VMware Reports Strong Q4, But Says Future Uncertain

The server virtualization leader saw its revenue and earnings grow across the board compared to last year and last quarter, except for professional services, where growth was flat as more of that part of the business goes to its channel partners.

The company declined to provide specific guidance for 2009 due to the economic uncertainty and said it will postpone merit raises in 2009 and cut back on hiring except in certain strategic areas.

The company reported revenue of $515 million for its fourth quarter, which ended Dec. 31. That was up 25 percent over the $412 million the company reported during the same period last year.

The company also reported fourth quarter earnings of $111 million, or 29 cents per share, up from the $78 million, or $0.19 per diluted share, it reported for the fourth quarter of 2007.

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Analysts had been expecting earnings per share of 26 cents on revenue of $510 million, according to thestreet.com.

Revenues for the full year 2008 were $1.9 billion, an increase of 42 percent from 2007. Income for the full fiscal year 2008 was $290 million, or 73 cents per share, compared to $218 million, or 61 cents per share, for 2007.

U.S. revenue for all of 2008 grew 37 percent to $988 million, while international revenue grew 48 percent to $893 million, VMware said.

License revenue in 2008 grew 30 percent to $1.2 billion compared to 2007, while services revenue grew 67 percent to $703 million.

However, while software maintenance services revenue grew compared to the third quarter of 2008 thanks to a growing installed base, professional services revenue was essentially flat quarter-to-quarter, said Mark Peek, VMware CFO.

The reason, Peek said, was the decision to move more of the company's professional services business to its channel partners, a move that VMware expects to continue going forward. In fact, he said, professional services revenue is expected to decline in the first quarter of 2009.

Peek also said that VMware acquired four companies during the fourth quarter, and saw its head count increase throughout the year.

However, Peek said, the current economic outlook is creating a high degree of uncertainty among customers. "We believe the uncertainty is causing customers to be conservative and hold on to their most basic resource -- cash," he said.

Looking at the current quarter, Peek said that VMware is not providing guidance because of the economic uncertainty. However, he said, internally the company expects revenue of $475 million during the first quarter of 2009, up about 8.4 percent over the $438 million reported in the first quarter of 2008.

The company's first quarter 2009 capital spending is expected to be a high single-digit percentage of revenue, and will probably be down from what was spent in the first quarter of 2008, he said.

VMware saw strong growth in accounts that view virtualization as a strategic investment, said Paul Maritz, president and CEO of VMware.

During the fourth quarter, the company signed a record number of new accounts. More than 1,500 customers acquired the company's management and automation products, particularly for deployments related to disaster recovery, Maritz said.

Over 50 percent of enterprise license agreements during the fourth quarter included a desktop virtualization component, Maritz said. "It's gratifying that customers are seriously looking at our [desktop virtualization] offerings," he said. "More than that, they're putting their money on it."

VMware is still competing well against its primary competitors, Citrix and Microsoft, Maritz said. "We see the major competition being the economy," he said.

Customers prefer a dedicated virtualization solution like VMware's over a shared tenancy model like that of Citrix, Maritz said. And Microsoft has yet to be a competitive threat, he said.