Osprey Flyer: VMware Reports Solid Q3 Earnings (Charts, Video) *Record revenues; net income & EPS dip* VMW

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VMware (VMW) reported Q3 2011 financial results on Monday, October 17, 2011

*Charts and commentary have been updated for VMware Q3 2011 financial results*

VMware (VMW) Reports Solid Q3 Earnings: Record revenues; net income & EPS dip

VMware Summary Q3 2011 VMware reported record total revenues, but operating income, net income, and earnings per share decreased. Financial position continues liquid with strong capital. An increase in operating expenses negatively impacted operating income, which is of concern as a drag on operating margin. Return on assets has improved in recent quarters and is now 9.12%. A $56 million gain on the sale of investment in Terremark Worldwide Inc. boosted net income and earnings per share in the prior Q2 2011. The gain was included in other income and did not affect operating income. Current Q3 2011 net income and earnings per share dipped as a result of this prior quarterly gain boosting the bottom line.

VMware Income Statement Q3 2011 VMware reported record total revenues of $941.86 million, net income of $177.54 million, and earnings per share of $0.41. From the prior quarter Q2 2011, total revenues were up +2.24%, net income down -19.36%, and earnings per share down +19.61%. From the prior year Q3 2010, these were up an impressive +31.87%, +109.86%, and +105.00%, respectively. Gross margin improved to 83.78% while operating, and net margins dipped slightly to 19.19%, and 18.85%, respectively. Cash flow from operations of $1.21 per share is an all-time high.

VMware Balance Sheet Q3 2011 Total assets increased +4% QoQ to a record $7.82 billion. The capital to assets ratio (total stockholders' equity divided by total assets) slightly decreased to 56.95%. The current ratio (current assets divided by total assets) increased to 61.54%. VMware is liquid with strong capital. Total deferred revenue, current and noncurrent, increased +7.5% and +$156 million to $2.23 billion. Return on assets increased to +9.12%, reaching the Q1 2009 peak once again.

VMware Outlook "Fourth quarter 2011 revenues are expected to be in the range of $1.03 billion and $1.06 billion, a year-over-year increase of 23% to 27%."

VMware Performance by the Quarters (Charts)

VMware Earnings Per Share and Cash Flow per Share (Chart) Below is a chart of quarterly earnings per share and cash flow from operations per share. Current Earnings per Share of $0.41 decreased QoQ -19.61% and increased YoY +105.00%. The dip was mostly attributable to the $56 million dollar gain on the sale of investment in Terremark Worldwide, Inc. in the prior quarter. Current Cash Flow per Share of $1.21 increased to an all time high. The chart averages for EPS and CFS are $0.20 and $0.64, respectively.

VMware Total Revenues, Operating Income, and Net Income (Chart) Below is a chart of quarterly total revenues, operating income, and net income. Current Total Revenues of $941.63 million are the 8th consecutive quarterly record high. The increase was +2.24% QoQ and +31.87% YoY. Current Operating Income of $180.72 million decreased QoQ, after 3 consecutive quarterly record highs. This was attributable to an increase in sales & marketing plus research & development expenses. Current Net Income of $177.54 million decreased -19.36% QoQ and increased +109.86% YoY. This was after 3 consecutive quarterly record highs. VMware realized a gain on the sale of its investment in Terremark Worldwide, Inc. of $56M, which was included in Other Income and therefore inflated Net Income over and above normal operations in the prior quarter. Prior quarter Net Income would have been $164.16M not including the sale and without taking into account income tax effect, but still would have been a quarterly record high. The chart averages for TR, OI, and NI are $568.15 million, $90.33 million, and $83.49 million, respectively.

VMware Gross Margin, Operating Margin, and Net Margin (Chart) Below is a chart of quarterly gross margin, operating margin, and net margin. Current Gross Margin of 83.78% is a 10-quarter high and has been stable in the 80%-84% range since the beginning of the chart. Current Operating Margin of 19.19% decreased slightly. Current Net Margin of 18.85% dipped slightly QoQ, but the prior quarter includes the $56M gain on sale of investment in Terremark Worldwide, Inc. The chart averages for GM, OM, and NM are 83.06%, 15.53%, and 14.28%, respectively.

