Identifying the key catalysts
Leading network virtualization company VMware (VMW) generates strong free cash flow, buoyed by the solid revenue growth and a large number of new contracts. Increased unearned revenues and its higher backlog have also contributed to growth in free cash flow.
Despite the regular share repurchase policy coupled with its acquisition strategy, the company is able to maintain strong growth in free cash flow.
From the graph above, we can see VMware’s free cash flow growth in the last five years. During this period, it maintained an increasing trend. VMW exited fiscal 2018 with free cash flow of ~$2.9 billion against $2.2 billion in fiscal 2017.
In Q4 2018, the company produced free cash flow of $748.0 million, compared with $419.0 million YoY (year-over-year). VMware also generated free cash flow at an average of $2.1 billion per year.
Importance of strong free cash flow
This strong free cash flow allows VMware to boost its capital return policy to its investors through regular share buybacks. After the share repurchases, the company maintains a healthy free cash flow. Strong free cash flow generation may drive the company’s inorganic growth through timely acquisitions.
In the last five years, VMW paid ~$5.4 billion to its shareholders, whereas it invested ~$2.2 billion in the acquisition. Citrix (CTXS), which operates in the same space, generated average annual free cash flows of ~$825.0 million in the last five years.