VMware's Growth Businesses Are Booming

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Virtualization solutions-provider VMware (NYSE: VMW) reported its third-quarter results after the market closed on Nov. 30. It was more of the same from the company, with double-digit revenue growth and even faster earnings growth. VMware boosted its guidance for the full year, and its results were buoyed by an acceleration in some key growth businesses, including NSX and EUC. Here's what investors need to know about VMware's third-quarter report.

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VMware: The raw numbers

Metric

Q3 2018

Q3 2016

Year-Over-Year Change

Revenue

$1.98 billion

$1.78 billion

11.1%

GAAP net income

$443 million

$319 million

38.9%

GAAP EPS

$1.07

$0.75

42.7%

Non-GAAP EPS

$1.34

$1.14

17.5%

What happened with VMware this quarter?

  • License revenue rose 14% year over year, to $785 million
  • Services revenue jumped 9.6% year over year, to $1.19 billion.
  • License revenue plus the sequential change in unearned license revenue grew 16% year over year.
  • Hybrid cloud and software-as-a-service accounted for over 8% of total revenue, down a bit from 9% of total revenue during the second quarter.
  • NSX license bookings doubled year over year, vSAN license bookings jumped by 150% year over year, and EUC license bookings rose 40% year over year.
  • Total-compute bookings jumped 11%, while cloud-management bookings were flat. Cloud-management license bookings slumped by a low single-digit percentage.
  • 42% of total bookings were enterprise agreements, with seven deals over $10 million. Nine of the top 10 deals include EUC and NSX, while eight include vSAN.

VMware's fourth-quarter guidance:

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  • Revenue of $2.263 billion and license revenue of $1.028 billion.
  • Non-GAAP operating margin of 36.9%, and diluted non-GAAP earnings per share (EPS) of $1.62.

VMware's full-year guidance:

  • Revenue of $7.875 billion and license revenue of $3.155 billion.
  • Non-GAAP operating margin of 33% and diluted non-GAAP EPS of $5.13.
  • Cash flow from operations of $3.1 billion, and free cash flow of $2.84 billion.

What management had to say

During the earnings call, VMware CEO Pat Gelsinger discussed the company's new partnership with Amazon Web Services (AWS):

We are particularly pleased to announce in partnership with Amazon Web Services initial availability of VMware cloud on AWS in the AWS U.S. West region. VMware cloud on AWS brings VMware software defined data center to the AWS cloud allowing customers to run applications across operationally consistent VMware vSphere-based private, public and hybrid cloud environments and optimized access to AWS services. And just this week at AWS re:Invent we announced another milestone service featuring expansion to the AWS U.S. East North Virginia region and a rich set of capabilities and add-on services that will enable customers to migrate, run and protect production workloads at scale.

CFO Zane Rowe detailed the company's share-buyback activity:

In Q3, we completed a $300 million repurchase of Class A common stock from Dell Technologies, which was announced on last quarter's call. In addition, we completed $555 million of stock repurchases in the open market during Q3. At the end of the quarter, we had just over $1 billion remaining on our stock repurchase authorizations.

Looking forward

VMware raised its full-year guidance for revenue and EPS, much like it did following its second-quarter report. An acceleration in VMware's NSX and EUC businesses compared to the second quarter, as well as the new partnership with Amazon Web Services, are likely two factors behind the guidance bump.

While hybrid cloud and software-as-a-service remains a small part of VMware's total revenue, the company continues to put up solid results as it adapts to a changing landscape.

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