VMware: quarter not bad; outlook not good and (ironically) wins a Tech Ed award

Given that VMware ditched its founder in favor of a Microsoft executive two weeks before reporting its Q2 results, one would have thought that the quarter would have shown a company bleeding red. Not so. VMware reported healthy revenue growth, healthy profits and increases in both U.S. and international software licenses. Plus, it is sitting on $1.5 billion in cash. From an enterprise's point of view, there is no urgent reason to worry about the company's financial standing. On the other hand, these Q2 numbers, along with its revised outlook, also point to potentially treacherous financial times ahead.

Specifically, VMware posted a profit (GAAP net income) of $52 million for the quarter, compared to $34 million for Q2 of 2007. It posted revenues of $456 million, an increase of 54% over Q2 '07. Its press release stated:

Second quarter U.S. revenues grew 43% to $240 million from the second quarter of 2007. International revenues grew 68% to $216 million from the second quarter of 2007 driven by strength in Europe and Australia. Software license revenue grew 39% to $284 million from second quarter of 2007. Service revenues, which include support, subscription and professional services, were $172 million, an increase of 85% from the second quarter of 2007.

On the other hand, the high-flying days of the stock's "overvaluation" seems to be over for good. The company projects that its full 2008 revenue is expected to grow 42% to 45% over 2007, which would put it in the range of $1.88 billion to $1.92 billion, the Wall Street Journal says. Analysts were expecting projections of up to $1.96 billion. Its P/E ratio doesn't justify a bounce in its current price, which in November hit a high of $125 and has been spiraling down ever since. Because EMC is its majority owner, the stock's dive over the past 8 months has not been good for EMC either.

The real black mark of the day, though, is that VMware credited its lowered projections to the tough economy. That's not striking the right cord with the Street or with IT execs. VMware's success is based on the incredible ROI that virtualization creates for IT. A tough economy should mean that server consolidation projects waiting on the back burner would come to the forefront. If the company is downgrading its revenue projections because customers are delaying on enterprise license agreements, that really means they are kicking the tires on Hyper-V or Citrix or other alternatives. And given VMware's price structure compared to its new competitors, investors are not impressed.

With a sense of supreme irony, today is also the day that VMware announced it had won a a best product award last month at Microsoft's Tech Ed 2008 IT Professional conference. The award was granted to it in the virtualization category from Windows IT Pro magazine and SQL Server Magazine.

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