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VMware (VMW) Q4 Earnings Beat Estimates, NSX & vSAN Aid Growth

Zacks Equity Research

VMware Inc. VMW reported fourth-quarter fiscal 2019 non-GAAP earnings of $1.98 per share, which beat the Zacks Consensus Estimate by 11 cents and increased 23.8% from the year-ago quarter.

Revenues of $2.59 billion also surpassed the consensus mark of $2.50 billion and improved 16.4% 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 there were 23 deals in the quarter that were worth more than $10 million.

Region wise, U.S. revenues (44.5% of total revenues) increased 14.1%, while International (55.5%) grew 18.3% from the year-ago quarter.

Services revenues (52.5% of total revenues) increased 12.6% to $1.36 billion. License revenues (47.5% of total revenues) grew 20.9% year over year to $1.23 billion.

Hybrid Cloud and SaaS represented 10% of total revenues and grew 35% year over year. Management stated that growth in VMware Cloud Provider Program (VCPP) revenues slowed down slightly due to unfavorable foreign exchange rate.

Robust Bookings

Networking and security portfolio had a strong fourth quarter. License bookings grew 50% year over year and customer base is now more than 10,000. The pace of NSX adoption is impressive. Moreover, expansion within the existing customer base is also good as repeat sales have been significantly higher than the size of the initial purchase value.

VMware stated that “customers are embracing NSX to meet demand for automation and cloud-native workloads for SD-WAN and for their network and security platform to connect multi-cloud applications.”

Bookings and customer adoption of VMware SD-WAN by VeloCloud exhibited growth in the reported quarter. Management observed strong traction across retail, financial and manufacturing verticals. VMware stated that the need to improve end customer experience, refresh network, NPLS augmentation and displacement, and cloud connectivity led to continued enterprise adoption of VMware SD-WAN.

Furthermore, vSAN license bookings grew 60% year over year, driven by strong VxRail and VMware Cloud Foundation.

EUC license bookings were up mid-single digits, driven by robust performance from Workspace ONE, which is VMware’s platform that securely delivers any application to any device.

Core SDDC license bookings grew more than 20% on a year-over-year basis. Bookings were up mid-teens year over year. For cloud management, both license and total bookings grew in the strong double-digit range in the reported quarter.

Compute licensed bookings growth was in the mid-teens and total compute bookings increased high-single digits on a year-over-year basis.

VMware exited fourth-quarter 2019 with almost $147 million of license backlog, which is $3 million higher on a sequential basis.

Portfolio & Partnership Expansions, Acquisition Details

VMware Cloud on AWS gained significant momentum across all three geographies. The company signed a large deal worth $20 million in the reported quarter. The company added a number of customers, namely Freddie Mac, Nant Media Holdings and the United States Air Force Field Enterprise Data Center.

VMware also announced the initial availability of VMware Cloud on AWS GovCloud last November with the first government customers adopting the service. Its CloudHealth technologies offerings have also gained momentum. VMware also announced general availability of integration with Wavefront.

In the reported quarter, VMware closed the acquisition of Heptio, a dominant name in the open Kubernetes ecosystem. The company also announced the general availability of VMware PKS 1.3, which delivers support for Microsoft Azure, further enhancing the solution’s multi-cloud capabilities. Adoption rate for PKS and Heptio was quite strong, with more than 150 customers selecting the service.

In connection with the Virtual Cloud Network, the company announced VMware NSX service mesh. The service will help solve some of the most pressing issues developers are facing while building applications based on containers in Kubernetes.

Additionally, VMware recently acquired AetherPal, a remote support solution provider. The buyout will help the company provide solution that simplifies digital workspace management.

Further, VMware has significant growth prospect from the increasing traction of 5G technology. The company is now working with more than 70 operators, more than 120 production implementation and more than 100 certified virtual network functions.

The company is Vodafone’s VOD primary strategic partner for telecommunications cloud infrastructure services. VMware solutions are used across Vodafone’s operating markets around the world. Per management, VMware solutions are live in 15 countries, in more than 50 sites, carrying increasing amounts of subscriber traffic on more than 300 core network functions.

VMware also announced expanded collaboration with AT&T, Ericsson and T-Systems to support enterprise and consumer customers using technologies, such as SD-WAN, NFV and VMware Cloud on AWS.

Operating Details

Non-GAAP gross margin expanded 40 basis points (bps) on a year-over-year basis to 88.6%. License gross margin contracted 40 bps. However, services gross margin expanded 60 bps in the quarter.

Research & development (R&D) expenses as percentage of revenues increased 50 bps to 17.1%. While sales & marketing (S&M) expenses as percentage of revenues remained unchanged, general & administrative (G&A) expenses declined 60 bps.

Non-GAAP operating expenses as percentage of revenues decreased 10 bps to 51.3%.

As a result, non-GAAP operating margin expanded 50 bps to 37.3% in the quarter.

Balance Sheet & Cash Flow

At the end of fourth-quarter fiscal 2019, cash & cash equivalents were $2.85 billion.

Operating cash flow was $1.01 billion in the quarter, while free cash flow was $946 million. In the previous quarter, operating cash flow was $769 million and free cash flow was $712 million.

In the reported quarter, VMware bought $42 million in stock. The company has approximately $834 million remaining under its current share repurchase authorization, which extends through the end of August 2019.


For fiscal 2020, VMware expects revenues of $10.03 billion. License revenues are expected to increase 12.8% to $4.28 billion.

Non-GAAP operating margin for the year is anticipated to be 33%. Non-GAAP earnings are expected to be $6.49 per share.

Cash flow from operations is expected to be $3.95 billion, up 8% year over year. Free cash flow is anticipated to be $3.63 billion. The $11-billion special dividend also impacts cash flow due to lower interest income on a year-over-year basis.

For first-quarter fiscal 2020, total revenues are expected to be $2.25 billion, up 11.8% year over year. License revenues of $865 million reflect an estimated increase of 11.7%.

Non-GAAP operating margin is anticipated to be 29.2%. Non-GAAP earnings are expected to be of $1.27 per share. Interest income on lower cash balance is expected to negatively impact non-GAAP earnings by approximately 10 cents.    

Zacks Rank & Stocks to Consider

Currently, VMware carries a Zacks Rank #3 (Hold).

Cadence Design Systems CDNS and CommVault Systems CVLT are stocks worth considering in the same industry. Both the stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Cadence and CommVault are currently pegged at 12% and 15.8%, respectively.

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