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Why Is VMware (VMW) Down 12.5% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for VMware (VMW). Shares have lost about 12.5% in that time frame, underperforming 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 Q1 Earnings Beat Estimates, Revenues Up Y/Y

VMware reported first-quarter fiscal 2020 non-GAAP earnings of $1.32 per share, which beat the Zacks Consensus Estimate by a nickel and increased 4.8% from the year-ago quarter.

Revenues of $2.27 billion also surpassed the consensus mark of $2.24 billion and improved 12.8% 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 (46.5% of revenues) increased 12.3%, while International revenues (53.5% of revenues) grew 13.4% from the year-ago quarter. The strong International growth was driven by robust performance from EMEA and Asia Pacific.

Services revenues (61.7% of total revenues) increased 13.2% to $1.40 billion. License revenues (38.3% of total revenues) grew 12.3% year over year to $869 million.

Hybrid Cloud and SaaS accounted for more than 12% of total revenues. More than 50% of EUC product bookings are now sold as SaaS.

Additionally, VMware acquired Bitnami, a leader in application packaging solutions providing the largest catalog of click-to-deploy applications and development stacks for major cloud and Kubernetes environments. The company also completed the acquisition of AetherPal.

Robust Bookings

NSX adoption was impressive as license bookings increased more than 40% year over year. All top 10 deals in the quarter included NSX.

Furthermore, vSAN license bookings grew 50% 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 low teens on a year-over-year basis and included in nine of the top 10 deals.

Core SDDC license bookings grew low teens on a year-over-year basis. Total core SDDC bookings were up low-double digits year over year. For cloud management, both license and total bookings recorded double-digit growth in the reported quarter.

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

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 14 regions globally, including Canada, Mumbai, Paris and Singapore.

Dell, Microsoft and VMware recently expanded their partnership, per which Microsoft will deliver a fully native, supported and certified VMware cloud infrastructure on Microsoft Azure, called Azure VMware Solutions.

Moreover, VMware Workspace ONE will be able to manage Office 365 across devices through cloud-based integration with Microsoft Intune and Azure Active Directory. Additionally, the extension of VMware Horizon Cloud on Azure will include Microsoft Windows Virtual Desktop.

Microsoft and VMware are also exploring initiatives to drive further integration between VMware infrastructure and Azure. The companies intend to integrate VMware NSX with Azure Networking and integration of specific Azure services with VMware management solutions. They will also be exploring bringing specific Azure services to the VMware on-premises customers.  

During the reported quarter, the company introduced VMware Cloud on Dell EMC. The company also updated VMware NSX-T Data Center 2.4 and NSX Cloud. It also introduced the VMware Service-defined Firewall.

Operating Details

Non-GAAP gross margin contracted 80 basis points (bps) on a year-over-year basis to 86.6%. License gross margin stayed flat. However, services gross margin contracted 120 bps in the reported quarter.

Research & development (R&D) expenses as percentage of revenues expanded 100 bps to 19.3%. Sales & marketing (S&M) and general & administrative (G&A) expenses as percentage of revenues shrunk 100 bps and 40 bps to 31.4% and 6.4%, respectively.

Non-GAAP operating expenses as percentage of revenues decreased 40 bps to 57.1%.

Non-GAAP operating margin contracted 30 bps to 29.4% in the reported quarter.

Balance Sheet & Cash Flow

At the end of first-quarter fiscal 2020, cash & cash equivalents were $3.31 billion compared with $2.83 billion at the end of fourth-quarter fiscal 2019.

Operating cash flow was $1.27 billion in the quarter, while free cash flow was $946 million. In the previous quarter, operating cash flow was $1.01 billion and free cash flow was $946 million.

In the reported quarter, VMware bought back shares worth $42 million. 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, up 11.8% year over year. License revenues are expected to increase 12.8% to $4.275 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 $3.950 billion. Free cash flow is anticipated to be $3.630 billion.

For second-quarter fiscal 2020, total revenues are expected to be $2.425 billion, up 11.5% year over year. License revenues are anticipated to be $1 billion, indicating an increase of 11.1% year over year.

Non-GAAP operating margin is anticipated to be 32.6%. Non-GAAP earnings are expected to be of $1.55 per share.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, VMware has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.


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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