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VMware Inc. Earnings: Sales and Expenses Push Higher

By Demitri Kalogeropoulos – Jul 21, 2015 at 5:28PM

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Breaking down the software giant's second-quarter results.

Virtualization software giant VMware (VMW -0.25%) on Tuesday evening posted second-quarter earnings results. Revenue and profits both came in above Wall Street's expectations:

Revenue $1.59 billion $1.6 billion
Profit $0.91 per share $0.93 per share

Expected is the average forecast of the 40 analysts who cover VMWare's stock. Source: Yahoo! Finance.

Sales and profit growth
Sales got a boost from VMWare's fast-growing portfolio of business software solutions. Revenue improved by 13% to $1.6 billion, exactly as management had forecast back in April. The best news for investors here was that software licenses picked steam, with growth rising 9% compared with a 6% gain in the prior quarter. "Our second-quarter results are solid, building on our solid start to the year in Q1," said CEO Pat Gelsinger.

Earnings rose 15% to $396 million, or $0.93 per share; Wall Street was expecting a slightly smaller profit jump. VMWare held the line on license delivery expenses, but more spending on services sales, research and development, and sales and marketing all contributed to a higher cost burden in the second quarter. Operating margin slipped from 13.7% to 13.5% of sales.

Source: VMware.

Investors shouldn't expect profitability to climb dramatically higher anytime soon as management prioritizes investments in the business. "We continue to see the opportunity to invest in our various new product areas and we intend to manage spending accordingly," Chief Financial Officer Jonathan Chadwick told investors back in April.

Finances and outlook
VMware ended the quarter in a good financial position: Cash and short-term investments stood at $7 billion, and unearned revenue was $4.81 billion, up from $4.74 billion three months ago. Meanwhile, free cash flow fell to $238 million from the prior year's $333 million. Cash flow was hurt by foreign exchange swings and a one-time $75 million settlement charge, management said.

Looking ahead, VMware plans to keep up its quick pace of product introductions in the second half of the year. These include solutions, services, and partnerships that will bring extra support for Apple devices and the iOS platform, more security to mobile platforms, and better managed traffic in and out of data centers.

Thanks to innovations like these, VMware is strengthening its position as a leader in its industry. Researcher IDC just recognized itas having the biggest market share in virtual client computing and in cloud systems management and data-center automation software. VMware's newly acquired AirWatch product was also named the market-share leader in enterprise mobility management.

Wall Street is forecasting 10% higher revenue for VMware in 2015 as profits improve by 14%. Those targets don't look out of reach in light of today's results.

Demitrios Kalogeropoulos owns shares of Apple. The Motley Fool recommends Apple and VMware. The Motley Fool owns shares of Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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