VMware Return on Assets (Chart) Below is a chart of annual return on average assets per quarter. The total net income for the most recent 4 quarters is divided into average assets for the most recent 4 quarters to obtain a rolling annualized ROA, an annualized return on average assets for the 12 months (4 quarters) ended. The ROA peaked in March 2009 at 9.12%, dipped to less than half the peak, and now has regained exactly the prior peak. ROA has improved for 6 consecutive quarters to the current Return on Assets of 9.12%, which is a 10-quarter high. As noted in charts above, the $56M gain on sale of investment in Terremark Worldwide, Inc. has inflated Net Income, but not Operating Income. This also inflates ROA to some extent. This is the only real negative about VMware: a low ROA for a technology sector company. For a leading-edge technology company, a minimum 10% ROA should be expected and even 20% is a reasonable expectation. However, the rebound in the ROA since Q4 2008 is impressive. The chart average for ROA is 6.84%.

VMware Growth Rates (Chart) Below is a chart of the annual (YoY, Y/Y, annual change) growth rates for revenues and earnings per share. VMware has maintained an impressive uptrend in both. Total Revenues Growth +31.87% is about the historical average. Earnings per Share Growth of +105.00% is well above the historical average. The chart averages for TRG and EPSG are 31.77% and 46.73%, respectively.

VMware Reports Third Quarter 2011 Financial Results

*** Year-Over-Year Revenue Growth of 32% to $942 Million; Operating Margin of 19.2%; Non-GAAP Operating Margin of 30.3%; EPS Growth of 105% to $0.41; Non-GAAP EPS Growth of 36% to $0.53; Trailing Twelve Months Operating Cash Flows Growth of 78% to $1.9 Billion; Free Cash Flows Growth of 72% to $1.8 Billion ***

PALO ALTO, CA -- (MARKET WIRE) -- 10/17/11 -- VMware, Inc. (NYSE: VMW), the global leader in virtualization and cloud infrastructure, today announced financial results for the third quarter of 2011:
* Revenues for the third quarter were $942 million, an increase of 32% from the third quarter of 2010, and an increase of 30% measured in constant currency.
* Operating income for the third quarter was $181 million. Non-GAAP operating income for the third quarter was $285 million, an increase of 40% from the third quarter of 2010.
* Net income for the third quarter was $178 million, or $0.41 per diluted share, compared to $85 million, or $0.20 per diluted share, for the third quarter of 2010. Non-GAAP net income for the quarter was $230 million, or $0.53 per diluted share, compared to $165 million, or $0.39 per diluted share, for the third quarter of 2010.
* Operating cash flows for the third quarter were $524 million. Free cash flows for the quarter were $494 million, an increase of 108% from the third quarter of 2010. l Trailing twelve months operating cash flows were $1.9 billion, an increase of 78%.
* Trailing twelve months free cash flows were $1.8 billion, an increase of 72%.
* Cash, cash equivalents and short-term investments were $4.0 billion and unearned revenue was $2.2 billion as of September 30, 2011.

U.S. revenues for the third quarter of 2011 grew 22% to $443 million from the third quarter of 2010. International revenues grew 42% to $498 million from the third quarter of 2010, and 37% in constant currency.

License revenues for the third quarter of 2011 were $444 million, an increase of 29% from the third quarter of 2010, and an increase of 25% measured in constant currency. Service revenues, which include software maintenance and professional services, were $498 million for the third quarter of 2011, an increase of 34% from the third quarter of 2010.

"VMware's third quarter results were driven by growth across all products. Demand was especially strong in the Asia Pacific markets and we also experienced the seasonal impact of sales to the US Federal Government," said Mark Peek, chief financial officer. "Fourth quarter 2011 revenues are expected to be in the range of $1.03 billion and $1.06 billion, a year-over-year increase of 23% to 27%."

"I'm pleased with another solid quarter for VMware illustrated by progress with new products, growth across our portfolio and a growing community. We are becoming a significant partner to businesses moving to the cloud," said Paul Maritz, chief executive officer.

About VMware

VMware delivers virtualization and cloud infrastructure solutions that enable IT organizations to energize businesses of all sizes. With the industry leading virtualization platform - VMware vSphere - customers rely on VMware to reduce capital and operating expenses, improve agility, ensure business continuity, strengthen security and go green. With 2010 revenues of $2.9 billion, more than 250,000 customers and 25,000 partners, VMware is the leader in virtualization, which consistently ranks as a top priority among CIOs. VMware is headquartered in Silicon Valley with offices throughout the world and can be found online at www.vmware.com

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