VMware Q4 Strong but Revenue Drop Ahead

VMware ended 2008 on a strong note but gave ominous guidance for 2009, echoing what many other firms have said in reporting their fourth quarter 2008 numbers.

Non-GAAP net income for the quarter ended December 31, 2008 was $142 million, or 36 cents per diluted share, up about 38 percent year-over-year (YoY) over the 2007 figure of $103 million or 26 cents per diluted share.

For the year, non-GAAP net income was $416 million, or $1.05 cents per diluted share. This was 41 percent higher YoY than the $295 million, or 82 cents per diluted share, chalked up in 2007. U.S. revenues for 2008 grew 37 percent to $988 million YoY while international revenues grew 48 percent to $893 million YoY.

Quarterly revenues overall totaled $515 million, up 25 percent YoY. Revenues for all of 2008 totaled $1.9 billion, up 42 percent YoY. The company beat Wall St. analysts’ estimates of 26 cents a share on revenue of $510 million. “License revenues were at their highest levels in company history in Q4 2008,” VMware (NYSE: VMW) President and CEO Paul Maritz told a conference call with analysts.

However, despite IDC’s predictions that 2009 will be a good year for virtualization, VMware warned of a bad first quarter during the conference call on Monday. It predicts a nearly eight percent slide in quarterly revenue to $475 million.

“We believe customers will be more conservative in budgets in early 2009, and are planning our business for $475 million in revenue in Q1, implying a 10 percent decline year over year in revenue,” Maritz said.

Economic uncertainty will cause the first quarter slide, Maritz said. “We’ve never seen this level of uncertainty before,” Maritz said. “CFOs across the board are trying to preserve cash and keep as many options open as possible.”

VMware expects enterprise licensing agreements and service revenues to fall in the first quarter of 2009. However, it will not veer from its strategic initiatives as laid out during its VMworld 2008 annual user conference in September.

VMware has a strong balance sheet, finishing the year with more than $1.8 billion in cash and $870 million in deferred revenue with no long-term debt.

Strategic initiatives

These are the Virtual Datacenter Operating System (VDC-OS), its vCloud initiative, and the vClient initiative. “We’ve had leading service providers, including SunGard and Terremark (NASDAQ: TMRK), use vCloud,” Maritz said. The vCloud initiative aims to let users transfer data between datacenters on-premise and in the cloud.

Microsoft’s (NASDAQ: MSFT) looming presence in the virtualization market continues to bedevil VMware, which was forced by market pressures to sign on to its arch-rival’s third-party server virtualization validation program (SVVP) in August.

Maritz made a point of noting VMware’s leadership in the industry. “We are not yet seeing major losses to competition,” he said. “The major concern is the economy.” Maritz also said 65 percent of customers now say they have a VMware first policy for purchases, up from 46 percent in Q4 2007.

But Maritz, who is known for his competitiveness, is not taking anything for granted. “The first order of business is surviving and thriving in what promises to be hard economic times,” he said.

To that end, he has cut, and plans to continue cutting, expenses, postponed merit increases, and is planning to roll out new products for 2009. “We and our partners are preparing a banquet for customers in VDC-OS,” he said. “We’re also preparing management and automation solutions and extending them to availability and security in 2009.”

VMware will also extend virtualization to mobile phones, update its vCloud offerings and will complete centralized management.

In addition, VMware will spend money strategically. “We’ll continue to make hires, but in the most strategic areas where payback will be very short, such as in areas where we have little or no presence,” he said.

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