VMware Impresses But Is the Best Yet to Come?

The virtualization software vendor posted an upside surprise in its first quarter, but industry-watchers are even more interested in what's next for this sector leader.

Interest among enterprise IT buyers in virtualization solutions remains high, as sector leader VMware (NYSE: VMW) delivered better-than-expected first-quarter sales and earnings and raised estimates for its full fiscal year.

VMware pleasantly surprised analysts and shareholders Tuesday when it returned a profit of $133 million, or $0.32 a share, on sales of $634 million. Revenue represented a 35 percent improvement from a year ago while the $0.32 a share profit was well above the consensus estimate of $0.28 a share (versus $0.25 a year ago), according to analysts surveyed by Thomson Reuters.

Wall Street responded by sending VMware shares up $5.14 a share, or 9 percent, to $61.66 in Wednesday trading. More encouraging, VMware executives during a conference call with analysts revised the company's full-year revenue expectations to between $2.63 billion and $2.73 billion, up at least 30 percent from the prior year.

For the IT sector, those numbers signal one thing: Enterprise virtualization technology is red hot and in high demand.

"The quarter's strong performance reinforces our position that virtualization is becoming a cornerstone for customers' IT strategy, particularly since it enables them an evolutionary path forward to cloud computing," CEO Paul Maritz said following the earnings report.

"With this broad acceptance of virtualization, it allows us to maintain an innovative and aggressive strategy to help remove complexity from IT and deliver on our vision of enabling IT-as-a-service," he added.

Next steps for the enterprise virtualization, SaaS leaders

It's this concept of IT-as-a-service, particularly from a virtualization standpoint, that has investors and virtualization competitors such as IBM (NYSE: IBM), Microsoft (NASDAQ: MSFT) and Oracle (NASDAQ: ORCL) waiting with bated breath for next's week much-ballyhooed joint announcement from VMware and on-demand CRM and business applications provider Salesforce (NYSE: CRM).

While exact details are sketchy, the blogosphere is abuzz with rumors of some kind of combined infrastructure-as-a-service or virtualization-as-a-service announcement from two of the tech industry's most prominent and cutting-edge software providers.

As Salesforce looks to expand its empire beyond the nuts-and-bolts CRM applications now threatening established enterprise software vendors like Microsoft, SAP (NYSE: SAP) and IBM, all indications are the software-as-a-service leader is poised to incorporate the benefits of VMware's virtual machines into a subscription-based service hosted in the cloud.

Until the details are unveiled April 27, industry-watchers will simply have to live with signs that VMware appears to have shaken off some of the fits and starts that aren't uncommon with emerging sector leaders to ride what appears to be a steadily improving IT spending market.

To wit, VMware's first-quarter licensing revenue improved 21 percent from the first quarter of last year to more than $312 million. Its services revenues, a key indicator not only of the popularity of its core desktop and server virtualization apps but also the perceived value-added resources that enterprises are now willing to pay for, surged up 51 percent to more than $322 million.

These encouraging trailing indicators, combined with Maritz' ebullient outlook for the rest of the year, led a pair of prominent Wall Street analysts to issue beaming research reports in their aftermath.

"We like VMware because we believe customers will increasingly invest in its solutions as the technology industry shifts to computing as a service," JMP Securities analyst Patrick Walravens wrote in research note Wednesday morning. "We view this shift as the most profound change in the technology industry since the introduction of the personal computer in the early 1980s."

Walravens also raised his 2010 profit target to $1.30 a share from $1.13 a share and upgraded the stock from a "market perform" rating to "market outperform."

Meanwhile, Morgan Keegan's Brian Freed also boosted his 2010 earnings forecast to $1.31 a share and set a 2010 revenue target of $2.64 billion while reiterating his "market perform" rating with what he characterized as "an increasingly positive bias."

"We were impressed with VMware's solid execution in the quarter and see VMware as an attractive investment vehicle for longer-term oriented investors focused on the opportunities in cloud storage," Freed wrote in a separate research note.

Last quarter, VMware easily hurdled analysts' estimates, returning a profit of $127 million, or $0.27 a share, on sales of $608 million.

"We're seeing a major shift in our industry," Maritz said during the earnings call with analysts. "The great recession of 2009 convinced customers they can't prop up aging infrastructure forever. We believe virtualization is key to this."

Larry Barrett is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.




Tags: cloud computing, virtualization, earnings, Salesforce, VMware


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