SAN FRANCISCO -- With customers growing nervous about technology spending, VMware (VMW) - Get Report cautioned that full-year revenue could come in at the low end of its prior forecast.

Investors, however, chose to focus on how well the virtualization software maker survived its most recent quarter.

Shares of Vmware shot 22% higher in extended trading Tuesday after the company beat Wall Street's third-quarter earningss expectations, as profit jumped 29%.

Profit grew 29% to $83.3 million, or 21 cents a share, from $64.7 million, or 18 cents a share, in the year-ago period.

Excluding special charges, EPS was 24 cents. Analysts were expecting 20 cents, less items.

Third-quarter evenue for the leading virtualization software vendor rose 33% to $472.1 million, from $357.8 million for the same quarter of last year. Analysts were looking for a top line of $462.7 million, according to Thomson Reuters.

During the quarter, VMware closed on 90% of the deals held over from the second quarter, executives said.

Deferred revenue jumped 83% year over year to $780 million and 8% sequentially.

For the full year, VMware said that revenue would likely be near the low end of the previously projected growth range of 42% to 45%, suggesting revenue closer to $1.88 billion. Full-year growth of 42% suggests fourth-quarter revenue of $516.2 million.

For the fourth quarter, analysts are expecting EPS, less items, of 24 cents on revenue of $518.4 million, according to Thomson Reuters.

VMware is seeing more of an effect from macroeconomic conditions than from competition, CEO Paul Maritz said on the company's third-quarter conference call Tuesday. Customers are taking longer to make choices between VMware and


(MSFT) - Get Report

or other competitors, "but the economy is a much greater concern at this point in time," he added.

"We're seeing caution from customers as they see turmoil" in the economy and a constriction of credit markets, said CFO Mark Peek. "We're cautiously optimistic that in the fullness of time, our pipeline will come through. Right now, we're being cautious about it."

"Customers are adopting a buy-as-you-go approach" instead of signing multi-year licensing contracts, Maritz said. The shift to short-term spending is merely delaying corporate decisions on more comprehensive agreements, while customers wait for the recent market volatility to play out.

"Given our firm foundations in terms of technology, people, financial resources ... I expect that VMware will be one of the companies that weathers the storm well," Maritz said.

A hiring freeze is in effect for the fourth quarter and for early 2009, although some hiring will be done for sales and marketing teams to expand VMware's international presence. High-level people will be added in Europe and Asia, particularly in fast-growing economies where VMware is significantly underpenetrated, Maritz said in an interview.

Microsoft issued a new challenge to VMware Tuesday by launching and shipping its Virtual Machine Manager software, with licenses starting at $1,304, or $1,497 for its full System Center with VMM.

Microsoft estimates its price points are one-third that of VMware's comparable virtualization-management software. Microsoft's System Center provides management of both virtual and physical servers.

Microsoft's virtualization suites lack functionality that VMware clients are looking for, Maritz said. "We think we have some specific advantages over them." He estimated that Microsoft's technology lags VMware's by 12 to 24 months, "by which time we will have moved on."

Virtualization competitor


(CTXS) - Get Report

reports results late Wednesday. Microsoft releases earnings Thursday after the bell.