VMware Shares Plunge on 4Q Report, Outlook

VMware shares tumbled $21.86 a share, or 26 percent, to $61.14 Monday as investors punished the virtualization software company for falling short of analyst revenue estimates in its fourth quarter and offered less-than-scintillating guidance for 2008.

In the quarter, VMware pocketed $103 million, or 26 cents a share, on sales of $412 million, topping analysts’ average profit estimates by two cents a share but falling about $5 million short of the consensus revenue target of $417.4 million.

Worse, VMware CFO Mark Peek, during a conference call after the bell, told analysts to expect 2008 sales growth of about 50 percent, down from the 88 percent it enjoyed in 2007.

“Our revenue guidance is largely based on scale,” CFO Mark Peek said during the conference call, eluding to the fact that VMware ended fiscal 2007 with more than $1.3 billion in sales. “As we look ahead to 2008, we’re very bullish on the company and where it’s headed and demand for our products.”

However, several analysts were concerned enough to press Peek and CEO Diane Greene for a more thorough explanation as to why the leading virtualization software vendor, which held its initial public offering in August, was essentially projecting software licensing growth somewhere between only 30 percent and 40 percent for the year even though it holds an enormous head start compared to emerging competitors such as Microsoft and Oracle.

“[Forecasting] 50 percent [growth] for the coming year means either the business is decelerating very rapidly in the next few quarters or over the course of the year to 30 percent to 40 percent,” Thomas Curlin, an analyst at RBC Capital Markets said while asking Peek to provide more details so he and other analysts can modify their models for fiscal 2008. “How do you recommend we get you to 50 percent assuming the business is not falling off the cliff?”

Peek reiterated VMware’s 50 percent growth target and projects operating margins in the mid-20s by percentage. He added the company expects to see higher growth rates in the first two quarters of 2008 compared to the third and fourth quarter and noted that VMware had essentially doubled its sales in just five quarters.

The after-hours sell-off sent the stock to its lowest price since shortly after its IPO in August, and more than halved it from its all-time high of $125.25 set in October. Storage giant EMC acquired VMware in 2004 for $625 million and still holds roughly 87 percent of all outstanding shares.

Despite investors’ violent reaction, Greene said the fourth-quarter and 2007 results were far from disappointing.

“VMware’s Q4 full-year results were outstanding,” she said. “We continue to execute on our considerable opportunities. We’re pleased with our growth overall and internationally where sales were especially strong in Eastern Europe, Japan and China. We’re seeing strong customer adoption on many fronts. Virtualization is becoming increasingly strategic to our customers.”

Of the $1.33 billion in sales recorded in 2007, VMware said 68 percent of sales came from new licenses and 32 percent was derived from services. Furthermore, 38 percent of total sales came from its platform products—including Virtual Infrastructure 3—while infrastructure management and automation products—including VMotion—accounted for 68 percent of sales.

Peek said the company expects service revenues and sales from the management and automation products to contribute to grow at a faster rate than licensing and platform sales in 2008.

During the post-earnings release conference call, analysts wanted to know if VMware was starting to feel the pressure from competitors such as Microsoft, which is aggressively targeting the virtualization market with a series of new products and began shipping a beta version of its Hyper-V hypervisor last month.

“We are not,” Greene said. “In fact some of our customers have already evaluated Hyper-V and see no reason to switch. Certainly customers ask about the competition but it’s not delaying sales.”

Last quarter, its first as a publicly traded company, VMware shattered analysts sales and earnings estimates when it posted a profit of $64.7 million, or 18 cents a share, on sales of $358 million.

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