Investment Loss Dings VMware's Bottom Line

Virtualization solutions provider VMware (VMW +0.00%) reported its third-quarter results after the market closed on Nov. 29. The bottom line was hit by an investment loss, but both revenue and adjusted earnings increased by double-digit percentages. Here's what investors need to know about VMware's third-quarter report.

VMware: The raw numbers

Data source: VMware. *Q3 2018 numbers adjusted to reflect the adoption of ASC 606.

What happened with VMware this quarter?

• GAAP net income was hit by a $161 million loss on an investment in Pivotal Software. GAAP operating income was up 21% year over year to $495 million.
• License revenue increased 16.6% year over year to $884 million.
• Services revenue rose 11.5% year over year to $1.32 billion.
• Hybrid cloud subscription and software-as-a-service accounted for more than 10% of total revenue, growing by 35% year over year.
• License bookings for NSX grew by 40% year over year, while vSAN license bookings jumped 50% year over year.
• Enterprise agreements accounted for 42% of total bookings, with nine deals valued at more than $10 million. That's down from 13 large deals in the second quarter.
• Nine of the top 10 deals included NSX, and 8 of the top 10 deals included vSAN.

VMware provided the following guidance:

• Fourth-quarter revenue is expected to grow by 12.3% year over year to $2.5 billion, with license revenue growing by 12.9% to $1.15 billion.
• Fourth-quarter non-GAAP earnings per share of $1.87 is expected.
• Full-year revenue is expected to grow by 13% to $8.882 billion, with license revenue growing by 15.9% to $3.708 billion.
• Full-year non-GAAP earnings per share of $6.22 is expected, along with free cash flow of $3.35 billion.
• For fiscal 2020, VMware sees revenue growth of approximately 12%, along with a non-GAAP operating margin of 33%.

Image source: Getty Images.

What management had to say

VMware CEO Pat Gelsinger discussed the company's role in the new hybrid cloud offering from Amazon Web Services during the earnings call: "AWS Outposts offers customers a seamless cloud experience for their on-premises environment. As an extension of the VMware Cloud on AWS, we will offer a variant which is specifically designed for AWS Outposts."

Gelsinger also talked about the company's partnership with International Business Machines: "Together, we announced the business agreement and major partnership expansion, including a new IBM services offering to help migrate and extend mission-critical VMware workloads to the IBM Cloud and new integrations to help enterprises to modernize applications with Kubernetes and containers."

VMware CFO Zane Rowe commented on the company's 2020 guidance: "We expect the strength we're seeing in the business to continue next year and are currently planning on total revenue growth of approximately 12% for FY '20 which includes accelerating our growth in hybrid cloud subscription and SaaS."

Looking forward

VMware is betting that multicloud and hybrid cloud will be the trends that shape the future of cloud computing. "Our customers increasingly find themselves navigating a multi-cloud world which as well as significant business benefits can also create a unique set of operational challenges," Gelsinger said during the earnings call. VMware's partnerships with major cloud providers, as well as its recent acquisition of CloudHealth Technologies, fit in with this strategy.

VMware expects its revenue growth to slow down a bit in fiscal 2020. But the company remains exceptionally profitable, and its hybrid- and multicloud push should keep sales growing for years to come.