It has been about a month since the last earnings report for VMware (VMW). Shares have lost about 0.9% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is VMware due for a breakout? 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 catalysts.
VMware Q2 Earnings Beat Estimates, Revenues Rise Y/Y
VMware’s second-quarter fiscal 2021 non-GAAP earnings of $1.81 per share beat the Zacks Consensus Estimate by 24.8% and also increased 18.3% year over year.
Moreover, revenues of $2.88 billion surpassed the consensus mark by 2.6% and also improved 9.2% on a year-over-year basis.
VMware’s results for the fiscal second quarter reflected benefits from its ongoing transition to cloud that fully offset sluggish on-premise project developments. Subscription & SaaS generated 22% of total revenues in the quarter under review. VCPP, modern applications, EUC and Carbon Black were major top-line contributors.
Markedly, VMware has reached general-availability status for new first-party services offerings with Alphabet’s Google Cloud and Oracle.
Google Cloud announced the general availability of Google Cloud VMware Engine that provides end-to-end support to migrate and run the VMware environment in Google Cloud.
Moreover, Oracle introduced Oracle Cloud VMware Solution. This dedicated, cloud-native VMware-based environment enables enterprises to easily move their production workloads to Oracle Cloud Infrastructure.
Further, in early fiscal second quarter, Microsoft unveiled its next-generation Azure VMware solution.
Notably, VMware Cloud on AWS revenues grew triple digits year over year. Additionally, VMware announced new capabilities that further improve the economic value of VMware Cloud on AWS.
The company also witnessed solid adoption of VMware Cloud Foundation at clients like Daimler and across financial services end-market.
VMware also made available the second generation of VMware Cloud on Dell EMC in the quarter under review.
Furthermore, VMware vSphere BitFusion, a new integrated feature in VMware vSphere 7 was introduced. The solution will enable enterprises to deliver elastic infrastructure on-demand for AI and machine learning applications.
Region-wise, U.S. revenues (50.1% of revenues) increased 9.3% year over year to $1.44 billion. International revenues (49.9%) grew 9.2% from the year-ago quarter to $1.44 billion.
Services revenues (53% of revenues) rose 7.4% year over year to $1.53 billion. Software Maintenance (83.3% of Services revenues) climbed 8.4% to $1.27 billion. Professional Services (16.7% of Services revenues) were $255 million, up 2.8% year over year.
Total License and Subscription & SaaS revenues (47% of revenues) improved 11.4% from the year-ago quarter to $1.35 billion.
License revenues (53.3% of License and Subscription & SaaS revenues) declined7% year over year to $719million.
Subscription & SaaS revenues (46.7% of segment revenues) jumped 43.7% year over year to $631 million.
Coronavirus Hurt Bookings in Q2
VMware witnessed slowdown in a number of on-premise projects in the Americas due to the coronavirus outbreak. This negatively impacted bookings in the reported quarter.
NSX product bookings (includes Subscription and SaaS, and license bookings equivalent to those stated in prior periods) declined in the mid-single-digits range.
Further, vSAN product bookings (includes Subscription and SaaS, and license bookings equivalent to as the same stated in prior periods) decreased in the low-single-digits range year over year.
Markedly, Carbon Black’s customer base jumped to more than 20,000. VMware’s modern applications business, which includes Pivotal, Heptio and Wavefront, generated product bookings well ahead of expectations in the fiscal second quarter.
EUC product bookings (includes Subscription and SaaS, and license bookings equivalent to the ones stated in prior periods) decreased in high-single-digits range on a year-over-year basis. However, EUC SaaS based on annual contract value grew more than 35% year over year.
Moreover, core SDDC product bookings (includes Subscription and SaaS, and license bookings equivalent to the levels stated in prior periods) decreased in the low-single-digit range year over year.
At the end of the quarter, VMware had license backlog of $8 million and total backlog of $36 million.
Revenue Performance Obligation increased 17% year over year to $10.3 billion. Of this, 54% is classified as current.
Research & development (R&D) expenses as a percentage of revenues slipped 20 basis points (bps) year over year to 19%.
Moreover, sales & marketing (S&M) expenses as a percentage of revenues decreased 290 bps on a year-over-year basis to 27.3%.
However, general & administrative (G&A) expenses as a percentage of revenues increased 50 bps to 6.9%.
Non-GAAP operating margin expanded 280 bps on a year-over-year basis to 33% in the reported quarter, driven by lower spending.
Balance Sheet & Cash Flow
As of Jul 31, 2020, cash & cash equivalents were $4.70 billion compared with $5.95 billion as of May 1, 2020.
Total debt as of Jul 31, 2020, was $6.21 billion compared with $7.46 billion as of May 1, 2020. During the reported quarter, VMware redeemed $1.250 billion of notes.
Operating cash flow plunged 47.7% sequentially but increased 12.2% year over year to $643 million.
Free cash flow fell 50% sequentially but increased 16.9% year over year to $643 million.
In the reported quarter, VMware bought back $130 million worth of shares. The company has approximately $1.69 billion remaining under its current share-repurchase authorization.
During the reported quarter, VMware acquired Lastline, a pioneer in anti-malware research and AI-powered network detection and response-solution provider. The company integrated it into NSX to provide a complete, internal firewall capability.
VMware also bought True Visibility Suite team and products from Blue Medora. This enables VMware vRealize Operations to provide visibility and insight into customers’ broad data center and hybrid cloud environments.
Further, the Datrium acquisition expands VMware Cloud on AWS’ Site Recovery offering.
On Aug 5, VMware and Intel announced a collaboration that focuses on developing an integrated software platform for virtualized Radio Access Networks to accelerate the rollout of both existing LTE and future 5G networks.
Moreover, VMware was selected as the cloud platform by DISH Network to deploy its 5G cloud-native Open Radio Access Network on Jul 31.
For the fiscal third quarter, total revenues are expected to be $2.80 billion, suggesting 5.4% year-over-year growth.
Subscription & SaaS and License Revenues are expected to be $1.265 billion (more than 50% from Subscription & SaaS), hinting at 5.6% growth year over year.
Non-GAAP operating margin is anticipated to be 27.5%. Moreover, non-GAAP earnings are expected to be $1.42 per share.
For fiscal 2021, VMware now expects revenues of roughly $11.6 billion, suggesting 7% year-over-year growth.
Subscription & SaaS and License Revenues are expected to be $5.5 billion (more than 45% from Subscription & SaaS), indicating nearly 9% growth year over year.
Non-GAAP operating margin is anticipated to be 30.5%. Moreover, non-GAAP earnings are expected to be $6.62 per share for fiscal 2021.
Further, cash flow from operations, capital expenditure and free cash flow are now expected to be roughly $3.7 billion, $300 million and $3.4 billion, respectively.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 15.09% due to these changes.
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.
Estimates have been broadly 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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