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The Street's Reaction To VMware's Q4

Jayson Derrick

Enterprise software company VMware, Inc. (NYSE: VMW) reported fourth-quarter results that disappointed investors, partly due to what the company described as "late-quarter execution challenges" as one very large deal "came in an hour after our bookings cut off."

Here is a summary of how some of the Street's top analysts reacted to the print.

The VMware Analysts

Morgan Stanley analyst Keith Weiss maintains an Equal-Weight rating on VMware's stock with a $175 price target.

KeyBanc Capital Markets analyst Alex Kurtz maintains at Overweight, price target lowered from $186 to $172.

Raymond James analyst Michael Turits maintains at Outperform, price target lowered from $193 to $164.

Mizuho Securities analyst Gregg Moskowitz maintains at Neutral, price target lowered from $165 to $147.

Morgan Stanley: 'Uneven Q4'

VMware's fourth quarter report, excluding the contribution of Pivotal, fell short of expectations in terms of license revenue, total revenue, operating margins, and EPS, Weiss said in a note. Management's execution-related commentary looks to be "largely credible" as the research firm's first-hand checks point to a "healthy demand environment" for VMware's products. The company's "solid" revenue outlook for 2021 consists of expectations of 11.5% growth also supports management's claims.

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However, management's guidance also calls for another year of operating margin declines as part of a strategy to drive more subscription and SaaS revenue to expand its overall opportunity, the analyst wrote. However, few details were offered on how margins and cash flow will be impacted in the near-term from a rising subscription mix.

"The lack of a framework to understand the unit economics underlying VMware's SaaS ambitions leaves investors with just operating margin, EPS and cash flow to assess valuation – all of which appear to be in decline or slowing heading into FY21," the analyst wrote.

KeyBanc: A Lot To Unpack

As expected, VMWare's results required "several steps to unpack" given changes in its reporting structure, the impact of the Pivotal and Carbon Black, and a faster than expected shift towards Sub and SaaS services, Kurtz wrote in a note. Nevertheless, the results were solid, most notably a billings beat at $3.78 billion (excluding Pivotal) versus expectations of $3.64 billion.

On the other hand, License revenue missed expectations as traditional licensing saw weaker close rates on large deals at the end of the quarter, the analyst wrote.

Raymond James: Guidance Short Of Expectations

VMware's 2021 revenue guidance of $11.185 billion (excluding Pivotal) represents a year-over-year growth rate of 11.5% but is still shy of the Street's estimate of $11.398 billion, Turits wrote in a note. First quarter revenue guidance of $2.525 billion (excluding Pivotal) was also shy of the consensus estimate of $2.56 billion.

Despite already coming short of estimates, VMWare's guidance doesn't seem to express a lot of caution, even with management's commentary that the coronavirus would impact the Asian region, the analyst wrote.

Mizuho: A Valuation Look

Shares of VMware were trading at $127 during Thursday's after-hours section, which implies a 2020 EV/FCF multiple of around 14.5 times and 2021 EV/FCF multiple of 12.5 times. The research firm's revised $147 price target implies a multiple of 16.5 times and 14 times, respectively. The valuation discount is warranted given a lower growth profile and the "unique ownership structure" which deflates the company's intrinsic value.

VMW Price Action

Shares of VMWare hit a new 52-week low of $119.40 and was lower by more than 12.2% on the day.

Photo by Markus Spiske on Unsplash

Latest Ratings for VMW

Date Firm Action From To
Feb 2020 Stifel Nicolaus Maintains Hold
Feb 2020 Deutsche Bank Maintains Buy
Feb 2020 JP Morgan Maintains Overweight

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