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VMware Predicts Rough Going Ahead

Its stock was down 11%-12% in after-hours trading

VMware said Thursday that it earned $69.9 million, 18 cents a share in Q1, up 64% on revenues up 7% to $470 million.

On a non-GAAP basis before charges, the virtualization leader earned 25 cents a share, up 14%. Its non-GAAP operating income was also up 14% to $121 million.

It was a bit light on revenues compared to expectations. Wall Street thought revenues would be $474.4 million, earning 20 cents a share based essentially on what VMware predicted going into the quarter. VMware did not apologize for the small shortfall given the recession.

What put the company's stock into a tailspin, however, was the guidance although Q1 license revenues declined 13% to $257 million too while Q1 services revenues were $213.3 million, up 48%.

In a canned statement CFO Mark Peek said VMware expects Q2 revenues to be "flat or even down" compared to last year, a result of tough economic conditions, budget constraints on new investments and the transition to the next-generation vSphere 4 cloud widgetry that the company expects to deliver shortly.

On the conference call, Peek, who said Q1 IT spending was worse than anyone predicted, added that vSphere will change VMware's pricing and that the company will start billing in local currencies.

Wall Street had figured VMware should do $501 million this quarter. Last year its Q2 revenues came to $456 million.

VMware's stock was down 11%-14% in after-hours trading, erasing recent advances.

CEO Paul Maritz blamed the fact that licenses were down on companies' reluctance to make capital purchases in the current environment and predicted that when IDC and Gartner release their Q1 server figures it's not going to make pretty reading.

Clients, he said, preferred just-in-time just-enough arrangements to enterprise licenses. People, he said were husbanding their money and were immune to discount blandishments. He claimed he saw no competitive pricing pressure, a reference to Microsoft, citing intelligence from OEMs.

Maritz, like AMD CEO Dirk Meyer, claimed not to be seeing the bottom that Intel CEO Paul Otellini said he saw. The only possible bright spot in the US for VMware, he said, is the federal sector, which produced a $20 million deal in Q1. The government has the money, he said. He described Europe as "depressed" and Asia as "more promising," but VMware is relatively new to the region.

Maritz said channel partner were feeling better than they were in January when everyone battened down the hatches but he had yet to see anyone put their money where their mouth was.

Despite the mess VMware still garnered 11,000 new customers in Q1 excluding those using its workstation and free ESXi products.

Maritz has also got 400 service providers signed up for vSphere and indicated that VMware would have some new products for them down the road.

VMware's US revenues for the first quarter grew 8% to $244.1 million. International revenues were up 6% to $226.2 million year-over-year.

And given the plunge in license revenues it added that the business mix continues to shift with services revenues becoming a larger proportion of total revenues. In Q1, services revenues were 45% of total revenues compared to 33% a year ago. VMware indicated it was having success selling multi-year maintenance and that renewals were strong.

The company had $2 billion in the bank and total deferred revenues of $917.2 million as of March 31, up 56% and 43% respectively year-over-year.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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