VMware Reports Double-Digit Earnings Growth

By Timothy Green Markets Fool.com

Image source: VMware.

Continue Reading Below

Virtualization and cloud infrastructure provider VMware (NYSE: VMW) reported its fourth-quarter results after the market closed on Jan. 26. Revenue growth was driven by solid results in both the licensing and services businesses, and earnings continued to grow faster than sales. Guidance calls for slightly slower growth during the first quarter, but EPS is still expected to expand at a double-digit rate. Here's what investors need to know about VMware's fourth-quarter results.

VMware: The raw numbers

Metric

Q4 2016

Q4 2015

Change (YOY)

Revenue

$2.03 billion

$1.87 billion

8.6%

GAAP net income

$441 million

$373 million

18.2%

GAAP EPS

$1.04

$0.88

18.2%

Non-GAAP EPS

$1.43

$1.26

13.5%

Data source: VMware. YOY = year over year.

What happened with VMware this quarter?

Continue Reading Below

Both license revenue and services revenue grew at a healthy pace.

  • License revenue grew 7.5% year over year to $887 million.
  • Services revenue jumped 9.8% year over year to $1.15 billion.
  • License revenue plus the sequential change in unearned license revenue grew by 14% year over year.
  • Total GAAP operating expenses rose by 4.8% year over year, substantially slower than revenue.
  • Hybrid cloud and software-as-a-service accounted for 8% of total revenue and grew by a double-digit percentage year over year.
  • NSX customer count surpassed 2,400, nearly double compared to the same time last year.
  • VMware booked 13 deals valued at over $10 million during the quarter.
  • VMware spent $559 million on share repurchases during the quarter, and $1.575 billion during 2016.

VMware provided guidance for the first quarter and the new fiscal year:

  • For the first quarter: Revenue between $1.675 billion and $1.725 billion and non-GAAP EPS between $0.93 and $0.96.
  • For the full year: Revenue of $7.57 billion, non-GAAP EPS of $4.87, and free cash flow of $2.39 billion.

What management had to say

VMware CEO Pat Gelsinger singled out the company's focus on hybrid cloud:

Q4 closed out a strong fiscal 2016 and was one of the most balanced quarters forVMwarein years. We're very pleased with our strong product momentum and customer enthusiasm for our Cloud strategy. We believe we have the world's most complete and capable hybrid cloud architecture, uniquely offering customers freedom and control in their infrastructure decisions.

CFO Zane Rowe detailed the company's new share repurchase authorization:

This was a very good year forVMwaredemonstrated by strong revenue, earnings and cash flow growth, as well as a significant amount of capital returned to shareholders in the form of stock repurchases. We're pleased to announce the authorization of an additional$1.2 billionof stock repurchases to be completed during fiscal 2018.

Looking ahead

Growth in both licensing and services drove VMware's revenue higher during the fourth quarter, and a combination of slower expense growth and share buybacks helped push earnings up by even more. While hybrid and SaaS could account for less than 10% of revenue, NSX, the company's software-defined networking product, is on track to generate $1 billion of revenue this year.

VMware's guidance was solid, calling for first-quarter revenue growth of 6.9% and non-GAAP EPS growth of 10.9% at the midpoint of the guidance ranges. The stock has soared over the past year, up roughly 78%. While growth has slowed down compared to the past, strong results have been driving the stock higher nonetheless.

10 stocks we like better than VMware
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now...and VMware wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool has a disclosure policy.