VMware on Tuesday published its third quarter financial results, beating market expectations and delivering 25% growth in Subscription and SaaS ARR. Though the company is moving to a Subscription and SaaS-based model, the company saw stronger-than-expected license revenue with deals over $10 million.
The company's non-GAAP net income for the third quarter was $725 million, or $1.72 per diluted share. Revenue for the third quarter was $3.19 billion, an increase of 11% from the third quarter of fiscal 2021.
Analysts were expecting earnings of $1.54 per share on revenue of $3.12 billion.
"We are pleased with our continued strong performance in Q3. This quarter, as we unveiled many new offerings at VMworld, we showcased how we are helping customers transform their businesses today and that our innovation engine is thriving," CEO Raghu Raghuram said in a statement. "Our mission is to be the trusted software foundation to accelerate our customers' innovation without compromise. We are committed to helping organizations unlock the full potential of multi-cloud."
The combination of subscription and SaaS and license revenue in Q3 was $1.53 billion, an increase of 16% from the third quarter of fiscal 2021.
Subscription and SaaS revenue for the third quarter was $820 million, an increase of 21% year-over-year. Subscription and SaaS annual recurring revenue (ARR) for the third quarter was $3.31 billion, an increase of 25% year-over-year.
Subscription and SaaS accounted for 26% of total revenue, up from 24.7% in Q2.
While SaaS and subscription revenue did not exceed expectations, as license revenue did, VMware executives on a Tuesday call said the business was on the right track. Raghuram described the three categories of SaaS and Subscription products: First, "pure offerings" include those built expressly for a SaaS model. "We expect these to reach scale and start to impact growth in a much bigger fashion," Raghuram said.
Next, "customer choice" products can be delivered via a license or subscription. The third category includes products primarily licensed that VMware will progressively be delivering as subscription and SaaS products next year.
"The combination of these three will drive the product portfolio even more to subscription and SaaS," Raghuram said.
VMware's non-GAAP operating income for the third quarter was $935 million, an increase of 5% from a year prior.
Operating cash flow for the third quarter was $1.09 billion. Free cash flow for the third quarter was $984 million.
For the fourth quarter, VMware expects revenue of $3.51 billion.