VMware Needs to Fend Off Microsoft

SAN FRANCISCO - Shareholders and IT managers will be paying close attention next week to see what plans VMware(VMW Quote) has up its sleeve to meet the stiff challenge it's getting from Microsoft(MSFT Quote).

In particular, investors at the VMworld conference in Las Vegas want to know whether the company merely plans to reset the technology bar as it did last year, or announce a broader strategy of data-center virtualization.

Since Microsoft began to encroach on VMware's server virtualization terrain in 2008, VMware shares have plummeted some 60% and its revenue growth projections have shriveled.

Whether VMware will lose some of its dominance among corporate customers depends to a large extent on whether it extends its engineering lead next year with products that advance the technology beyond server consolidation.

Microsoft has delivered its first virtualization product and plans to ship two more by early October that partially replicate some basic and management components of VMware's line.

VMware is expecting 14,000 attendees for the conference, up 27% from 11,000 last year.

In September 2007, shares of VMware rose 10% after the company announced products and directions the day before the conference began. VMware then outlined a new desktop virtualization strategy and introduced software for manufacturers to embed into servers before they are shipped.

Those launches only extended VMware's traditional focus on server consolidation and pushed virtualization downstream to the client -- both easy directions for Microsoft to emulate.

In early July, the Palo Alto, Calif. company revised its full-year revenue growth to a range of 42% to 45% year over year, from 50%. That falls far short of VMware's 2007 growth of 88%.