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VMware Earnings Preview: Shareholders Uneasy Despite Expected Growth
Trefis Team, Contributor
Jan 25, 2016 @ 01:56 PM
VMware is scheduled to announce its fourth quarter and full year earnings on Tuesday, January 26. At the beginning of Q4, tech giant Dell announced that it would acquire VMware’s majority owner EMC in a $67 billion acquisition. Dell management intended to keep VMware a publicly traded company, retaining an approximately 28% stake in VMware. VMware’s shareholders have reacted negatively to both the acquisition news, the introduction of a tracking stock related to VMware, and future plans by EMC that included a capital-intensive joint venture Virtustream with VMware. Consequently, VMware’s stock plummeted by about 30% through the quarter to about $55 by the end of December. Despite pressure from shareholders and investors, the company has continued to enhance its product offerings across end-user computing, mobility management and hybrid cloud domains.
We currently have a $86 price estimate for VMware’s stock, which is significantly higher than the current market price.
Is Dell/EMC Hindering VMware’s Growth?
Before Dell made the announcement, EMC had an 80% stake in VMware and 97% of voting rights. With Dell acquiring EMC, it has effectively taken the 97% voting rights but floated over 50% of VMware’s stock as tracking stock with no voting rights. Under the conditions of the deal, Dell would have a 28% stake in VMware with 97% voting rights, while existing VMware shareholders retain the 20% ownership with 3% voting rights, and over 50% ownership lies with former EMC shareholders in the form of tracking stock with no voting rights. Not only has the introduction of the tracking stock increased VMware’s float and depressed the valuation, shareholders are bound to be unhappy in a scenario where 97% of the voting rights lie with a party that has only a 28% economic interest in the company.
Network Virtualization, End-User Computing To Sustain Growth
VMware has seen a sustained period of strong customer response for the its software-defined networking platform NSX, its end-user computing product license sales and hybrid cloud computing offerings. The total number of paying customers for VMware’s NSX rose to over 900 by the end of Q3, up from 400 at the end of December and only about 150 at the end of June last year. Six out of VMware’s ten largest deals in Q3 included the NSX implementation, while the company also released the NSX 6.2 during the September quarter, which contributed significantly to the 100% annual rise in revenue generated through license bookings during the quarter.
The solid demand for NSX and software-defined networking likely continued through Q4, and is likely to continue to boost top line figures in the coming quarters. According to the company’s estimates, the number of production customers that are currently using NSX is far greater than the number of customers using similar products of any competing provider. Many of VMware’s customers continue to upgrade their networking and security requirements owing to the hardware-bound limitations in their current architectures. On the other hand, non-IT small and medium enterprises are likely to migrate to a newer technology once it fully matures. Accordingly, VMware could witness an increasing mix of large-scale license agreements and implementations in the coming years.
During the quarter, VMware announced the general availability of new hybrid networking capabilities including VMware Hybrid Cloud manager and Advanced Networking Services. Moreover, the company announced enhancements in the public cloud space for its Unified Hybrid Cloud platform at VMworld conference early in Q4. The product enhancement included the general availability for Google Cloud DNS and vCloud Air on a single platform and additional support for vSphere Integrated Containers on vCloud Air.
The other key area of growth for VMware has been end-user computing and mobile device management, which was boosted by the $1.5 billion Airwatch acquisition in January last year. The company has since witnessed strong demand for mobility solutions, as evidenced by 50-60% year-over-year growth in end-user computing license bookings through 2014 and in Q1’15. VMware witnessed a 30% year-over-year increase in license bookings for AirWatch in the June quarter, which further slowed to about 15% in Q3. The growth rate was lower in Q2 and Q3 mainly due to tougher year-over-year comparisons. The company has sustained growth in this domain and was recently recognized by IDC as a clear leader in enterprise mobility management domain.
Despite the massive drop in VMware’s market price through Q4, the company is likely to sustain growth for the quarter. The company expects Q4 revenues to be over $1.85 billion, which is a 9% year-over-year increase. Growth could be even higher in constant currency terms. VMware’s services revenue stream is likely to continue to witness a higher growth rate than the revenues generated through license bookings. The company has given guidance for license booking revenues to rise by 4-5% on a year-over-year basis to about $815 million, while services revenues could rise by over 10%.