VMware’s Multicloud Offerings Shine in Its Q4

VMware VMW reported fiscal 2023 fourth-quarter results above our expectations for revenue and adjusted earnings per share. The firm did not host an earnings call or provide guidance due to its pending acquisition by Broadcom, which is expected to close in Broadcom’s current fiscal year. We are raising our probability-weighted fair value estimate to $161 per share for narrow-moat VMware, as we now assign a 50% probability of the deal being completed (versus 75% previously). Broadcom’s offer price of $146.85 per share consists of 50% received as $142.50 cash and 50% received as 0.2520 share of Broadcom per VMware share. On a stand-alone basis, our fair value estimate remains at $175 per share.

Fourth-quarter revenue increased 5% year over year to $3.7 billion. Subscription and software-as-a-service revenue were $1.18 billion in aggregate, up 36% compared with the prior-year period. VMware is undergoing a transition to a subscription and SaaS model from perpetual licenses, placing a short-term hindrance on growth. We believe headwinds are temporary and the underlying demand for VMware’s solutions remains solid. Remaining performance obligation was $13.6 billion in the quarter, up 13% year over year. Non-GAAP operating margin was 30.4% compared with 32.2% a year ago as the model transition also pressures profitability.

In our view, the addition of VMware aligns well with Broadcom’s software penetration strategy and expanding recurring revenue streams. We believe VMware’s unique value is being the simple path to embracing any cloud environment, being able to support legacy compute and storage locations while developing new cloud-based applications, and helping organizations achieve increased utilization and security for their networking. Being an omnipresent layer across on-premises, public clouds, and private clouds for networking, developers, and security teams makes VMware’s technology critical for the long term.