VMware Earnings: Back to Business as Usual

Jul.21.10 | About: VMware, Inc. (VMW)

Lost in the shadow of world dominance by Apple (NASDAQ:AAPL), last evening it was business as usual for VMware (NYSE:VMW), which reported another fine quarter and increased guidance for the next quarter and full year. VMware is one of the true secular growth stories in the U.S.

The main question for a name like this is valuation. We have this stock along with a few others in the "valuation does not matter" wing of the portfolio, but of course it only does not matter... until it does. The way I treat these richly valued names is to cut back in front of earnings, and then once the coast is clear it is back to business as usual for the next 90 days until the next report. Eventually all good momentum stocks hit that quarter where analysts finally push out a target too high and you have that implosion, at which point you have to walk away.

I've cut back the position sharply late last week, and we'll look to reposition on the next pullback. Thus far nothing too troubling in the charts. VMW continues to make higher lows and higher highs; even in a difficult market. (Click to enlarge)

Via Reuters:

  • VMware Inc's revenue forecasts beat Wall Street expectations and the business software maker said sales were strong to small- and mid-sized businesses. VMware's sales are growing faster than those of many other technology companies because its server virtualization products are used to build virtual data centers and cloud computing systems, two of the fastest-growing areas in the tech sector, said Jefferies & Co analyst Katherine Egbert. "VMware owns the market," she said.
  • Revenue in the second quarter climbed 48 percent to $674 million, beating analysts' average forecast of $657 million.
  • New software license revenue, a marker of future growth, grew 42% in the second quarter to $323.67 million.
  • Operating margin rose more than 6 points to 27.7% vs. the 26.6% analysts were expecting.
  • VMware is among the most richly valued software makers. The shares trade for about 47 times next year's average estimated earnings per share.

Guidance:

  • The company said it expects third-quarter revenue of $680 million to $705 million, ahead of the $672 million average forecast of analysts, according to Thomson Reuters I/B/E/S.
  • VMware also raised its full-year revenue forecast to a range of $2.725 billion to $2.8 billion, from its previous outlook of $2.625 billion to $2.725 billion. That compares with the average analyst estimate of $2.71 billion.
  • Second-quarter profit, excluding items, was 34 cents per share, beating analysts' average forecast of 32 cents.
  • Company executives said their forecasts were somewhat conservative, reflecting concerns that global economic recovery could stall. For example, VMware's third-quarter forecast assumes the component of revenue that comes from sales of software will be flat compared with the second quarter, even though software sales typically rise in the third quarter.

[Jul 1, 2010: Bookkeeping - Starting VMWare and Acme Packet]

Disclosure: Long VMWare in fund; no personal position

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