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VMware double-stuffs profits in Q4

Revenues rise 37%

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Server and desktop virtualization juggernaut VMware said that it saw the strongest "budget flush" in the fourth quarter of 2010 since it went public more than three years ago, and the extra spending helped pump revenues a bit and profits a lot.

In the quarter ended December 31, 2010, VMware reported revenues of $835.7m, up 37.4 per cent, and net income more than doubled to $119.9m, up 212.5 per cent. Earnings per share in the quarter were precisely double, at 28 cents. For the full year, VMware had $2.86bn in revenues, up 41.2 per cent, with net income of $357.4m, up 81.4 per cent.

Mark Peek, VMware's chief financial officer, said in a call with Wall Street analysts that the IT spending environment has improved over 2009 and that the company, which sells products to dice and slice servers and desktops to allow them to run multiple operating systems and their workloads simultaneously, did well in the face of "persistent and determined competition".

In Q4, VMware had software license revenues of $422.3m, an increase of 38.8 per cent compared to the year-ago period. Services revenues, which is dominated by software maintenance and support fees for its hypervisors and management and development tools, rose to $413.3m, an increase of 36 percent. Peek said that professional services revenues is still a small part of the overall business, but hit $68m and rose by 18 per cent.

Sales in the United States hit $439m, up 39 percent, while international sales reached $396m, up 35 per cent. Peek said that revenues were balanced across product lines and geographies, but he added that the popularity of low-cost vSphere Enterprise and Enterprise Plus licenses pushed down the average license sales price in the quarter.

Peek said that enterprise license agreements represented 26 per cent of bookings in the quarter, but VMware does not provide a bookings figure. (Wall Street was guessing somewhere around $1.2bn in bookings on the call, which Peek did not confirm). During the quarter, VMware inked two eight-figure deals, and one of them ironically was with none other than VMware's parent company, disk array maker EMC.

Everybody is wondering if 2011 is the breakout year for virtual desktop infrastructure sales, by which is meant a number of different approaches to virtualizing desktops and laptops so they can run multiple operating systems or be managed centrally at a lower cost than is possible with OSes running on bare metal.

Peek did not give a lot of hints about whether or not we should expect a "hockey stock" adoption rate for VDI technology, such as VMware's View and Citrix Systems' XenDesktop, but when pressed said that the fourth quarter was a record quarter for VMware's desktop products, which include the Workstation hypervisor for Intel-based PCs as well as the View VDI package, but which does not (oddly enough) include the Fusion hypervisor for Apple platforms. He added that for the full year in the United States, desktop products accounted for 10 per cent of revenues. (Presumably Peek meant license revenues, but maybe not).

Peek said that VMware believed that server shipments to go down in 2011, but cautioned about thinking that VMware's fate was correlated directly with server shipments. The rate of server virtualization is increasing, and while Peek did not say this, I will: increasing virtualization will start putting pressure on shipments, as I think it did in 2010.

Paul Maritz, VMware's president and chief executive officer, was optimistic but cautious about 2011. "We do see things getting better, but I think the whole industry saw an uptick in Q4," Maritz said on the call, adding that he was not sure if the spending level in Q4 "has long legs".

To that end, VMware is planning conservatively for the year. Looking ahead, VMware expects revenues in the first quarter to be somewhere between $800m and $820m, which represents 26 to 29 per cent growth. Peek said that license revenues in Q1 2011 will shrink sequentially, and possibly by as much as 10 per cent compared to Q4. For the full year, VMware is penciling in revenues of between $3.45bn and $3.55bn, which represents growth of between 21 and 24 percent over 2010's levels. License revenues for the 2011 year are projected to rise by between 14 and 19 per cent.

Peek said that VMware would continue to hire people at a "brisk pace" to support is aspirations in the cloudy infrastructure and application development arena. The company did seven acquisitions in 2010, adding around 600 people, and added another 1,400 to bring its worldwide workforce up to 9,000.

VMware ended 2010 with $1.9bn in deferred revenues, $1.63bn in cash, $1.7bn in short-term investments, and a debt of $450m due to parent EMC. That is a formidable war chest, and one that VMware will need to take on Microsoft and its partners, OpenStack and its enthusiasts, Red Hat and its adherents, and a few other players that have some skin in the desktop and server virtualization game. ®

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