Apr
23
VMware Reports First Quarter Earnings – Revenues are Up, Stock is Down
VMware (NYSE: VMW), one of the global leaders in virtualization, reported its first quarter earnings yesterday. The good news is revenue increased 7% over the same quarter last year to $470.3 million, with a profit of 18 cents per diluted share. However, this missed analysts estimates of $474.4 million in revenue with a profit of 20 cents per share. This miss, along with a disappointing forecast for the coming months, sent shares of VMware plummeting. Shares are down over 18% in early trading this morning.
There are some important points in the VMware press release from yesterday, however. One of the most notable pieces of data is an increase in services revenue to $213.3 million, an increase of 48% from last year. This is a very sizable shift in VMware’s business model, with services now accounting for 45% of total revenues compared to 33% a year ago. What troubled investors is a decline in software license revenues, which are down 13% from a year ago. VMware is primarily a software product vendor, and this shift to services could contribute to higher labor costs and issues with scaling growth.
Mark Peek, CFO of VMware, attempted to justify the earnings misses and poor outlook by saying, “…due to the tough economic conditions, we expect customers will continue to keep a very tight rein on their IT spending, particularly new investments. Also during this quarter, we and our extensive ecosystem of partners will begin the transition to VMware vSphere 4. As a result, we expect our second quarter revenues will be flat, or even down, compared to the second quarter of 2008.”
It is true that software companies typically see a sales slump right as a new product is first rolled out. However, analysts are worried for more fundamental reasons. Global Equities Research analyst Trip Chowdhry said, “It’s a serious miss. It is not just the magnitude that is troubling. It is the reason they are giving. There is something fundamentally wrong — either in product strategy or sales execution.”
Despite what Wall Street thinks, VMware is still extremely successful with consistant revenue gains. Most companies in this country are reporting losses this quarter, while VMware is delivering solid profits. Virtualization adoption by companies around the world is on the rise due to cost savings and environmental responsibility. VMware is positioned better than any other software company to capitalize on the virtualization trend.
For more information, see the Reuters article from last night. For information on VMware products and virtualization in general, see SoftwareMedia.
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