Tuesday, April 19, 2011

VMware, Inc. (NYSE: VMW): Q1 Earnings Preview 2011

VMware, Inc. (NYSE: VMW), the world's biggest maker of virtualization software is scheduled to release its first-quarter earnings after the closing bell on Tuesday, April 19, 2011. Analysts, on average, expect the company to report earnings of 42 cents per share on revenue of $815.35 million. In the year ago quarter, the company reported earnings of 32 cents per share on revenue of $633.5 million.

VMware, Inc. provides virtualization infrastructure software solutions and related support and services primarily in the United States. The Company’s suite of virtualization solutions addresses a range of information technology (IT) problems that include cost and operational inefficiencies, business continuity, software lifecycle management and desktop management. VMware, like many software companies, generates revenue primarily by selling new software licenses to its customers. When the license period expires, customers can sign up for maintenance and service contracts at a lower fee.

In the preceding fourth quarter, the Palo Alto, California-based company's net income was $120 million or $0.28 per share, compared with $56 million or $0.14 per share last year. On an adjusted basis, the company earned 46 cents per share. Revenue surged 37% to $835.6 million from $608.2 million. Analysts, on average, expected the company to report earnings of 44 cents per share on revenue of $803.58 million. 

At its last earnings call in January, , the company said that it expects first-quarter revenues of $800 million to $820 million, an increase of 26 percent to 29 percent from a year earlier.  Non-GAAP operating margin for the first quarter is expected to be in the range of 27% to 28.%

For fiscal 2011, VMware anticipates revenues of $3.45 billion to $3.55 billion, an increase of 21 percent to 24 percent from 2010. The company said it expects license revenues to increase between 14 percent and 19 percent. Management also expects license revenues to grow at a similar clip in both the second and third quarters of fiscal 2011. Operating margins may not expand in 2011, VMware also said.  Non-GAAP operating margin for the full year is expected to be in the range of 28% to 29%. The company, majority-owned by EMC Corp., plans to spend more on staff and on international expansion, Chief Financial Officer Mark Peek said.

The company is benefiting from improving demand, customer wins and geographical expansion.VMware has a strong product pipeline and loyal customer base that will boost its profitability in the long term. The company’s virtualization platform – vSphere – addresses a range of information technology problems that include cost and operational inefficiencies, business continuity, software lifecycle management and desktop management. VMware works closely with over 900 technology partners, including server, microprocessor, storage, networking and software vendors.VMware competes with Microsoft (NASDAQ: MSFT) and Citrix (NASDAQ: CTXS) in the virtualization market, which it leads with around 45% share globally. vSphere allows companies to increase the utilization of their servers by allocating server resources to software applications independent of the underlying operating system required to execute the application. vSphere also makes it easier for IT managers to better manage various internal or external "clouds" or groups of virtualized server resources. Looking ahead, the company will focus on hybrid cloud opportunities, which blends private cloud infrastructure with public cloud services.  VMware is well hedged against potential revenue disruptions in the U.S. as it generates approximately half of its revenue from its international customers.

During the quarter in review,  VMware launched Cloud Foundry, the industry’s first open Platform-as-a-Service (PaaS). According to technology 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 February, the company's Board of Directors authorized the purchase of up to $550 million of its Class A common stock through the end of 2012.

The company's stock currently trades at a forward P/E (fye Dec 31, 2012) of 39.24 and PEG ratio (5 yr expected) of 2.04. In terms of stock performance, VMware shares have gained nearly 55 percent over the past year.  

Full Disclosure: None.
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