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VMware (VMW) Q3 Earnings Beat Estimates, Revenues Up Y/Y

Zacks Equity Research

VMware Inc. VMW reported third-quarter fiscal 2020 non-GAAP earnings of $1.49 per share, which beat the Zacks Consensus Estimate by 4.9% but decreased 4.5% year over year. The figure also beat management’s guidance of $1.42 per share.

Revenues of $2.46 billion surpassed the consensus mark by 2.2% and improved 11.6% 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 18 deals in the quarter that were worth more than $10 million.

Region-wise, U.S. revenues (47.7% of revenues) increased 11.4% to $1.17 billion. International revenues (52.3% of revenues) grew 11.8% from the year-ago quarter to $1.28 billion.

Services revenues (60.3% of total revenues) rose 12.6% to $1.48 billion. License revenues (38.6% of total revenues) grew 7.1% year over year to $947 million, which lagged management’s guidance of $950 million.

Hybrid Cloud and SaaS accounted for more than 13% of total revenues.

VMware, Inc. Price, Consensus and EPS Surprise


Robust Bookings

VMware stated that six of its top 10 customers purchased the entire VMware Cloud Foundation stack in the reported quarter.

NSX adoption was impressive as license bookings increased 50% year over year. Notably, eight of the top 10 deals in the quarter included NSX.

Furthermore, vSAN license bookings grew 35% year over year. The product was included in eight of the top 10 deals.

EUC license bookings were up 20%    on a year-over-year basis and included in eight of the top 10 deals.

Core SDDC license bookings grew in the high-single digits on a year-over-year basis. Total core SDDC bookings were up in the mid-single digits year over year.

Compute license bookings grew mid-single digits and total compute bookings increased low-single digits on a year-over-year basis.

Management license bookings increased in the mid-teens whereas total management bookings were up 11% year over year.

At the end of the quarter, VMware had license backlog of $33 million and total backlog of $71 million.

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 $8.50 billion at the end of the quarter.

Key Q3 Developments

During the quarter, VMware launched a new security business unit including Carbon Black (acquisition completed in October) and AppDefense offerings.

Additionally, Dell technologies DELL announced that Carbon Black Cloud, along with Dell Trusted Devices and Secureworks, is now the preferred endpoint security solution for Dell commercial customers. Notably, Dell has a majority stake in VMware.

VMware unveiled VMware Tanzu, a new portfolio of products and services that helps enterprises build, run and manage software on Kubernetes. The portfolio includes Project Pacific, a technology preview focused on transforming VMware vSphere into a Kubernetes native platform in a future release.

VMware Tanzu solution also includes VMware Tanzu Mission Control, a single point of control from which customers will manage all their Kubernetes clusters regardless of where they run.

Notably, VMware and Amazon Web Services (AWS) have expanded their partnership that now enables the latter to resell VMware Cloud on the platform. VMware Cloud on AWS is now available in 17 regions globally. Number of available global regions in Europe expanded to five with the addition of Stockholm

VMware also unveiled new Workspace ONE Intelligent Hub innovations during the quarter.

Furthermore, the partnership with Microsoft MSFT resulted in the introduction of VMware Workspace ONE for Microsoft Endpoint Manager. This solution enables modern management for Windows 10 and Azure VMware Solutions within new industries and geographies.

VMware also added new cloud migration capabilities with VMware HCX and extended Azure’s ability to serve the branch and edge with VMware SD-WAN by VeloCloud.

In September, VMware and Oracle ORCL announced an expanded partnership to help customers support their hybrid cloud strategies by running VMware Cloud Foundation on Oracle Cloud Infrastructure.

Notably, Oracle will also provide technical support for Oracle software running in VMware environments both in customer on-premises data centers and Oracle-certified cloud environments.

Operating Details

Non-GAAP gross margin contracted 90 basis points (bps) on a year-over-year basis to 86.8%. While license gross margin shrank 40 bps, services gross margin contracted 120 bps in the reported quarter.

Both research & development (R&D) and sales & marketing (S&M) expenses, as a percentage of revenues, increased 100 bps each to 19.2% and 30.4%, respectively. General & administrative (G&A) expenses, as a percentage of revenues, declined 10 bps to 6.3%.

Non-GAAP operating expenses, as a percentage of revenues, increased 190 bps on a year-over-year basis to 55.9%.

Non-GAAP operating margin contracted 280 bps to 30.9% in the reported quarter. However, operating margin was better than management’s expectation of 30.3%.

Balance Sheet & Cash Flow

As of Nov 1, 2019, cash & cash equivalents were $2.03 billion compared with $2.95 billion as of Aug 2, 2019.

Operating cash flow was $810 million in the reported quarter, while free cash flow was $760 million. In the previous quarter, operating cash flow was $699 million and free cash flow was $611 million.

In the reported quarter, VMware bought back shares worth $242 million. The company has approximately $1 billion remaining under its current share repurchase authorization, which extends through the end of fiscal 2021.


For fiscal 2020, VMware now expects revenues of $10.10 billion, up 12.5% year over year. The Zacks Consensus Estimate for revenues is currently pegged at $10.03 billion, indicating growth of 11.7% from the year-ago reported figure.

License revenues are now expected to increase 12% to $4.245 billion (up from the previous guidance of $4.215 billion).

Non-GAAP operating margin is anticipated to be 33%.

Non-GAAP earnings are expected to be $6.58 per share (up from previous guidance of $6.54 per share). The consensus mark for earnings is pegged at $6.54 per share, suggesting growth of 3.3% from the figure reported in the previous year.

Cash flow from operations is expected to be $3.85 billion. Free cash flow is anticipated to be $3.57 billion.

For fourth-quarter fiscal 2020, total revenues are expected to be $2.95 billion, up 13.8% year over year. The Zacks Consensus Estimate for revenues is pegged at $2.92 billion, indicating growth of 12.5% from the figure reported in the year-ago quarter.

License revenues are anticipated to be $1.39 billion, indicating a year-over-year increase of 13%.

Non-GAAP operating margin is anticipated to be 37.6%.

Non-GAAP earnings are expected to be $2.16 per share. The consensus mark for earnings is pegged at $2.20 per share, suggesting growth of 11.1% from the figure reported in the year-ago quarter.

Zacks Rank

Currently, VMware carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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