Another Strong Quarter and Guidance Boost for VMware

By Markets Fool.com

Image source: VMware.

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Virtualization and cloud infrastructure provider VMWare (NYSE: VMW) reported its third-quarter results after the market closed on Oct. 26. VMware's revenue came in at the high end of its guidance, and non-GAAP EPS surpassed the company expectations. The services segment led the way, posting strong growth, while the trend of sluggish licensing growth continued. Here's what investors need to know about VMware's third-quarter results.

VMware: The raw numbers

Metric

Q3 2016

Q3 2015

Growth (YOY)

Revenue

$1.778 billion

$1.672 billion

6.3%

GAAP net income

$319 million

$256 million

24.6%

GAAP EPS

$0.75

$0.60

25%

Non-GAAP EPS

$1.14

$1.02

11.8%

Data source: VMWare Q3 2016 earnings release.

What happened with VMware this quarter?

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Growth in services drove much of VMware's performance during the third quarter. The company also managed to keep costs in check, leading to the larger increase in earnings.

  • License revenue increased by 1.5% year over year to $691 million.
  • Services revenue jumped 9.7% year over year to $1.087 billion.
  • License revenue plus the sequential change in unearned license revenue grew by 9% year over year.
  • Total operating expenses rose by just 3.8% year over year.
  • VMware announced in October a partnership with Amazon.com to bring a vSphere-based cloud service to AWS. It will be VMWare's primary public cloud solution.
  • Hybrid cloud and software-as-a-service products grew by a double-digit percentage year over year, accounting for 8% of total revenue.
  • The number of NSX customers more than doubled year over year to over 1,900.
  • VMware generated $620 million of operating cashflow and $590 million of free cash flow.
  • VMware spent over $1 billion of share repurchases during the quarter.

VMware also provided guidance for the fourth quarter and the full year.

  • Fourth-quarter revenue is expected between $1.965 billion and $2.015 billion, up 6.4% year over year at the midpoint.
  • Fourth-quarter non-GAAP EPS is expected between $1.37 and $1.41, up 10.3% year over year at the midpoint.
  • Full-year revenue is expected between $7.025 billion and $7.075 billion, up from a previous range of $6.95 billion to $7.05 billion.
  • Full year non-GAAP EPS is expected between $4.34 and $4.38, up from a previous range of $4.27 to $4.33.

What management had to say

VMware CEO Pat Gelsinger spoke in broad terms about the company's results: "Our very good third-quarter financial results reflectVMware'sstrength in delivering strategic value to our customers. We are helping customers run any application across their private, public and hybrid clouds with our new Cross-Cloud Architecture, the industry's most complete and capable hybrid cloud offering."

CFO Zane Rowe added: "We are pleased with our Q3 financial performance, which exceeded the midpoint of our revenue and operating margin guidance. We continue to broaden our portfolio with a range of products that will drive growth for the company."

Looking ahead

VMware's revenue growth has slowed down, but earnings are still growing at a faster rate. Growth of smaller businesses such as NSX continues to impress, and the company's hyper-converged software license bookings grew by more than 150% year over year during the quarter. Profitability remains robust, with the company expecting to generate free cash flow of $2.155 billion this year.

Shares of VMware have rebounded strongly over the past six months, surging nearly 30% and erasing a portion of its 2015 decline. Growth isn't as impressive as it used to be, but the company's strategy is still driving revenue and earnings higher.

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Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. The Motley Fool recommends VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.