Company Overview: VMware, Inc. is an information technology (IT) company. The Company is engaged in development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. The Company offers various products, which allow organizations to manage IT resources across private clouds and multi-cloud, multi-device environments by leveraging synergies across three product categories: Software-Defined Data Center (SDDC), Hybrid Cloud Computing and End-User Computing (EUC). The SDDC is designed to transform and modernize the data center into an on-demand service that addresses application requirements by abstracting, pooling and automating the services that are required from the underlying hardware. The Company provides many storage and availability products to offer data storage and protection options to all applications running on the vSphere platform.



VMW Details

VMware Inc. (NYSE: VMW) is witnessing a number of favorable trends that signal for continuous growth falling into place for next year. Factors including synergies from the Dell channel, enterprises moving towards a software defined data center and deals related to Network Functions Virtualization ahead of 5G upgrades, seem to provide the next leg of growth. The strength of latest quarterly update is expected to continue into upcoming quarter while FY19 revenue guidance of 10% year on year growth sets a positive outlook.

Third Quarter Financial Performance highlights: VMware lately reported for adjusted earnings per share of $1.34 in the third quarter of FY 18. The group’s adjusted revenue growth was of the order of 11% to $1.98 billion in the third quarter while the License revenue grew 14% for the third quarter to $785 million. The non-GAAP net income for the quarter grew 17% to $553 million and non-GAAP operating income grew 16% to $689 million. Moreover, the company has an operating cash flows of $970 million and free cash flows of $911 million, as of November 3, 2017. The company has posted the cash, cash equivalents and short-term investments of $11.6 billion, and unearned revenue of $5.6 billion. Additionally, the year on year growth rate for total revenue plus the sequential change in total unearned revenue is 21% and the year on year (yoy) growth rate for license revenue plus sequential change in unearned license revenue is 16%. The NSX license bookings have increased over 100% yoy and vSAN license bookings increased over 150% yoy. EUC license bookings for the quarter grew over 40% yoy. In addition, the total Compute bookings grew up 11% and the Compute license bookings grew up in the mid-single-digits yoy. The total Cloud Management bookings were flat in the third quarter, with Cloud Management license bookings down in the low-single digits. The revenue for VMware Cloud on AWS will be recognized on a “net” basis upon adoption of the new accounting standard ASC 606 in Q1 FY19. Meanwhile, VMW in the third quarter has finished a $300 million repurchase of VMW’s Class A common stock from Dell Technologies and completed $555M of stock repurchases in the open market, ending the third quarter with just over $1B remaining on the stock repurchase authorizations.

 

Performance highlights (Source: Company reports)
 
Recent Strategic Steps taken by VMW: The group has introduced an expanded set of products and services as part of VMware Cloud including, VMware Cloud on AWS, which is initially available in AWS U.S. West region. VMware Cloud on AWS has brought VMW’s software-defined data center to the AWS Cloud that allows the customers to run applications across operationally consistent VMW vSphere, which is based on private, public and hybrid cloud environments, with optimized access to AWS services. New VMware Cloud Services enables the end-to-end visibility into cloud usage, costs and networks, with consistent networking and security across public clouds and on-premises environments. The group had announced its breakthrough solution for securing applications running on virtualized or cloud environments, VMware AppDefense. The solution helps to deliver an intent-based security model and enables least privilege environments for critical applications. Further, VMware and Pivotal Software, Inc., in collaboration with Google Cloud, had introduced Pivotal Container Service (PKS), which is a commercial release of the open source Cloud Foundry Container Runtime technology that, when available, would help Global 2000 companies operationalize Kubernetes. Additionally, VMW has planned its intent to acquire VeloCloud Networks, Inc., provider of industry-leading cloud-delivered software-defined wide-area network (SD-WAN) technology for enterprises and service providers. After the acquisition gets completed, VeloCloud would enable VMW to build on its industry-leading network virtualization platform, VMware NSX and expand its networking portfolio to address end-to-end automation, application continuity, branch transformation and security from data center to cloud to edge.
 
Expanding partnership base: VMW has established relationships with regard to hardware with many big vendors that include Cisco, HPE, IBM, and others. Moreover, the company also works closely with Intel and AMD to advance hardware, thus enhancing virtualization experience for customers. The company has collaborations with IBM, Telefonica, T-Systems, CenturyLink, Fujitsu, Samsung Electronics, Microsoft, and many others for services and IoT offerings. With IBM cloud building more and more on the group’s offerings, they are positioning them as one of the major partners for the VMware cloud foundation.  IBM enhanced their customers on IBM cloud with the VMware software stacks, leading to solid growth rates. The group currently has 1,400 plus customers with IBM. The group partnered with IBM and their QRadar to boost the security offerings with the AppDefense and QRadar.

 

Hybrid Cloud and SaaS (Source: Company Reports)
 
Updated Integrated Hybrid Cloud Platform: VMware introduced a major update for its Integrated Hybrid Cloud Platform, VMware Cloud Foundation 2.3 that will provide customers with a simplified path to building a hybrid cloud based on consistent infrastructure and operations. Hybrid Cloud and SaaS accounted over 8% of total revenue in the third quarter of FY18. Going forward, this platform is anticipated to deliver the management and provisioning of compute, network, storage and application services at scale across hybrid cloud environments through the integrations with VMware vRealize Automation, vRealize Operations and vRealize Log Insight. Moreover, the integration of VMware Cloud Foundation and vRealize Automation will help customers to get greater business agility by automating application and infrastructure service delivery through the self-service capabilities.
 
Guidance for FY 18: The group forecasts a total revenue of $7.875 billion in the FY 18 while License revenue is expected to be $3.155 billion. Non-GAAP operating margin is expected to be 33% and diluted non-GAAP earnings per share is expected to be $5.13 taking in account for diluted share count of 412 million. Moreover, for FY 18, the cash flow from operations is expected to be $3.10 billion, capex is expected to be $260 million and free cashflow is expected to be $2.84 billion. Additionally, the company in the fourth quarter of FY 18 expects the revenue to be $2.263 billion with license revenue to be $1.028 billion and diluted non-GAAP earnings per share to be $1.62.
 
Positive Outlook: With the ongoing rising as-a-service portion of the group’s business, management sees this momentum to continue going forward. They are launching new products targeting the new areas which include NSX and vSAN. The group sees solid potential for their VMware cloud on AWS, as well as growing penetration of their end-user computing business products in SaaS. They continue to focus on the software and the net billing aspects while maintain emphasis on high margin software growth rate. On the other side, the expected 5G build by 2020 or 2021 would also open opportunities to the group. The group is positioning in this market via VNS virtual network functions, dedicated for telco applications, crossing 50 of those that are validated and available for the VMware platform. They have over 350 million subscribers that are running some service over a VMware hosted NFV infrastructure while the group also launched the next version of their open stack platform for NFV architectures. They released the Dell EMC NFV ready bundle for VMware.

 

Enterprise Agreements (Source: Company Reports)
 
Stock Recommendation: The shares of VMW have corrected in the last four weeks despite the strong result update and this can be a good investment opportunity. VMW has otherwise risen 44.9% in last one year (as of December 06, 2017). The company has continued to witness broad-based strength across the product portfolio and geographies and expects a strong demand going forward from their partners. Moreover, the group has been indicated to be the major hyperconverged infrastructure software vendor during the first half of 2017 based on sales of hyperconverged solutions running VMware vSAN. Given the prospects and high return on equity, we put a “Buy” recommendation on the stock at the current price of USD 116.67



VMW Daily Chart (Source: Thomson Reuters)

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