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VMware's fiscal roller coaster tumbles through Q2

Will offer ESXi for free

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Wall Street expectations have once again overshadowed VMware's financial results in its second fiscal quarter 2008.

But that's really the story of its life.

The virtualization giant's Q2 revenue jumped 54 per cent from a year ago. GAAP adjusted income was $61m, compared to $47m year-over-year.

Total revenues for the second quarter were $456m. Broken down: revenues from the US grew 43 per cent to $240, and international revenues grew 68 per cent to $216m.

Cash on-hand exceeded $1.5bn and deferred revenue was $271m as of June 30, 2008.

Certainly not a bad showing. But all eyes were on VMware's financial results today to see its forecast for the full year. The explosively successful company is currently top dog in a new age of increased competition. Analysts are circling to spot a weakness.

Earlier this month, VMware kicked its CEO and co-founder Diane Greene to the curb after the company forecast its full year earnings would be "modestly below" previous expectations of 50 per cent growth over 2007.

As the new boss of only a few weeks making his public debut, former Microsoft exec Paul Maritz specified that the growth will be 42 per cent to 45 per cent for the year.

Investors apparently aren't impressed with the company's definition of "modest." VMware's stock price plunged more than 15 per cent (or is that plunged modestly?) in after-hours trading.

The virtualization house blames the ever-increasing economic headwinds and say that customers are more reluctant to sign long-term contracts now that Microsoft has arrived on the scene with the Hyper-V hypervisor.

Maritz assured investors and analysts today that it's more a matter of customers weighing their options than a loss of sales to Microsoft's rival product, which he calls "much less mature," than VMware's more extensive virtualization offerings.

"I know Microsoft is a formidable, but not invincible competitor," said Maritz. "It can play a long waiting game. But if a competitor has a lead and invests to stay ahead, they can be very hard to catch — even for Microsoft."

But in certain cases, customers are foregoing discounts that come with signing for the long term - and taking shorter contracts.

One analyst noted during VMware's conference call today that the trend may in fact be a return to contract-signing normalcy rather than a downturn. VMware predictably denies the notion.

Still, Martiz admits there's action to be taken. He sees the company entering a third phase of its life. Phase one was establishing the hypervisor, and phase two was going beyond that to be a virtual infrastructure provider for desktops and servers.

The third step will be "dramatically extending virtual infrastructure technology and products to more uses and users," said Martiz.

That means offering lower priced products for VMware infrastructure to target small and medium businesses. It's something VMware desperately needs now that competitors are offering their wares much cheaper, and even free.

Martiz also intends to become less dependent on sales in the US, Europe and Australia by expanding to developing countries. This is a move several big tech companies have been using to avoid economic doldrums haunting the industry.

Free ESXi?

VMware hinted at some upcoming news as well. Martiz said the company expects to seize an opportunity with "one of the largest SaaS providers," to use their software for backup recovery.

More tantalizing, Martiz said the next version of ESXi (the light-weight version of VMware's ESX hypervisor) will arrive in upcoming weeks and will "take the product price to zero."

That's certainly good news. But it was a long time coming. ®

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