These Analysts Attended VMWare's User Conference: Here's The Chatter

September 1, 2015

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These Analysts Attended VMWare's User Conference: Here's The Chatter

VMware, Inc. (NYSE: VMW) hosted its twelfth VMworld User Conference in San Francisco, California, which drew roughly 23,000 attendees and some of Wall Street’s top analysts.

Baird: Upgrading To Outperform

Jayson Noland of Baird upgraded shares of VMware to Outperform from Neutral with an unchanged $95 price target as the company cited “improved traction” in a number of product areas. The analyst added that management’s commentary reinforces his channel feedback, which has “improved” as of late.

Noland added that management offered “limited” 2016 guidance (management does not offer detailed out-year guidance at VMworld), which includes an expansion of operating margin by 32 percent and a 12 percent cash flow from operations tailwind as a few one-time items “fall away.”

Noland also pointed out that the company’s CEO Pat Gelsinger “essentially took a downstream merger with EMC Corporation (NYSE: EMC) off the table” and that a downstream merger is “not being given serious consideration.” The analyst noted that this commentary should be viewed as a “relief” for VMware’s stock.

In addition to launching the Unified Hybrid Cloud (UHC) management platform this week, the company announced the EVO SDDC Manager, as well as updates to VRealize, NSX Networking, vSAN Storage and vSphere compute.

Finally, Noland stated that management was “positive” on end-customer demand for Enterprise Agreements (EA). 2016 will be a traditional year of renewal, which should be considered as a “minor positive.” The company’s ability to expand the EA percentage of bookings is “critical.”

FBR: Three Core Priorities

Daniel Ives of FBR commented in a note that VMware’s presentation focused on its three core priorities: software-defined datacenter (SDDC), hybrid cloud and end-user computing offerings.

Ives continued that there was a “big focus” on the NSX and hybrid cloud market opportunity, as well as ELA growth heading into next year. In addition, Cross-Cloud vMotion was “notably well received” by customers the analyst interacted with.

Ives added that while NSX remains a “small piece of the overall pie,” it is unclear if its emerging solutions can scale fast enough and achieve similar market leadership as in the server virtualization arena. As such, the analyst suggested that ramping its emerging technologies (e.g., NSX, VSAN, etc.) remains “critical” in reigniting license revenue and license billings growth.

Finally, Ives noted that “the big news” surrounded management’s commentary, which essentially dismissed a downstream merger with EMC. However, this now raises the question of what the next move for EMC/VMware will be in the “continuing strategic soap opera.”

Shares remain Market Perform rated with an unchanged $90 price target.

Morgan Stanley: Key Issues Remain

Keith Weiss of Morgan Stanley commented in a note that the management downplayed the possibility of a downstream merger with EMC. While the announcement should “come as a relief” to shareholders and the stock, investor attention may now focus to the company’s core fundamental challenges.

Weiss continued that key issues remain, including: 1) when will newer product categories reach sufficient scale to overcome declines in its maturing core, and 2) cam VMware participate in key secular trends like public cloud and containers.

Weiss answered his own questions, noting that the pace of product innovation at VMware “remains well ahead” of revenue contribution and the company “continues to embrace” emerging open source technologies.

However, an inflection point for an upswing in revenue growth remains several quarters away. As such, the stock has a “balanced” risk-to-reward profile at current levels.

Shares remain Equal-Weight rated with an unchanged $89 price target.

Pacific Crest: Remain Buyers

Rob Owens of Pacific Crest commented in a note that VMware’s presentation focused on the “maturing” hybrid cloud opportunity, as its evolution of solutions is “supporting an AnyCloud value proposition.”

Owens continued that as the company shifts toward its new products, it is increasing large ELA adoptions and driving stronger adoption of products with recurring revenue streams (which now accounts for 55 percent of total revenue), with vCloud Air and Airwatch “leading the way.”

With that said, Owens noted that the company’s hybrid cloud vision is beginning to pay off and will transition from early adopters to broader distribution in the near-term, giving the company an “opportunity to accelerate the business” as early as next year.

Shares remain Overweight rated with an unchanged $105 price target.