VMware forecasts strong licensing revenue growth for 2014

By Sruthi Ramakrishnan

(Reuters) - Cloud software maker VMware Inc reported a higher-than-expected quarterly profit as it sold more licenses to enterprise customers and indicated that strong licensing revenue growth would continue into next year.

The company said it expected revenue to grow 15 percent in 2014 on continued strength in its enterprise licensing business and higher demand for its vCloud Suite of products.

"The guidance for next year is for a stronger license trajectory, which remains the key ingredient in the company's recipe for success over the coming years," FBR Capital Markets analyst Daniel Ives told Reuters.

License revenue rose 15 percent in the quarter ended September 30, VMware said on Monday.

VMware shares rose 9 percent in extended trading, while those of parent EMC Corp rose 5 percent, even though VMware lowered the upper end of its full-year revenue forecast range to $5.21 billion from $5.26 billion.

Analysts on average were expecting revenue of $5.20 billion, according to Thomson Reuters I/B/E/S.

VMware sells virtualization software, which enables the creation of a virtual machine that acts like a real computer with an operating system. This helps companies use server and storage space more efficiently and reduce IT costs.

The company's vCloud Suite of products, introduced in 2012, allows companies to build a complete cloud infrastructure.

"The strength in the quarter was licenses. They had a very good license quarter and that's kind of front and center for investors," Ives said. "It seems the company is poised to see a nice reacceleration in license revenue heading into 2014."

VMware said it signed its largest-ever enterprise license deal with the U.S. Army in the third quarter.

The company, which gets 10-15 percent of its revenue from the U.S. government, said it expected government-related revenue to be flat in the current quarter, which included a two-week government shutdown.

VMware raised the high end of its full-year revenue forecast range in July, saying government demand and enterprise deals were likely to pick up in the second half.

Over the last year, VMware has been renewing its enterprise licensing contracts at a higher rate and adding more enterprise customers, Mizuho Securities USA analyst Abhey Lamba wrote in a pre-earnings note.

Long-term license agreements including maintenance and support make up a quarter to one third of VMware's sales.

VMware said third-quarter net income rose to $261 million, or 60 cents per share, from $157 million, or 36 cents per share, a year earlier.

Excluding items, the company earned 84 cents per share.

Total revenue rose 14 percent to $1.29 billion.

Analysts on average had expected earnings of 82 cents per share on revenue of $1.29 billion, according to Thomson Reuters I/B/E/S.

(Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Ted Kerr)