VMware imposes hiring freeze, forms separate business units

Changes made to ride out the economic storm, new CEO says

Three months after being made VMware Inc.'s CEO, Paul Maritz announced changes at the company that are designed to help it ride out the economic storm while at the same time changing from a fast-growing start-up into a mature software company.

The changes include implementing a hiring freeze, or "hiring pause," as Maritz put it, that started during the third quarter and will probably last into 2009. He will also divide VMware into separate business units to handle different areas of product development and appoint new senior executives to manage those divisions.

The changes were announced after VMware reported solid third-quarter financial results Tuesday, including profits that were ahead of expectations. But they also come as the IT industry braces for an expected slowdown in customer spending, and as VMware in particular exits a heady period of rapid growth.

Revenue at the virtualization software company grew 37% in the third quarter to $472 million. That compared with growth of 54% in the second quarter, 69% in the first and 80% in the fourth quarter of last year.

"VMware is coming off a period of very rapid growth, so it's a healthy thing in any case to take stock and make sure we have people focused on the right areas," Maritz said during a conference call in reference to the hiring freeze. "But it's also too soon to say what will happen in 2009" in terms of customer spending, he said.

"We'll suspend new hiring except for important and strategic hires," Maritz said. "We'll continue this into the fourth quarter, and frankly into 2009 as well."

The company joins SAP AG, among others, in its decision to limit hiring amid the economic slowdown.

Maritz said dividing the company into separate product divisions will help it execute on its plans while it continues to expand. He didn't say how those divisions would break down. They each will have a separate research and development group but will share a common sales and marketing force, he said.

"We're still working our way through the details; our intent is to have them ready and implemented as we go into 2009," Maritz said. The company will hire or promote a senior executive to run each division, he said.

The move comes as VMware expands its technology road map into new areas. At VMworld in September, the company said it would build a "virtual data center operating system," including new products for virtualizing not only servers, but also network and storage gear. It is also developing products to let companies link their data centers to those of cloud computing service providers.

The executive changes may also help address turmoil that hit VMware's upper ranks. Diane Greene, its former CEO and co-founder, was ousted earlier this year. She was followed soon after by Chief Scientist Mendel Rosenblum, who is Greene's husband, and Richard Sarwal, who led research and development. Maritz addressed those departures on the call.

"My first order of business was to make sure the transition from Diane to myself went as smoothly as possible," he said. "As with any transition, we've had our challenges there, but I can report that we are making our way through them and moving ahead."

VMware will also divide its sales division into geographic regions, each with its own profit-and-loss responsibility and its own senior manager, Maritz said. The company thinks it can expand significantly in Japan, Korea, Brazil, Russia, India and China, among others, he said.

Maritz also discussed competition from Microsoft Corp. Some customers delayed purchases in the quarter to do side-by-side comparisons of the companies' products, he said. "By and large those worked in our favor," according to Maritz. "We did not see any major losses to Microsoft."

He argued that Microsoft is still behind VMware with its virtualization technology. "We don't see them catching up to us until the next 12 to 24 months, by which time we will have moved on," he said.

Executives were cautiously optimistic on the call but acknowledged that VMware's growth will continue to slow as it becomes bigger and the virtualization market matures. The company will start to follow the seasonal trends typical of the industry, which means its first-quarter revenue will likely decline compared to the fourth, said Mark Peek, the company's chief financial officer.

The economic climate prompted some customers to avoid long-term enterprise license agreements during the quarter and buy short-term licenses instead, Peek said.

Meeting financial targets in the quarter was "certainly very challenging," Maritz said. "As we went into September, we saw uncertainty set in in a big way."


Copyright © 2008 IDG Communications, Inc.

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