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VMware surfs virtualization wave in Q1

SMB expansion balances enterprise discounting

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VMware has been able to more or less hold the line on its pricing for its enterprise server virtualization tools despite intense competition from Microsoft and Citrix Systems. But with the first big wave of enterprise license agreements coming up for renewal, the virtualization juggernaut has had to start discounting a bit.

Luckily, VMware is making it up in volume just fine by offering cheaper virtualization tools to small and medium businesses, and pushing out into the service provider racket too.

In the first quarter ended in March, VMware did a little better than expected, the company's top brass said in a call with Wall Street analysts after the market closed yesterday (April 19). Revenues were up by 33 per cent, to $843.7m, in the quarter, with license sales of $419m (up 34 per cent) and services sales of $424.7m (up 32 per cent).

Net income was up a very impressive 60 per cent, to $125.8m, with VMware able to bring about 15 per cent of revenues to the bottom line – something that companies who have a monopoly in any subset of the software racket should be able to do if they are running properly. (No one is saying VMware hasn't earned what is essentially a monopoly on virtualizing Windows-based servers in the data center.) That higher net income was delivered despite a 21 per cent increase in research and development spending, to $41.9m, and a 40 per cent increase in sales and marketing spending.

Mark Peek, VMware's chief financial officer, said in the call that VMware's service provider program, which seeks to establish VMware's ESXi hypervisor as the virtualization layer of choice among cloudy infrastructure sellers, now has 3,500 partners. A superset of VMware's hypervisor tools, called vCloud and providing a fabric for managing server slices on a large scale, continues to get traction as well, with Softbank signing up to use vCloud for its infrastructure cloud services. Verizon and Terremark (the former just ate the latter) had inked deals with VMware already to support vCloud, and so have SingTel, Bluelock, and Computer Sciences.

On the software sales front, Peek said that enterprise license agreements (ELAs) with large customers represented 22 per cent of bookings during the first quarter, and that the company had five transactions that were in excess of $10m. Those big deals made the ELA pot bigger than VMware had expected. However, Peek said that the "blended vSphere ASPs" were down slightly in the quarter because of expanded sales of products aimed at small and medium businesses, which have lower price tags and more features than VMware was offering a few years back, and due to higher discount rates on the larger ELA contracts.

Software maintenance and support revenues were $364m, up 36 per cent, in the first quarter, with customers buying, on average, more than 24 months of support. Professional services revenues hit $61m, up only 13 per cent and that increase driven mostly by acquisitions.

VMware's sales outside of the United States exploded in the quarter, up 40 per cent to $444m, while sales in the US rose by a more modest 26 per cent to $400m

Looking ahead, Peek said that the company expected second quarter revenues would be in the range of $860m to $880m, which is a growth rate of 28 to 31 per cent. For the full year, VMware anticipates raking in between $3.55bn and $3.65bn in sales, which represents growth of between 24 and 28 per cent compared to 2010. Peek added that the company did not expect to see sequential growth in license revenues from Q1 to Q2 or from Q2 to Q3.

VMware ended the quarter with $3.7bn in cash and investments and with almost $2bn in unrecognized revenue. Customers are starting to virtualize large and complex back-end systems now, including databases, email servers, ERP systems, and such. It is hard to imagine VMware doing better than it is doing. ®

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