VMware Q1 Beats Sales Estimates But Cautious on Future Demand

Virtualization kingpin VMware (NYSE: VMW) beat analysts’ expectations for its Q1 2013 sales and per-share earnings but net income fell 9.3 percent for the period, which, combined with the vendor’s cautious outlook on future demand and the economy, dipped its stock some 5 percent for the day.

For the quarter VMware recorded a 13 percent year-over-year rise in revenue to $1.19 billion and per-share earnings of 74 cents a share. Net income fell to $173.6 million, a 9.3 percent slide from $191.4 million during the year earlier period. Analysts had been expecting $1.18 billion in sales and 70 cents in per share earnings.

“Q1 was a solid start to the year despite a mixed economic environment,” said Pat Gelsinger, VMware chief executive. “I am very pleased with my team’s performance this quarter particularly in light of recent results from many of our industry peers.”

You’d think that VMware’s Q1 performance, especially given the sluggish economy, would brighten its outlook for the coming quarter but its cautious nature took over as it forecast Q2 revenues at $1.21 billion to $1.24 billion, an 8 percent to 10 percent rise from the same period last year, with license revenues ranging as high as $535 million. The company stuck to its earlier projections of 2013 overall revenue at between $5.12 billion to $5.24 billion, up 11 percent to 14 percent from last year.

Last quarter, a similarly gloomy outlook, along with planned cuts of 900 jobs, hammered VMware’s stock some 15 percent. It is somewhat challenging to determine if VMware is playing possum with Wall Street, especially considering the company has guided cautiously in the past only to zoom by expectations. On the one hand, Gelsinger articulates a clear company strategy—pursuing nascent markets such as the software-defined data center, gingerly moving to hybrid cloud services while gleaning revenue from end user computing. On the other hand, VMware seemingly brings a cold, wet dish rag to its financial reporting of late, seemingly irrespective of the numbers.

Perhaps VMware’s market uncertainty owes to taking the long view. At VMware’s earnings conference call, Gelsinger described the company’s strategy this way: “We’re on a multiyear journey as we guide our customer’s technology and business transformation. We believe this IT transformation presents VMware with a $50 billion total addressable market opportunity by 2016.”

Then it was Carl Eschenbach, VMware president and chief operating officer’s turn: “We are in the early days of this market, but I am increasingly bullish on the opportunity to monetize our lead in virtualization of the network. And we will continue to provide updates on how this market is evolving over the coming quarters.”

Sounds good. But then the cold splash came, delivered by Jonathan Chadwick, VMware chief financial officer, when asked about the coming quarter and economic outlook: “We see an uncertain economic outlook for the upcoming year,” he said. “The drivers really have not changed from what we shared in just 90 days ago.”

Still, one gets the sense either that VMware’s internal market research leaves it with more than it’s saying, or the company is setting the stage for another zoom-by. More Chadwick: “Frankly, we are also looking for a little bit of a modest uptick with respect to the economy, and in particular, we are looking forward to the federal third quarter helping the second half. And then finally, I mean, not least of which, we have had a solid start to the fiscal year. So, we believe our solid bookings performance in Q1 gives us a nice foundation on which to build the full year.”

In VMware’s case, it might not be cautious is as cautious does.