VMware's End-User Computing Unit Surges In Q4, But Shares Dip On Licensing Outlook

VMware reported solid fourth-quarter profit and revenue on Tuesday, but its top executives seemed more excited about seeing their end-user computing and software-defined networking investments starting to bear fruit.

For the quarter ended Dec. 31, VMware's profit jumped 62 percent year-over-year to $335 million, or 77 cents a share, beating Wall Street's consensus forecast by a penny. Revenue came in at $1.48 billion, up 15 percent from last year's quarter and in line with analysts' expectations.

For fiscal 2013, VMware reported revenue of $5.21 billion, up 13 percent compared to 2012, and profit of $1.01 billion, or $2.34 per share. Wall Street was expecting $5.20 billion and earnings of $2.50 per share.

[Related: New VMware Americas CTO Says Company's Best Days Are Ahead ]

VMware's end-user computing unit, which saw revenue dip slightly last quarter, bounced back to grow 30 percent during the fourth quarter overall, and 40 percent in VMware's Americas business.

In a Q&A during VMware's earnings call, CEO Pat Gelsinger credited Sanjay Poonen, head of the vendor's end-user computing business, with "clearly providing a lot more momentum in this category."

COO Carl Eschenbach said VMware's go-to-market investments for end-user computing, which include the hiring of hundreds of new staff, are starting to pay off. VMware expects its October acquisition of desktop-as-a-service vendor Desktone, and last week's $.5 billion purchase of mobile device management vendor Airwatch, to keep the ball rolling, he said.

NSX, VMware's horse in the software-defined networking market, isn't expected to generate meaningful revenue until next year. But VMware has had several big NSX customer wins already, including three of the five largest banks, according to Gelsinger.

VMware's vCloud Hybrid Service, which launched in the U.S. in August, gained hundreds of new customers during the quarter, according to Gelsinger. Service providers are also looking to get in on the action, and Gelsinger told investors to expect VMware to make "important" hybrid cloud announcements this quarter.

VMware is seeing "strong customer demand" for its vCloud Hybrid Service, which kicked off as a beta in December in the U.K. and is on track to launch in February, Gelsinger said.

VMware's license revenue grew 15 percent during the quarter, and NSX actually drove a number of the enterprise license agreements it signed during the quarter, Eschenbach said.

ELAs have been a solid business for VMware, and they accounted for 40 percent of the vendor's total bookings in the fourth quarter. CFO Jonathan Chadwick said, given the current high renewal rate for ELAs, VMware expects to see that figure reach the 50 percent level.

VMware is expecting revenue between $1.33 billion and $1.37 billion for its current quarter, and $5.94 billion to $6.1 billion for all of fiscal 2014. Wall Street's consensus estimate is $1.35 billion and $5.99 billion, respectively.

However, as noted by Seeking Alpha, VMware expects licensing revenue to grow between 12 and 14 percent this quarter, after growing 15 percent in the fourth quarter. VMware also expects operating margin to drop from 34 percent in fiscal 2013 to 31 percent in fiscal 2014.

VMware investors reacted to the guidance by sending VMware shares down more than 5 percent to $89.90 in Tuesday after-hours trading.

PUBLISHED JAN. 28, 2014