) reported third quarter 2012 non-GAAP earnings per share of 70
cents, which improved from 53 cents reported in the previous-year
quarter. However, including stock based compensation, earnings
came at 39 cents per share, missing the Zacks Consensus Estimate
of 42 cents. The year-over-year earnings growth was primarily due
to solid top-line expansion.
Revenue for the quarter increased 20.4% from the previous-year
quarter to $1.13 billion, which was in line with the Zacks
Consensus Estimate. Reported revenue was within management's
guided range of $1.11 billion-$1.15 billion.
Revenue for the quarter was positively impacted by higher
service revenues and license revenues. Moreover, strong demand
for VMware solutions across international and domestic markets
also helped revenues.
License revenue increased 10.7% year over year to $491.1
million. Enterprise License Agreements ("ELA") were approximately
24.0% of third quarter bookings boosted by the prudent mix of new
ELAs and renewals.
Service revenue was $642.6 million, up 29.0% year over year.
It includes two segments, namely Software maintenance and support
and Professional services. The revenues of both these segments
increased 29.0% from the previous-year quarter.
U.S. revenues increased 25.0% year over year to reach $554.0
million, while International revenues witnessed a year-over-year
growth of 16.0% to $580.0 million in the reported quarter.
Non-GAAP gross profit came at $997.9 million, up 21.1% from
the previous-year quarter. Gross profit (including stock based
compensation) increased 21.0% from the previous-year quarter to
$989.6 million. Gross margin was 87.3% versus 86.8% in the
prior-year quarter. The year-over-year increase in gross margin
was due to higher revenue base.
Operating expenses increased 21.2% from the previous-year
quarter to $756.5 million due to 16.7% increase in the research
and development expenses, 24.6% increase in the selling and
marketing expenses and 19.5% increase in the general and
administrative expenses. Operating expenses as a percentage of
revenue increased 40 basis points.
Non-GAAP operating income increased 28.0% from the
previous-year quarter to $365.2 million. Operating income
(including stock-based compensation) in the reported quarter
jumped 20.4% year over year to $233.1 million. Operating margin
remained flat on a year-over-year basis at 20.6%.
Non-GAAP net income increased 31.8% from the previous year
quarter to $303.4 million. However, including stock based
compensation, net income came at $171.2 million.
VMware exited the quarter with cash and cash equivalents
(including short-term investments) of $4.39 billion, compared
with $5.35 billion in the previous quarter. Cash from operations
was $436.2 million versus $391.3 million in the previous quarter.
Free cash flow was $385.9 million in the quarter versus $379.7
million in the previous quarter.
VMware expects fourth quarter revenue to range from $1.26
billion to $1.29 billion, reflecting an increase of 19.0% to
22.0% on a year-over-year basis. Moreover, revenue from license
agreements is expected to grow in the range of 14.0% to 18.0%
from the previous-year period. Non-GAAP operating margin is
expected in the range of 31.5%-32.5%.
For fiscal 2012, revenue is expected in the range of $4.572
billion to $4.602 billion, an increase of 21.4% to 22.2% from
fiscal 2011, primarily driven by strong license revenue growth.
License revenue is expected to increase within 12.8% to 13.8%
range. Operating margin on non-GAAP basis is expected in
the range of 32.0% to 32.3%.
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.
However, we believe that sluggish North American and European
markets coupled with modest IT spending environment and
Citrix Systems Inc.
) are the headwinds going forward. Moreover, the company's
continued investments in emerging markets, product innovations
and acquisitions are expected to weigh on the margins in the
We have a Neutral recommendation on VMware over the long term.
Currently, VMware has a Zacks #4 Rank, which implies a Sell
rating on a short-term basis.
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