Updated below: VMware reported strong fourth quarter earnings and revenue growth but sales fell short of estimates.
When the dealing was done VMware shares were down roughly $20 from a close of $83. Were the numbers really that bad?
VMware (all resources and statement) reported net income of $78 million, or 19 cents a share, on sales of $412 million, up 80 percent from a year ago. Excluding charges, VMware reported earnings of $103 million, or 26 cents a share. Both earnings figures include a tax gain of a penny a share.
The problem: VMware was expected to report sales of $417 million. Earnings were expected to be 24 cents a share. Add it up and VMware's quarter was mixed to Wall Street--mixed enough to bail on shares.
Here's what's scary to investors: VMware's specialty is virtualization--the hottest market in enterprise software. If VMware can't hit its revenue target what does that say about enterprise spending? Is that instant analysis on target? Maybe. Maybe not. But right now it is what it is.
Nevertheless, you'd never know VMware's quarter was viewed as such a disappointment to analysts by the numbers. VMware had 2007 operating income of $235 million on revenue of $1.33 billion. Net income for 2007 was $218 million, or 61 cents a share. VMware ended 2007 with 100,000 customers.
Not bad at all. But clearly not good enough to please Wall Street.
Update: In a research note, JP Morgan analyst Adam Holt said that license revenue of $284 million was the problem in the quarter. License revenue fell below Holt's $295 million revenue and the consensus of $292 million. In a nutshell, Holt said VMware had little room for error given its shares were trading at lofty levels. License revenue growth fell to 76 percent from year over year compared to 96 percent from the third quarter. Holt noted that deceleration will raise concerns about demand or a weakening economy.
Update 2: VMware's conference call wasn't so bad from a product perspective, but growth expectations downshifted big time.
CFO Mark Peek said:
Revenue for 2008 is expected to grow approximately 15% compared to 2007. Our expectation for revenue growth considers a number of factors. The increasing size of our revenue base and increasing number of competing companies marketing, their intent to introduce virtualization products, and our continued strategy to make VMware technology the new platform for data center virtualization through broad proliferation. It is also important to remember that all of our sales are US dollar denominated and our expected growth rate does not reflect any benefit from currency translation.