VMware Reports Strong Q1 Growth, Cites Services Strength

VMware on Tuesday said increased demand for services combined with greater-than-expected IT spending propelled strong revenue and income growth during its first fiscal quarter of 2010.

The company also said it was able to maintain price discipline despite aggressive competition from unnamed rivals.

VMware reported revenue for its first quarter of 2010 of $634 million, up 35 percent over the $470 million the company reported for the same period in 2009.

The company also reported a profit of $78 million, or 19 cents per share, up from $70 million, or 18 cents per share, last year.

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Revenue from the U.S. market was $317 million, up about 30 percent over last year compared to a 40 percent increase in non-U.S. revenue.

VMware reported strong growth in both license and services revenue. License revenue was up 21.4 percent over the same period last year, while services revenue was up by 50.1 percent, led by a 52.1 percent increase in maintenance revenue.

As a result, services revenue accounted for 50.7 percent of total revenue, VMware reported.

Mark Peek, VMware CFO, said the company was able to maintain strong price discipline during the quarter, keeping prices similar to what they were in 2009.

The ability to grow without discounting prices beyond the norm indicates the importance customers placed on the company's technology as a base on which to build private clouds, Peek said.

"The message from our customers is, cloud computing is not a destination. It is an architecture," he said.

Next: VMware CEO Paul Maritz Outlines Coming Upgrades

Paul Maritz, president and CEO of VMware, said his company plans to unveil significant upgrades to some of its key technologies in 2010.

For instance, VMware plans to increase the scalability and automation of its vSphere server virtualization platform as a way to make it more suitable for building private clouds, Maritz said.

Also planned are increased configuration control, compliance management, and discovery capabilities for its vCenter virtualization management application thanks to its acquisition in February of technologies from parent company EMC.

VMware also plans to introduce a new version of its VMware View desktop virtualization technology, and continue development of its Zimbra cloud-based, open-source collaboration suite, which it acquired from Yahoo in January, Maritz said.

Maritz also said VMware is not concerned about increasing competition. He declined to mention specific competitors by name, but Microsoft with its Hyper-V has been the most active company in terms of trying to break VMware's near-stranglehold on the server virtualization market.

"We are more than holding our own against our competitors," he said. "But we have noted that they are determined, and have deep pockets."

Tod Nielsen, COO of VMware, said that the company is gaining traction in the SMB market.

SMB customers, once they start down the road toward virtualization, tend to virtualize their IT environments more quickly than larger companies because they have fewer servers and because their smaller IT departments can rapidly benefit from the technology, Nielsen said

VMware is expecting the growth of desktop virtualization to start approach a tipping point at which virtual desktops start to exceed physical ones in part because there is a large number of obsolete desktop PCs which need to be refreshed, Nielsen said.

That tipping point could be late this year or sometime in 2011. "We're going to make sure, when it does tip, we're ready for it," he said.

When asked about VMware's acquisition plans and the kind of companies it might be interested in acquiring, Maritz answered that VMware is looking to add new technology and not merely increase revenue.

He declined to be more specific, saying, "We don't want to drive prices [of potential acquisitions] up."

Looking forward, Peek said VMware expects second quarter revenue to be between $635 million and $665 million, up from the $456 million reported last year. However, he said, that increase is due in part to revenue from recent acquisitions.

Revenue for all of 2010 is expected to be between $2.625 billion and $2.725 billion, up between 30 percent and 35 percent over 2009, Peek said.