues
are expected to grow in the range of 16.0% to 18.5% for 2014. The
Zacks Consensus Estimate is pegged at $6.04 billion.
License revenues for 2014 are expected to be in the range of
$2.55 billion to $2.63 billion (up 12.0% to 16.0% year over
year). Excluding Pivotal and divestitures but including AirWatch,
license growth rate is expected to be up 13% to 17% versus 2013.
For 2014, non-GAAP operating margin is expected to be
approximately 31.0% while the GAAP operating margin is expected
to range between 15% and 18%. Management expects the GAAP tax
rate to be approximately 1-2.5 pts lower than the non-GAAP tax
rate of 18.5%. The company expects to continue its share
buyback program in 2014.
For second quarter of 2014, management expects revenues to be in
the range of $1.43 billion to $1.4737 billion (up 15% to 18% year
over year). The Zacks Consensus Estimate is pegged at $1.44
License revenues for the second quarter are expected to be $605.0
million to $615.0 million (up 14.0% to 16.0% year over year).
Non-GAAP operating margin for the second quarter is expected to
be within the range of 29% to 29.5% while GAAP operating margin
is expected to range between 12% and 15.5%. Management expects
the GAAP tax rate to be approximately 1-2.5 pts lower than the
non-GAAP tax rate of 18.5%. Moreover, management also expects to
continue its share buyback program in the second quarter of 2014.
We believe that a sluggish IT spending environment and
intensifying competition from its peers such as
) are primary headwinds for VMware, going forward.
Moreover, VMware's continued investments in the emerging markets,
product innovations and acquisitions are expected to weigh on
margins in the near term.
However, VMware's strong product portfolio is a major positive.
The company continues to win contracts and robust international
sales will continue to the boost top line, going forward.
Moreover, the acquisitions of Desktone and AirWatch will boost
the top line, going forward.
Currently, VMware has a Zacks Rank #3 (Hold).