VMWare Reports Strong Earnings, But Stock Falls

Oct.19.10 | About: VMware, Inc. (VMW)

VMware (NYSE:VMW) is the largest software company in virtualization infrastructure solutions. Its products allow companies to better use their server capacity, as well as help companies prepare for cloud computing. Most of VMware’s revenues are associated with virtualizing servers, however the company is also attempting to succeed in desktop virtualization. VMware serves 100% of the Fortune 100 and a majority of the Fortune 1000. The Company is over 80% owned by EMC Corporation (NYSE:EMC).

VMware is one of the fastest growing software companies, as virtualization is on the top of the list of spending priorities by most corporations. As such, expectations are quite high for the company and the company trades at an elevated P/E ratio of over 60x 2011 estimates. The stock has risen over 90% YTD.

Monday the company reported license revenues of $714mm, up 46% over last year’s Q3 [see call transcript]. The Company had guided to revenues of $680mm to $705mm. GAAP earnings came in at $.20, with the more relevant non-GAAP earnings coming in at $.39. Expectations had been for non-GAAP earnings of $.35. Management claims that results were strong across all products and regions, but were led by the U.S. Federal sector.

Guidance was also robust for Q4, with revenues expected to be $790-$810. Reuters consensus is currently $772.

In spite of what look like very strong numbers, the stock is off over 5% in the aftermarket. Two numbers that appear to be light of expectations are deferred revenues and operating cash flow. Given the heady valuation of the stock, expectations may have gotten ahead of themselves.

Total Revenues: $714mm, up 46%
License Revenues: $343mm, up 43%
Service Revenues: $371mm, up 49%

The balance sheet is also very strong, with cash and equivalents of approximately $2.9bn at quarter-end, with minimal debt.

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Disclosure: No position in VMW.