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VMware Inc. (VMW)

Q3 2010 Earnings Call Transcript

October 18, 2010 5:00 pm ET


Mike Haase – VP, IR

Mark Peek – CFO

Tod Nielsen – COO


Heather Bellini – ISI Group

Israel Hernandez – Barclays

John DiFucci – JP Morgan

Derek Bingham – Goldman Sachs

Brent Thill – UBS

Walter Pritchard – Citi

Kash Rangan – Merrill Lynch

Gregg Moskowitz – Cowen

Adam Holt – Morgan Stanley

Shaul Eyal – Oppenheimer

Philip Winslow – Credit Suisse

Michael Turits – Raymond James



Welcome to the VMware third quarter 2010 earnings call, and thank you for standing by. At this time all participants are in a listen-only mode. (Operator instructions) Today’s conference is being recorded. If you have any objections you may disconnect at this time. Now, I will turn the meeting over to Mr. Mike Haase, Vice President of Investor Relations. Mr. Haase, you may begin.

Mike Haase

Thank you and welcome to VMware’s third quarter 2010 earnings conference call. We will have prepared remarks from Tod Nielsen, our COO; and Mark Peek, our CFO. Paul Maritz, our CEO, is still out of the country following VMworld Europe in Copenhagen last week. But he is on the phone and will join Tod and Mark for the Q&A session. Our press release was issued after close of market and is posted on our website, where this call is being simultaneously web cast.

Statements made on this call include forward looking statements, such as those with the words will, believes, expects, continues, and similar phrases that denote future expectations or intent regarding our financial outlook, product offerings, customer demand, and other matters. These statements are based on the environment as we currently see it and are subject to risks and uncertainties. Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission, including our most recent reports on Form 10-Q and Form 10-K for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such 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, and not as a substitute for or an isolation from GAAP measures. Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, amortization of intangible assets, employer payroll tax and employee stock transactions, the net effect of amortization and capitalization of software, and acquisition related items. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in the press release and on the investor relations page of our website.

The web cast replay of this call will be available for the next 30 days on our company website under the investor relations link. Our fourth quarter quiet period begins at the close of business December 16, 2010. Also, unless otherwise stated, all financial comparisons in this call will be in reference to our results for the comparable period of 2009.

With that, let me hand it over to Mark.

Mark Peek

Thanks, Mike, and good afternoon, everyone. Driven by a strong product portfolio and great field execution, we once again set new records in revenue, non-GAAP operating profit and trailing 12-month free cash flows. Business was strong across geographies, transaction types, and products.

We saw continued momentum of vSphere, as customers adopt the vSphere platform as a strategic investment that delivers substantial cost savings, improved efficiency, and business agility. Our customers also are looking to VMware to help make cloud computing a reality. VMware is enabling the delivery of IT as a service using our evolutionary approach based on the vSphere platform.

It is clear that virtualization is the platform for the cloud, and vSphere is the cornerstone enabling customers to leverage their existing IT investments, and greatly simplifying their data centers. In July, we successfully launched vSphere 4.1. In September we released View 4.5. Customer feedback and early adoption has been very positive on both products.

We are also making solid progress in our desktop business. Desktop license bookings exceeded 10% of total license bookings in the US during the third quarter, and year-to-date. In Q3, we acquired Integrien, a leader in real-time application and infrastructure performance and analytics software. We also acquired TriCipher, a leader in secure access management and enterprise identity federation for cloud hosted SaaS applications. While these acquisitions will not add significant short-term revenue, they accelerate the expansion of our platform as we continue to build out the stack for this next era of computing.

We ended the quarter with $2.9 billion of cash. Strong operating performance and capital efficiency led the trailing 12 month free cash flow growth of 39% to $1.1 billion or $2.51 per share. So all told, we had a great September quarter. On behalf of our long-term shareholders and management team thanks to all of the people of VMware, our partners and our customers.

Now I will take a few minutes to walk you through the details. Revenues for the third quarter were $714 million, up 46% from a year ago, or 47% measured on a constant currency basis. License revenues were $343 million, an increase of 43% from the third quarter of a year ago. Demand was strong across our global regions and customer segments.

On the product side, the growing interest in our desktop solution led to record quarterly desktop license revenues. With the release of vSphere 4.1, we changed our packaging to move certain features including VMotion to a (inaudible); one of our SMB focused vSphere offerings. This resulted in a shift within our SMB SKUs from Essentials for the list price of $4.95 to Essentials Plus with a list price of $34.95. We also saw strong demand for our enterprise packages.

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