VMware to Report Q4 Earnings: What's in the Cards?

VMware, Inc. (VMW - Snapshot Report) is set to report fourth-quarter and fiscal 2015 results on Tuesday, Jan 26. Last quarter, the company posted a 2.7% negative earnings surprise. However, it has delivered an average positive earnings surprise of 5.72% over the past four quarters. Let’s see how things are shaping up for this announcement.

Factors to Consider

VMware remains one of the leading companies in the virtualization and cloud computing market. The company’s innovative product pipeline, strategic partnerships, continuous contract wins and robust international sales are expected to drive overall results. Additionally, the company continues to make some strategic acquisitions, which have significantly expanded its product portfolio.

Despite this, the last few months have been tough for VMware owing to the news that its parent-company EMC Corporation (EMC - Analyst Report) will be acquired by Dell Inc. and Silver Lake. Per the deal, EMC’s stake in VMware (about 81% of the company) will be owned by Dell post closure. Dell will create a tracking stock from 53% of the value of total VMware shares, through which it could still retain 80% of VMware shares.

The acquisition related uncertainty has resulted in dwindling investor confidence especially as Dell would be able to get significant control of VMware at a much discounted price.

Last month, the company had announced that it will not form Virtustream Cloud Services Business with EMC as announced in the last earnings report. This move was a slight relief as it would mean that VMware will not have to forego of a part of its profits by investing significantly in the still loss-making Virtustream.

We note that VMware has also given a soft outlook for revenue growth in 2016 owing to the weakness in bookings.

Earnings Whispers

Our proven model does not conclusively show that VMware is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: VMware has an Earnings ESP of 0.00% as both the Most Accurate and the Zacks Consensus Estimate stand at 98 cents.

Zacks Rank: VMware currently has a Zacks Rank #3 (Hold). Though Zacks Rank #1, 2 or 3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stock to Consider

Here are a couple of stocks that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Ericsson (ERIC - Analyst Report) has an Earnings ESP of +34.62%  and holds a Zacks Rank #2.

Valero Energy Corporation (VLO - Analyst Report) has an Earnings ESP of +1.34% and holds a Zacks Rank #2.