UPDATED 16:51 EDT / OCTOBER 26 2016

NEWS

VMware calms investor nerves with solid third-quarter results

VMware Inc. today beat analyst expectations for both revenues and earnings per share in its third quarter and raised revenue guidance for the rest of the year as new cloud partnerships boosted sales.

The news buoyed investor spirits.  VMware’s shares jumped nearly 3 percent in after-hours trading.

Third-quarter revenues came in at $1.78 billion, an increase of 6 percent from the third quarter of 2015 and slightly ahead of consensus estimates of $1.76 billion. Earnings per share came in at $1.14 against estimates of $1.10.

License revenues, an important metric for the company, which makes “virtualization” software that allows multiple versions of the same operating software to run on the same computers, grew 1 percent year-over-year. That’s an achievement in a market in which software license revenues have been falling due to customers’ shift to cloud subscription services.

“VMware’s better than expected results suggest that the company hasn’t tripped or missed a step related the the close of Dell’s acquisition if EMC,” said said Charles King, president and principal analyst at Pund-IT Inc. “That seemed unlikely given EMC’s longstanding neutrality in exercising it’s VMware ownership role, a strategic approach whose value Dell appears to recognize and share.”

The company boosted its midpoint estimate of total revenues for the year by $50 million to $7.05 billion. “Compute and management bookings exceeded estimates as some core customers extended their commitments to vSphere,” Chief Executive Pat Gelsinger said. “We had several large customers make double-down commitments.”

Gelsinger attributed much of the success to continued strong sales of the company’s core virtualization platform, which has defied gravity to some extent for the last three quarters. But he reiterated that VMware is realistic about overall trends.

“We aren’t changing our long-term view of that business being flattish overall with a 10 percent license bookings decline,” he said on the company’s conference call. “We’re very happy that we’ve overachieved against that guidance for three quarters. The strength of that platform gives us a stronger position for all the things we’re doing across the portfolio.”

Gelsinger also sang the praises of the company’s new Cross-Cloud Architecture, which will enable customers to manage applications hosted on public cloud platforms. The initial products will support only cloud services from IBM Corp., with whom VMware has a strategic partnership, but others are expected to follow. The IBM alliance, which was announced in February, has signed up more than 1,000 customers, Gelsinger said.

VMware also announced the formation of a new Products and Cloud Services organization focused on computer, storage, networking, management and business mobility. VMware veteran Raghu Raghuram will head up the new organization along with Rajiv Ramaswami, who spent 10 years at Nortel Networks Corp. and Cisco Systems Inc.

“The creation of a new business unit focusing on cloud based solutions and services seems particularly apropos following the company’s recent announcements of cloud partnerships with IBM and Amazon Web Services,” King said.

Calmed nerves

The results should ease concerns about VMware’s ability to continue operating independently under new owner Dell Technologies Inc. Dell has pledged to preserve the independence that VMware and other members of the EMC Federation enjoyed prior to the acquisition by Dell.

VMware moved quickly after the acquisition to strike a blockbuster deal with Amazon Web Services that will enable customers to move workloads between their data centers and the Amazon cloud. VMware said AWS will become its “primary” public cloud provider, ending a years-long feud between the companies and addressing customer demands for VMware to define a clear path to hybrid cloud.

“Providing a seamless experience from on-premise to hybrid to Amazon will accelerate customers’ abilities to take advantage of the cloud writ large,” Gelsinger said, noting that the company is forecasting that half of enterprise workloads will run on cloud platforms by 2021.

The partnership prompted William Blair & Co. to raise its rating on VMware stock to “outperform,” saying that the deal will help VMware retain its customer base and strengthen its competitive position against Microsoft. “We believe VMware’s positioning in the public cloud is materially improving,” wrote William Blair analyst Jason Ader.

VMware has been under pressure on multiple fronts. Its failure to define a strong public cloud position has raised fears that it would be unable to compensate for lost on-premises license revenues as customers move to the cloud. More recently, the popularity of open-source containers has caused worries that those technologies could displace virtual machines.

The company has been rapidly diversifying its product base in response, moving into virtual storage and networking, end-user computing and hyper-converged architecture. The shift appears to be paying off. VSphere license revenues comprised only about half of total license revenues in the quarter while sales of vCloud Air, the NSX network virtualization platform and vSAN virtual storage all exceeded expectations.

VMware reported more than a doubling of NSX customers to a total of 1,900. Hyper-converged software license bookings for vSAN and VxRail increased over 150 percent, and license bookings for the vCloud Air Network grew 35 percent, said Chief Financial Officer Zane Rowe.

Sales of the company’s end-user computing products fell short due to contract delays, but VMware is still bullish on that market. “We remain optimistic about the potential of the desktop business, and We have a sizable pipeline of large deals,” Rowe said.


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