Tech Earnings on Deck: BMC Software, VMware, Yahoo!

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Despite a respectable 4% gain for the Nasdaq composite index year-to-date, the technology sector appears to be running out of steam.

In the past week, investors received weaker-than-expected quarterly earnings reports from the likes of Apple, Microsoft, and Nokia. On Wednesday, Apple beat EPS guidance but came in short of analyst’s revenue forecasts. Gross margin declined to 38.6% compared to 44.7% a year ago. iPhone sales came in short of expectations at 47.8 million, despite rising from 37 million during the prior year period. Apple is also changing its approach to earnings guidance going forward. In the past, the company provided a single point of reference for guidance, whereas effective immediately Apple management is providing estimates within a range.

On Thursday, Microsoft posted earnings that beat consensus by a penny, but revenue came in lighter than expected. Nokia also reported on Thursday and its board of directors is proposing that the company’s dividend be eliminated going forward. The dividend cut shouldn't be a huge surprise to investors, as Nokia sold its world headquarters in Finland for a large cash sum, only to enter into a long-term lease at the same location.

Despite the lukewarm performance for technology in recent days, it’s possible to see greater optimism heading into the final week of January. Here are three standout technology companies I’ll be following on Monday, January 28.

BMC Software (NASDAQ: BMC)
Monday, Jan. 28 after market close; Consensus $1.01 EPS / Revenue $587.38 million

This Houston, Texas headquartered software company provides IT solutions to large and midsize private enterprises for cloud computing. BMC Software had a lengthy battle with activist investor Elliot Associates during 2012, who was awarded two seats on the company board of directors in July.

In October, Bloomberg reported that BMC Software was attracting buyout interest from private equity suitors. This is not the first time the discussion of a buyout has occurred, as Elliot Associates attempted to gather support for the idea in the past.

Investment firm Janney Montgomery Scott recently initiated coverage of BMC Software with a Buy rating and $52 price target, the highest on Wall Street. The mean (average) price target on the stock is $45.50, within close proximity to the current market price. Overall, the analyst community has a moderate to slightly bullish outlook on BMC. Management obviously believes the stock is inexpensive, as the company announced a large $1 billion share repurchase authorization in late October, equivalent to 15% of outstanding shares.

BMC Software has seen earnings decline 15% in the last year despite positive revenue growth of 0.2%. The company’s board, with the addition of the two directors from Elliot Associates, may be more inclined to a buyout in the months ahead if BMC is unable to return to its former peak profitability.

VMware (NYSE: VMW)
Monday, Jan. 28 after market close; Consensus $0.78 EPS / Revenue $1.28 billion

The Palo Alto, CA based tech company provides virtualization and virtualization-based cloud infrastructure solutions.

Numerous Wall Street firms have stated in recent weeks that channel checks indicate VMware had a positive fourth quarter, despite broader macroeconomic concerns resulting in less IT spending. Analysts believe that new customer acquisition sales are trending higher than anticipated, in addition to VMware retaining a high number of existing customers.

On January 10, Susquehanna raised its price target on VMware to $98 from $85. The Lititz, Pennsylvania based Susquehanna believes that VMware had a strong finish to the calendar fourth quarter on the basis of the company’s new licensing structure for its software.

Despite the optimism on Wall Street, a handful of industry observers have expressed concerns that OpenStack is becoming a legitimate competitor to VMware’s paid offerings. OpenStack is open source cloud software that is available at no cost for corporations. The best analogy to OpenStack’s threat to VMware’s enterprise business can be made by comparing with Apache’s OpenOffice taking market share from Microsoft’s paid Office suite. Entrenchment of OpenStack into VMware’s territory would result in decreased pricing power for the cloud provider going forward, causing a decline in revenue and gross margin.

Earnings at VMware have grown nearly 15% over the last four quarters (prior to the upcoming release), while revenue has grown approximately 23% during the same time frame. A strong earnings report from VMware should also bode well for Citrix, which is scheduled to report after the market close on Wednesday, January 30.

Monday, Jan. 28 after market close; Consensus $0.28 EPS / Revenue $1.21 billion

CEO Marissa Mayer recently gave her first televised interview to Bloomberg TV at the World Economic Forum in Davos, Switzerland. During the 30-minute interview, Mayer made numerous remarks but stated that Yahoo! should be able to use its search network to create a great mobile business in coming months. Investors have increasingly turned their attention to mobile as a source of earnings growth for the technology sector, in particular with a focus on Facebook and Google in recent months.

In December, Needham & Company raised its price target on Yahoo! to $26 from $19, stating activist investor Daniel Loeb of Third Point Capital is a strong advocate of a higher share price and that Yahoo’s board of directors is aligned with shareholder interests.

Readers are interested in learning more about the likelihood of an Alibaba IPO, and the potential effect on Yahoo’s share price. Alibaba is the top Chinese e-commerce company, and Yahoo! sold half of its 40% stake in Alibaba for $7 billion in May 2012. A 20% sale of the company for $7 billion gives Alibaba an enterprise value of approximately $35 billion.

In recent weeks, the original Alibaba founder announced he will be stepping down, paving the way for a new CEO to be named on May 10, 2013. Rumors have also persisted that Alibaba has hired Credit Suisse and Goldman Sachs for a Hong Kong IPO later this year.

Overall, readers should be invested in Yahoo because they are buying into CEO Marissa Mayer’s turnaround story for search and the company’s content platform. The size of the Alibaba IPO is expected to reach $3 billion to $4 billion in size, indicating only a portion of the stock will be publicly traded. Investment firm Sanford Bernstein downgraded Yahoo! to Market Perform from Outperform on January 7 for this reason, citing the lack of clarity related to the Alibaba IPO and the potential for downside risk to revenues from Mayer’s reorganization plans for Yahoo.

Shares of Yahoo have risen nearly 30% since the company reported third quarter earnings on October 22. I like the long-term fundamental story for Yahoo, and would use any potential weakness following the upcoming earnings report as a buying opportunity. In addition, the stock is inexpensive on an earnings basis compared to Google, which is fairly valued in my opinion.

Economic Data for Monday, Jan. 28

On the economic front, the U.S. Census Bureau is scheduled to release its monthly report on durable goods for December, a leading indicator of industrial production and capital spending. Durable goods range from household appliances to industrial machinery, all of which are non-consumable items that are used for an extended duration between individual purchases.

New orders for durable goods have increased in six of the last seven months. Machinery has also posted an increase for three consecutive months through November. Readers will be able to view the December report after 8:30 a.m. on Monday here.

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johnmacris has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of BMC Software and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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