A month has gone by since the last earnings report for VMware (VMW - Free Report) . Shares have lost about 1.9% 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 its most recent earnings report in order to get a better handle on the important drivers.
VMware Q3 Benefits From Robust NSX and vSAN Growth
VMware reported third-quarter fiscal 2019 non-GAAP earnings of $1.56 per share, which beat the Zacks Consensus Estimate by six cents and increased 26.8% from the year-ago quarter.
Revenues of $2.20 billion also surpassed the consensus mark of $2.17 billion and improved 13.5% on a year-over-year basis. Strong top-line growth was primarily driven by robust performance from NSX and vSAN product lines. Enterprise agreements were 42% of total bookings. VMware stated that nine deals were worth more than $10 million.
Management raised fiscal 2019 guidance based on solid third-quarter results. The company also provided initial fiscal 2020 guidance.
Region wise, U.S. revenues (47.8% of total revenues) increased 8.5%, while International (52.2%) grew 18.6% from the year-ago quarter.
Services revenues (59.8% of total revenues) increased 11.5% to $1.32 billion. License revenues (40.2% of total revenues) grew 16.6% year over year to $884 million.
Hybrid Cloud and SaaS represented 10% of total revenues and grew 35% year over year. VMware Cloud Provider Program (VCPP) increased 30% from the year-ago quarter.
NSX license bookings, including VeloCloud, increased more than 40% year over year and its adoption continues to expand. Notably, nine out of the top 10 enterprise agreements in the quarter included NSX.
Moreover, vSAN license bookings soared 50% on a year-over-year basis. Notably, eight of the company’s top 10 deals included vSAN.
EUC license bookings were up high-single digits, driven by robust performance from Workspace ONE, VMware’s platform that securely delivers any application to any device. Notably, eight out of the top 10 enterprise agreements included EUC.
Core SDDC license bookings (combination of compute and management) grew high-single digits on a year-over-year basis. Compute grew low-single digits and management bookings were up in the high-teens range.
VMware exited third-quarter 2019 with almost $144 million of license backlog, which is $3 million higher on a sequential basis.
Portfolio & Partnership Expansions, Acquisition Details
VMware’s partnership with Amazon is expanding rapidly. During the quarter, data center expansion across multiple regions in Asia-Pacific, including Sydney and Tokyo, were open for VMware Cloud on Amazon Web Services (AWS).
At VMworld 2018, the company announced the new Amazon Relational Database Service (RDS) on VMware. Most recently, VMware announced two new offerings for AWS Outposts. It also announced VMware Cloud Foundation for EC2 that provides AWS native Outposts customers a software-defined data center experience, supported by NSX, vRealize Automation and Network Insights, and AppDefense.
Moreover, partnership between IBM and VMware expanded during the quarter. The expansion includes a new IBM Service offering to help migrate and extend mission-critical VMware workloads to the IBM Cloud. It also encompasses new integrations to help enterprises modernize applications with Kubernetes and containers.
Further, partnerships with Alibaba and Rackspace are expected to drive VCPP growth in the long haul.
VMware expanded its integrated hybrid cloud offering, VMware Cloud Foundation 3.5, to deliver greater deployment flexibility and choice, including new Kubernetes support. Other enhancements included the new VMware vSphere Platinum Edition along with updates to VMware vSAN and the VMware vRealize Cloud Management platform.
The company also added innovative features to Workspace ONE platform and extended modern management and security across the platform.
Moreover, VMware NSX SD-WAN by VeloCloud is targeting integration with Microsoft Azure Virtual WAN in the first half of 2019.
VMware continued its acquisition spree in the quarter. The company acquired CloudHealth Technologies, a cloud operations platform across AWS, Microsoft Azure, Google Cloud and VMware environments. VMware also inked definitive agreement to buy Heptio, a leader in the open Kubernetes ecosystem.
Non-GAAP gross margin contracted 10 basis points (bps) on a year-over-year basis to 87.7%. License gross margin contracted 70 bps. Services gross margin contracted 10 bps in the quarter.
Research & development (R&D) expenses as percentage of revenues remain unchanged at 18.2%. While sales & marketing (S&M) expenses as percentage of revenues increased 20 bps, general & administrative (G&A) expenses declined 130 bps.
Non-GAAP operating expenses as a percentage of revenues decreased 110 bps to 54%.
As a result, non-GAAP operating margin expanded 100 bps to 33.7% in the quarter.
Balance Sheet & Cash Flow
At the end of third-quarter fiscal 2019, cash & cash equivalents were $13.53 billion compared with $13.30 billion in the year-ago quarter.
Operating cash flow was $769 million in the quarter, while free cash flow was $712 million. In the previous quarter, operating cash flow was $787 million and free cash flow was $726 million.
On Jul 2, VMware announced an $11-billion one-time conditional special dividend that it expects to pay toward the end of December.
For fourth-quarter fiscal 2019, revenues are anticipated to be $2.5 billion, up 12.3% year over year. License revenues are expected to increase 12.9% from the year-ago quarter to $1.15 billion.
Non-GAAP operating margin is anticipated to be 37.3%. Non-GAAP earnings are expected to be $1.87 per share.
For fiscal 2019, revenues are projected to increase 13% (up from 12.2%) to almost $8.882 billion (up from $8.820 billion). License revenues are expected to increase 15.9% year over year to $3.708 billion.
Non-GAAP operating margin is anticipated to be 33.8%, up 10 bps from prior guidance. Non-GAAP earnings are expected to be $6.22 per share, better than prior guidance of $6.14.
VMware projects cash flow from operations of $3.6 billion, up from $3.575 billion expected earlier. Capital expenditures are expected to be $250 million and free cash flow to be approximately $3.35 billion.
For fiscal 2020, VMware expects revenues to grow 12% year over year. Non-GAAP operating margin is anticipated to be approximately 33%.
How Have Estimates Been Moving Since Then?
Fresh estimates followed an upward path over the past two months.
Currently, VMware has an average Growth Score of C, a grade with the same score on the momentum front. 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 #2 (Buy). We expect an above average return from the stock in the next few months.