Option Trade 
VMware, Inc. (NYSE:VMW) Calls
Wednesday, June 07, 2017

** OPTION TRADE: Buy the VMW OCT 20 2017 95.000 CALL at approximately $3.30. Place a pre-determined sell at $6.60.

Note: No protective stop losses added -- but if you wish to do so make it $1.35.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey                   

VMware, Inc. (NYSE:VMW), a supplier of virtualization infrastructure solutions, dropped 2% last Friday following the company’s latest earnings report, providing a great opportunity to enter into an option trade at a reduced cost.

Shares of virtualization software pioneers VMware reported fiscal Q1 revenue and profit that topped analysts’ expectations, offered a forecast for this quarter comfortably ahead of consensus, and raised its full-year view.

The year-over-year growth in earnings was driven by strong top-line and stringent cost control which aided in expanding margins.

The strong top-line growth can be attributed to robust performance from its product offerings like NSX, AirWatch, vSphere, and vSAN. During the quarter, VMware completed the divestiture of vCloud Air Network to OVH Group, a global hyper-scale cloud provider.

As well, VMware recently completed the acquisition of Wavefront, an ultra-high performance metrics monitoring service for cloud and modern application environments.

On the conference call with analysts, Zane Rowe, VMware’s CFO, said the increased in forecast was a consequence of the "strong performance" last quarter.

"Q1 was a great start to the year,” he said, "and we're continuing to see good momentum across the business in Q2."

Revenue in the three months ended in April rose 9%, year over year, to $1.74 billion, yielding EPS of 99 cents.

Analysts had, on average, been modeling $1.71 billion and 96 cents.

For the current quarter, the company sees revenue in a range of $1.84 billion to $1.89 billion, and EPS of $1.11 to $1.14. That compares to consensus for $1.81 billion and $1.10.

For the full year, the company now sees profit per share of $4.91, up from a prior forecast of $4.87, and higher than consensus of $4.89. It raised its revenue view to $7.6 billion, up from a prior $7.57, which also happens to be consensus.

VMware’s 50-day moving average price is $93.99 and its 200 day moving average price is $87.92. The firm has a market capitalization of $38.97 billion, a P/E ratio of 34.33 and a beta of 0.97. VMware has a 12 month low of $55.12 and a 12 month high of $98.00.

Influencing Factors to Consider

VMware continues to generate high-single-digit revenue growth and double-digit earnings growth.

The company unloaded its IaaS business during the first quarter, likely seeing no way to compete with major players like AWS and Azure. Hybrid cloud and SaaS remain a small part of VMware's overall business, but it's growing at more than triple the rate of the company as a whole. The NSX and vSAN businesses are growing even faster. Going forward, these smaller businesses should continue to drive growth for the company.

Services revenues (64.9% of total revenue) increased 10.7% to $1.13 billion, driven by 9.3% and 20.6% growth in Software Maintenance and Professional Services revenues, respectively.

License revenues increased 6.6% year over year to $610 million. NSX licensed bookings grew over 50% on a year-over-year basis driven by strong demand for micro segmentation security solution. Moreover, customer count increased to over 2600.

vSAN licensed bookings surged more than 150%, with customer count reaching 8000. Further, EUC license bookings were up over 20%, on the back of healthy growth in both mobile and desktop businesses.

Region wise, U.S. revenues (49.5% of total revenue) increased 7.5%, while International (50.5%) grew 11% from the year-ago quarter.

VMware's hybrid cloud and SaaS offerings now represents more than 9% of revenues. This product segment grew 30% from the year-ago quarter. The growth was driven by continued strong adoption of vCloud Air Network, which surged 40% on a year-over-year basis.

Total Cloud management bookings were up in the mid-single digits. However, cloud management licensed bookings were down in the low teens on a year-over-year basis.

VMware has inked number of partnerships, which includes the likes of Microsoft MSFT , Oracle ORCL , Alphabet's GOOGL Google division and Pivotal. The company also extended its partnership with IBM.

