It has been about a month since the last earnings report for VMware (VMW). Shares have added about 1.8% 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 catalysts.
VMware Beats on Earnings & Revenues in Q2
VMware reported second-quarter fiscal 2020 non-GAAP earnings of $1.60 per share, which beat the Zacks Consensus Estimate by a nickel and increased 3.9% from the year-ago quarter.
Revenues of $2.44 billion also surpassed the consensus mark of $2.43 billion and improved 12.2% on a year-over-year basis. Strong top-line growth was primarily driven by robust performance from NSX, VeloCloud and vSAN product lines. VMware stated that it inked 16 deals in the quarter that were worth more than $10 million.
Region-wise, U.S. revenues (48% of revenues) increased 10.3%, while International revenues (52% of revenues) grew 14% from the year-ago quarter. The strong International growth was driven by robust performance from EMEA and the Asia Pacific.
Services revenues (58.5% of total revenues) rose 12.1% to $1.43 billion. License revenues (41.5% of total revenues) grew 12.3% year over year to $1.01 billion.
Hybrid Cloud and SaaS accounted for more than 12.5% of total revenues. More than 50% of EUC product bookings are now sold as SaaS.
VMware announced that it has inked a definitive agreement to acquire Pivotal for an enterprise value of $2.7 billion, which equates to a blended price of $11.71 per share.
Notably, VMware will pay $15 per share in cash to Pivotal’s Class A stockholders. Moreover, Pivotal’s Class B common stockholder, Dell Technologies, will receive roughly 7.2 million shares of VMware Class B common stock, based on an exchange ratio of 0.0550 shares of VMware for each share of Pivotal.
Overall, VMware’s net cash payout is expected to be $0.8 billion on this transaction. As a result of the equity issue, Dell’s ownership stake in VMware will increase to 81.09% based on the shares currently outstanding.
VMware currently holds 15% of Pivotal’s fully-diluted outstanding shares.
The company also announced that it has entered a definitive agreement to acquire Carbon Black through a cash tender offer of $26 per share, which equates to an enterprise value of $2.1 billion. VMware’s net cash payout is expected to be $1.9 billion on this transaction.
Both transactions are expected to close in the second half of VMware’s fiscal 2020, which ends on Jan 31, 2020.
The acquisitions are expected to boost the top line (by 2 points), driven by more than $1 billion of predominantly Hybrid Cloud subscription and SaaS revenues in the year one of completion. Moreover, in year two, the acquisitions will increase Hybrid Cloud subscription and SaaS revenues to more than $3 billion.
Also, the company recently completed the acquisitions of Avi Networks, Bitfusion, Uhana and Veriflow.
NSX adoption was impressive as license bookings increased more than 30% year over year. Notably, nine of the top 10 deals in the quarter included NSX.
Furthermore, vSAN license bookings grew 45% year over year. The product was included in eight of the top 10 deals. Notably, customer count has exceeded 20K.
EUC license bookings were up 20% on a year-over-year basis and included in all the top 10 deals. The growth was driven by robust performance from Workspace ONE.
Core SDDC license bookings grew in the high-single digits on a year-over-year basis. Total core SDDC bookings were up 11% year over year.
Compute license bookings grew mid-single digits and total compute bookings increased 12% on a year-over-year basis.
Notably, remaining performance obligations that capture all of VMware’s committed and non-cancelable future revenues, both billed and unbilled, including future revenues related to its growing hybrid cloud subscription and SaaS businesses, were $8.05 billion at the end of the quarter.
Portfolio & Partnership Expansions
VMware and Amazon Web Services (AWS) expanded their partnership that now enables the latter to resell VMware Cloud on the platform. The service is now available in 16 regions globally, including Seoul and Sao Paulo.
In July, Alphabet division Google Cloud and VMware announced “Google Cloud VMware Solution by CloudSimple.” The new service allows organizations to run their VMware workloads on Google Cloud Platform. This provides customers with choice and flexibility to run VMware workloads on-premises, in hybrid architecture, or the cloud.
Moreover, the company unveiled “VMware HCX Enterprise, which accelerates large-scale live migrations of vSphere and non-vSphere workloads.”
In June, “VMware Secure State” was made available on CloudHealth by VMware. Further, “VMware Essential PKS 1.15” was released in July, which includes upstream “Kubernetes 1.15.1” and additional support for Project Harbor.
Non-GAAP gross margin contracted 80 basis points (bps) on a year-over-year basis to 87.2%. While license gross margin expanded 20 bps, services gross margin shrank 150 bps in the reported quarter.
Research & development (R&D) and sales & marketing (S&M) expenses, as a percentage of revenues, increased 60 bps and 40 bps to 18.5% and 29.7%, respectively. General & administrative (G&A) expenses, as a percentage of revenues, declined 80 bps to 6.1%.
Non-GAAP operating expenses, as a percentage of revenues, increased 10 bps to 54.3%.
Non-GAAP operating margin contracted 90 bps to 32.9% in the reported quarter.
Balance Sheet & Cash Flow
At the end of second-quarter fiscal 2020, cash & cash equivalents were $2.95 billion compared with $3.31 billion at the end of first-quarter fiscal 2019.
Operating cash flow was $699 million in the quarter, while free cash flow was $611 million. In the previous quarter, operating cash flow was $1.27 billion and free cash flow was $946 million.
In the reported quarter, VMware bought back shares worth $446 million. The company has approximately $1.3 billion remaining under its current share repurchase authorization, which extends through the end of fiscal 2021.
For fiscal 2020, VMware still expects revenues of $10.03 billion, up 11.8% year over year. License revenues are now expected to increase 11.3% to $4.215 billion (down from the previous guidance of $4.275 billion).
Non-GAAP operating margin is anticipated to be 33%. Non-GAAP earnings are expected to be $6.54 per share (up from previous guidance of $6.49 per share).
Cash flow from operations is expected to be $3.950 billion. Free cash flow is anticipated to be $3.630 billion.
For third-quarter fiscal 2020, total revenues are expected to be $2.405 billion, up 9.3% year over year. License revenues are anticipated to be $950 million, indicating a year-over-year increase of 7.5%.
Non-GAAP operating margin is anticipated to be 30.3%. Non-GAAP earnings are expected to be $1.42 per share.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -11.88% due to these changes.
Currently, VMware has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
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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