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VMware Batters Estimates

The software developer's profit more than triples.

Updated from 4:29 p.m. EDT



(VMW) - Get Report

shot past revenue expectations in its debut third-quarter report Wednesday.

The Palo Alto, Calif. based virtualization software developer reported revenue of $357.8 million, up 89.5% year on year and 7.6% higher than expectations. Analysts were projecting a top line of $332.5 million, according to Thomson Financial.

Revenue was $188.8 million in the same quarter of the prior year.

EPS was 18 cents on net income of $64.7 million, vs. EPS of 6 cents and a bottom line of $19.2 million in the year-ago period.

The stock was recently up more than 4% to $108.

Excluding items, EPS was 23 cents. Analysts were expecting EPS, excluding items, of 17 cents.

CFO Mark Peek said on a conference call that the company would not provide fourth-quarter guidance, calling it "extremely challenging" to do so yet. He said the company's fourth quarter typically is seasonally stronger, and deferred revenue would increase accordingly.

"Increased customer-adoption of VMware infrastructure was a significant driver in growing our revenues 90%," CEO Diane Greene said in a statement.

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Operating cash flow for the trailing 12 months was $514 million, compared to $230 million a year ago, according to the company.

Excluding items, operating cash flow for the quarter was $137 million vs. $56 million in the prior year.

The company is targeting an operating margin for the full fiscal year of 20%. Excluding items, "operating margins are going to have some level of volatility" from quarter to quarter, Peek said, cautioning investors not to read too much into it.

Deferred revenue was $427 million at the end of the quarter, a 104% increase over the same quarter of 2006, Peek said. Most deferred revenue is typically recognized in the following quarter, giving investors clear insight into the coming quarter's expectations, he added.

About 80% of deferred revenue comes from services and subscriptions, rather than licensing, Peek said. Licenses accounted for 69% of revenue recognized during the quarter.

As expected, the company used some of its IPO funds to ramp up hiring. VMware has added 1,500 employees since the previous quarter, bringing the total to 4,500, Greene said on the call. Some of those were added through three acquisitions completed during the quarter, including an engineering firm in Bulgaria.

"We see more opportunity than we have staff" to address it, she said.

The company has broadened its international focus, where sales outpace even the healthy domestic growth rate. Revenue in Japan was up 200% year on year, Greene said.

In addition to its IPO, another important milestone for the company was achieving over $1 billion in trailing 12-month revenue. And the stock price's recent inflation ranks VMware's market cap as "one of the five most valuable software companies in the world," she said.

VMware's channel partners now number over 6,000. While there is some overlap with competitor


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recently acquired XenSource virtualization software, it's not a problem for VMware, Greene said. "Perhaps it's an issue for someone trying to compete with us."