The company won six large deals equal to or greater than $10 million in the quarter versus one large deal in the year-ago quarter.

VMware also launched some key products during the quarter including a new release of vSAN, vCloud NFV 2.0, and Pulse IoT Center, a secure, enterprise grade Internet of Things (IoT) Infrastructure management solution.

The company also announced IoT based partnerships with HARMAN, Samsung and Fujitsu.

Gross margin (including stock-based compensation) contracted 90 basis points (bps) to 85%, primarily due to unfavorable product mix. Services gross margin contracted 140 bps, which was partially offset by 50 bps expansion in license gross margin.

Under operating expense line, research & development (R&D) as percentage of revenues increased 170 bps, fully neutralize by 170 bps and 140 bps expansion in Selling & Marketing and General & Administrative expenses, respectively.

As a result, operating margin (including stock-based compensation) expanded 60 bps to 19% in the reported quarter.

VMware completed the remaining $125 million in stock repurchase from its previous authorization of $500 million. Additionally, the company repurchased $300 million of stock in the quarter from Dell Technologies. Of this 2.7 million were delivered in the reported quarter and the remaining 0.7 million will be delivered in the second quarter.

VMware currently have $900 million remaining under its $1.2 billion repurchase authorization which extends through the end of fiscal 2018.

Analysts and Hedge Funds Opinions

VMware, Inc. has been a standout performer for more than a year, according to BTIG.

VMware is "clearly executing well, navigating the initial chapters of the Dell deal nicely, showing promising momentum in new product categories and again modestly taking up forecasts," analyst Edward Parker said in a Friday note.

The strong first-quarter results validated VMWare's hybrid strategy, which helps customers transition from on-site IT to next generation cloud modalities, Parker said.

First-quarter license and total billings rose 10 percent and 12 percent, respectively, after adjusting for the vCloud Air sale, Parker said. The analyst attributed the results to balanced performance across VMware's diversifying portfolio.

On the segments, the analyst said networking and storage continued hyper growth momentum and the legacy compute continued to show "respectable mid-single digit growth."

Taken together, the good performance was responsible for the modest revenue and earnings per share outperformance, Parker said.

Also, VMware, Inc.‘s stock had its “buy” rating reissued by stock analysts at MKM Partners in a research note issued on Thursday. They currently have a $110.00 price target on the virtualization software provider’s stock, up from their previous price target of $100.00. MKM Partners’ price objective indicates a potential upside of 15.35% from the stock’s current price.

Also, several brokerages recently weighed in on the company…..

  • JPMorgan Chase & Co. reiterated an “overweight” rating and set a $95.00 price target on shares of VMware in a research note on Thursday.
  • Royal Bank of Canada boosted their price target on shares of VMware from $97.00 to $110.00 and gave the stock an “outperform” rating in a research note on Wednesday, May 31st.
  • Robert W. Baird upgraded shares of VMware from a “neutral” rating to an “outperform” rating and boosted their price target for the stock from $90.00 to $115.00 in a research note on Wednesday, May 31st.
  • Finally, Cowen and Company boosted their price target on shares of VMware from $92.00 to $98.00 and gave the stock an “outperform” rating in a research note on Thursday, May 25th.

One investment analyst has rated the stock with a sell rating, twenty have given a hold rating and seventeen have given a buy rating to the company’s stock. VMware presently has a consensus rating of “Hold” and a consensus target price of $100.00.

Harvey’s Options Volatility Indicator


It is believed that the impressive first-quarter results and positive fiscal year guidance (up from the previous guidance) driven by expanding product portfolio, partnerships and continuing enterprise deal wins will help the stock maintain momentum in the rest of fiscal 2018.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the VMW OCT 20 2017 95.000 CALL at approximately $3.30. Place a pre-determined sell at $6.60.

Note: No protective stop losses added -- but if you wish to do so make it $1.35.

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Options traders win because they are successful.