VMware Q3 Earnings Beat, Revs In Line - Analyst Blog

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VMware Inc. ( VMW ) reported third-quarter 2013 non-GAAP earnings per share of 64 cents, beating the Zacks Consensus Estimate of 60 cents. The company witnessed year-over-year growth in revenues. VMware shares jumped 11.30% in after-hours trading.

Revenues

Total revenue increased 13.7% from the year-ago quarter to $1.29 billion and was in line the Zacks Consensus Estimate. Reported revenues were toward the higher end of management's guided range of $1.27 billion and 1.30 billion. Revenues excluding Pivotal revenues and other divestitures increased 19.0%.


The year-over-year increase in revenues can be attributed to higher service revenues and modest growth in license revenues. Moreover, strong demand for VMware solutions across international and domestic markets also helped revenues.

During the quarter, VMware secured five deals, each worth more than $10.0 million. VMware introduced technologies such as VMware NSX, VMware Virtual SAN, VMware vCloud Suite 5.5, and VMware vSphere.

License revenues increased 14.9% from the year-ago quarter to $564.0 million. Enterprise License Agreements (ELA) accounted for approximately 33.0% of third-quarter bookings, comprising a mix of new ELAs and renewals.

Service revenues surged 12.8% from the year-ago quarter to $725.0 million. It includes two segments, namely Software maintenance (up 16.9% year over year), and Professional services (down 12.0% year over year).

Margins

Non-GAAP operating income (including stock-based compensation) increased 38.4% from the year-ago quarter to $321.0 million, while operating margins were up 440 basis points (bps) on a year-over-year basis to 24.9%.

Operating margin (excluding stock-based compensation) was at the high point of management's guided range of 32.5% to 34.0% attributable to higher revenues and cost controlling measures.

On a non-GAAP basis, operating expenses increased 6.0% year over year to $1.0 billion. Including stock-based compensation, operating expenses came in at $968.0 million.

Non-GAAP net income increased 44.4% from the year-ago quarter to $277.4 million or 64 cents per share.

Balance Sheet

VMware exited the quarter with cash and cash equivalents (including short-term investments) of $5.84 billion compared with $5.32 billion in the previous quarter. Cash from operations was $637.0 million versus $534.1 million in the previous quarter. Free cash flow was $543.0 million.

During the quarter, VMware repurchased approximately 1.2 million shares for approximately $90 million at an average price of $74 per share.

Guidance

VMware expects fourth-quarter revenues to range between $1.45 billion and 1.48 billion, reflecting an increase of 12% to 14% on a year-over-year basis. Moreover, revenues from license agreements are expected to grow in the range of 12% to 16% to $670 million.

For fiscal 2013, VMware has increased the high end of the guidance range. VMware now expects revenues in the range of $5.175 billion - $5.205 billion, reflecting 12.0% to 13.0% growth. Excluding pivotal and other divestiture, revenues for VMware is expected to increase in the range of 10% to 11%.

Recommendation

We believe that VMware's posted a modest third quarter result with revenues matching the Zacks Consensus Estimate and earnings beating the same. Moreover, the company's continues to perform well in the International market.

However, we believe that sluggish North American and European markets coupled with modest IT spending environment and stiff competition from its peers such as Microsoft Corp. ( MSFT ), Computer Sciences Corp. ( CSC ) and Citrix Systems ( CTXS ) are the headwinds, going forward.

Saturation of the server virtualization market is another point of concern. Moreover, VMware's continued investments in the emerging markets, product innovations and acquisitions are expected to weigh on margins in the short term.

Currently, VMware has a Zacks Rank #4 (Sell).



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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 , Earnings , Stocks

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

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