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VMware Beats Street; Raises Q4 Outlook

vmware Earnings
VMware (NYSE: VMW) delivered the goods in its third quarter Wednesday, posting a profit of $95 million, or $0.24 a share, on sales of $490 million -- easily topping analyst estimates on both fronts -- and upped its sales forecast for the rest of the year.

Investors sounded their approval in after-hours trading, sending the virtualization software maker's shares up $0.92 a share, or 2 percent, to $45.85 after closing up $0.29 a share ahead of the earnings results.

A survey of analysts by Thomson Financial pegged the Palo, Alto, Calif.-based company for a profit of $0.20 a share on sales of $473 million.

VMware also raised its fourth-quarter sales forecast to between $540 million and $560 million, well above its previous guidance of roughly $523 million.

"We had a solid third quarter and benefited from a weaker dollar in our local currency exchanges as well as strong results from our U.S. federal sector," CFO Mark Peek said in a conference call with analysts.

"While we welcome the improved short-term visibility and our raising our fourth-quarter estimates, we're unsure how long the recovery will take and we're assuming it will be a slow recovery."

Including one-time charges and expenses, VMware pocketed $38 million, or $0.09 a share.

U.S. sales inched up 1 percent from the year-ago quarter to $246 million while international sales rose 9 percent to $244 million. The company exited the quarter with $2.2 billion in cash and short-term investments and more than $1 billion in deferred revenue on its books.

CEO Paul Maritz during the call noted the early uptake of its vSphere suite and thanked his sales team for "bringing home a good quarter in improving but challenging times."

Services revenues, which include software maintenance and professional services, were $250 million, an increase of 33 percent from the third quarter of 2008.

"The sun is going to come up again and people need to start thinking about it," Maritz said. "But they know they need to be cautious and not go out on a limb. The welcome news here is that people are starting to think in longer term horizons and not just immediate survival."

Last quarter, VMware topped analyst estimates when it reported a profit of $0.20 a share on sales of $456 million.

However, the $490 million in sales only represents a modest improvement from the $472 million it recorded in the year-ago period, a clear signal that gap between it and other virtualization software providers such as IBM, Microsoft and Red Hat is narrowing.

Eager to expand its core revenue base from deep-pocketed enterprise customers, VMware, through its vSphere offering, is aggressively targeting small- and mid-sized businesses -- the sweet spot that Gartner and other research firms have identified as the source of significant revenue growth for virtualization software vendors in the near future.

Peek said vSphere was "tracking very well" since its May release, with smaller companies buying its Essentials and Essential Plus applications. He added that because some customers needed to be brought current on their maintenance contracts to install vSphere, the company recorded about $5 million more in maintenance sales than it previously expected.

VMware also closed its $356 million acquisition of SpringSource in the quarter.

Nineteen of the 33 analysts tracking the stock rate it a "hold" while eight rate it either a "buy" or "strong buy." Three analysts are recommending investors sell the stock as it hovers near its 52-week high.

Update adds executives' comments from today's conference call.