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VMware Tops Estimates

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VMware Inc. (VMW - Free Report) reported robust first-quarter 2012 results with earnings per share (EPS) soaring 62.5% year over year and handily beating the Zacks Consensus Estimate by 10 cents. EPS (including stock-based compensation) came in at 52 cents in the reported quarter compared with 32 cents in the year-ago quarter. The better-than-expected results were driven by solid revenue growth on the back of strong global demand for VMware products.

Quarter Details

Revenues for the reported quarter not only moved up 25.1% year over year to $1.06 billion, but also moved past management’s guided range of $1.015 billion to $1.040 billion and surpassed the Zacks Consensus Estimate of $1.03 billion. The upside was primarily driven by strong Enterprise License Agreement (ELA) growth. Moreover, strong demand in the international markets, particularly from the Asia-Pacific region, contributed to the revenue surge.

License revenue was up 15.0% year over year to $481.9 million, primarily attributable to strong global demand for VMware products. ELA was 22.0% of first quarter bookings and included two transactions worth $10 million or more.

Services revenue jumped 35.0% year over year to $573.3 million, and it includes two segments, namely Software maintenance and support and Professional services. The revenues of these two segments increased 35.0% and 33.0%, respectively.

VMware stated that with the purchase of new licenses, customers continued to buy more than 24 months of support and maintenance, which reflects their strong commitment to VMware as a core element of their data center architecture and hybrid cloud strategy.

US revenues increased 21.0% year over year to reach $485.0 million, while International revenues witnessed a year-over-year growth of 28.0% to $570.0 million in the reported quarter.

Gross profit (including stock-based compensation) increased 25.6% year over year to $920.9 million in the first quarter. Gross margin was 87.3% versus 86.9% in the prior-year quarter. The year-over-year increase in gross margin was due to higher revenue base.

Operating income (including stock-based compensation) in the reported quarter jumped 57.0% year over year to $261.9 million. Operating margin was 24.8% in the quarter compared with 19.8% in the year-ago quarter. The upside was primarily driven by strong revenue growth and strict cost-control measures.

Net income (including stock-based compensation) was $225.3 million, up from $135.7 million in the fourth quarter of 2011. Net margin was 21.4%, up from 16.1% in previous-year quarter.

Balance Sheet and Cash Flow

VMware exited the quarter with cash and cash equivalents (including short-term investments) of $5.23 billion, compared with $4.51 billion in the previous quarter.

Cash from operations was $576.6 million versus $561.4 million in the prior quarter. Free cash flow was $596.6 million in the quarter, an increase of 26.0% from the year-ago quarter.


Management expects vSphere’s latest versions, which is expected to be launched in the second half of 2012, to perform exceedingly well in the forthcoming quarters on the back of robust international demand.

Management provided robust guidance for the second quarter of 2012. VMware expects total revenue to range from $1.10 billion to $1.12 billion, reflecting an increase of 19.5% to 21.5% over the second quarter of 2011. The Zacks Consensus revenue estimate is pegged at $1.10 billion, in line with the lower end of management guidance.

Moreover, revenue from license agreements is expected to grow in the range of 10% to 12% form the previous year period. However, management expects maintenance revenues to outperform license revenue in 2012.

VMware continues to increase investments in emerging markets and product innovation, which will hamper operating margin expansion for 2012. Non-GAAP operating margin for the second quarter is expected to be within a range of 30.5% to 31.5%.

For fiscal 2012, revenue is expected in the range of $4.525 billion to $4.625 billion, an increase of 20.0% to 23.0% from fiscal 2011, primarily driven by strong license revenue growth, which is expected to increase within 12.0% to 16.0% range.  Operating margin is expected in the range of 30.25% to 31.25%.

Our Take

VMware’s results were positively impacted by a robust growth in the international markets and the company’s increasing focus on emerging markets will also be a crucial factor over the long term, in our view. Moreover, we believe that VMware’s strong and innovative product pipeline will enable the company to drive its top-line growth over the long term.

However, we believe that a sluggish North American and European market coupled with modest IT spending environment will be an overhang on the stock over the next 12 to 18 months.  Moreover, increasing competition from Microsoft Corp. (MSFT - Free Report) and Citrix Systems Inc. (CTXS - Free Report) will be a deterrent factor going forward.

We have a Neutral recommendation on VMware over the long term (for the next 6 to 12 months). Currently, VMware has a Zacks #4 Rank, which implies a ‘Sell’ rating on short-term basis.

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