VMware Reports 13 Percent Decline in Q2 Profits Due to Economic Fears

VMware reports 13 percent decline in profits in second quarter and expects market softness ahead due to continued debt crisis in Europe and concern about how it will affect global economic growth.

Virtualization market leader VMware reported its second quarter 2012 results July 23 with no indication what impact Microsoft's Hyper-V is having on VMware sales, though Microsoft certainly has something to say about that.

In reporting financial results July 23, VMware revealed that its net income fell by 13 percent to $191.7 million in the second quarter from $220 million in the second quarter of 2011. Revenue grew to $1.12 billion in the second quarter of 2012, from $921 million in the year ago quarter. In particular, licensing revenue, called enterprise license agreement (ELA) revenue, rose to $517 million from $465 million a year ago. But VMware says it may not be able to do that again in the third quarter.

"We do not anticipate having this benefit in the third quarter and expect ELA bookings to decline as a percentage of total bookings," said Carl Eschenbach, chief operating officer (COO) of VMware, during its quarterly report conference call on July 23. "In addition, while the third quarter is traditionally strong for U.S. federal government spending, we remain cautious and have revised our earlier estimates downward for this sector."

Also potentially impacting third quarter revenue is the continuing economic and debt crisis in Europe, which could further dampen sales in the region, Eschenbach said.

VMware forecasts total revenue in the range of $1.11 billion to $1.15 billion in the third quarter and license revenue in the range of $470 million to $500 million. "This is a sequential decline from the second quarter but in line with our 2011 seasonal pattern."

So, while the financial crisis in Europe and slower than usual expected U.S. federal IT spending are expected to hold down VMware's revenue, there is no indication in this report that Microsoft Hyper-V is cutting in to sales.

Microsoft is clearly gunning for VMware with the improvements in its Hyper-V hypervisor-based virtualization product, which is in the soon-to-be-released Microsoft Server 2012 platform. At a workshop to acquaint software developers with Server 2012 back in May, Microsoft touted performance virtualization enhancements that best VMware on several metrics.

Microsoft is also incentivizing its partners to push Hyper-V, especially to existing VMware users. At its Worldwide Partners Conference July 10 in Toronto, Microsoft unveiled the "Switch to Hyper-V" program, which provides partners with tools, resources and guidance to take some of the risk out of such migration projects, which is often an impediment for a customer making a big switch, such as from VMware to Microsoft. Server 2012 is scheduled for final release sometime in September.

But while VMware may be facing rising competition from Microsoft, it is simultaneously creating new competition for Cisco Systems with its acquisition, also announced July 23, of Nicira, a provider of software-defined networking technology, for $1.26 billion. VMware was a pioneer of server-based virtualization, which was followed by storage and then desktop virtualization. The network was the one area of the data center not yet virtualized and virtualization is an essential ingredient of cloud-based computing.

"Our strategy is to be the leader in providing the software ingredients of the software-defined data center," said Paul Maritz, CEO of VMware, on the conference call. "The whole data center industry is in the midst of a transition towards an architecture comprised largely of standardized hardware building blocks that run under the control of layers of software."

This was the last conference call for Maritz, who is stepping down as CEO after four years, to be replaced by Pat Gelsinger, who moves over from EMC, a majority owner of VMware. The company said Maritz's departure was part of a planned succession process.