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VMware Revenue Grows 22%, But Profits Decline

VMware's ability to sustain high growth rates appears to be tapering off as annual revenues approach $5 billion.

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Intel Puts Future On Exhibit
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VMware revenues were up 22% to $1.12 billion in the second quarter, but profits declined 13% compared to a year ago. The news came on the heels of VMware's announcement that it planned to switch out Paul Maritz as CEO and bring in Pat Gelsinger, current president of parent company EMC. Maritz will move up to chief technology strategist at EMC, after a changing of the guard expected to be staged at VMworld in San Francisco Sept. 1.

VMware revenues continued strong in the second quarter at a time that other software companies are encountering headwinds, and edged past earnings expectations, coming in one cent per share higher than expected at 69 cents. Third quarter revenues will be in the $1.11 billion to $1.15 billion range, with annual revenues expected to be around $4.54 billion to $4.63 billion.

Net income was off for the second quarter at $192 million, or 44 cents per share, compared to $220 million and 51 cents per share in the same quarter last year.

As VMware's revenue base grows, however, its ability to sustain high growth rates appears to be tailing off. Twenty-two percent is down from 37% revenue growth in the second quarter last year and still further down from the 48% registered in 2010. But the total revenues in 2012 were nearly twice those of 2010.

VMware had $5.3 billion in cash and cash equivalents at the end of the second quarter. It will pay out $1.05 billion and take on $210 million in unvested stock obligations in the second half to acquire virtual networking startup, Nicira. Acquiring Nicira will give VMware greater capabilities in building virtual networks and assigning network resources to virtual machines.

VMware said Monday that it plans to acquire Nicira, a three-year-old startup that has attracted $50 million in venture capital backing, in order to build out programmable networks in the virtualized environment. Nicira is based on using an OpenFlow protocol approach to configuring networks. With OpenFlow, a controller device can be programmed and reprogrammed to deliver routing instructions to switching devices, depending on the needs of network users. CTO Steve Herrod says programmable networking is part of the "software-defined data center" that it's building out for the future.

[ How does Nicira fits into VMware's vision of the software-defined data center. See VMware Buys Nicira; Start Of Networking Wars? ]

"Despite the tough market conditions, we achieved record quarterly results in total revenue, license revenue, and non-GAAP operating income," said Carl Eschenbach, chief operating officer, in the second quarter announcement. Eschenbach was named to that post in April from a former position as VMware co-president of customer relations.

The recent acquisition of IT automation vendor DynamicOps and the pending acquisition of Nicira "is providing the means for our customers to transform IT as we move into the cloud era," said Maritz in the earnings announcement.

VMware's idea of the software-defined data center is that computing, networking, and storage in the future will exist as a pool of capacity that gets assigned and reassigned to virtual machines as they do their daily work. Instead of operations staff and systems administrators needing to run physical devices through their management interfaces, most of the work will be done by automated processes.

VMware officials called attention during the earnings announcement to the fact that VMware was placed in the leader's quadrant of Gartner's Magic Quadrant for x86 virtualization vendors in June. It was placed higher and further to the right on the "completeness of vision" axis than its two nearest competitors, Microsoft followed by Citrix Systems. Spokesmen didn't say how it had been ranked previously. In addition to leaders, there are visionaries, challengers, and niche player quadrants.

VMware has previously been named the market leader in virtualization software revuenes by IDC.

Extending core virtualization concepts to storage, networking, I/O, and application delivery is changing the face of the modern data center. In the Pervasive Virtualization report, we discuss all these areas in the context of four main precepts of virtualization. (Free registration required.)

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