VMware: Sales light; shares much lighter afterhours

VMware: Sales light; shares much lighter afterhours

Summary: 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.


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.

Topics: VMware, Banking, Enterprise Software

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  • Priced for Perfection

    Nothing is wrong with VMWare's numbers, just the investors' expectations regarding those numbers. As you mentioned, this stock was priced for perfection and delivered something less. All else being equal, investors like to see more licensing revenue because that is seen as the hardest revenue to capture at enterprise and a better indicator of true growth. Additionally, Microsoft's release of their Hypervisor is causing some heartburn as well. There is a great post out there correlating VMware with a previous company/product known as Netware. Clearly, the honeymoon is over for VMWare. However, this does not mean that the company does not have a great future. It just means that investors don't think that the company's future cashflows justify a $30+ billion valuation. $20 billion+ is still a great achievement considering the age of this company and its technology. If you would've asked anyone when it started if they'd be happy to achieve a $20B valuation, I think they'd all agree that would be in the most optimistic of any conceivable scenario.
  • Uncertainty in changing landscape

    I'm sure the fact that Citrix bought Xen and Microsoft is soon to release its virtualization has had an impact. With the changing landscape of virtualization and big players coming onto the scene in full force, its bound to have an impact on VMWware.

    The bigger question is where will VMWare be in 4 to 6 years from now when Microsoft has version 3 of its virtualization technology? (We all know Microsoft generally gets it right by version 3)
  • You Have to Realize...

    ...that these marvelous Wall Street analysts get paid millions of dollars to GUESS what a stock will do. A pretty good racket.
  • advise to VMWare

    We're using the free version and it's a great product. I'd love to upgrade to the paid version, but the cost difference between free and $7000 (correct me if that's wrong) is just too great, especially for smaller companies.

    • RE: Advice to VMWare

      My clients generally pay about $2500/server for ESX Server so $7000 seems a little high. Plus, when you start to scale VMWare Server (the free product you use), the performance suffers tremendously.

      • thanks

        Thanks for the update! Glad to hear is was on the high side...

  • VMware

    Well Boys and Girls I think that if you Buy at $48.00 per share and sell at $125.00 as a lot of people did...You do the math....As for me Ill keep my pultry 125 shares and wait to see what has happened...sleep well
  • Virtualization is no secret anymore

    If i run 10 windows VM's on the server enterprise virtual server i pay 1 windows license. Thats roughly 3000$ depending on your server. If i run VMWare i have to pay 10 licenses. Even if you don't factor in the cost of ESX it will be way more expensive.
    The benefits will be exactly the same.

    I am not saying virtual server is better than VMWare but virtualization is no secret anymore. The picture gets even worse if you use open source operating systems.

    The picture gets much worse if you check what you can achieve if you setup your own heartbeat server and design a proper DR strategy.
    The other side of good DR is, that a sloppy installation or not 99% reliable virtualization will get you to 100% ... for free.

    If you look at how enterprises use virtualization today you will quickly realize that the market for commercial virtualization is shrinking.
    The same is not true for consulting and support.
  • Despite how things may appear at first glance...

    VMware still has a viable market available to them if they'd only choose to tap it. It seems as though every commercial virtualization package is targeting the enterprise market. While I can't blame them, it might also be beneficial to target the end user market as well. There are features of a pc that are still yet to be fully implemented in any VM, and there are a great many end users who would willingly fork over a $100+ license fee to get a VM suitably capable.