) reported second quarter 2012 non-GAAP earnings of 68 cents, which
improved from 55 cents in previous-year quarter. However, including
stock based compensation of 23 cents but excluding total one time
items of 10 cents and proportionate tax effect of 3 cents, earnings
came at 52 cents per share, which comfortably surpassed the Zacks
Consensus Estimate by 4 cents.
Earnings surged 33.3% from prior-year quarter driven by solid
revenue growth, based on strong global demand for VMware products.
The company also announced the acquisition of Nicira for $1.26
billion, a software-defined networking company.
Revenue for the quarter increased 22.0% year over year to $1.12
billion. This was in line with the Zacks Consensus Estimate and
higher end of management's guided range of $1.10 billion-$1.12
billion. The upside was primarily driven by strong growth from the
license and services segments. Moreover, strong demand in the
international and domestic markets also contributed to the
License revenue was up 11.3% year over year to $517.2 million,
primarily attributable to strong global demand for VMware products.
Enterprise License Agreements were approximately 30.0% of second
quarter bookings and included four transactions worth $10 million
Services revenue jumped 32.7% year over year to $605.8 million.
It includes two segments, namely Software maintenance and support
and Professional services. The revenues of these two segments
increased 33.0% and 24.0%, respectively.
VMware stated that with the purchase of new licenses, customers
continued to buy more than 24 months of support and maintenance.
This reflects their strong commitment to VMware as a core element
of their data center architecture and hybrid cloud strategy.
US revenues increased 22.0% year over year to reach $551.0
million, while International revenues witnessed a year-over-year
growth of 22.0% to $572.0 million in the reported quarter.
Gross profit (including stock-based compensation) increased
22.3% year over year to $979.8 million in the second quarter. Gross
margin was 87.2% versus 87.0% in the prior-year quarter. The
year-over-year increase in gross margin was due to higher revenue
Operating expenses increased 20.4% from the previous-year
quarter to $722.5 million due to 14.5% increase in the research and
development expenses, 24.9% increase in the selling and marketing
expenses and 17.8% increase in the general and administrative
expenses. However, operating expenses as a percentage of revenue
declined 90 basis points.
Operating income (including stock-based compensation) in the
reported quarter jumped 27.9% year over year to $257.3 million.
Operating margin was 22.9% in the quarter compared with 21.8% in
the year-ago quarter. The upside was primarily driven by strong
revenue growth, higher gross margin base and lower operating
expenses as a percentage of revenue.
Net income (including stock-based compensation) was $223.9
million, up from $171.5 million in the second quarter of 2011. Net
margin was 19.9%, up from 18.6% in previous-year quarter.
VMware exited the quarter with cash and cash equivalents
(including short-term investments) of $5.35 billion, compared with
$5.23 billion in the previous quarter. Cash from operations was
$391.3 million versus $576.6 million in the previous quarter. Free
cash flow was $379.7 million in the quarter versus $596.6 million
in the previous quarter.
VMware expects total revenue to range from $1.11 billion to
$1.15 billion, reflecting an increase of 18.0% to 22.0% over the
third quarter of 2011. Moreover, revenue from license agreements is
expected to grow in the range of 6% to 13% from the previous-year
period. However, management expects services revenue to outperform
license revenues in 2012.
VMware continues to increase its investments in emerging
markets, product innovations and acquisitions. Increased
investments are expected to hamper operating margin expansion for
2012. Non-GAAP operating margin for the third quarter is expected
to be within a range of 28.75% to 29.75%.
For fiscal 2012, revenue is expected in the range of $4.54
billion to $4.635 billion, an increase of 20.5% to 23.0% from
fiscal 2011, primarily driven by strong license revenue growth,
which is expected to increase within 11.0% to 15.0% range.
Operating margin is expected in the range of 30.25% to 31.25%.
We believe that VMware's strong and innovative product pipeline
along with its strategic acquisitions will enable the company to
drive its top-line growth over the long term. Moreover, the
company's continued strong performance in international markets and
focus on emerging markets will also be a crucial factor over the
long term, in our view.
However, we believe that sluggish North American and European
markets coupled with modest IT spending environment and competition
Citrix Systems Inc.
) are the headwinds going forward.
We have a Neutral recommendation on VMware over the long term.
Currently, VMware has a Zacks #3 Rank, which implies a Hold rating
on a short-term basis.
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