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VMware busts through billion dollar quarter

Headman Maritz expects Microsoft to 'come back at us'

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Server virtualization juggernaut VMware has busted through its first billion dollar quarter, beating Wall Street estimates for the fourth quarter of 2011 in both sales and profits.

Anyone – this means you, Red Hat, Citrix Systems, and Microsoft – that thinks they can knock out VMware in server virtualization should consider this: VMware's virtual server business now rivals the revenue stream that IBM gets from its Power Systems and System z mainframe physical server businesses (individually), is roughly the same size as the systems business at Oracle, and is larger than the Itanium-based server business at HP.

As far as enterprise data centers are concerned, nobody ever got fired for buying IBM VMware. It is the only way to explain why, despite competition coming at it from all angles and prices that customers complain about, that VMware just keeps on a-growing.

In their fourth quarter ended in December, VMware pushed $513.8m in software licenses for its myriad virtualization tools, up 21.6 per cent compared to the year-ago period. Services revenues rose an even more impressive 32.2 per cent, hitting $546.5m. All told, the company booked $1.06bn in sales, up 26.9 per cent – and even with all of its costs on the rise, president and CEO Paul Maritz kept an iron hand on costs and boosted net income by a stunning 67.2 per cent to $200.4m. That means VMware us bringing nearly a fifth of its revenues to the bottom line, and that is big time in any era of the IT racket.

You might think that the launch of the ESXi 5.0 hypervisor, the vSphere 5.0 management stack, plus vCloud extensions for cloud management, which all came out last summer, no doubt helped VMware have a strong finish to the year. But software license sales actually cooled quite a bit as 2011 came to an end, perhaps thanks to server refresh cycles being delayed by Intel and AMD, or perhaps because customers are just jumpy about the global economy.

For the full year, VMware's sales rose by 31.8 per cent to $3.77bn, with license sales of $1.84bn (up 31.4 per cent) and services revenues of $1.93bn (up 32.3 per cent). The company exited 2011 with $4.51bn in cash and short-term investments, $2.71bn in unearned revenues, and a $450m note to parent company EMC.

The company spent $380m in 2011 on capital expenditures, mostly to upgrade its Palo Alto campus, as well as $650m on share buybacks and $300m on eight acquisitions. VMware now has over 11,000 employees and added over 2,000 people last year, including those acquisitions.

Mark Peek, VMware's CFO, said in a statement that the company expects sales of between $1.015bn and $1.04bn in the first quarter, an increase of between 20 and 23 per cent compared to Q1 2011.

Welcome to the server business, VMware, where the first quarter tends to be a bit tough because everyone is hung over from the prior Q4 spending binge.

For all of 2012, Peek said that VMware expects to have sales of between $4.475bn and $4.6bn, which would be an increase of between 19 and 22 per cent over 2011's sales. He added that the company expected software license sales in 2012 to rise at only between 11 and 16 per cent compared to 2011. So growth is expected to slow going forward.

VMware is starting to saturate its server virtualization market, particularly in the US, but is moving up the stack with platform cloud tools such as vFabric and Cloud Foundry, and PC and application management software such as Harmony and View.

In a conference call with Wall Street analysts after the market closed, Peek said that VMware is seeing lots of interest in the open source variant of Cloud Foundry, and that a commercialized version of this platform cloud layer would be available later this year.

Peek added that View 5 virtual desktop software was getting traction, particular in overseas markets, and that the various client, cloud, and systems management tools outside of the core vSphere stack were seeing higher attach rates during server virtualization product renewals.

Various management tools accounted for 10 per cent of bookings in the fourth quarter of 2011 – which is all Peek would say about these tools, since they are not yet broken out in the financial reporting and vSphere represents the bulk of the company's revenues.

Peek also said that the vSphere Enterprise Plus, the top-end vSphere SKU, accounted for 30 per cent of bookings in the fourth quarter, and that the company had five deals in excess of $10m each that accounted for less than $100m in aggregate sales.

ASPs for vSphere tools were flat, year-on-year. VMware had five $10m-plus deals in the first quarter of 2011 and Peek said he did not expect this to happen in Q1 2012. So the compares will be tougher for Enterprise Plus going forward, at the same time the economy in Europe and the US are jittery. But luckily for VMware, Asia is still exploding and virtualization is still red hot there.

That said, Peek told Wall Street that VMware would not be looking for margin expansion in 2012 – nothing like it had in 2011, at least.

Maritz said that the competitive environment with Microsoft, Red Hat, and Citrix had not changed appreciably in 2011, but he said that VMware expected for Windows Server 8 and Hyper-V 3 to come out later this year and take a run at VMware.

"We're expecting them to come back at us again, and we’re prepared for that," Maritz said of his former employer. ®

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