SaaS Is Growing Double-Digits For VMware, Inc
Salesforce.com (NYSE:CRM) got the market’s attention a few days when the company reported earnings. The company, a specialist in Customer Relationship Management services for business, posted a 28% increase in revenue despite the impacts of the pandemic. The news is a clear sign that growth within digital and cloud-computing is accelerating and sent the entire industry moving higher.
VMware’s (NYSE:VMW) business isn’t an exact match to Salesforce.com but it was nonetheless no surprise to hear it reported strong earnings too. The SaaS and subscription revenue, the most-comparable segment of the business, grew more than 44% on a YOY basis to blow away both the consensus and Salesforce.com’s much weaker showing.
What is a surprise is that VMware is trading at such a low multiple. The company is trading only 23X this year’s earnings where Salesforce.com is closer to 73X. That leaves quite a gap even when adjusting for business differentiation and that is an opportunity for investors today. To bring things back around for perspective, where Salesforce.com helps businesses engage with their clients via the cloud, VMware is fundamental to the entire Cloud environment. It can help any business capitalize on the cloud with any device. It's also a fundamental play on 5G, as if the cloud wasn't enough.
VMware Beats Consensus On Strength In Subscriptions
VMware’s top-line growth including all segments came in at 9.5% YOY and 270 basis points above consensus. Strength was driven by Subscription and SaaS Licensing 44% revenue growth, as I’ve said, but it also grew to account for 20% of the business for the first time. That’s important for two reasons. First is because subscription revenue is recurring revenue that can be counted on in future quarters. Second is because cloud-computing subscription services and licensing software are the future of the industry.
The core Services segment, the largest segment and more than half of revenue, remained strong as well but growth was weaker at 1.5%. The weakest link in the chain is licensing revenue which saw a small YOY decline. Licensing revenue is about 25% of the business and will likely be overtaken by SaaS in future quarters.
“Our performance in Q2 reflected strength in our Subscription and SaaS product offerings, which grew 44% year-over-year,” said Zane Rowe, executive vice president and CFO, VMware. “We plan to accelerate certain product initiatives through the remainder of the year, which will further support customers’ digital transformations and grow our Subscription and SaaS product offerings.”
VMware Is A Growth Machine
VMware made a number of strategic purchases over the quarter and the first half of the year that will help drive growth over the long-term. These include Lastline, an anti-malware, and AI network detection/incident response organization as well as Datrium, a world-class disaster recovery solution for the AWS cloud. Looking forward, we can expect the company to continue investing in its growth and it has the cash to do it. The company is currently sitting on more than $14 per share in cash, about $6 billion, and current debt obligations are low.
The Technical Outlook: VMware Is Lagging The Market, And It Shouldn’t Be
Shares of VMware have been lagging the market during the rebound and they really shouldn’t be. The company is well-positioned for growth in the post-pandemic environment and the Q2 results show it. With more businesses moving to digital and the cloud we can expect not only for revenue and earnings to grow but also for subscription and SaaS revenue to account for a larger portion of the business. Not to say that shares should have popped 25% as Salesforce.com’s did, but a move lower is not in line with this company’s outlook. Price weakness should be viewed as a buying opportunity.
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