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Vmware (VMW) : Growth Should Continue, Buy On Recent Weakness

 June 06, 2012 01:44 PM

(By Mani) VMware, Inc. (NYSE:VMW) should record continued growth in fiscal 2012 as several of the near-term catalysts should allow the company to ride the wave of adoption in virtualization and cloud computing trends.

Palo Alto, California-based VMware offers virtualization solutions that help to lower IT costs, increase infrastructure flexibility through data center consolidation, remote virtualized desktop provisioning and management.

Moreover, shares are down 16 percent, making it more attractive for investors to add positions in the stock. Though, the stock appears pricey at 33.5 times on its price to earnings, it warrants such premium due to its strong fundamentals.

[Related -VMware, Inc. (NYSE:VMW): Set To Become The Biggest Beneficiary Of Hybrid Cloud]

In 2011, the company has delivered 44 percent growth in earnings per share on 32 percent rise in revenue. For 2012, the company is expected to deliver 22 percent and 24 percent growth in earnings per share and revenue, respectively.

Given the strong adoption of virtualization and cloud computing, near-term catalysts are renewals of enterprise licensing agreements (ELAs), adoption of management solutions and growth in virtual desktop infrastructure (VDI).

VMware's ELA contracts typically renew in three-year cycles. For 2012, ELA renewal base contracts were signed in 2009, a weak year due to tumultuous market conditions.

"Given the cross selling opportunity, security and storage solutions should provide a boost to fiscal 2012 license revenue," Oppenheimer analyst Shaul Eyal wrote in a note to clients.

[Related -Amazon.Com, Inc. (AMZN): Workspaces Negative For Citrix Systems, Inc., Vmware, Inc.]

Meanwhile, the company grew its management software business 43.6 percent from last year, according to market research firm IDC. These solutions are the fastest growing product segment at the company, and it has mentioned the high attach rates these solutions have with ELA renewals.

According to IDC, VMware has about 20 percent share in the VDI market, with key verticals in health care and the public sector. VMW has invested many resources enhancing the end user experience, and with its latest VDI solution, it is expected to gain ground in the desktop virtualization market.

For the first quarter ended March 31, 2012, VMware earned $191.4 million or 44 cents per share, higher than $125.8 million or 29 cents per share for the year-ago quarter. Excluding items, it earned $287.3 million or 66 cents per share, topping Wall Street consensus estimate of 60 cents per share.

Total revenue for the first quarter rose 25 percent to $1.06 billion, while analysts had a consensus revenue estimate of $1.03 billion for the first quarter. License revenues advanced 15 percent to $482 million, while service revenues surged 35 percent to $573 million.

The company sees second quarter revenue of $1.10 billion to $1.12 billion. Analysts currently expect the company to post revenue of $1.12 billion for the second quarter.

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