Why Is VMware (VMW) Down 14.7% Since Last Earnings Report?

It has been about a month since the last earnings report for VMware (VMW). Shares have lost about 14.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is VMware due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

VMware Q4 Earnings Lag Estimates, Revenues Rise Y/Y

VMware’s fourth-quarter fiscal 2020 non-GAAP earnings of $2.05 per share missed the Zacks Consensus Estimate by 5.1% but increased 9.6% year over year.

Revenues of $3.07 billion surpassed the consensus mark by 4.3% and also improved 11.4% on a year-over-year basis.

Strong top-line growth was primarily driven by robust performances in NSX and vSAN product lines. Management stated that it inked 31 deals in the quarter worth more than $10 million.

Region-wise, U.S. revenues (51.1% of revenues) increased 11.4% to $1.57 billion. International revenues (48.9%) grew 1.7% from the year-ago quarter to $1.50 billion.

Services revenues (46.8% of total revenues) rose 9.6% to $1.44 billion. License revenues (33.6%) inched up 0.7% year over year to $1.03 billion.

Subscription and SaaS revenues (18.1% of total revenues) jumped 51.5% year over year to $556 million.

Robust Bookings

The company announced that six of its top 10 customers purchased the entire VMware Cloud Foundation stack in the reported quarter.

NSX adoption was impressive as product bookings (includes Subscription and SaaS, and license bookings, equivalent to license bookings as stated in prior periods) increased more than 20% year over year. Notably, all the top 10 deals in the quarter included NSX.

Furthermore, vSAN product bookings (includes Subscription and SaaS, and license bookings, equivalent to license bookings as stated in prior periods) increased in mid-teens year over year. The product was included in all the top 10 deals.

EUC product bookings (includes Subscription and SaaS, and license bookings, equivalent to license bookings as stated in prior periods) were up more than 30% on a year-over-year basis and included in eight of the top 10 deals. Customers continued to increase their SaaS purchases of Workspace ONE. More than two-thirds of EUC product bookings were sold as SaaS in the reported quarter.

Core SDDC product bookings (includes Subscription and SaaS, and license bookings, equivalent to license bookings as stated in prior periods) decreased in the low-single digits year over year. Total core SDDC bookings were flat year over year.

At the end of the quarter, VMware had license backlog of $5 million and total backlog of $18 million.

Notably, remaining performance obligations that capture all of VMware’s committed and non-cancelable future revenues, both billed and unbilled, including future revenues related to its growing hybrid cloud subscription and SaaS businesses were $10.3 billion at the end of the quarter.

Operating Details

Research & development (R&D) expenses as a percentage of revenues slipped 10 basis points (bps) year over year to 17.7%. Moreover, sales & marketing (S&M) expenses as a percentage of revenues decreased 60 bps on a year-over-year basis to 28.7%.

General & administrative (G&A) expenses as a percentage of revenues increased 40 bps to 6.6%.

Non-GAAP operating expenses as a percentage of revenues dipped 30 bps on a year-over-year basis to 52.9%.

Non-GAAP operating margin expanded 20 bps on a year-over-year basis to 34.3% in the reported quarter.

Balance Sheet & Cash Flow

As of Jan 31, 2020, cash & cash equivalents were $2.92 billion compared with $2.03 billion as of Nov 1, 2019.

Operating cash flow was $1.09 billion in the reported quarter while free cash flow was $1.02 billion. In the previous quarter, operating cash flow was $810 million and free cash flow was $760 million.

In the reported quarter, VMware bought back shares worth $55 million. The company has approximately $1 billion remaining under its current share repurchase authorization, which extends through the end of fiscal 2021.

Guidance

For fiscal 2021, VMware now expects revenues of $12.050 billion, suggesting an 11.5% rise from the year-ago reported figure.

Subscription & SaaS and License Revenue are expected to be $5.860 billion, implying a 15.9% increase from the prior-year reported number. More than 40% of these revenues is expected to come from Subscription & SaaS.

Non-GAAP operating margin is anticipated to be 28.8%. Non-GAAP earnings are expected to be $6.55 per share.

Cash flow from operations is expected to be $4.10 billion. Free cash flow is anticipated to be $3.76 billion.

For the fiscal first quarter, total revenues are expected to be $2.73 billion, suggesting 11.4% growth from the year-ago reported figure.

Subscription & SaaS and License Revenues are expected to be $1.225 billion, hinting at 15.9% growth from the prior-year reported number. More than 45% of these revenues is expected to come from Subscription & SaaS.

Non-GAAP operating margin is anticipated to be 25.1%. Non-GAAP earnings are expected to be $1.27 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -28.96% due to these changes.

VGM Scores

At this time, VMware has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise VMware has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.