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VMware has Solid Quarter, Maintains Guidance

Despite the financial meltdown during the last part of its third fiscal quarter, VMware chalked up record revenues, with the $1.4 billion in revenue coming in so far this year exceeding its total for 2007.

Net income was $83 million, or 21 cents per diluted share, up almost 28 percent from the $63 million, or 18 cents per diluted share year over year (YoY). Revenues for the third quarter were $472 million, 32 percent up YoY.

VMware (NASDAQ: VMW) Chief Financial Officer Mark Peek said during the company's third quarter earnings call on Tuesday VMware is "cautiously" maintaining its 2008 revenue guidance for annual growth of 42 percent to 45 percent YoY, but warned that chances are strong that the lower figure is more likely. "Economic growth must come about quickly for us to target the mid- to high end of this range," he added.

Meeks said VMware's business is beginning to follow "traditional seasonal patterns," and he expects results for the first quarter to "decline substantially" from fourth quarter results, as he previously mentioned during VMware's second quarter earnings call in July.

That decline will also be due to economic concerns, because customers "continue to proceed cautiously in capital expenditures, forgoing larger discounts for enterprise-wide orders and choosing to buy for present needs," Meeks said.

However, "we are in this business for the long term, and expect to maintain our leadership, managing the business prudently, and have great faith in our ability to execute on the unique opportunity in front of us," Meeks added.

Just going through changes

That opportunity is abroad, as it is for many companies. "We have significant opportunities in the near term to grow our business in Asia and emerging markets," Maritz said. "In 2009, in addition to focused investments in product capability, we'll expand in sales and marketing capabilities in these high-growing areas of the world."

Those areas include Japan, Germany, Korea and what's known as the "brick countries" in the IT industry -- India, China and Brazil. "In China, we hired our first country manager recently, and are aggressively increasing our sales force," Meeks said.

International revenue grew 43 percent year-over-yar to $224 million, Meeks said, adding that U.S. revenue constitutes 53 percent of VMware's total revenue. Because VMware's prices worldwide are quoted in U.S. dollars, it "may be impacted by high volatility in exchange rates," he warned, but added that VMware is "very confident" in its long-term health.

Continuing on the theme of caution that he and CEO Paul Maritz outlined during the previous quarter's earnings call, Meeks said the company has slowed its hiring in the second half, taking on a total of 200 people in the third quarter.

Hiring in the fourth quarter will be based on a restructuring of the company. VMware will "organize at the top level into the server and desktop product lines as well as along major geographical lines" as it moves into 2009, CEO Maritz said. He expects to hire senior people to manage these product lines and will look to promote from within corporate ranks as well.

Coping with challenges

Maritz also addressed two issues that have kept the grapevine buzzing: The possible loss of engineers in the wake of the abrupt departure of his predecessor, Diane Greene, who co-founded the company with her husband Mendel Rosenblum; and competition from Microsoft (NASDAQ: MSFT).

"Despite the market turmoil and the loss of Diane, her husband Mendel and Richard Sarwall, our organization is stepping up to challenges, and we're asking internal people to take more responsibility," Maritz said. Observers had speculated that there would be an exodus of engineers from VMware after Greene left.

As for Microsoft, VMware takes its archrival "very seriously, and we keep our eyes very closely focused on them," Maritz said. Noting that VMware "did not lose any customers" to Microsoft, he pointed out that Microsoft "is still behind in terms of their product roadmap and we don't see them catching up to us until the next 12 to 24 months, by which time we hope to move on."

Microsoft today unveiled System Center Virtual Machine Manager (SCVMM) 2008, which is the management piece of its virtualization product line. This manages both physical and virtual systems, unlike VMware's products, which only manage the virtual.

In closing, Maritz pointed out that things are "uncertain" for 2009 but, given VMware's firm technology foundation, financial resources and the strong demand for virtualization, "VMware will be one of the companies that weathers this current storm well and will remain a stronger and fitter company ready to exploit opportunities that open up."