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How Dell May Be Limiting VMware’s Financial Prospects

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Apr. 4 2018, Updated 7:30 a.m. ET

VMware’s financial position

So far in this series, we’ve explored various facets of VMware’s (VMW) performance in fiscal 4Q18. Though the Dell subsidiary’s top-line growth trickled down to its bottom line in fiscal 4Q18, VMware stock is under pressure due to Dell’s merger and acquisition concerns. Dell, which is heavily leveraged, is considering a reverse merger with VMware to increase its earnings and cash flow after 2017’s tax reform. VMware has seen revenue and margin growth.

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VMware’s cash, cash flow, and debt position

Let’s assess VMware’s balance sheet. In 4Q18, VMware’s cash, cash equivalents, and short-term investments stood at ~$11.7 billion. It had $4.2 billion in total debt as of 4Q18, almost all of which was long term. VMware debuted in the bond market in August 2017.

In 4Q18, VMware’s operating cash flow grew 83% year-over-year to $847 million. Excluding its $99 million in capital expenditure, VMware had FCF (free cash flow) of $748 million. In 4Q18, the company’s FCF rose 78.5% and it had a 32.4% FCF margin.

In fiscal 2018, VMware generated ~$3 billion in FCF and ~$7.9 billion in revenue, translating into a 37.2% margin. In fiscal 2017, it generated $2.2 billion in FCF and ~$7 billion in revenue, which translated into a 31.4% margin. VMware’s cash flow has expanded consistently due to double-digit revenue growth and operating margin improvement.

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