VMware (VMW) Q2 Earnings In Line, Revenues Top Estimates

VMware, Inc.’s (NYSE:VMW) second-quarter of 2016 adjusted earnings of 69 cents came in line with the Zacks Consensus Estimate. Revenues of $1.693 billion however easily topped the consensus mark of $1.678 billion. On a year-over-year basis, revenues grew 11.3% driven by strong performance of newer cloud offerings like NSX, virtual SAN and End-User Computing.

Encouraged by the growth prospects, the company also provided an upbeat revenue outlook for the third quarter. Shares were up 9% in aftermarket trading yesterday.

The company reported non-GAAP earnings of 97 cents compared with 93 cents reported in the year-ago quarter.

VMWARE INC-A Price, Consensus and EPS Surprise

Revnues from services rose 9.4% year over year to $1,049 million driven by strength in both its sub-segments. Sales in software maintenance increased 10.4% year over year to $915 million while professional services sales rose about 3.5% from the prior-year quarter to $134 million.

License revenues increased a meager 0.9% year over year to $644 million.

The company reported non-GAAP operating margin of 30% in the quarter.

Other Financial Details

VMware exited the quarter with cash and cash equivalents (including short-term investments) of $8.7 billion compared with $7.5 billion as on Dec 31, 2015. For the quarter, the company reported operating cash flow of $577 million, up 82.6% year over year. Free cash flow was $539 million.

Guidance

For third quarter 2016, the company expects the midpoint of its revenue range to be $1.763 billion and that of License revenues to be $682 million. Non-GAAP earnings per share are expected to be $1.10 at the midpoint. Non-GAAP operating margin is expected to be 32.6%.

For the full year, the midpoint of its revenue range is expected to be $7 billion while that License revenues is expected to be $2.734 billion. Non-GAAP earnings per share are expected to be $4.30 at the midpoint. Non-GAAP operating margin is expected to be 32%.

Our Take

VMware remains one of the leading companies in the virtualization and cloud computing market. The company’s innovative product pipeline, strategic partnerships, continuous contract wins and robust international sales are expected to drive overall results. Additionally, the company continues to make some strategic acquisitions, which have significantly expanded its product portfolio.

Despite these, the company has been seeing weakness in its core business (vSphere software) for a while owing to a sluggish PC market. In order to overcome it, VMware has been increasing its focus on developing its cloud services like vCloud Air service and vCloud Air Network.

Also, its parent company EMC Corporation’s (NYSE:EMC) merger with Dell Inc should prove beneficial for VMware. However, merger associated tracking stock disruption remains an overhang on the stock. Also, intensifying competition from its peers such as Microsoft Corp. (NASDAQ:MSFT) and Citrix remain concerns.

Currently, VMware has a Zacks Rank #3 (Hold). A better ranked stock worth consideration in the same space is MeetMe, Inc. (NASDAQ:MEET) which sports a Zacks Rank #1 (Strong Buy).

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