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VMware Shares Fall 19.5% Despite Strong Fiscal 3Q15 Earnings

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Fiscal 3Q15 highlights

On October 19, 2015, VMware (VMW) reported its fiscal 3Q15 earnings. It also made an unexpected announcement that day of its plan to launch a new cloud services company called Virtustream in collaboration with parent company EMC (EMC). We’ll shed some light on the new company in the next part of this series. Let’s first look at VMware’s performance in 3Q15.

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VMware beats analysts’ estimate

For fiscal 3Q15, VMware reported 10% YoY (year-over-year) growth in revenues, or $1.7 billion, and non-GAAP (generally accepted accounting principles) EPS (earnings per share) of $1.02. This was higher than analysts’ estimated $1.7 billion in revenue and EPS of $1.

Despite strong earnings, WMware stock fell 19.5% to close at $55.42 on October 20. This was due to concerns over the complexity of the launch of the new cloud company amidst the merger with Dell.

WMware generates revenue through licenses and services. Revenue from licenses grew 7% YoY to $681 million. Revenue from services grew 13% YoY to $991 million.

While VMware posted growth, IBM (IBM) missed analysts’ expectations and posted revenue of $19.3 billion in fiscal 3Q15, down 19% YoY. Hewlett-Packard (HPQ) and Cisco (CSCO) are yet to release their earnings.

Revenue by geography 

Geographically, VMware churned maximum bookings from Asia Pacific (VPL), followed by the Americas and EMEA (Europe, the Middle East, and Africa). The company saw strong performance where larger deals were signed in India, Southeast Asia, Germany, and Italy. This was offset by lower-than-expected performances in Russia, the United Kingdom, Brazil, China, and Japan.

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Profitability

On a GAAP basis, VMware’s operating income rose 35% YoY to $326 million. Net income rose by a similar percentage to $256 million.

Cash position 

During the quarter, VMware generated $411 million in cash from operations and spent $200 million to buy back around 2.4 million shares. From January until September 2015, the company spent about $1.1 billion to buy back more than 12.5 million shares. It plans to spend another $200 million in fiscal 4Q15.

WMware is optimistic about the Dell-EMC merger and expects it to bring more than $1 billion of revenue synergies over the coming years. Dell has stated that VMware will continue to operate as an independent entity.

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