Tuesday, October 19, 2010

VMWare (VMW) Smoked, Despite a Pretty Good Quarter

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I always like to think that with the "loose information' on the Street (a lot of winking, nodding, and insider 'whispering') that the charts help us see what other people know ahead of the masses; especially the important people.  Hence any stocks not partaking in this massive move put up a big yellow flag.  A company like Intuitive Surgical (ISRG) has been a dog this entire run (so I'll be curious how it does on earnings), and VMWare (VMW) had joined it the past 3-4 weeks.  The company reported a quite nice quarter but the Street is finding things it does not like such as cash flow & deferred revenue.... and the stock is being punished.



Today's move has completed the round trip back to mid August lows.  Next in line is a potential move to retest July lows, ESPECIALLY if the S&P 500 can actually retreat for more than a 1-2 sessions.  The 200 day moving average also comes into play in about $4.00+.

Unlike most 'cloud' stocks, which are pseudo cloud stocks, but getting outrageous valuations just by having a small portion of their revenue stream involved in Wall Street's latest 'fad', VMW is very much in the center of this sector.  And as I have stated since Oct 1st, there seemed to be a rotation by the institutional money out of the sector once the quarter end 'window dressing' was over, and these stocks turbo charged to the moon.  Which means for now, it has (ironically) become difficult to make money in a sector, with a market that you generally can throw a dart at and find a winning stock.

Via Barron's:
  • The virtualization software company reported revenue of $714 million and non-GAAP profits of 39 cents a share; the Street has been expecting $697.8 million and 35 cents. For Q4, the company sees revenue of $790 million to $810 million, above the Street at $774.4 million.
  • RBC Capital analyst Robert Breza points out in a research note this afternoon that while profits and revenue exceeded expectations, deferred revenue and cash flow disappointed. He notes that deferred revenue was $1.505.6 billion, below the Street at $1.54 billion, while cash flow was $196.7 million, below the Street at $276.2 million. Bookings, he adds, at $747 million, was below expectations at $779 million.

Via Reuters:
  • "A lot of people are fixated on the change in deferred (revenue)," JP Morgan analyst John DiFucci said on the same conference call. He was referring to a steep decline in deferred revenue, or the portion of a sale that has been completed but not booked as revenue on a company's income statement.
  • VMware's bookings, or new sales, dropped about 3 percent in the third quarter from the second quarter. They had climbed more than 15 percent in the second quarter from the first quarter.
  • The company posted cash flow from operations of $197 million, far below what most investors were expecting, said Pat Walravens, an analyst with JMP Securities. He had forecast cash flow from operations of $311 million.
  • Laxmi Poruri, an analyst with Primary Global Research, said investors reacted so strongly to the news because VMware is an expensive stock based on cash flow, a key metric that investors use to value shares.

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