UPDATED 21:22 EDT / NOVEMBER 24 2020

CLOUD

Strong subscription revenue growth highlights upbeat VMware earnings

The good times continue to roll at VMware Inc., which topped analysts’ expectations today on both revenue and profit in the third quarter and raised its financial outlook for the rest of the year.

The company, which has positioned itself as a kind of broker for customers using multiple clouds, reported third-quarter net income of $434 million, or $1.66 a share, up from $407 million, or 96 cents a share, a year ago. Revenue rose to $2.86 billion from $2.66 billion a year ago. Both figures beat analysts’ forecasts of $2.81 billion and revenue and a $1.44 profit per share.

Significantly, VMware crossed a threshold with a 44% increase in subscription and software-as-a-service revenue, to $676 million. That figure surpassed on-premises license revenue for the first time. Subscription operating margins of 31% handily beat the vendors previous guidance of 27.5%.

Although the company expects license revenues to bounce back in the fourth quarter as they typically do, “we expect that to flip back for the next year,” said Chief Executive Pat Gelsinger (pictured). “We expect to have all of our major product offerings as sub and SaaS by the end of next year.”

VMware raised its outlook for the year to adjusted earnings of $7.03 per share on revenue of $11.7 billion, well ahead of analyst forecasts of $6.66 a share and $11.62 billion in revenue. “We feel good about demand heading into the fourth quarter,” said Chief Financial Officer Zane Rowe. VMware stock bounced around after-hours, settling down about 1% after rising 1% in the regular session.

Executives said the ongoing shift to subscription revenues is affecting growth but that the long-term trend is favorable. VMware signed 16 deals of more than $10 million in the quarter compared with 19 in the same quarter last year. Gelsinger blamed the delays on the pandemic. “Big deals are taking longer; there’s an additional sign-off involved,” he said.

“The COVID impact is quite extensive this year,” Rowe added, citing staff reductions and delayed contract signings. But he noted that the positive revenue impact of accelerated digital transformation initiatives has outpaced the drain caused by the weak economy by about a two-to-one ratio.

Although VMware is successfully turning the corner toward a subscription-based business model, the company isn’t discounting the virtues of software licenses. “We think no one is as well-positioned to do both the on-prem and cloud offerings,” Gelsinger said. Of the shift to subscriptions, he noted, “many times it isn’t a dollar-for-dollar switch. Customers are buying into the full solution so we see the benefit of a richer set of our offerings and better lifetime value.”

VMware noted that it had an especially busy quarter in new product and partnership announcements. Among them was the integration of Carbon Black Cloud Workload into the vSphere virtualization manager, partnerships with Menlo Security Inc. and Zscaler Inc. around zero-trust security, the acquisition of infrastructure automation provider SaltStack Inc. and Project Monterey, a long-term campaign to move security and management functions directly into the network.

The company also said it’s benefiting from the large-scale rollout of 5G wireless networks that’s expected to occur over the next two years. During the quarter the company announced a platform that enables service providers to run containerized workloads across private, carrier, edge and public clouds and a collaboration with Samsung Electronics Co. Ltd. to accelerate the roll-out of 5G networks.

Photo: SiliconANGLE

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