Vmware, Inc. (VMW)

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VMware, Inc. (VMW)

F1Q09 Earnings Call Transcript

April 22, 2009 at 5:00 pm ET

Executives

Paul A. Maritz - President, Chief Executive Officer

Mark S. Peek - Chief Financial Officer

Mike Haase - Vice President of Investor Relations

Tod Neilsen - Chief Operating Officer

Analysts

Heather Bellini - UBS

Adam Holt - Morgan Stanley

Sarah Friar - Goldman Sachs

Kash Rangan - Merrill Lynch

Israel Hernandez - Barclays Capital

Brent Thill - Citi

John Difucci - J.P. Morgan

Philip Winslow - Credit Suisse

Matthew Whittaker - FTN Equity Capital Markets

Jason Noland - Robert W. Baird

Robert Breza - RBC Capital Markets

Presentation

Operator

Please standby we are about to begin. Good afternoon. Welcome to VMware’s first quarter 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. At this time, I would like to turn the call over to Mr. Mike Haase, Vice President of Investor Relations. Please go ahead sir.

Mike Haase

Thank you. Good afternoon and welcome to VMware’s first quarter 2009 earnings call. We will have prepared remarks from Paul Maritz, President and CEO and Mark Peek, our CFO. Following the prepared remarks from Paul, Mark, and Tod Nielsen, our COO, will be available for Q&A.

Please note that this call is being simultaneously webcast on our Investor Relations website. Our press release was issued today after the close of market and is also posted on the website.

I would like to remind you that statements made in today’s discussion that are not statements of historical fact are forward-looking statements subject to the Safe Harbor Provisions under federal securities laws. This includes but is not limited to, statements regarding our financial outlook, future product offerings and projected demand. These statements are based on current expectations as of the date of this call and are subject to uncertainties and changes in condition, significance, value and effect as well as other risks detailed in documents filed with the Securities and Exchange Commission including our annual report on Form 10-K for the period ending December 31st, 2008 that may cause actual results to differ materially from those set forth in our statements.

In addition, during today’s call, we will discuss certain non-GAAP financial measures. These non-GAAP financial measures which are used as measures of VMware’s performance should be considered in addition to, not as a substitute for or in isolation from measures of VMware’s financial performance prepared in accordance with GAAP. Our non-GAAP financial measures differ from GAAP and they exclude stock based compensation, amortization of intangible assets, the write-off of in-process research and development, employer payroll tax on employee stock transactions, and the net effect of the amortization and capitalization of software under Statement of Financial Accounting Standards No. 86. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP measures in our earnings release for the period ended December 31st, 2009 and on the Investor Relations page of our website.

The webcast replay of this call will be available for the next 30 days on our Company website under the Investor Relations link.

For your planning purposes, our first quarter [quiet] period begins at the close of business June 16th, 2009. Also, unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2008.

With that, let me hand it off to Mark Peek.

Mark S. Peek

Thanks Mike and good afternoon everyone. Welcome to our first quarter earnings call. Despite the challenging economic environment, VMware had a good quarter in the context of the difficult macro environment and reduced IT spending. We are very pleased with our execution in the field operationally and in our R&D organization.

Customers continue to adopt the VMware platform as a strategic investment to deliver substantial cost savings, improved efficiency and flexibility for their business. But with the economic uncertainty, we are seeing customers reduced their IT purchases in order to preserve cash.

Despite the quick ROI from virtualization, customers have generally put the brakes on all new investments. With the uncertain macro environment, people are doing what you would expect them to do, conserve cash and focus on operations. Any investment has done with extreme caution and done with just enough and just in time.

As a result, despite a couple of large deals, our ELA volumes fell to less than 20% of bookings during the quarter and our total license volumes lag consistent with new server shipment.

In January, I told you that for planning purposes we were estimating first quarter revenue of approximately $475 million. Total revenue for the quarter was $470 million about 1% off of our planning assumptions and candidly given the market condition we feel pretty good about these planning accuracies. However, we saw our continued weakness throughout the quarter in all geographies particularly Europe. Total license revenue declined 12.6% from the very strong first quarter of a year ago compared to our estimate of roughly 10%.

On the other hand, services revenue increased to a very strong 48% as we benefit from our models selling multiple years of maintenance and saw a very strong growth in renewals.

We adopted very well the economic conditions by reducing our non-GAAP operating cost sequentially by 8%, resulting in non-GAAP operating margin of 25.7% and non-GAAP diluted EPS of $0.25 per share. We executed well on the austerity measures we instituted at the end of last year and we will continue to have a laser focus on cost management. But at the same time, and this is a point I want to emphasize, we were able to sustain our investments in the strategic areas of our business and we will continue to invest through this recession.

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