VMware Q1 Profits Rise, But License Sales Fall

VMware also said it expects its professional services revenue to stay flat going forward as it continues to depend on its channel partners to do more on the services side.

VMware reported revenue for its first quarter, which ended March 31, of $470.3 million, up about 7 percent from the $438.2 million it reported during the same quarter of 2008. The company earned $69.9 million, or 18 cents per share, up from last year's $43.1 million, or 11 cents per share.

That increase in revenue comes from a 48-percent jump in services revenue, tempered by a drop of more than 12 percent in licensing revenue, however, said VMware CFO Mark Peek.

The drop in licensing revenue is expected to continue as a result of a couple of factors, said Paul Maritz, VMware president and CEO.

Part of the drop is coming from the softening economy, which is causing customers to cut back on spending and only make purchases when needed and "just in time," Maritz said.

Also factoring into the drop in licensing during the second quarter will be VMware's introduction of its vSphere 4 technology, the follow-on to its current VMware Infrastructure 3 and ESX families. Maritz said there will be disruption caused by the new product introduction, especially as customers recertify the technology for their businesses. "I wouldn't look for a short-term pop from vSphere," he said.

However, Maritz said, VMware is not seeing any competitive pressures from Microsoft or Citrix Systems. He said that macroeconomic issues remain the dominant factor, and that while Microsoft is preparing to launch Windows Server 2008 with Hyper-V technology, vSphere "will have raised the bar" in virtualization technology.

Peek also said that macroeconomic factors are the main concern in the short run. "Looking ahead, people are being cautious about large investments," he said. "So it will be up to the macro to see when [licensing revenue] will grow again."

Going forward, solution providers will be an important part of VMware's vSphere rollout, based in large part on the company's successful partner summit held last week, said Tod Nielsen, VMware's COO.

VMware spent nearly a week with partners training them mainly on solution selling and on expanding VMware's business via partnering, Nielsen said. He said that VMware's direct sales also are important, but mainly in how it helps its channel partners.

Also important going forward is working with channel partners to grow the services business around vSphere, Peek said. VMware expects only a modest growth in its own professional services business as partners take a larger role in this part of the business, he said.

Allan B. Krans, senior analyst at Technology Business Research, wrote that VMware "reported its first sequential revenue decline in company history during 1Q '09, and its guidance indicated that more firsts are on the way," including second-quarter revenue that could be flat or even decline year to- year.

"VMware's seen the increasing competition in the market and economic slowdown coming for the past year, and the company's 1Q '09 results are yet another reminder there are wolves at the door," Krans wrote.

Despite the softening in VMware's growth, Krans said that it still looks good compared to that of other software vendors, including IBM, which saw its software drop 6.4 percent during the quarter; Oracle, which saw its revenue rise a mere 1.9 percent; and Microsoft, which is expected to report a drop later this week.

Commoditization of the server virtualization technology also is an issue, Krans said.

"Already free, base virtualization platforms have become rapidly commoditized, forcing VMware to continue moving up the stack to offer higher level management functions to maintain revenue. While this trend may have been inevitable, it was certainly accelerated by Microsoft's entry into the virtualization market, and its decision to offer the base-level hypervisor free of charge. The move may have cut off an easy source of revenue for VMware, but certainly does not signal an end of financial opportunities for the company," he wrote.