VMware 2Q '15 Revenue Up 4 Percent, But Dragged Down By Government Settlement

VMware on Tuesday beat earnings expectations and enjoyed solid revenue growth for its second fiscal quarter despite paying a $76 million fine related to a U.S. Department of Defense contract.

Sales growth for some of VMware's newer key technologies including its NSX software-defined networking and AirWatch enterprise mobility management did very well during the quarter, Palo Alto, Calif.-based VMware said.

For its second fiscal quarter of 2015, which ended June 30, VMware reported total GAAP revenue of $1.52 billion, up 4.1 percent from the $1.46 billion the company reported for the second quarter of 2014.

[Related: VMware, Carahsoft Pay $75.5 Million To Settle Government Overcharging Lawsuit]

That revenue number was impacted by a $75.5 million settlement VMware made with the U.S. Department of Justice and the General Service Administration, which VMware paid during the quarter in cash.

VMware and its reseller partner Carahsoft, Reston, Va., agreed last month to pay that amount to settle a civil lawsuit under which they were alleged to have overcharged the federal government for VMware products and services over a six-year period.

On a non-GAAP basis, revenue for the second quarter were $1.6 billion, up 10 percent over that of the second quarter of 2014.

VMware reported license revenue in the second quarter of $638 million, up 3.9 percent over last year's same-quarter result. Software maintenance revenue was up by 12.5 percent, to $829 million, while professional services revenue rose 22.6 percent, to $130 million.

GAAP income for the second quarter was $172 million, or $0.40 per share, up from $167 million, or 38 cents per share, for the second quarter of 2014. Non-GAAP income for the quarter was $396 million, or 93 cents per diluted share, up over last year's $351 million, or 81 cents per share.

The non-GAAP earnings per share of 93 cents per share exceeded analysts' expectations of 91 cents per share, according to Seeking Alpha.

Investors seemed unsure of what to make of the VMware financial results.

During the second quarter of 2015, VMware signed seven deals valued at $10 million or higher, said VMware CEO Pat Gelsinger during the company's Tuesday quarterly financial analyst conference call.

Nine of the company's top 10 deals in the quarter included VMware EUC, or End User Computing, technology, while five of the top 10 deals included the company's NSX software-defined networking technology, said Carl Eschenbach, VMware president and chief operating officer, during the conference call. The company has more than 700 paying customers for its NSX technology, Eschenbach said.

VMware's second-quarter desktop license business grew 15 percent, while its AirWatch business grew 60 percent, over the same quarter last year, Eschenbach said. "We believe we gained market share from competitors," he said.

VMware's cloud management business is now employed by almost 16 percent of the company's installed base, giving the company "plenty of headroom for growth," Eschenbach said.

"We are excited about the future, and are positioned to lead the industry in the future," he said.

VMware in early 2014 acquired AirWatch in a transaction worth more than $1.5 billion as a way to bring mobile device and application management along with mobile content management solutions to its enterprise customers.

VMware expects to continue to increase the value of its customers' solutions, said Jonathan Chadwick, the company's chief financial officer and chief operating officer.

VMware is seeing customers moving away from "naked vSphere" and toward the addition of other technologies, Chadwick said during the question-and-answer portion of the conference call.

Non-vSphere revenue is approaching 80 percent of total revenue, he said. "There's no reason to believe it won't go to 100 percent," he said.

Gelsinger, responding to an analyst's question, said VMware customers are still finding OpenStack an immature technology, and are relying on VMware technology, including vSphere and NSX, as a base on which they can build OpenStack cloud environments.

"They're not standing up parallel environments. ... [OpenStack with VMware] happens in days. It happens in years with the alternative," he said.

Looking forward, Chadwick said, VMware expects total revenue for all of 2015 to reach between $6.575 billion and $6.685 billion, or up between 9 percent and 11 percent over 2014. License revenue is expected to rise during that time 5 percent to 7 percent, he said.

For the third quarter of 2015, revenue is expected to rise 9 percent to 10 percent over last year's third quarter, while license revenue is expected to rise 6 percent to 7 percent, he said.

PUBLISHED JULY 21, 2015