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Why Is VMware (VMW) Down 1.7% Since Last Earnings Report?

It has been about a month since the last earnings report for VMware (VMW). Shares have lost about 1.7% in that time frame, underperforming 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 catalysts.

VMware Q2 Benefits From Robust NSX and vSAN Growth

VMware reported second-quarter fiscal 2019 non-GAAP earnings of $1.54 per share, which beat the Zacks Consensus Estimate by a nickel and increased 14.1% from the year-ago quarter.

Revenues of $2.17 billion also surpassed the consensus mark of $2.15 billion and improved 12.5% on a year-over-year basis. Strong top-line growth was primarily driven by robust performance from NSX and vSAN product lines.

Region wise, U.S. revenues (48.9% of total revenues) increased 10.2%, while International (51.1%) grew 14.9% from the year-ago quarter. EMEA delivered robust performance in the reported quarter.

Services revenues (58.6% of total revenues) increased 10.9% to $1.27 billion. License revenues (41.4% of total revenues) grew 14.9% year over year to $900 million.

Hybrid Cloud and SaaS represented 10% of total revenues. VMware Cloud Provider Program (“VCPP”) increased more than 30% from the year-ago quarter.

Robust Bookings

NSX license bookings including VeloCloud increased more than 40% year over year and its adoption continues to expand beyond micro-segmentation, network automation, cloud-native applications, multi-cloud networking, enterprise branch SD-WAN and network functions virtualization.

Notably, nine out of the top 10 enterprise agreements in the quarter included NSX. VMware stated that 82 companies of the Fortune 100 have adopted NSX.

Moreover, vSAN license bookings soared 70% on a year-over-year basis. VMware stated that more than 60% of vSAN customers are now using vSAN to run business critical applications. Notably, seven of the company’s top 10 deals included vSAN.

EUC license bookings were up in the mid-teens, driven by robust performance from Workspace ONE, VMware’s platform that securely delivers any application to any device. Notably, nine out of the top 10 enterprise agreements included EUC.

Core SDDC license bookings (combination of compute and management) grew in the low-teens on a year-over-year basis. Compute grew more than 10% and management bookings were up in the high-teens-digit range.

VMware exited second-quarter 2019 with almost $141 million of license backlog, roughly $19 million higher on a sequential basis.

Product Portfolio Expands, Partnerships Key Catalyst

During the quarter, VMware Cloud on AWS received its fourth major quarterly update, bringing the service to Germany. Moreover, VMware Cloud on AWS GovCloud (US), a forthcoming hybrid cloud service, was also introduced in June.

VMware stated that more than 150 competency partners have joined the VMware Cloud and AWS partner program. Additionally, more than 50 of these partners are now transacting business directly with customers.

Meanwhile, at 5G World Summit 2018, VMware unveiled VMware vCloud NFV-OpenStack Edition 3.0. This is the next generation of the company’s network functions virtualization platform for communication service providers (CSPs).

During the quarter, VMware and Okta inked a partnership to integrate Workspace ONE and the Okta Identity Cloud, enabling customers to easily and more securely move to the cloud.

Moreover, VMware’s collaboration with AT&T is expanding rapidly in many customer segments such as retail and financial services, which is a positive for top-line growth

Operating Details

Non-GAAP gross margin remained unchanged on a year-over-year basis at 87.9%. License gross margin contracted 20 basis points (bps). Services gross margin contracted 10 bps in the quarter.

Research & development (R&D), general & administrative (G&A), and sales & marketing (S&M) expenses as percentage of revenues increased 40 bps, 50 bps and 10 bps, respectively.

Non-GAAP operating expenses as a percentage of revenues increased 100 bps to 54.1%.

As a result, non-GAAP operating margin contracted 100 bps to 33.8% in the quarter.

Balance Sheet & Cash Flow

At the end of second-quarter fiscal 2019, cash & cash equivalents were $13.30 billion.

Operating cash flow was $787 million in the quarter, while free cash flow was $726 million.

On Jul 2, VMware announced an $11-billion one-time conditional special dividend.

Guidance

For third-quarter fiscal 2019, revenues are anticipated to be $2.165 billion, up 11.7% year over year. License revenues are expected to increase 14.1% from the year-ago quarter to $865 million.

Non-GAAP operating margin is anticipated to be 33%. Non-GAAP earnings are expected to be $1.50 per share.

For fiscal 2019, revenues are projected to increase 12.2% (up from 11.7%) to almost $8.820 billion. License revenues are expected to increase 14.8% year over year to $3.675 billion.

Non-GAAP operating margin is anticipated to be 33.8%. Non-GAAP earnings are expected to be $6.14 per share.

VMware projects cash flow from operations of $3.575 billion. Capital expenditures are expected to be $280 million and free cash flow to be approximately $3.295 billion.

Management continues to expect $700 million in synergies with Dell this fiscal year, up from the $400 million in synergies it achieved last year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, VMware has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, VMware has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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