In other words, management is calling for growth of 13%, or 7% lower than what would have pleased investors. What's more, analysts absolutely hated that VMware guided license revenue for growth in only single digits versus growth estimates of 14%. Granted, these adjustments weren't entirely drastic. Then again, the premiums investors have been paying were not for average performance either.
It also didn't escape analysts that license billings posted only 7% growth, the second consecutive quarter of single-digit movement. This means that demand is beginning to slow. Although there had been concerns about the overall health of the virtualization industry, it is clear these worries are valid.
VMware must convince investors it can restore its growth momentum. In the meantime, management has begun to focus on extensive cost-saving efforts, which include the elimination of 900 jobs. It's unfortunate that it has come to this. But despite strong profit margins, growth seems to be what investors want. Will this be enough?
VMware understands the challenge it is up against. The company realizes it has seen a decline in license revenue over the past several quarters. By and large, this has contributed to the central question of whether the company can continue to grow into its valuations. As evident by the 20% decline in the stock, investors are no longer willing to risk it.The good news, though, is VMware is still the market leader in virtualization. This should afford the company some time to turn things around. But the gap is beginning to narrow. Aside from Red Hat and Citrix, there's also Microsoft (MSFT), which has its own ambitions in this arena with SMS -- growing that business 5% to $5.19 billion. Although Microsoft is not a threat today, it should not be taken lightly.