VMware says revenue may decline for the first time

VMware says revenue may decline for the first time

Profits are up but revenue growth will be flat or might even decline next quarter, it says

VMware reported a first-quarter profit on Wednesday but said that sales are being hit by the recession and it might report its first-ever drop in revenue next quarter.

Revenue for the period to March 31 was US$470 million, up 7 percent from the same quarter last year but a fraction below what analysts had predicted, according to Thomson Reuters.

License revenue declined 13 percent from a year ago, to $257 million, as customers cut their IT spending and signed fewer large deals, VMware said. The drop was offset by a 48 percent jump in service revenue, which includes software maintenance fees and is becoming a larger part of VMware's business.

Net income for the quarter was $69.9 million, or $0.18 per share, up from $43.1 million, or $0.11 per share, in the first quarter of 2008. Excluding one-time charges, the earnings were $0.25 per share, up from $0.22 a year earlier. That beat the estimates of financial analysts, who had forecast a 10 percent drop in earnings, to $0.20 per share.

The tough economic climate, combined with the transition to a new version of VMware's core software that was announced Tuesday, will depress VMware's sales in the current quarter, CFO Mark Peek said in a statement.

"As a result, we expect our second-quarter revenues will be flat, or even down, compared to the second quarter of 2008," he said.

That would be a first for VMware, which has seen its revenue climb every quarter since it went public two years ago. The growth has been slowing, however, as VMware grows larger and the initial wave of virtualization adoption starts to slow.

On Tuesday, VMware introduced vSphere, a new version of its core software that includes new capabilities for fault tolerance, storage management and network management. It is due for release by the end of the quarter.

VMware said the product positions it well for the future, but in the short term it will be a disruption for its sales operation and its partners, who will have to recertify products to work with vSphere. That disruption partly explains the weak forecast for the April quarter.

The other factor is the economy. "Basically, customers battened down the hatches and were reluctant to spend on anything not operational," CEO Paul Maritz said during a conference call to discuss the results. VMware signed two large enterprise licensing agreements during the quarter, but in general customers are making smaller purchases, he said.

"Despite the quick ROI from virtualization, customers have generally put the brakes on all new investment," Peek said. Sales in Europe were particularly weak, he added.

In the coming quarters, VMware plans to introduce new management tools for vSphere that are designed around specific "scenarios" such as test and development, disaster recovery and application management, Maritz said.

"These management suites are important as they will constitute the new user interface to the vSphere platform and allow customers to get out of the business of managing plumbing and basically focus on the things that are truly business-critical to them," he said. Maritz didn't provide any other details and a VMware spokeswoman said the company won't comment further on them yet.

VMware expects Microsoft to emerge as a bigger competitor over time, but Maritz said competition and pricing pressure are not contributing to the decline in its business. "The macroeconomic conditions are the major factor," he said.

He called the first-quarter results "solid" given the challenging climate. The company added 11,000 new customers during the quarter for VMware Infrastructure 3, he said. Three-quarters of VMware's 350 biggest customers have standardized on VMware, according to Maritz, and some are running more than 5,000 virtual machines in their data centers.

The company is in a strong cash position, with more than $2 billion in the bank, which will allow it to maintain its research and development during the downturn, Peek said.

Investors reacted negatively to the results. VMware's share price dropped 15 percent in after-hours trading, to $27.60, having risen almost 8 percent earlier in the day.

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