VMware Inc.
(
VMW
)
reported an outstanding fourth quarter 2011 with 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.
EPS (including stock-based compensation) came in at 52 cents in
the reported quarter compared with 33 cents in the year-ago
quarter. Excluding one-time items and stock-based compensation, EPS
was 62 cents, up 34.8% from 46 cents reported in the year-ago
quarter.
Quarter Details
Revenue 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.
License revenue was up 21.6% year over year to $513.8 million,
primarily attributable to strong global demand for vSphere, vFabric
and Cloud Foundry project. ELA was 30.0% of fourth quarter bookings
and included five transactions worth $10 million or more. The
company experienced stronger demand for end-user computing and
management products with the renewals of ELAs.
Services revenue jumped 32.2% year over year to $546.5 million.
Software maintenance and support revenue increased 34.0% year over
year to $463.0 million in the fourth quarter of 2011.
VMware stated that with the purchase of new licenses, customers
continued to buy more than 24 months of support and maintenance,
which reflects their strong commitment to VMware as a core element
of their data center architecture and hybrid cloud strategy.
Professional services revenue was $83.0 million, up 22.0% from the
year-ago quarter.
USrevenues increased 21.0% year over year to reach $531.0
million while International revenues witnessed a year-over-year
growth of 34.0% to $529.0 million in the reported quarter.
Gross profit (including stock-based compensation) increased
26.7% year over year to $930.1 million in the fourth quarter. Gross
margin was 87.7% versus 87.8% in the prior-year quarter. The
year-over-year decline in gross margin was due to higher proportion
of service revenue in the mix.
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.
Net income (including stock-based compensation) was $223.4
million, up from $139.2 million in the fourth quarter of 2010. Net
margin was 21.1%, up from 16.7% in previous-year quarter.
Balance Sheet and Cash Flow
VMware exited the quarter with cash and cash equivalents
(including short-term investments) of $4.51 billion, compared with
$3.98 billion in the previous quarter.
Cash from operations was $561.4 million versus $524.0 million in
the prior quarter. Free cash flow was $535.3 million in the
quarter, an increase of 32.0% from the year-ago quarter. During the
quarter, the company repurchased shares of its common stock worth
$90 million.
Guidance
Management provided robust guidance for the first quarter of
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 $1.02 billion, in line with the lower end of management
guidance.
VMware continues to increase investments in emerging markets and
product innovation, which will hamper 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, 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.
Our Recommendation
Enterprises that are shifting to the cloud need proper
infrastructure, which VMware provides through its four key
products: vSphere that helps in coordinating and automating
computer storage and networking; vShields for virtualized Edge
functions and security; vCloud Director to enable cloud
functionality; and vCenter Operations Suite for management. We
expect VMware to benefit from increased adoption of virtualization
and cloud computing technologies going forward.
We believe that VMware's strong innovative product pipeline will
drive top-line growth over the long term. Moreover, the company's
increasing focus on emerging markets will also drive its
profitability over the long term, in our view.
However, we believe that a sluggish North American and European
market coupled with weak IT spending environment will be an
overhang for the stock over the next 12 to 18 months.
Moreover, increasing competition from
Microsoft Corp. (
MSFT
)
and
Citrix Systems Inc. (
CTXS
)
will remain a deterrent 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 a short-term basis.
CITRIX SYS INC (
CTXS
): Free Stock Analysis Report
MICROSOFT CORP (
MSFT
): Free Stock Analysis Report
VMWARE INC-A (
VMW
): Free Stock Analysis Report
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