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VMware, Inc. Message Board

  • orcleman orcleman Feb 11, 2013 3:39 PM Flag

    VMW: Evercore Ups to Buy; Both ELAs and Transactions Have Upside

    Feb 11, 2013
    2:23 PM VMW: Evercore Ups to Buy; Both ELAs and Transactions Have Upside
    By Tiernan Ray
    cloud computing
    Shares of virtualization software maker VMware (VMW) are down $1,96, or 2.5%, at $77.23 today despite an upgrade from Evercore Partners‘s Matthew Williams, who raised his rating on the stock to Overweight from Equal Weight, opining that the stock has support at $72, based on a multiple of 11 times operating cash flow in 2014, while it could go as high as $98 if there’s any “acceleration” in the growth of software license sales.

    Writing that the “pullback creates opportunity though some patience may be required,” Williams argues VMware resellers are learning to sell the company’s “software-defined data center,” or SDDC, while the current estimates on the Street leave room for an improvement in the company’s “transactional” license deals, meaning those that come in any given quarter, versus the subscription licenses that have of late dominated results:

    Channel transition to SDDC message will take time, but ELA momentum provides an offset. ELA tailwinds could provide a ~4% lift to license bookings in 2H13, so the optics around the business should improve over the course of the year. While we believe the channel will take time to transition to the SDDC message, if ELA growth (+26% y/y in C4Q) can remain steady, we believe the ’13 license guidance only assumes a modest rate of growth in the transactional business (+12%; +6% in 1H) and potentially leaves room for upside.

    And then, too, there’s more upside potential from the “enterprise license agreements,” or ELAs, being renewed, which has to be factored in:

    While ELAs remain less than 30% of VMW’s bookings in a given quarter, the renewal portfolio should start to accelerate over the next couple of quarters as the base ELAs increases from its trough in 2009. We assume that ELAs grow 20% in FY13 (vs. 65% in FY11 and 26% in FY12). Our ELA license renewal estimates are based off of the renewed value of ELAs being 75% of the original ELA (from 3 years ago), which compares to an average of 76% over the past 8 quarters, and then we assume that 34% of this renewed value is incremental license revenue. We estimate that from 1Q13 onward, 12% of our deferred revenue estimate is license revenue (vs. average of 13% over the past 8 quarters) to reach our license bookings estimate of 8% in FY13 and 10% in FY14 (EVR license revenue growth estimates are 8% for both years). Using the above assumptions, we estimate that ELA renewals could provide a roughly 3% lift (~$75m) to total license bookings and a 4.6% ($118m) lift in FY14.

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