Two weeks after its co-founder and CEO Diane Greene was abruptly dismissed, VMware – now run by one of Microsoft's old rulers, Paul Maritz (pictured) – disclosed exactly how much under its promised 50% year-over-year growth 2008 is going to be. It's going to be 5%-8% short of the magic number. Reason of course dictates that 42%-45% growth may some day look heroic, but the punters didn’t think so Tuesday after they did a quick calculation and realized that VMware was saying that its growth in the second half would be just 30%, down from 61% in Q1.
One analyst muttered something about “shocking margin compression.”
So Wall Street took another 15% off the virtualization leader’s already desiccated stock price in after-hours trading, pushing it down below 33 bucks. This is uncharted territory for a company that only went public last summer and jumped to $125 by October.
VMware earned $52 million, or 13 cents a share, in Q2 on revenues of $456 million, up 54% year-over-year, but said that this quarter’s revenues would be between $462 million and $468 million with a GAAP operating margin of 11%-13%.
Wall Street wanted $497 million.
VMware’s grew 88% last year before Microsoft and some competitors seriously entered the market, a fact that kicked the stuffing out of its stock price but not its sales, it claims.
According to Maritz, VMware hasn’t lost a single deal to Microsoft.
The problem, according to CFO Mark Peek, is with the macro-economy and the impact uncertainty and fear are having on the behavior of enterprise accounts.
Given its experience in Q4, VMware was expecting to do a bang-up business in Enterprise License Agreements (ELAs) this year, essentially trading a discount for more product than an account could immediately use and letting it deploy at will.
But the bottom dropped out of ELAs in Q2, Peek said, denying that either VMware’s channel or OEM business was slowing down too, an assertion that analysts may or may not buy considering ELAs, something VMware only started in 2Q07, only represent 20% of its revenues.
Peek, however, stuck to his story of lengthening sales cycles, delayed closings and piecemeal purchasing by the corporates, offering as an example an enterprise deal that was supposed to bring in $2 million in June winding up as a $300,000 channel sale.
When asked if the weakness corresponded to verticals, he said, no, it was geographical, starting in the US and now spreading to Europe.
So to bring costs more in line with reality, Maritz has declared what he called a “hiring pause,” limiting new recruits to strategic hires after what has been exponential growth in the company’s headcount.
The company also needs to open up the BRIC countries and Asia-Pacific, he said, places where it has yet to have much penetration.
The company said its US revenues in Q2 were up 43% year-over-year to $240 million and international revenues were up 68% to $216 million, compliments of Europe and Australia.
Software license revenue were up 39% year-over-year in Q2 to $284 million and service revenues, which include support, subscription and professional services, came in at $172 million, up 85% year-over-year.
Deferred revenues stand at $721 million, up 74% year-over-year, with deferred licenses accounting for $27 million. The pipeline is said to be “healthy.”
Maritz, a veteran of Microsoft’s epic battles for the browser, the server and the enterprise, the guy wrote its play books, is there to see that VMware keeps technologically ahead of Microsoft, the key, he said, to besting it.
Microsoft, he said, is “formidable, but it’s not invincible.” You just have to make yourself hard to catch.
Microsoft’s threat to VMware is the free Hyper-V hypervisor that it’s bundling with Windows Server 2008 – a subset of VMware’s technology and less mature – so matching Microsoft’s price point, Maritz intends to make VMware’s ESXi hypervisor free.
According to him VMware has all the making of a great company, one that changes the way people do computing.
It’s moved from the simple hypervisor that isolates the operating system from the underlying hardware, to a virtual infrastructure, and is now – he said, dropping the latest hot buzzword – “on the threshold of a major new opportunity – as customers begin to leverage VMware as both the on-ramp to the Cloud and for key elements of the Cloud itself.”
VMware’s technical people are as good as anything Microsoft’s got but now that it’s approaching $2 billion, he said, it needs to execute on multiple fronts simultaneously and “fire on all cylinders.”
Maritz tackled the “trauma” of VMware losing Diane Greene and the morale issue head on. So far, he said, the company hadn’t lost anybody and to make him more palatable the company is going to swap the staff’s underwater options for new ones – hopefully this quarter but at least by the end of the year. That ought to make him popular.
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