VMware feels good about revenue target

By Jim Finkle and Eric Auchard

NEW YORK (Reuters) - VMware Inc (VMW.N: Quote, Profile, Research, Stock Buzz) is comfortable with its goal of posting 50 percent revenue growth this year despite concerns about capital spending in the United States, its largest market.

"We feel good about that 50 percent number," VMware Chief Executive Diane Greene told the Reuters Global Technology, Media and Telecoms Summit in New York on Tuesday.

"It's hard for us to tell what the effect of ... a downturn in the economy would be, because there are so many factors," Greene said. "Certainly people will spend less, but at the same time, virtualization clearly lets them do more with less."

The hottest company in enterprise software is the subject of an intense debate on Wall Street about whether its guidance reflects fears that corporate spending will tumble in the back-half of the year, or that the company is setting expectations low so that it can impress investors later.

VMware sells server virtualization software, which can help businesses save money by enabling a single computer to perform the work of many machines. Fewer machines require fewer computer technicians and also cuts energy bills.

The company kept its full-year revenue target unchanged when it announced financial results a month ago. But it forecast second-quarter revenue growth of 55 percent.

Given that VMware reported 69 percent growth in revenue for the first quarter, the 50 percent predicted rate for the full year implies a certain slowdown in the back half of the year or that VMware is being conservative.

"I think they baked in some pretty conservative estimates," said Jefferies & Co analyst Katherine Egbert. "You are looking at something well south of 50 percent growth in the back half of the year," she said.

Recent results from computer giant Hewlett-Packard Co (HPQ.N: Quote, Profile, Research, Stock Buzz) and network equipment leader Cisco Systems Inc (CSCO.O: Quote, Profile, Research, Stock Buzz) show corporate spending holding up pretty well, Egbert said.

If corporate purchasers delay projects or dramatically cut technology spending, VMware is vulnerable. The United States accounts for about half of VMware sales.

But offsetting that risk is the fact that many information technology managers rank VMware as the top priority new software purchase and say its products may be the last to be cut because of a rapid return on investment (ROI).

"You can prove the ROI on the back of a cocktail napkin," Egbert said. Many big companies have taken out enterprise-wide licenses to use VMware to cut costs across their organizations, but smaller businesses may choose to delay 6 months, she said.

Greene said that VMware has about 85 percent of the market for virtualization software. Rivals include Citrix Systems Inc (CTXS.O: Quote, Profile, Research, Stock Buzz), Oracle Corp (ORCL.O: Quote, Profile, Research, Stock Buzz) and privately held Virtual Iron.

Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) also plans to start selling a new product in November that will be tightly integrated with its widely used Windows Server 2008 software.

Greene said VMware had seen triple-digit growth in 15 of the world's emerging markets during its last quarter, including Brazil, Russia, India and China. Developed market Australia also grew faster than 100 percent in the first quarter.  Continued...