UPDATED 23:07 EDT / JANUARY 26 2017

CLOUD

A strong quarter sets up VMware to double down on networking and the cloud

Virtualization software company VMware Inc. pulled off another strong quarterly showing Thursday, beating Wall Street estimates for both profits and revenues and forecasting slightly better-than-expected revenues in the current quarter.

On top of that, the company, whose software allows companies to use their data center computers more efficiently by allowing multiple operating software and applications to run on the same computer, said it would buy back $1.2 billion in stock, potentially bolstering the share price.

On a day when other tech giants, such as Google Inc., Microsoft Corp. and Intel Corp. issued earnings that didn’t thrill investors, investors liked what they saw in VMware’s results. Its shares rose nearly 4 percent, to $87.47, in late trading. Update: In midday trading Friday, investors were even a bit more enthusiastic, as shares rose 5.4 percent.

VMware reported fourth-quarter earnings of $441 million, or $1.04 per share, on revenues of $2.03 billion, up 9 percent from a year ago and above Wall Street analysts’ forecast of $1.99 billion. Earnings excluding certain items such as stock compensation were $1.43 per share, four cents above consensus.

VMware’s strong growth in the quarter can be attributed in part to its increased software license revenues, a vital metric for the company, which topped $887 million for the quarter, an 8 percent increase from the fourth quarter of 2015. In an industry where software license revenues are generally on the decline due to the shift to cloud subscription services, that’s relatively impressive growth.

“It was a good quarter by VMware. The company is now a leader in hyper-converged infrastructure and its integration strategy is working,” said longtime industry analyst Dave Vellante, co-chief executive of SiliconANGLE Media Inc. “If VMware is the new legacy, this is a hell of a testament to decades of dominance in the data center.”

Higher guidance

The company also issued guidance for the following quarter, forecasting first-quarter revenues of $1.675 billion to $1.725 billion and earnings per share of 93 to 96 cents. That compares with Wall Street’s consensus of $1.69 billion in revenues, or 96 cents per share.

VMware has been forced to diversify itself in recent years in response to fears that its failure to define a strong public cloud position could affect its on-premises license revenues, and the looming threat of open-source application containers that could displace virtual machines. That diversification looks to be paying off, as the company reported a 150 percent jump in vSAN license bookings, and a 50 percent rise in NSX license bookings.

VMware has big hopes for NSX in particular. The product, which pools networking hardware such as routers and switches and allows them to be reconfigured and managed via software, is on track to bring in $1 billion this fiscal year, VMware CEO Pat Gelsinger (pictured) said during the earnings conference call. He also revealed that VMware had closed a $10 million NSX deal – the company’s largest ever, he said.

“Q4 closed out a strong fiscal 2016 and was one of the most balanced quarters for VMware in years,” Gelsinger said. “We’re very pleased with our strong product momentum and customer enthusiasm for our Cloud strategy.”

AWS partnership key

The company’s performance in the quarter was all the more remarkable considering it has yet to enjoy the fruits of its recently announced cloud partnership with Amazon Web Services, said Holger Mueller, vice president and principal analyst at Constellation Research Inc. The partnership will allow VMware customers to migrate computing jobs run on VMware software to AWS’s cloud to take advantage of its more flexible and lower-cost storage and computing services, and will be crucial if the company is to sustain its growth in 2017. But Mueller warned that with the AWS partnership only hitting the books from the third quarter onward, the company could face a tough couple of quarters ahead.

“VMWare has delivered another strong quarter, quite remarkable considering that some of its offerings and the AWS partnership hasn’t yet taken off,” Mueller said. “[But] traditional on-premises revenue path is slowly shutting down, and it will need to show it can grow revenue from new offerings and partnerships while offsetting the decline in traditional revenue segments.”

Vellante agreed on the importance of the AWS deal, pointing out that it’s unclear how long VMware can sustain its growth in license revenue in the face of such strong cloud and open-source momentum.

“At some point you’d think the lack of cloud will hurt, but the AWS deal buys them time. I would expect VMware to increasingly live off of its maintenance business,” he said. “But license growth in the near term in encouraging.”

VMware also revealed it plans to buy back $1.2 billion of its stock through the end of fiscal 2018. That’s on top of the company’s existing $500 million plan announced in December.

Among many other appearance on SiliconANGLE Media’s theCUBE mobile video studio, Gelsinger talked about VMware’s strategy at last year’s VMWorld conference:

Photo by theCUBE

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