VMware Inc. (VMW) is scheduled to announce its first quarter 2011 results after the market closes on April 19, 2011.
Despite missing the Zacks Consensus Estimate by four cents in the previous quarter, the company provided robust guidance for the first quarter and fiscal 2011, based on strong revenue growth.
VMware reported fourth quarter revenues of $835.7 million, up 37.4% year over year. The upside was primarily driven by strong growth from the license (up 38.8%) and services segment. Earnings per share increased 56.3% year over year to 25 cents per share. For further details, please see VMware Misses, Shares Fall.
VMware posted an average earnings surprise of 5.62% in the trailing four quarters, implying that it has outdone the Zacks Consensus Estimate by the same magnitude for the last four quarters.
Currently, the Zacks Consensus Estimate for the first quarter of 2011 is pegged at 27 cents, implying a 35.0% increase from the prior year quarter.
We believe VMware will continue to benefit from increased virtualization and cloud computing over the long term.
Organizations, by using VMware solutions, can virtualize their applications from x86 based server hardware and operating systems, thereby reducing costs and increasing the flexibility of server capacity to run required applications.
According to research firm Gartner, Inc. VMware is the leader in the x86 server virtualization infrastructure market, and competes with Microsoft Corp. (MSFT), Red Hat Inc. (RHT) and Oracle Corp (ORCL) in this space.
Most recently, VMware delivered Cloud Foundry, the industry’s first open Platform-as-a-Service (PaaS).
PaaS is a common reference to the layer of cloud technology architecture that contains all application infrastructure services, which are also known as middleware. It is the technology that intermediates between the underlying system infrastructure (operating systems, networks, virtualization and storage) and overlaying application software.
According to Gartner Inc, 2011 will be the year of PaaS as most of the leading enterprise software vendors are expected to introduce new offerings. With Cloud Foundry, VMware will enjoy a first mover advantage going forward, in our view.
VMware is expected to gain from its expansion in the key growth markets of China, Japan, Eastern Europe and Latin America. The company is also expected to benefit from higher ELA (Enterprise License Agreement) renewals in 2011.
Moreover, increasing desktop virtualization, strong product portfolio and stability in enterprise spending will boost top-line growth in 2011, in our view.
However, sluggish license growth and flat margin growth in 2011, as forecasted by management, will keep the shares range bound in the near term. Since the release of fourth quarter 2010 results, VMware shares have declined 2.0%.
Further, a higher rate of hiring and increasing research & development (R&D) expense can hurt profitability in the first quarter of 2011.
No Movement in Estimates
We maintain our Neutral rating on VMware over the long term (6-12 months).
Given no change in the Zacks Consensus Estimate for the first quarter of 2011 in the last 60 days, VMware is expected to report in line results. Moreover, none of the 16 analysts providing estimates for the quarter revised their estimates in the last thirty days.
VMware has a Zacks #4 Rank, which implies a Sell rating in the near term (1-3 months).
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