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VMware (VMW) Up 2.9% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for VMware (VMW). Shares have added about 2.9% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important drivers.

VMware Q1 Earnings Beat Estimates, Revenues Rise Y/Y

VMware’s first-quarter fiscal 2021 non-GAAP earnings of $1.52 per share beat the Zacks Consensus Estimate by 27.7% and also increased 21.6% year over year.

Moreover, revenues of $2.73 billion surpassed the consensus mark by 3.2% and also improved 11.6% on a year-over-year basis.

Notably, VMware Cloud on AWS, reported triple-digit revenue growth year over year.

Apart from strong demand for its cloud-based solutions, VMware also gained traction from an expanded portfolio in the quarter under review. The company rolled out offerings like Tanzu and VMware Advanced Security for Cloud Foundation. Moreover, it updated its core portfolio including vSphere, NSX-T, vSAN and vRealize Operations Cloud.

Markedly, five of VMware’s top 10 deal wins in the fiscal first quarter included Tanzu.

However, the company didn’t reinstate its fiscal 2021 guidance, which it withdrew in March due to economic uncertainty over the coronavirus outbreak. Nevertheless, VMware expects revenue growth in the mid-single digits for fiscal 2021. As economies around the world recover, the company witnesses a more normalized double-digit growth rate in fiscal 2022.

Top-Line Details

Region-wise, U.S. revenues (49.9% of revenues) increased 14% to $1.36 billion. International revenues (50.1%) grew 9.3% from the year-ago quarter to $1.37 billion.

Services revenues (54.9% of revenues) rose 7.8% year over year to $1.50 billion. Software Maintenance (82.9% of Services revenues) climbed 8.4% to $1.25 billion. Professional Services (17.1% of Services revenues) were $257 million, up 4.9% year over year.

Total License and Subscription & SaaS revenues (45.1% of revenues) improved 16.6% from the year-ago quarter to $1.23 billion.

License revenues (53.6% of segment revenues) inched up 2.2% year over year to $660 million, driven by stronger-than-expected EUC license demand.

Subscription & SaaS revenues (46.4% of segment revenues) jumped 39.2% year over year to $572 million. Top-line growth benefited from a strong revenue performance by VMware’s EUC, Carbon Black and VeloCloud offerings as well as VMware Cloud on AWS.

Robust Bookings

NSX adoption was impressive as product bookings (includes Subscription and SaaS, and license bookings equivalent to those stated in prior periods) shot up more than 20% year over year.

Further, vSAN product bookings (includes Subscription and SaaS, and license bookings equivalent to as the same stated in prior periods) increased more than 20% year over year.

Carbon Black’s customer base jumped to more than 15,000. The company witnessed strong product bookings growth, particularly in Carbon Black Cloud.

VMware’s modern applications business, which includes Pivotal, Heptio and Wavefront generated product bookings well ahead of expectations in the fiscal first quarter.

EUC product bookings (includes Subscription and SaaS, and license bookings equivalent to as the ones stated in prior periods) were up nearly 10% on a year-over-year basis. Notably, beginning this fiscal, VMware shifted its focus from total contract value to annual contract value (ACV) for EUC SaaS product bookings, which hurt bookings in the reported quarter. However, ACV bookings grew 20% year over year.

VMware also witnessed strong demand for its VDI solutions, which helped grow on-premises perpetual license bookings by roughly 40% year over year.

Workspace ONE too gained significant traction the reported quarter.

However, core SDDC product bookings (includes Subscription and SaaS, and license bookings equivalent to the levels stated in prior periods) decreased in the mid-single digit range year over year. Additionally, total core SDDC bookings declined 7% year over year, primarily due to the COVID-19 outbreak.

At the end of the quarter, VMware had license backlog of $2 million and total backlog of $4 million.

Revenue Performance Obligation (RPO) increased 19% year over year to $10.1 billion. Of this 54% is classified as current.

Operating Details

Research & development (R&D) expenses as a percentage of revenues slipped 20 basis points (bps) year over year to 19.8%.

Moreover, sales & marketing (S&M) expenses as a percentage of revenues decreased 20 bps on a year-over-year basis to 29.8%.

General & administrative (G&A) expenses as a percentage of revenues fell 100 bps to 5.7%.

Non-GAAP operating margin expanded 320 bps on a year-over-year basis to 29.9% in the reported quarter, driven by lower spending.

Balance Sheet & Cash Flow

As of May 1, 2020, cash & cash equivalents were $5.95 billion compared with $2.92 billion as of Jan 31, 2020. Cash includes proceeds from a $2-billion bond offering completed in April.

Total debt as of May 1, 2020 was $7.46 billion compared with $5.48 billion as of Jan 31, 2020.

Operating cash flow augmented 34.6% sequentially and 26.6% year over year to $1.37 billion.

Free cash flow dipped 2.6% sequentially but increased 26.1% year over year to $1.29 billion.

In the reported quarter, VMware bought back 1.5 million shares. The company has approximately $819 million remaining under its current share repurchase authorization.

Guidance

For the fiscal second quarter, total revenues are expected to be $2.80 billion, suggesting 6% year over year growth.

Subscription & SaaS and License Revenues are expected to be $1.30 billion, hinting at 7% growth year over year.

Non-GAAP operating margin is anticipated to be 28%.

Non-GAAP earnings are expected to be $1.44 per share.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted 6.38% due to these changes.

VGM Scores

At this time, VMware has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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