VMware (NYSE:VMW), a leader in cloud infrastructure and virtualization solutions, reported its third-quarter results on Oct. 20 after the market close. The company edged out analyst estimates for both revenue and earnings, reporting solid revenue growth and double-digit increases in both GAAP and non-GAAP EPS. VMware provided preliminary results on Oct. 12, coinciding with the announcement that Dell will acquire EMC (NYSE:EMC). EMC currently owns an 81% stake in VMware.

VMware results: The raw numbers


Q3 2015

Q3 2014

Growth (YOY)


$1.67 billion

$1.52 billion


GAAP net Income

$256 million

$194 million










Source: VMware Q3 2015 earnings release.

What happened with VMware this quarter?
VMware reported another solid quarter, with strong revenue and earnings growth.

  • With 48.5% of VMware's revenue coming from outside the United States, currency had a negative impact on sales. On a constant-currency basis, revenue grew by 14% year over year.
  • License revenue grew to $681 million, up 7% year over year, and up 11% on a constant-currency basis. Licensing accounted for 40.7% of VMware's total revenue.
  • Services revenue grew by 13% year over year to $991 million, accounting for the rest of VMware's revenue.
  • VMware generated free cash flow of $321 million during the quarter, spending $200 million on share repurchases. Over the past nine months, the company has spent $1.05 billion on buybacks, more than double compared with the same period last year.
  • Revenue plus the sequential change in unearned revenue increased by 3% year over year, or by 8% year over year on a constant-currency basis.

VMware also provided guidance for both the fourth quarter and 2016.

  • Fourth-quarter non-GAAP EPS is expected to be between $1.23 and $1.27, up from $1.08 reported during the fourth quarter of 2014.
  • Full-year 2016 revenue is expected to grow by a high-single-digit to low-double-digit percentage.

On Oct. 12, Dell agreed to acquire EMC, which holds a majority stake in VMware.

  • VMware will remain an independent, publicly traded company.
  • VMware and EMC will form a new Cloud Services Business, jointly owned by both companies, offering customers a comprehensive hybrid cloud portfolio.

What management had to say
CEO Pat Gelsinger was happy with the company's third-quarter results and optimistic about the company's future following the Dell/EMC merger:

Our solid third-quarter financial results reflect VMware's strength in delivering extraordinary value to our customers. We are very optimistic about the long term value to VMware of the Dell and EMC plans to merge and the formation of the Cloud Services Business. VMware's mission and strategy remain unchanged as we continue to deliver extraordinary value to our customers through the power of disruptive innovation.

Looking forward
The merger between Dell and EMC is a complicated transaction, and shares of VMware declined on the news. EMC shareholders will receive $24.05 in cash and 0.111 shares of a tracking stock tied to EMC's economic interest in VMware. Concerns about this tracking stock diluting existing VMware shareholders seem to have driven down the stock price.

The business itself is producing solid results, with revenue growing nicely and profitability improving despite the currency headwind. Guidance calls for more of the same, and while the merger is currently knocking down the stock, VMware's business is performing well.