VMware Inc. (VMW) reported fourth-quarter 2014 non-GAAP earnings of 87 cents per share, which increased 4.5% on a year-over-year basis. In addition, earnings per share (EPS) comfortably beat the Zacks Consensus Estimate of 80 cents.
Revenues
Revenues increased 15% year over year to $1.70 billion and surpassed the Zacks consensus estimate of $1.69 billion. The year-over-year growth was primarily attributable to strong customer adoption of VMware’s products and services worldwide. Revenues from services rose 16.3% to $926 million. This resulted from 13% growth in license revenues to $777 million, 14.9% increase in Software maintenance to $803 million and 26.9% improvement in professional services to $123 million.
Total revenue for 2014 came in at $6.35 billion, up 16% year over year.
Margins
Operating margin declined 230 basis points (bps) from the year-ago quarter to 33.3%. The decline was due to higher research and development, general and administrative expenses, and lower gross profit.
Balance Sheet & Cash Flow
VMware exited the fourth quarter with cash and cash equivalents (including short-term investments) of $7.08 billion compared with $7.10 billion in the previous quarter. The company reported operating cash flows of $2.18 billion in 2014, down 14% year over year, and free cash flow of $1.83 billion, down 17% from 2013.
Share Repurchase
VMware initiated a new share repurchase program of $1 billion scheduled to end in 2017. The new stock repurchase authorization is in addition to the current $1 billion stock repurchase program initiated in Aug 6, 2014. The company expects the new share repurchase program to offset equity based compensation programs in 2015.
Guidance
For first-quarter 2015, the company expects revenues in a range of $1.49 to $1.51 billion and License revenues within $570 to $580 million.
Adjusted earnings per share are expected in the range of 83 to 85 cents. The Zacks Consensus Estimate is pegged at 64 cents. Non-GAAP operating margin is expected to be 29.5%.
For 2015, the company expects revenues in the range of $6.64 to $6.76 billion and License revenues to be between $2.735 billion and $2.815 billion.
Non-GAAP EPS is expected within $3.96 to $4.04. The Zacks Consensus Estimate for earnings is pegged at $3.59. Non-GAAP operating margin is likely to be 31.5%. Cash flow from operations is expected around $2 billion along with cash taxes of $350 million.
The company expects stock repurchase worth at least $1 billion in 2015 compared with roughly $700 million shares repurchased in 2014.
Our Take
We believe that VMware’s strong product portfolio is a major positive. The company continues to win contracts. Robust international sales will boost the top line, going forward. The acquisitions of CloudVolumes, Desktone and AirWatch will also add to the top line, going forward.
We further believe that the numerous strategic partnerships and accretive acquisitions that the company is entering into will significantly boost its top line.
However, a sluggish IT spending environment and intensifying competition from its peers such as Microsoft Corp. (MSFT), Hewlett-Packard and Citrix (CTXS) are the primary headwinds. Moreover, VMware’s continued investments in the emerging markets, product innovations and acquisitions are expected to weigh on margins in the near term.
Currently, VMware has a Zacks Rank #4 (Sell). A better-ranked stock in the same space is VASCO Data Security International Inc. (VDSI) sporting a Zacks Rank #1 (Strong Buy).
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