VMware Posts Strong 4Q - Analyst Blog
January 24 2012 - 3:45AM
Zacks
VMware Inc.
(VMW) reported an outstanding
fourth quarter 2011 with earnings per share (EPS) surging 59.2%
year over year and handily beating the Zacks Consensus Estimate by
9 cents. The better-than-expected results were driven by solid
revenue growth on the back of strong global demand for VMware
products.
EPS (including stock-based
compensation) came in at 52 cents in the reported quarter compared
with 33 cents in the year-ago quarter. Excluding one-time items and
stock-based compensation, EPS was 62 cents, up 34.8% from 46 cents
reported in the year-ago quarter.
Quarter
Details
Revenue increased 26.9% year over
year to $1.06 billion, in line with the high end of management’s
guided range of $1.03 billion to $1.06 billion and surpassed the
Zacks Consensus Estimate of $1.05 billion. The upside was primarily
driven by strong Enterprise License Agreement (ELA) growth, strong
demand in the U.S. and across the Asia-Pacific markets during the
quarter.
License revenue was up 21.6% year
over year to $513.8 million, primarily attributable to strong
global demand for vSphere, vFabric and Cloud Foundry project. ELA
was 30.0% of fourth quarter bookings and included five transactions
worth $10 million or more. The company experienced stronger demand
for end-user computing and management products with the renewals of
ELAs.
Services revenue jumped 32.2% year
over year to $546.5 million. Software maintenance and support
revenue increased 34.0% year over year to $463.0 million in the
fourth quarter of 2011.
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. Professional services
revenue was $83.0 million, up 22.0% from the year-ago quarter.
USrevenues increased 21.0% year
over year to reach $531.0 million while International revenues
witnessed a year-over-year growth of 34.0% to $529.0 million in the
reported quarter.
Gross profit (including stock-based
compensation) increased 26.7% year over year to $930.1 million in
the fourth quarter. Gross margin was 87.7% versus 87.8% in the
prior-year quarter. The year-over-year decline in gross margin was
due to higher proportion of service revenue in the mix.
Operating income (including
stock-based compensation) in the reported quarter jumped 62.7% year
over year to $257.3 million. Operating margin was 24.3% in the
quarter compared with 18.9% 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 $223.4 million, up from $139.2 million in the
fourth quarter of 2010. Net margin was 21.1%, up from 16.7% in
previous-year quarter.
Balance Sheet and Cash
Flow
VMware exited the quarter with cash
and cash equivalents (including short-term investments) of $4.51
billion, compared with $3.98 billion in the previous quarter.
Cash from operations was $561.4
million versus $524.0 million in the prior quarter. Free cash flow
was $535.3 million in the quarter, an increase of 32.0% from the
year-ago quarter. During the quarter, the company repurchased
shares of its common stock worth $90 million.
Guidance
Management provided robust guidance
for the first quarter of 2012. VMware expects total revenue to
range from $1.015 billion to $1.040 billion, reflecting an increase
of 20.0% to 23.0% from the first quarter of 2011. The Zacks
Consensus revenue estimate is pegged at $1.02 billion, in line with
the lower end of management guidance.
VMware continues to increase
investments in emerging markets and product innovation, which will
hamper operating margin expansion for 2012. Management expects
first quarter 2012 operating margin to exceed the full-year
operating margin growth. Non-GAAP operating margin for the first
quarter is expected to be within a range of 30.0% to 31.0%.
For fiscal 2012, revenue is
expected in the range of $4.475 billion to $4.6 billion, an
increase of 19.0% to 22.0% from fiscal 2011, primarily driven by
strong license revenue growth, which is expected to increase within
11.0% to 16.0% range. Operating margin is expected in the
range of 29.5% to 30.5% in the upcoming quarter.
For 2012, VMware expects capital
expenditure in the range of $325.0 million to $350.0 million.
Our
Recommendation
Enterprises that are shifting to
the 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 vCenter Operations Suite for management.
We expect VMware to benefit from increased adoption of
virtualization and cloud computing technologies going forward.
We believe that VMware’s strong
innovative product pipeline will drive top-line growth over the
long term. Moreover, the company’s increasing focus on emerging
markets will also drive its profitability over the long term, in
our view.
However, we believe that a sluggish
North American and European market coupled with weak IT spending
environment will be an overhang for the stock over the next 12 to
18 months. Moreover, increasing competition from
Microsoft Corp. (MSFT) and
Citrix Systems Inc. (CTXS) will
remain a deterrent 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 #3 Rank, which implies a Hold rating on a
short-term basis.
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