Services Drives Healthy VMware Revenue, Earnings

VMware on Monday proved it can still show virtualization market momentum, reporting healthy revenue and earnings growth for its third fiscal quarter.

Strong sales over all its product lines and geographies, especially in the U.S. Federal government market, as well as increasing renewals, contributed to VMware's growth for the quarter.

VMware reported revenue for its third quarter, which ended September 30, of $714 million, up 46 percent compared to the $490 million it reported for the third quarter of 2009.

The company also reported income of $85 million, or 20 cents per share, compared to $38 million, or 9 cents per share, for the period last year.

The record quarterly revenue comes on strong growth in VMware's vSphere cloud management software, said CFO Mark Peek. "Our customers are looking to VMware to make cloud computing a reality," Peek said. "It is clear that virtualization is the cornerstone to the cloud."

Next: Services, Renewals Revenue Outpacing New Licenses

VMware's services revenue rose faster than that of new licenses. The company's revenue included $343 million in license sales, up 43 percent over last year, and $371 million in services, up 48 percent over last year.

Customers are renewing contracts at higher rates than their original contracts, Peek said. The average renewals contract is for three years, he said.

VMware is also seeing strong growth in ELAs (enterprise licensing agreements) continuing since the fourth quarter of 2009, Peek said. Prior to that quarter, the company booked very little in terms of ELA revenue, he said.

Growth in third quarter sales and income were also driven by higher average selling prices thanks to a shift towards higher-priced products by SMB customers and pricing discipline by VMware, which cuts down on discounting, Peek said.

VMware is also seeing strong growth in its VDI (virtual desktop infrastructure) business, with growth rates 10 percent higher than overall revenue. "This is an emerging market opportunity," said VMware COO Tod Nielsen.

Next: Slower Growth Forecast

Geographically, the U.S. continues to be VMware's largest market, accounting for about $362 million, or 47 percent, of total revenue for the third quarter.

VMware expects revenue and earnings growth in the fourth quarter of 2010 and in all of 2011, although the growth rate may not be as strong as it has been, Peek said.

The company expects revenue for the fourth quarter to hit $790 million to $810 million, up between 30 percent and 32 percent over the fourth quarter of 2009, Peek said. Non-GAAP earnings in the fourth quarter are expected to be up between 29 percent and 30 percent over the third quarter, with GAAP earnings falling about 15 percent and 16 percent below non-GAAP earnings, he said.

For all of 2010, revenue is expected to grow between 39 percent and 40 percent over 2009, Peek said.

Revenue growth for the first quarter of 2011 is expected to be about 25 percent compared to the first quarter of 2010, Peek said. That compares to a year-over-year growth rate of 35 percent for the first quarter of 2010.