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Will the EMC-Dell Deal Impact VMware's (VMW) Q3 Earnings?

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VMware, Inc.VMW is set to report third-quarter 2015 results on Oct 20. Last quarter, the company posted a 4.55% positive earnings surprise. Moreover, it has delivered an average positive earnings surprise of 9.64% over the past four quarters. Let's see how things are shaping up for this announcement.

Factors to Consider

The last few days have been tough for VMware owing to the news that its parent-company EMC Corporation EMC will be acquired by Dell Inc. and Silver Lake. Per the deal, EMC's stake in VMware (about 81% of the company) will be owned by Dell post the closure. Dell will create tracking stock from 53% of the value of total VMware shares through which it could still retain 80% of VMware shares.

VMware remains one of the leading companies in the virtualization and cloud computing market. The company's innovative product pipeline, strategic partnerships with the likes of Hewlett-Packard HPQ , continuous contract wins and robust international sales are expected to drive overall results. Additionally, the company continues to make some strategic acquisitions, which have significantly expanded its product portfolio.

Through the EMC acquisition, Dell would be able to get significant control of VMware at a much discounted price. As a result, investors have become jittery regarding the valuation of the company.

In addition, sluggish IT spending and stiff competition remains headwind. Moreover, VMware's continued investment in the emerging markets, product innovation and acquisitions are expected to weigh on margins in the near term.

As per the recently announced preliminary results, VMware expects revenues in the third-quarter to be approximately $1.672 billion, up 10% on a year-over-year basis. Non-GAAP earnings are expected to be $1.02 per share, a robust 18% increase on a year-over-year basis. The company also gave projections for License revenues ($681 million) and non-GAAP operating margin (31.5%).

Earnings Whispers

Our proven model does not conclusively show that VMware is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: VMware has an Earnings ESP of 0.00% as both the Most Accurate and the Zacks Consensus Estimate stand at 74 cents.

Zacks Rank: VMware currently has a Zacks Rank #3 (Hold). Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company's ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stock to Consider

Here is a stock that, as per our model, has the right combination of elements to post an earnings beat this quarter:

Apple Inc. AAPL with Earnings ESP of +0.54% and a Zacks Rank #3.

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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 Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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