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Higher Contract Wins Driving Unearned Revenue Growth for VMware

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What’s causing unearned revenue growth?

VMware (VMW) maintained strong growth in unearned revenues, triggered by winning a large number of deals. The launch of new products, coupled with the growing demand for network virtualization, has increased the company’s product bookings.

The ongoing migration of business to the cloud, coupled with the strong partnership with leading cloud service operators like Amazon (AMZN) and IBM (IBM), has led to unearned revenue growth.

The strong economic scenario has led to higher IT spending by many companies. This trend is driving billings growth for VMW and increasing unearned revenues.

In the last five years, the VMware’s unearned revenues have grown at a CAGR (compound annual growth rate) of 6.9%.

Detail analysis

From the graph above, we can see that VMware’s unearned revenues maintained an increasing trend buoyed by higher order growth.

In fiscal 2018, VMware’s unearned short-term and long-term revenues came in at nearly $6.3 billion, climbing 18.9% YoY (year-over-year). The company maintained average unearned revenues of ~$5.9 billion per year.

In the reported quarter, VMware’s NSX license bookings grew 24.0% YoY, and its vSAN licensed bookings improved 100.0% YoY. The company exited fiscal Q4 2018 with nearly $100.0 million of license backlog. Increasing renewal rates have driven strong bookings growth in fiscal Q4 2018.

Desktop virtualization company Citrix (CTXS) reported first-quarter results, in which its deferred revenues came in at ~$1.7 billion, which is significantly lower than VMware’s revenues.

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