VMware Inc.
(VMW) reported strong first quarter 2011
results beating the Zacks Consensus Estimate of 27 cents by a
penny. Shares were up $10.73 (12.48%) in after-hours trading.
Operational
Performance
Earnings (excluding one-time net
item of one cent, but including stock-based compensation) increased
75.0% to 28 cents per share from 16 cents reported in the year-ago
quarter.
Earnings (excluding one-time items
and stock-based compensation) of 48 cents, were up 50.0% from 32
cents reported in the prior-year quarter. The year-over-year growth
was primarily attributable to strong revenue growth in the
quarter.
Net income (excluding one-time net
item of one cent, but including stock-based compensation) of $118.4
million, increased 82.2% year over year from $65.0 million in the
first quarter of 2010. Net margin was 14.0%, up from 10.3% in the
first quarter of 2010.
Gross profit increased 32.2% year
over year to $693.8 million. Gross margin decreased 70 basis points
(bps) year over year to 82.2% in the first quarter of 2011.
Operating income (excluding
one-time items) leaped 55.6% year over year to $158.2 million in
first quarter 2011. Operating margin was 19.8% in the reported
quarter compared with 16.9% in the year-ago quarter. Strong revenue
growth and strict cost control were the primary drivers for this
upside.
Revenue
Revenues increased 33.2% year over
year to $843.7 million, well above management’s guided range of
$800.0 million to $820.0 million. The upside was primarily driven
by strong Enterprise License Agreement (ELA) growth and new product
launches.
License revenues were up 34.2% year
over year to $419.0 million, primarily attributable to strong
demand in international markets and Enterprise License Agreement
(ELA) bookings during the quarter. ELA’s were 22% of total first
quarter bookings and included five transactions worth $10 million
or more.
Services revenue jumped 32.2% year
over year to $424.7 million. Software maintenance and support
revenue was $364 million, up 36% compared with the year-ago
quarter. VMware cited that customers generally tend to purchase
support & maintenance contracts spanning more than 24 months,
which reflects a strong customer base for the company’s
products.
US revenues (47.0% of the total
revenue) increased 26.0% year over year to reach $400.0 million.
Similarly, international revenues (53.0% of the total revenue)
witnessed a year-over-year growth of 40.0% to gross $444.0
million.
Balance Sheet and Cash
Flow
As of March 31, 2011, cash and cash
equivalents (including short-term investments) were $3.66 billion
compared with $3.32 billion at the end of December 31, 2010.
Deferred revenue (including current
portion) was $1.98 billion compared with $1.86 billion at the end
of December 31, 2010.
Cash from operations increased to
$500.5 million from $357.0 million in the prior quarter. Free cash
flow increased to $473.5 million in the first quarter versus $406.5
million in prior-year quarter.
During the quarter, VMware spent
approximately $200.0 million for mergers & acquisitions,
capital spending and share repurchase program. VMware’s board of
directors authorized an additional $550 million of share repurchase
(Class A common stock) through 2012, with the sole purpose of
partially offsetting the dilution from employee stock issuance.
Guidance
Management provided robust guidance
for the second quarter. For the second quarter of 2011, VMware
expects total revenue to range from $860.0 million to $880.0
million, reflecting an increase of 28.0% to 31.0% from the second
quarter of 2010.
For fiscal 2011, VMware has raised
its revenue guidance. The company expects revenue to be in the
range of $3.55 billion to $3.65 billion, up from the previous
guidance of $3.45 billion to $3.55 billion, a growth of 24% to 28%
over the prior year.
Given the strong first quarter
results from OEM partners and the large ELAs, management does not
expect sequential growth in license revenues for the upcoming
second and third quarters of 2011.
VMware expects non-GAAP operating
margin for 2011 to expand slightly compared with 2010. Non-GAAP
operating margin for the second quarter is expected to be in the
range of 28% to 29%, and the full-year 2011 to range from 28.5% to
29.5%.
Our Take
We believe increasing adoption of
virtualization and cloud computing technologies will drive growth
for VMware over the long term.
Enterprises shifting toward cloud
need proper infrastructure, which VMware provides through its four
key products: vSphere that helps in coordinating and automating
computer storage and networking; vShields for virtualized Edge
functions and security; vCloud Director to enable cloud
functionality; and the recently launched vCenter Operations Suite
for management.
According to VMware, vCenter
Operations Suite achieved strong initial response, which will boost
the customer base going forward.
Recently, VMware launched Cloud
Foundry, the industry’s maiden open Platform-as-a-Service (PaaS).
According to research firm Gartner Inc, 2011 will be the year of
PaaS as most of the leading enterprise software vendors are
expected to introduce new offerings. With Cloud Foundry, VMware
will enjoy a first mover advantage going forward, in our view.
However, we have a Neutral
recommendation on VMware over the long term (for the next 6 to 12
months) primarily due to tough competition from the likes of
Citrix Systems Inc. (CTXS), Microsoft
Corporation (MSFT), International Business
Machines Corporation (IBM) and the privately held
PARALLELS International GMBH.
Moreover, flat margin prospects and
moderating license growth could act as potential headwinds.
Currently, VMware has a Zacks #3
Rank, which implies a Hold rating on a short-term basis.
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