VMware beats forecast with strong Q2 results

Revenue and profit were both up sharply from a year ago, the company said

VMware on Tuesday reported a 48 percent jump in revenue for the second quarter, a greater increase than expected, and raised its outlook for the full year on strong demand for its virtualization software.

The results see VMware back on a growth streak after its business sputtered during the recession. Its sales were flat in the second quarter last year but gradually recovered, increasing 18 percent in the December quarter and 35 percent in the first three months of this year.

Revenue for the quarter just ended was US$674 million, up from $456 million a year earlier and ahead of the $656 million that financial analysts had been expecting, according to Thomson Reuters.

Net profit was $75 million, or $0.18 per share, more than double the $33 million, or $0.08 per share, that VMware reported a year earlier. Excluding one-time charges the profit would have been $0.34 per share, $0.02 ahead of the analyst forecast.

Sales of new software licenses, seen as a measure of future growth, increased by 42 percent to $324 million. Services revenue, including software maintenance fees, climbed at a slightly higher rate to $350 million, VMware said.

The company expects to book about the same amount of license revenue in the third quarter, along with total revenue of up to $705 million -- higher than analysts currently expected. VMware raised its guidance for the full year to between $2.7 billion and $2.8 billion, which would be a 35 percent increase from 2009.

Despite the bullish outlook, VMware executives highlighted some areas of potential concern on a conference call to discuss the results.

The company has been selling more of its software to smaller businesses, which led to a $100 decline in the average selling price for each unit of its vSphere virtualization software sold, said Chief Financial Officer Mark Peek.

That trend is likely to continue, since VMware now offers its vMotion technology, which lets customers move workloads between servers while they are still running, with lower-priced versions of its software. It used to be available only with higher-end editions.

"Although we expect the reduced average selling prices to be offset by increased volumes, we cannot be certain that will occur," Peek said.

He also pointed to renewed concerns about the economy -- particularly in Europe, where business was down in large markets such as Germany and the U.K. -- and the strengthening U.S. dollar, which reduces VMware's reported revenue when overseas license sales are converted back into U.S. currency.

Despite that, the company sounded generally upbeat about its business. Demand was strong for all product categories, and VMware benefitted from an uptick in server sales during the quarter, since customers often buy its software along with new server hardware.

The company is making good progress in renewing large customers' Enterprise License Agreements, Peek said, many of which come up for renewal this year. The total value of ELA renewals in the quarter was greater than the value of the original contracts, because customers are buying additional licenses or adding new products, he said.

VMware is still waiting to see a tipping point for its VDI (virtual desktop infrastructure) products, however, an area some see as important to its long-term growth.

"We continue to hold high expectations for the desktop virtualization market, yet it remains difficult to predict at what pace will customer interest and evaluations turn into accelerated buying," Chief Operating Officer Tod Nielsen said during the call.

"We are seeing Windows 7 upgrades and the proliferation of new end-user devices, such as the iPad and smartphones, are fuelling public discussion and customer interest," he said. "However, no single technological or economic tipping point is emerging as the accelerant to VDI adoption."

The company plans to release an update to its desktop virtualization software, VMware View 4.5, in September, Nielsen said.

VMware shares ended the regular trading day at $72.42, down slightly from Monday's close. In the after-hours markets, after the results were announced, the stock was trading 4.5 percent higher at the time of this report.

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