VMware license revenue slips 20 percent

The results mark the first time sales haven't increased at VMware since it became a public company two years ago

VMware reported a drop in profit for the second quarter as businesses cut spending on new software amid the tough economy.

Revenue was flat from the year before, at US$456 million, while net profit declined to $33 million, from $52 million in the second quarter last year, the company said Wednesday.

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New license revenue, which is seen as an indicator of future growth, declined 20 percent from a year ago to $228 million, VMware said. It blamed "the challenging macroeconomic environment." The decline was offset by a 32 percent increase in service revenue, which climbed to $228 million.

The results beat the expectations of financial analysts. VMware had warned in April that revenue might be flat or down slightly for the quarter, and analysts had been forecasting a 1 percent drop in sales, to $452 million.

Excluding one-time charges, VMware's profit was $80 million, or $0.20 per share, better than the analyst forecast of $0.19 per share, Thomson Reuters said.

This marks the first time that VMware's revenue hasn't grown since the company went public in 2007. The growth rate had been slowing gradually each quarter, as VMware became larger and the initial wave of adoption for server virtualization started to slow.

Separately on Wednesday, VMware rival Citrix Systems reported second-quarter revenue of $393 million, up a fraction from last year, and a profit of $43 million, up from $35 million. Product license revenue declined 15 percent, however, the company said.

During the quarter VMware launched vSphere, a major update to its core virtualization software. The company bills it as a "cloud operating system" that will allow customers to manage and provision server, storage and network resources as if they were a single large computer.

The software includes fault tolerance and a more scalable hypervisor that should allow customers to run large databases and other enterprise applications on virtualized servers, according to VMware.

With the basic tools for virtualization now a commodity, analysts say vSphere is important for VMware to help it retain a technology lead over Microsoft and Citrix.

VMware is increasing its front-line customer support staff by 20 percent to help ensure the upgrades to vSphere go smoothly, said Chief Operating Officer Tod Nielsen. Executives said the rollout has been going well.

VMware plans a further upgrade that will allow companies to transfer virtual workloads between their own data centers and those of cloud service providers such as Terremark and Savvis. It didn't say Wednesday when that product would ship.

It is also working on some management add-ons for vSphere, the first of which shipped this month, and a big update to its desktop virtualization software, VMware View. The update will include a new PC-over-IP remote display protocol developed with Teradici.

Executives didn't say when those new products would ship, only that they plan to make "a set of announcements" in August at VMworld or before.

Customers continued to shy away from large deals in the quarter because of the uncertain economy, executives said on the call. For the first time in two years, deals valued at less than $50,000 made up more than half of VMware's orders during the three months.

The company has introduced a "back maintenance program" designed to get smaller customers -- those who made purchases of about $10,000 or less -- current with their software license agreements. Those customers apparently fell through the cracks while VMware focused on larger deals.

"Renewals of some of these customers may have been lost in the jet stream of the tremendous growth we've experienced over the years," Nielsen said.

Also during the quarter, VMware paid $20 million to buy a 5 percent stake in Terremark, a close partner that uses VMware's software for its managed hosting services.

Copyright © 2009 IDG Communications, Inc.

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