VMware Inc. (
reported second-quarter 2014 non-GAAP earnings (including stock
based compensation but excluding all one-time items) of 55 cents
per share, which declined 9.9% on a year-over-year basis. However,
earnings per share (EPS) were in line with the Zacks Consensus
Shares of VMW were up 3.01% ($3.08) following the release of the
second quarter earnings.
Revenues increased 17.2% year over year to $1.46 billion almost
near the higher end of management's guided range of $1.43
The year-over-year increase in revenues can be attributed to
15.6% growth in license revenues to $614.0 million and an 18.4%
increase in services revenues to $843.0 million in the reported
quarter. Among services revenues, software maintenance jumped 20.0%
from the year-ago quarter, while professional services rose 8.2% on
a year-over-year basis.
Moreover, strong demand for VMware solutions across
international as well as U.S. markets helped revenues.
International accounted for 53.1% of net revenue in the reported
quarter while the U.S. chipped in with the remnant 46.9% share.
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, EMEA was the strongest followed by the
Americas and Asia-Pacific.
Among the product groups, End User Computing (EUC) license
bookings (including AirWatch) grew 50.0% on a year-over-year basis
while Cloud Management grew over 30.0% in the reported quarter.
Hybrid cloud business grew 80.0% on a year-over-year basis in the
During the quarter, VMware secured eight deals, each worth more
than $10.0 million. In Germany itself, the company closed two of
these $10.0 million deals. Enterprise License Agreements (ELA)
accounted for approximately 36.0% of second-quarter bookings.
Recently, the company announced plans of expanding its
operations in the Asian sub- continent. In Japan, VMware formed an
alliance with SoftBank to launch its vCloud Hybrid Service while in
China it entered into a partnership with China Telecom to launch
During the quarter, VMware announced VMware Horizon 6, an
integrated solution that delivers published applications and
desktops on a single platform. The quarter also witnessed an
alliance between VMware and SAP AG for announcing the availability
of the SAP HANA platform VMware vSphere 5.5.
In the reported quarter, the company announced VMware vCloud
Hybrid Service - Disaster Recovery, a new cloud-based disaster
recovery (DR) service that provides a continuously available
recovery site for VMware virtualized data centers.
Operating margin declined 510 basis points (bps) from the
year-ago quarter to 19.8%. Operating profit includes stock-based
compensation but excludes one-time items. The decline was primarily
attributable to the huge expenses incurred for the acquisition of
The decline in operating margin was due to higher research and
development expense (up 80 bps), sales and marketing expense (up
160 bps), general and administrative expense (up 100 bps) and lower
gross profit (down 220 bps).
Non-GAAP net income (including stock based compensation but
excluding all one-time items) was $239.3 million or 55 cents per
share in comparison to $264.1 million or 61 cents reported in the
year-ago quarter. Net margin declined 490 bps on a year-over-year
basis to 16.4%.
Vmware, Inc - Earnings Surprise |
Balance Sheet & Cash Flow
VMware exited the quarter with cash and cash equivalents
(including short-term investments) of $6.64 billion compared with
$6.62 billion in the previous quarter. Cash from operations was
$409.0 million while free cash flow was $333.0 million in the
During the quarter, VMware repurchased approximately 2.5 million
shares for around $238.0 million at an average price of $96.0 per
For 2014, VMware forecasts revenues to be in the range of $5.96
billion to $6.08 billion with $6.02 being the mid-point. Excluding
Pivotal and divestitures, revenues are expected to grow in the
range of 16.0% to 18.0% for 2014.
License revenues for 2014 are expected to be in the range of
$2.56 billion to $2.62 billion (up 13.0% to 15.0% year over year).
Excluding Pivotal and divestitures but including AirWatch, license
growth rate is expected to be 14% to 16% versus 2013.
For 2014, non-GAAP operating margin is expected to be
approximately 31.0% while GAAP operating margin is expected to
range between 14.0% and 18.0%. Management expects the GAAP tax rate
to be approximately 1-2.5 percentage points lower than the non-GAAP
tax rate of 18.5%. The company expects to continue its share
buyback program in 2014.
Further, management believes that by the end of 2014, VMware
operated clouds will be available in over 75.0% of the world's
For third quarter of 2014, management expects revenues to be in
the range of $1.42 billion to $1.52 billion (up 15% to 18% year
over year). License revenues for the third quarter are expected to
be $630.0 million to $645.0 million (up 12.0% to 14.0% year over
Non-GAAP operating margin for the third quarter is expected to
be within the range of 29% to 29.5% while GAAP operating margin is
expected to range between 11.4% and 15.4%. Other income and expense
is expected to be nil in the third quarter. Moreover, management
also expects to continue its share buyback program in the third
quarter of 2014.
We believe that a sluggish IT spending environment and
intensifying competition from its peers such as
Microsoft Corp. (
Hewlett Packard (
are primary headwinds for VMware.
Moreover, VMware's continued investments in the emerging
markets, product innovations and acquisitions are expected to weigh
on margins in the near term.
However, recognition of the company by IDC as number one in both
worldwide cloud systems management software and worldwide data
center automation software is a major positive for VMware. Also,
the company featured in Gartner's Magic Quadrant during the
VMware's strong product portfolio is a major positive. The
company continues to win contracts. Robust international sales will
continue to boost the top line, going forward. The acquisitions of
Desktone and AirWatch will also add to the top line, going
Currently, VMware has a Zacks Rank #4 (Sell).
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