VMware's Q4 Earnings Up Y/Y, Revs Beat

Zacks

VMware Inc. (VMW) reported fourth-quarter 2013 non-GAAP earnings of $1.01 per share, which jumped 24.7% from the year-ago quarter, driven by strong revenue growth and margin expansion.

Quarter Details

Revenues increased 14.7% year over year to $1.48 billion and was slightly better than the Zacks Consensus Estimate. Revenues were toward the higher end of management’s guided range of $1.45 billion–$1.30 billion.

The year-over-year increase in revenues can be attributed to 15.1% growth in license revenues and 14.4% increase in services revenues. Among services revenues, software maintenance jumped 18.3% from the year-ago quarter, which fully offset the 7.6% decline in professional service revenues.

Moreover, strong demand for VMware solutions across international markets helped revenues. International revenues (52.0% of total revenue) surged 17.9% year over year to $771.0 million. U.S. revenues (48.0% of total revenue) increased 11.4% from the year-ago quarter to $712.0 million.

Bookings grew 20.0% year over year in the Americas, with strong growth from the federal market. Europe, Middle East and Africa bookings grew in low double-digits, while Asia-Pacific bookings increased at high teens range. China bookings were up 20.0% from the year-ago quarter.

During the quarter, VMware secured 10 deals, each worth more than $10.0 million. Enterprise License Agreements (ELA) accounted for approximately 40.0% of fourth-quarter bookings.

VMware’s network virtualization platform NSX, launched in Aug 2013, was adopted by several high-profile customers including McKesson, Starbucks, Medtronic (MDT), Best Buy (BBY) and China Telecom (CHA) in the quarter.

VMware’s hybrid cloud solutions grew 100% year over year in the last quarter.

Operating margin expanded 460 basis points (bps) from the year-ago quarter to 27.3%. Operating profit includes stock-based compensation but excludes one-time items.

The strong growth in operating margin was driven by lower research & development expense (down 150 bps) and sales & marketing (down 260 bps), which was partially offset by higher general & administrative expense (up 20 bps).

Net Income margin was 24.0% compared with 18.8% reported in the year-ago period. Earnings including stock-based compensation but excluding one-time items was 82 cents per share, which beat the Zacks Consensus Estimate by a nickel.

VMware exited the quarter with cash and cash equivalents (including short-term investments) of $6.18 billion compared with $5.84 billion in the previous quarter. Cash from operations was $688.0 million versus $637.0 million in the previous quarter. Free cash flow was $590.0 million.

During the quarter, VMware repurchased approximately 1.4 million shares for approximately $116.0 million at an average price of $82.0 per share.

Guidance

For fiscal 2014, VMware forecasts revenues to be in the range of $5.94 billion to $6.10 billion (up 14.0% to 17.0% year over year). Excluding Pivotal, divestitures but including $75.0 million from recently acquired AirWatch, revenues are expected to grow in the range of 16.0% to 18.5% for 2014. The Zacks Consensus Estimate is pegged at $5.99 billion.

License revenues for 2014 are expected to be in the range of $2.55 billion to $2.63 billion (up 12.0% to 16.0% year over year). Excluding Pivotal and divestitures, and including AirWatch, license growth rate is expected to be up 13% to 17% versus 2013.

For fiscal year 2014, operating margin is expected to be approximately 31.0%. The company expects to continue its share buyback program in 2014.

For first quarter of 2014, management expect revenues to be in the range of $1.33 billion to $1.37 billion (up 12% to 15% year over year). Excluding Pivotal, divestitures but including maximum $10.0 million from recently acquired AirWatch, revenues are expected to grow in the range of 16.0% to 19.0% for the first quarter. The Zacks Consensus Estimate is pegged at $1.35 billion.

License revenues for the first quarter are expected to be $545.0 million to $555.0 million (up 12.0% to 14.0% year over year). Excluding Pivotal and divestitures, and including AirWatch, license growth rate is expected to be up 14.5% to 17% versus the first quarter of 2013.

Operating margin for the first quarter is expected to be approximately 31.0%. However, operating margin is expected to decline 150 bps to 200 bps in the second quarter due to the dilutive effect of the AirWatch acquisition. Second-half 2014 operating margin is expected to increase as compared to the first quarter.

VMware expects revenues to increase 16.0% to 20.0% in 2015 and 2016, up from previous guidance of 15.0% to 20.0%. The AirWatch acquisition is expected to be accretive to non-GAAP earnings in late 2015.

Recommendation

VMware’s back-half loaded 2014 outlook failed to impress the market. Moreover, the dilutive effects of the AirWatch acquisition is expected to remain an overhang on the stock. We believe that sluggish IT spending environment and intensifying competition from its peers such as Microsoft Corp. (MSFT) are primary headwinds, going forward.

Moreover, VMware’s continued investments in the emerging markets, product innovations and acquisitions are expected to weigh on margins in the near term.

However, VMware’s strong product portfolio is a major positive. The company continues to win contracts and robust international sales will continue to boost top line, going forward. Moreover, the acquisitions of Desktone and AirWatch will boost top line, going forward.

Currently, VMware has a Zacks Rank #3 (Hold).

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