A month has gone by since the last earnings report for VMware (VMW). Shares have added about 0.3% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is VMware due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
VMware Q3 Earnings Beat Estimates, Revenues Rise Y/Y
VMware’s third-quarter fiscal 2021 non-GAAP earnings of $1.66 per share beat the Zacks Consensus Estimate by 16.1% and also increased 16.9% year over year.
Moreover, revenues of $2.86 billion surpassed the consensus mark by 2% and also improved 7.8% on a year-over-year basis.
VMware’s results for fiscal third quarter reflected benefits from its ongoing transition to cloud that fully offset sluggish on-premise project developments. Subscription & SaaS generated 24% of total revenues in the quarter under review. VCPP, modern applications and VMware Cloud on AWS were major top-line contributors.
Notably, VMware Cloud on AWS revenues grew more than 100% year over year. The company also witnessed solid demand for Tanzu solution which was selected by the likes of Fiserv in the reported quarter.
Region-wise, U.S. revenues (51.2% of revenues) increased 10.8% year over year to $1.47 billion. International revenues (48.8%) grew 4.9% from the year-ago quarter to $1.40 billion.
Services revenues (54.1% of revenues) rose 6.2% year over year to $1.55 billion. Software Maintenance (82.8% of Services revenues) climbed 6.8% to $1.28 billion. Professional Services (17.2% of Services revenues) were $267 million, up 3.5% year over year.
Total License and Subscription & SaaS revenues (45.9% of revenues) improved 9.8% from the year-ago quarter to $1.32 billion.
License revenues (48.6% of License and Subscription & SaaS revenues) declined 12.2% year over year to $639 million.
Subscription & SaaS revenues (51.4% of segment revenues) jumped 43.8% year over year to $676 million.
NSX, vSAN and EUC product bookings declined in the low-to-mid-teens range on a year-over-year basis. The company also saw a slowdown for Workspace One projects.
However, modern applications witnessed strong product bookings in the reported quarter. Carbon Black Cloud reported robust performance.
At the end of the quarter, VMware had license backlog of $9 million and total backlog of $33 million.
Revenue Performance Obligation increased 10% year over year to $10.2 billion. Of this, 55% is classified as current.
Research & development (R&D) expenses as a percentage of revenues increased 30 basis points (bps) year over year to 20%.
Moreover, sales & marketing (S&M) expenses as a percentage of revenues decreased 270 bps on a year-over-year basis to 28%.
Further, general & administrative (G&A) expenses as a percentage of revenues decreased 60 bps to 6%.
Non-GAAP operating margin expanded 250 bps on a year-over-year basis to 31% in the reported quarter, driven by lower spending.
Balance Sheet & Cash Flow
As of Oct 30, 2020, cash & cash equivalents were $3.90 billion compared with $4.70 billion as of Jul 31, 2020.
Total debt as of Oct 30, 2020, was $4.72 billion compared with $6.21 billion as of Jul 31, 2020.
Operating cash flow surged 38% sequentially and 32.1% year over year to $992 million.
Free cash flow jumped 41.2% sequentially and 29.9% year over year to $908 million.
In the reported quarter, VMware bought back $144 million worth of shares.
Key Q3 Highlights
During the reported quarter, VMware acquired SaltStack, a pioneer in building intelligent, event-driven automation software.
Moreover, the company unveiled VMware Carbon Black Cloud Workload and VMware Workforce Anywhere solutions. It also introduced VMware vSphere 7 Update 1, VMware vSAN 7 Update 1 and VMware CloudFoundation 4.1 products.
VMware also announced the 5G Telco Cloud Platform, which includes Tanzu Kubernetes Grid, an embedded Kubernetes distribution. This will allow Communication Service Providers to reliably build, manage and run containerized workloads across private, telco, edge and public clouds.
The company also announced partnerships with Menlo Security and Zscaler. The partnerships aims at helping large global enterprises simplify the adoption of a complete SASE architecture and more effectively implement Zero Trust security.
Further, VMware announced updates to Tanzu support across VMware Cloud on AWS, Azure VMware Solution and Oracle Cloud VMware Solution.
VMware announced Project Monterey that focuses on evolving the architecture for the data center, cloud and edge to address the changing requirements of next-generation applications including AI, machine learning and 5G applications. The company is partnering with Intel, NVIDIA, Pensando Systems, Dell Technologies, Hewlett Packard Enterprises and Lenovo.
Additionally, VMware and NVIDIA announced a broad partnership to deliver both an end-to-end enterprise platform for AI and a new architecture for data center, cloud and edge that uses NVIDIA’s data processing units to support existing and next-generation applications.
The company also announced collaboration with Samsung to further extend its leadership in 5G. The partnership will help both companies address the needs of Communication Service Providers related to the requirements of 5G networks.
For fiscal fourth quarter, total revenues are expected to be $3.225 billion, suggesting 5% year-over-year growth.
Subscription & SaaS and License Revenues are expected to be $1.660 billion (more than 43% from Subscription & SaaS), hinting at 4.5% growth year over year.
Non-GAAP operating margin is anticipated to be 33.5%. Moreover, non-GAAP earnings are expected to be $2.04 per share.
For fiscal 2021, VMware now expects revenues of roughly $11.70 billion, suggesting 8% year-over-year growth.
Subscription & SaaS and License Revenues are expected to be $5.56 billion (more than 45% from Subscription & SaaS), indicating nearly 10% growth year over year.
Non-GAAP operating margin is anticipated to be 32%. Moreover, non-GAAP earnings are expected to be $7.03 per share for fiscal 2021.
Further, cash flow from operations, capital expenditure and free cash flow are now expected to be roughly $3.75 billion, $300 million and $3.45 billion, respectively.
For fiscal 2022, VMWare expects revenues to grow in the high-single digits and non-GAAP operating margin of roughly 28%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 10% due to these changes.
At this time, VMware has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, VMware has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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