VMware Shares Plunge

Investors punish VMWare on a disappointing revenue report.
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Updated from 5:04 p.m. EST

SAN FRANCISCO -- Shares in

VMware

(VMW) - Get Report

plunged in late trading Monday after the company posted disappointing fourth-quarter revenue and projected slower growth for the full year.

The stock fell $22.25, or 26.8%, to $60.75 in after-hours trading.

VMware said revenue was $412.5 million, up 80% year over year. But analysts polled by Thomson Financial were expecting a top line of $417.4 million, or 82% growth year over year.

Revenue for the third quarter, the debutante stock's first public report, had grown nearly 90%.

On Monday's conference call, CFO Mark Peek projected 2008 revenue would decelerate to 50% growth. With revenue of $1.33 billion for the year just ended, that would put 2008's revenue just short of $2 billion -- or 4% below analysts' expectations for a top line of $2.08 billion.

The company's slower revenue growth is due to its size and the entrance of more competitors into the field, Peek said. "Our principle reason around a revenue growth rate of 50% is scale."

The company just crossed a $1 billion revenue level and exited 2007 with a revenue run-rate of $1.3 billion for the trailing 12 months, making such growth more difficult to achieve in the future, CEO Diane Greene said.

Largely due to a one- to two-month lag to the sales reported to VMware by its manufacturing partners in 2007, the company expects revenue to be higher in the first two quarters of the year and lower in the later quarters, Peek said.

Noting that higher revenue for the early quarters implies a dropoff below 50% in the second half of the year, analysts seemed perplexed by the sudden drop. "A dropoff into the high 30s and 40s is extreme," noted Jason Maynard of Credit Suisse.

Excluding items, operating margin in 2008 is expected to be in the mid-20% range.

Net income in the fourth quarter rose 152% to $78.2 million, or 19 cents a share, vs. $31 million, or 9 cents a share, one year ago.

Excluding items, EPS was 26 cents, two cents ahead of analysts' expectations.

License revenue grew 70% and services grew over 90%, Peek said. That means that as deferred revenue is recognized, services will become a bigger portion of overall revenue, he added.

The company ended the year with $553 million in deferred revenue, up 80% year over year, from $306.5 million.

VMware is seeing its strongest growth in Europe and Japan, Greene said. "Customers around the world are standardizing on VMware to reduce capital and operating expenses ... and go green."

As competitors such as

Oracle

(ORCL) - Get Report

and

Microsoft

(MSFT) - Get Report

enter the virtualization space in 2008, VMware's guidance does not "bake in price decreases" on existing products, Peek said. Instead, the company adds features to existing products to stay a step ahead.

VMware is 85% owned by storage technology company

EMC

(EMC)

, which is scheduled to release fourth-quarter earnings Tuesday before the market opens. Shares of EMC lost $2.01, or 12%, falling to $14.90 after hours.