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VMware's Q2 Profit Soars On Licensing, Services Growth

VMware's virtualization business kept chugging healthily along in Q2, driven by strong growth in enterprise licensing sales and professional services.

VMware's Q2 profit nearly tripled to $220 million, or 51 cents a share, while revenue rose 37 percent to $921 million. Excluding items, VMware's net income was $235 million, or 55 cents per share, easily surpassing the 47 cents per share that analysts polled by Thomson Reuters had been expecting.

VMware's Q2 licensing revenue rose 44 percent to $465 million, while software revenue, which VMware defines as software maintenance and professional services, grew 30 percent year-over-year to $456 million. Operating income was $291 million, up 56 percent from last year's quarter, while operating cash flow grew 114 percent year-over-year to $463 million.

VMware investors seemed pleased with how things turned out, as VMware shares rose more than 6 percent to $112.74 in Tuesday after hours trading.

However, as they've done in the past few quarters, VMware executives struck a cautionary tone when discussing the outlook for fiscal Q3. VMware's Q2 licensing revenue received a boost from several early enterprise licensing agreement renewals, but CFO Mark Peek said the company expects ELAs to decline between 5 and 10 percent sequentially in Q3.

Further muddling VMware's Q3 licensing revenue outlook is the uncertainty around the federal budget, and the potential for "short term disruption" in licensing deals closing as customers and partners transition to the new vSphere licensing model, Peek said during the call.

VMware previously pegged vSphere licensing to the number of server cores, but vSphere 5 licensing is based on the amount of memory that customers allocate to virtual machines on the host. Customers haven't responded positively to the change, but during the call, VMware CEO Paul Maritz said 95 percent of customers won't be affected by it.

VMware expects Q3 operating margin to drop sequentially by 260 to 360 basis points due to increased head count and approximately $53 million in costs associated with the campus expansion it announced in May. During the call, Peek also noted that VMware intends to keep expanding its technology portfolio through M&A, which "could cause lumpiness" in the company's results.

For Q3, VMware expects revenue of between $915 and $940 million, a year-over-year increase of 28 percent to 32 percent. For its fiscal 2011, VMware is forecasting revenue between $3.65 billion and $3.75 billion, up 28 percent to 31 percent from its fiscal 2010.

Maritz said VMware's unveiling last week of vSphere 5, as well as other key updates to its cloud infrastructure stack, will help customers follow VMware's lead and start talking advantage of the efficiencies of the cloud model.

"We took a big step forward with the release of vSphere 5 into production, which provides new functions in scale and automation," Maritz said in the call. "Our cloud stack will help customers on their journey to higher levels of virtualization, and help them get more value from their virtualized infrastructure."

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