FBR MSFT
We believe Mr. Nadella's cloud vision will remain front and center as he looks to drive strong, organic growth at Microsoft over the coming years with cloud-enabled devices providing tailwinds to the company's fast-growing cloud (e.g., Azure, Office 365) initiatives. We believe Mr. Nadella's proactive approach at cleaning up the Nokia acquisition is a positive "tipping of the hand" around Microsoft's future focus on software (versus hardware) as the company heads into a pivotal year, with Windows 10 front and center as a major product catalyst set to launch next week. Overall, we believe the "Nadella era" at Microsoft is on track as he veers away from the status quo, representing a breath of fresh air for investors.
With 2015 shaping up to be another tough year for PC shipment unit growth given recent data from IDC indicating a continued deterioration in CY2Q15 (June) shipments and despite continued declines in Microsoft s Windows OEM business in F4Q, we believe Microsoft has some incremental tailwinds with the upcoming Windows 10 platform launch on July 29 and positive momentum on the tablet front. We also believe Mr. Nadella is taking necessary steps (e.g., free Windows on certain mobile devices, laser-focus on cloud/mobile) to ensure Windows successfully makes the transition to mobile devices and that longer-term growth coming off the PC market will be more than offset by growth in the cloud.
FBR VMW
With the large majority of server workloads (we estimate 70%- plus) penetrated, the company faces growth challenges as it looks to diversify away from its vSphere-focused top line, in our view, despite the increased focus on suite offerings, good uptake of VMware's management tools, and growing its non- stand-alone vSphere business. Although we believe VMware will continue to benefit from a number of secular trends (e.g., next- generation applications, big data, cloud) in the field, we believe competition across a number of fronts (e.g., EUC, mobile device management, etc.), as well as the potential for pricing pressure at the core as competing virtualization technologies ramp, could dull growth prospects for FY16 and beyond.
With a large amount of license revenue coming from vSphere and related products, expanding the companys product footprint has been looked upon favorably by the Street. With the company s newer/updated offerings (e.g., vSphere, vCloud Suite, NSX, VSAN, EVO:RAIL, etc.) and the focus on providing the software-defined datacenter, we believe VMware continues to hold competitive advantages in a number of key virtualization areas (compute, storage, networking). That said, in our opinion, the company faces growth challenges at its core given our expectations for fading tailwinds from the all-important ELA cycle as this area for VMware matures and as competition heats up.
As customers purchase more products around the SDDC (e.g., vCloud Suite, vSOM, VSAN, etc.) and adoption of its new products ramps, the company will face the challenge of balancing growth and profitability. Management s reiterated 2015 margin expectations are for 31.5%, and while we note that the company has historically done a commendable job with this balance, in our view, increasing competition from other large technology vendors (e.g., MSFT, IBM, CTXS, CSCO, etc.) and the potential for pricing pressure at the core could add challenges to significant margin expansion.
