VMWARE INC. (VMW) filed Quarterly Report for the period ended 2009-09-30.
VMware provides virtualization solutions from the desktop to the data center. Their solutions enable organizations to aggregate multiple servers storage infrastructure and networks together into shared pools of capacity that can be allocated dynamically securely and reliably to applications as needed increasing hardware utilization and reducing spending. They have expanded their offering with virtual infrastructure automation and management products to address distributed and heterogeneous infrastructure challenges such as system recoverability and reliability backup and recovery resource provisioning and management capacity and performance management and desktop security. They derive a significant majority of their revenues from their indirect sales channel that include distributors resellers x86 system vendors and systems integrators. Vmware Inc. has a market cap of $15.64 billion; its shares were traded at around $39.12 with a P/E ratio of 68.7 and P/S ratio of 8.3.
Highlight of Business Operations:
In the three months ended September 30, 2009 and 2008, we recognized professional services revenues of $4.9 and $4.6, respectively, for services provided to EMC’s customers pursuant to our contractual agreements with EMC. In the nine months ended September 30, 2009 and 2008, we recognized $15.0 and $11.7, respectively, from such contractual arrangements with EMC. As of September 30, 2009, $1.3 of revenues from professional services to EMC customers were included in deferred revenue.
As calculated under our tax sharing agreement with EMC, we paid $11.7 and $14.2 during the third quarter and the nine months ended September 30, 2009 for our portion of EMC’s consolidated federal and state income taxes for various periods, as well as the conclusion of the 2005 and 2006 federal income tax audit. We paid $62.3 during the nine months ended September 30, 2008 for our portion of EMC’s 2007 consolidated federal income taxes. No payments were made during the third quarter of 2008. Under the same tax sharing agreement EMC paid us $19.7 and $107.6 during the third quarter and the nine months ended September 30, 2009 for our stand-alone federal taxable loss for the fiscal year ending December 31, 2008 and for a refund of an overpayment related to our portion of EMC’s 2007 federal consolidated income taxes. The amounts that we pay to EMC for our portion of federal income taxes on EMC’s consolidated tax return differ from the amounts we would owe on a stand-alone basis and the difference is presented as a component of stockholders’ equity. For the three and nine months ended September 30, 2009 the difference between the amount of tax calculated on a stand-alone basis and the amount of tax calculated per the tax sharing agreement was recorded as a decrease in stockholders’ equity of $4.3 and $5.6, respectively. In the three and nine months ended September 30, 2008, the difference was not significant.
Software license revenues decreased by $44.8, or 16%, to $240.3 in the third quarter of 2009, compared with $285.1 in the third quarter of 2008. Software license revenues decreased by $138.1, or 16%, to $725.2 in the first nine months of 2009, compared with $863.3 in the first nine months of 2008. We believe a significant majority of the license revenues decrease in the third quarter and first nine months of 2009 compared with the respective prior-year periods in 2008 was the result of the overall difficult macroeconomic environment and the related challenges that our customers face, including restrictions on IT spending. Despite the generally quick return-on-investment of virtualization, the economic environment has slowed capital expenditures. Organizations typically update their IT infrastructure when adopting virtualization, but the hardware investment is a capital outlay that is several times larger than that of our software.
Services revenues increased by $62.4, or 33%, to $249.5 in the third quarter of 2009, compared with $187.0 in the third quarter of 2008. Services revenues increased by $187.4, or 37%, to $690.5 in the first nine months of 2009, compared with $503.1 in the first nine months of 2008. The increase in services revenues during the third quarter and first nine months of 2009 was primarily attributable to growth in our software maintenance revenues. We expect that services revenues will continue to compose a larger proportion of our revenue mix for the foreseeable future.
Software maintenance revenues increased by $65.5, or 44%, to $212.8 in the third quarter of 2009, compared with $147.3 in the third quarter of 2008. Software maintenance revenues increased by $182.1, or 46%, to $577.6 in the first nine months of 2009, compared with $395.4 in the first nine months of 2008. In the third quarter of 2009, we had increased revenue as a result of customers becoming current on their maintenance agreements in order to receive vSphere as part of those arrangements. In addition, the growth in services revenues year-over-year reflects overall strong renewals, the benefit of multi-year software maintenance contracts sold in previous periods, and additional maintenance contracts sold in conjunction with software licenses.
Professional services revenues decreased by $3.1, or 8%, to $36.7 in the third quarter of 2009, compared with $39.7 in the third quarter of 2008. Professional services revenues increased by $5.2, or 5%, to $112.9 in the first nine months of 2009, compared with $107.7 in the first nine months of 2008. Although we continue to serve our customers directly, our strategy has been to encourage our partners to build their professional services businesses around us, which we believe will leverage our license sales through this channel. As a result of this strategy, our professional services revenue can vary based on the delivery channels used in any given period as well as the timing of engagements. We generally earn a lower margin on professional services fulfilled by our partners than had we performed the work directly.
VMW is in the portfolios of John Griffin of Blue Ridge Capital, Ron Baron of Baron Funds, PRIMECAP Management.
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