Wall Street scores VMware's Q4 results an error

Computerworld - VMware Inc. had $1.33 billion in revenue during 2007, an 88% increase from the year before. But the virtualization software vendor, which reported its latest financial results on Monday, didn't meet Wall Street's fourth-quarter expectations, and its stock price was hit hard in after-hours trading.

The Palo Alto, Calif.-based company also toned down its business outlook for this year, forecasting a 50% increase in revenue for 2008 as a whole. VMware officials cited several reasons for the reduced growth rate, including the increasing size of the company's revenue base, which makes it harder to sustain a meteoric rise in sales.

But they also acknowledged that there is more competition in the virtualization market, even if it was something of a backhanded compliment to rival vendors. For instance, Mark Peek, VMware's chief financial officer, said during a conference call about the results that there is "an increasing number of competing companies marketing their intent to introduce virtualization products."

Even so, Peek's comments didn't stop VMware's stock from falling sharply after the fourth-quarter results were announced. The stock, which had closed at $83 per share at the end of regular trading hours yesterday, tumbled into the mid-$60 range during after-hours trading sessions.

VMware said its fourth-quarter revenue totaled $412 million, while profits during the quarter more than doubled year-over-year to $78 million. That amounted to 19 cents per share, but financial analysts had expected earnings to come in at 24 cents per share.

During the conference call, VMware president and CEO Diane Greene sent out a message that appeared to be aimed at the company's user base.

"Automation is the next stage for virtualized infrastructure," said Greene, who added that the company plans to continue trying to make it simpler for users to run their data centers. She pointed to some recent products, now in beta-testing, that are intended to accomplish that goal.

One example was a recently release beta of an upcoming VMware Stage Manager tool for managing the testing, configuration and production deployment of virtual systems. The company has also shipped a beta of Site Recovery Manager, which is designed to automate disaster recovery.

Greene vowed that VMware, as well its business partners, will deliver many more products focused on business continuity, desktop management and security.

VMware is facing increasing competition from Citrix Systems Inc., which acquired open-source virtualization vendor XenSource Inc. last year, and from Microsoft Corp., which last month released a beta of Hyper-V, a virtualization hypervisor that will be built into Windows Server 2008. In addition, both Oracle Corp. and Sun Microsystems Inc. announced their entries into the virtualization market last fall, the former with its Oracle VM software and the latter with a product line called xVM.

Charles King, an analyst at Pund-IT Inc. in Hayward Calif., said that VMware's "greatest strength at this point is in the fact that they've got a very mature product and set of services that give them the ability to move forward with next-generation functionalities."

Automating management procedures will be particularly important for customers with large virtual server installations, King said. But he added that smaller companies just moving into virtualization may also see benefits from the upcoming tools.

VMware's biggest challenge, King said, will be with Microsoft, "which is going to be bundling virtualization into every product they have."

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