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VMware's first quarter sales were up 7 per cent thanks to a huge jump in its services revenue, but the virtualization house warned it's likely to report a first-ever drop in revenue next time around.

The expected shortfall was blamed on a transition to VMware's newest product, VMware vSphere 4 - and the crap economy.

"We expect our second quarter revenues will be flat, or even down, compared to the second quarter of 2008," VMware financial chief Mark Peek said in a prepared statement.

In the company's Wednesday earnings call, CEO Paul Maritz surprisingly added that he doesn't expect a short-term "pop" in revenues because of the release of vSphere.

"VSphere's going to have a very profound effect, but it's going to take several months for it to fully work its way into the marketplace," Maritz said.

In the meantime, VMware enjoyed a respectably healthy Q1 despite the abundance of tightened wallets across IT.

Total revenues for the quarter were $470.3m, an increase of 7 per cent compared to the same period last year. License revenue declined 13 per cent from Q1 2008 to $257m, but the slide was offset by a 48 per cent increase in VMware's services revenue to $213.3. Cash from services totaled about 45 per cent of the company's revenues in the first quarter, compared to 33 per cent a year ago.

Maritz said the year started very tough. While in January, customers began reporting signs of improvement, it "hasn't translated into people opening their wallets," he said. "Their feet aren't doing what they're mouths are saying yet."

GAAP net income was $69.9m in Q1 2009, up 60% from $43.1m in the same period last year.

Maritz said the company still isn't seeing significant competitor or pricing pressure — which can probably be chalked up to bravado given that Microsoft is breathing down their neck with a rival hypervisor. The CEO added that customers are still interested in virtualization and buying the kit, but the scope and scale of rollouts are smaller than they've seen. That's a result of the economy, according to Maritz.

"Server shipment numbers aren't out yet, but when they do, I don't expect they'll make pretty reading," Maritz said.

All-in-all, the VMware chief called it a "solid" quarter despite the economic climate. ®

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