Strategic Change in Right Direction, Guidance Looks Too Doomsday
VMW is refocusing on core competency (private/hybrid cloud) and eliminating the
costs/distractions of tertiary low-TAM areas. More focus means less missteps for
customers (eg, vSphere pricing fiasco) and for shareholders faster growth/higher
margins over time (‘more wood/fewer arrows’). Guidance looks overly pessimistic
(continuation of weak Fed/Fin Services, no big deals, muted ELA trends) mixed
with typical ‘new CFO’ conservatism. While ‘1 more reset’ risk to est’s from 3/13
‘Pivotal’ event, magnitude of tailwinds (details inside) suggest ‘beat/raise’ 2013.
FQ1 to $1.86B/$0.68 from $1.26B/$0.76. FY13e to $5.23B/$3.13 from
$5.45B/$3.33 on license +7.0% (taking conservative view until better understand
on 3/13 ‘Pivotal’ spin P&L impact). FY14e to $6.0B/$3.59 from $6.3B/$3.79.
FQ4 - Notable Items
Pros: 1) Better than expected European bookings. 2) Exceeded bookings plan for
critical product vCloud Suite. 3) vCloud Suite 3x greater ASPs than vSphere. 4)
vSphere ASPs ticked higher q/q suggests muted competitive impact from MSFT.
Cons: 1) Weak bookings for US (industry theme in Q4) and major verticals
Federal/Fin Services. 2) Failed to quantify P&L impact from ‘Pivotal’ spinoff
(expected 3/13, co still working through finc’l impact). 3) OCF $100M light.
Valuation: AH Trade 18x FY13 FCF/share. Buy Pessimism/Sell Optimism.
Stock has been in 3-yr trading range $75-$115. We continue to rate the shares Buy
at current levels. PT to $115 = 21x revised forward NTM FCF.