We think investors should wait before purchasing shares of this narrow-moat firm.
By Ilya Kundozerov | 08-14-17 | 12:16 PM | Email Article

Today,  VMware  announced preliminary results for its fiscal second-quarter 2018 period that were above our expectations and management’s guidance. The company now expects second-quarter total revenue to be in the $1.894 billion-$1.906 billion range, up from original guidance of $1.840 billion-$1.890 billion. Management also raised full fiscal 2018 revenue guidance to $7.830 billion from $7.610 billion due to strong sales expectations across its product portfolio. Adjusted operating margin for the second quarter is now expected to be in the 30.5%-31.1% range, up from 30.5%, while full-year guidance has also been revised up to 32.7% from 32.5% in the prior quarter. All together, second-quarter non-GAAP diluted EPS is now expected to be $1.15-$1.19 (versus $1.11-$1.14 prior guidance) and full fiscal 2018 is expected to come in at $5.08 per share (versus $4.91 prior guidance).

Ilya Kundozerov is an equity analyst for Morningstar.

VMware’s board of directors also approved a $1.2 billion expansion of its existing-share repurchase program, of which $900 million remains available, by an additional $1 billion stock repurchase authorization over the next 12 months, announced in January. The company also announced an offering of senior notes, the proceeds of which will be used to fund the share repurchase program, repay $1.23 billion promissory notes to EMC, and to use the remaining proceeds for general corporate purposes. In addition, VMware announced a mixed securities shelf offering for an undisclosed amount. Overall, we are maintaining our $80 fair value estimate for narrow-moat VMware. With shares rising 5% on the news, the shares are trading at a premium to our fair value estimate and we recommend potential investors to remain on the sidelines.

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Ilya Kundozerov does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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