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Morningstar | VMware Showcases Strength Across Its Portfolio in 1Q; Maintaining $194 FVE. See Updated Analyst Note from 30 May 2019

Narrow-moat VMware's year-over-year revenue growth of 13% slightly topped our expectation while operating margin came in as forecast. VMware posted strong growth across the portfolio, with license revenue growing 12% year over year while sales from services increased by 13% annually. Momentum in the hybrid cloud subscriptions and SaaS portfolio accelerated with 35% annual growth, and this segment now represents more than 12% of total revenue. We remain impressed with VMware's shift from an on-premises provider of virtual machines into being ubiquitously used within hybrid and public cloud ecosystems for a multitude of critical networking functions. Shares have pulled back 3% after hours, making VMware slightly undervalued as we are maintaining our $194 fair value estimate.

VMware is uniquely positioned within the networking landscape, and we continue to see the company gaining momentum as the glue between all networking environments. VMware Cloud on AWS can now be sold by the Amazon AWS team, and the service is available in 14 regions globally. Microsoft Azure will now deliver VMware solutions and VMware's Workspace ONE provides Office 365 management capabilities to customers. VMware commented that VMware Cloud on AWS has been designated FedRAMP in process, which we see as a precursor to larger U.S. government deals employing VMware. While VMware continues to expand its footprint with the public clouds, the company is also being showcased within Dell Technologies' solutions for cloud and data centers as a service.

Guidance for next quarter includes license revenue of $1 billion (11.1% year over year growth) and total revenue of $2.425 billion (11.5% annual growth), with a 32.6% non-GAAP operating margin target and a $1.55 non-GAAP EPS goal. We expect continued strong broad-based demand resulting in VMware slightly beating its revenue target while meeting the bottom line as the company continues to ramp up investments in development and sales.

In the quarter, revenue plus the sequential change in unearned revenue grew by 25% year over year (for licenses, it was a 23% year over year compare). The NSX portfolio's license bookings increased by 40% year over year, while vSAN license bookings expanded by 50% year over year. Cloud Management, driven by booking strength in vRealize and CloudHealth, grew by double digits while End User Computing license bookings increased in the low-teens. Enterprise agreements made up 43% of total bookings, with 16 deals worth over $10 million each. All of the top 10 deals included NSX, while nine had Management and EUC, and 8 had vSAN. VMware posting strength in various parts of its portfolio gives us confidence in its ability to weave itself into customer's hybrid cloud infrastructures as networking teams are rearchitecting their networks across multiple clouds and on-premises locations.

VMware acquired Bitnami, a provider of application packaging solutions, in May. This purchase allows VMware to help customers deploy applications across public or hybrid cloud environments and in virtual machines or containers. We believe this strengthens VMware's push from a virtual machine seller and into a solutions provider for networking across on-premises and clouds. Additionally, we think VMware is prepping itself for any shift in customer habits from virtual machines to container workloads through this purchase and its previous Heptio acquisition.

In April, Dell Technologies announced its cloud platform that uses VMware Cloud on Dell EMC. This gives customers an avenue to offload the complexities of managing data center environments by having VMware fully manage the servicing of Dell Technologies' Data Center-as-Service solutions. As some data and workloads will not be sent to public clouds, and most enterprises will employ hybrid models in our view, we see this as a way for VMware to remain sticky within data centers in any location.

VMware and Microsoft announced a partnership that will provide fully native, supported, and certified VMware cloud infrastructure on Microsoft Azure. Additionally, Microsoft 365 and VMware Workspace ONE customers can manage their Office 365 postures across devices readily. We viewed this announcement as great news for VMware as its presence in the public cloud keeps growing and we see this as a proof point that VMware products are demanded from enterprise teams due to being accustomed to their products, wanting ubiquity across IT ecosystems, and enjoying VMware feature sets.

VMware announced that its board authorized an additional $1.5 billion to be allocated for Class A common stock repurchased through the end of fiscal 2021. The company had $243 million remaining on its existing repurchase plan at the end of the quarter.