Tuesday, October 19, 2010

VMWare - "We Can Deliver 20% Growth in 2011"

By David Gross

After yesterday's close, VMWare (VMW) reported revenue of $714 million for the third quarter, a big 47% increase year-over-year, and guided for a 39% annual boost in revenue for all of 2010. However, the company was quick to point out that growth next year will decelerate, with CFO Mark Peek saying "I believe we can deliver 20% growth in 2011"

Service revenues were up slightly more than license revenue, with the split between the two coming out at $371 million vs. $343 million. Operating cash flow for the quarter was $196.7 million, with free cash flow (calculated as op cash flow less capex) of $165.6 million.

Operating margins improved significantly, from about 5% a year ago, to 13% in the most recent quarter, with reductions in R&D, SG&A, and Cost of Goods Sold expense ratios. R&D went from 27% to 25% of revenue, SG&As from 48% to 44% of revenue, and Aggregate Cost of Goods Sold - for both licenses and services - inched down from 19% of revenue to 18%. Operating Profit was up nearly four-fold as a result, but net income was up quite a bit less - just over 100% - due to the impact of income tax benefits in the previous year.

The company is sitting on a big pile of cash - $2.9 billion, about $400 million more than it had nine months ago. Wall Street did not like the slowing revenue growth story, however, and the stock was down nearly 6% after hours to $73.90 a share.

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