VMware Earnings Preview: Software-Defined Storage, Networking In Focus

| About: VMware, Inc. (VMW)

Virtualization and cloud-computing giant VMware (NYSE:VMW) is scheduled to announce its Q1 2014 earnings on Tuesday, April 22. During the course of last year, the company witnessed stagnating sales of its core vSphere product offerings due to a maturing virtualization market. On the other hand, VMware's vCloud Suite - the company's cloud-computing product line - was largely responsible for driving sales during the year, especially in the latter half of 2013. VMware also saw robust growth in services revenues, with growth of nearly 18% for the full year compared to 2012. Going forward, the company's services division is likely to continue to reap benefits from its hybrid cloud offering as the vCloud Hybrid service gains popularity among buyers. Among the new developments in the first quarter of 2014, VMware's acquisition of mobile-device management (MDM) software provider AirWatch for $1.5 billion in January stood out the most. The acquisition boosts VMware's MDM capabilities which would help the company to provide virtualization on mobile devices such as smartphones and tablets.

We have a price estimate of just over $97 for VMware's stock, which is in line with the current market price.

Network and Storage Virtualization To Look Forward To After Server Virtualization

VMware has dominated the server virtualization market in the last few years, commanding a 55-60% market share in this segment. However, more recently, competitors such as Microsoft (NASDAQ:MSFT) and Citrix (NASDAQ:CTXS) have developed their product offerings to compete with VMware's and consequently gained share in this market by offering competitive prices. However, as it is a maturing market, VMware has shifted its focus to tap into newer market technologies such as network virtualization (also called software-defined networking) and software-defined storage.

VMware introduced NSX, its own software-defined networking (SDN) platform in late 2013, to establish itself in the fast growing segment. The company reported that it made great progress in the last quarter by signing deals with major clients that included a number of large enterprises in the finance, banking and telecommunications sectors. Management expects the SDN to follow a similar trajectory for the company in server virtualization in 2009. [1] Going by that estimate, 2014 should be a highly productive year for the company as SDN has started gaining traction among buyers. VMware's main concern at this point should be Cisco's (NASDAQ:CSCO) different approach to the SDN architecture. Cisco's SDN is built on OpenStack, an open-source platform rather than the VMware platform. [2] If Cisco's different approach gains more popularity among buyers, it could have a negative impact on VMware's performance unless VMware changes its own approach. [3]

Additionally, VMware recently introduced its Virtual SAN software-defined storage, which is fully compatible with its vSphere virtualization platform. [4] This converged offering combines two of the three areas in the VMware's software-defined data center (SDDC) vision. Given that the converged infrastructure targets both large enterprises and small and medium businesses, we expect the Virtual SAN combined with vSphere to help drive VMware's performance going forward.

VMware's future seems bright with the progress it has made in network and server virtualization which, combined with its mobile-device management and mobile application management capabilities, should lead to a strong year. The company has given revenue guidance of about $1.35 billion for the quarter, which is a 15% increase over the prior year quarter. With a healthy customer response to VMware's new product offerings and the growing services department, we expect the company to meet its guidance.

Disclosure: No positions.

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