VMware Details (VMW): Guidance Low, licence Revenue Weak

VMware shares got smashed after the company’s revenue came in light. Here are a few additional details from VMware’s conference call:

  • 2008 revenue guidance was low: 50% growth after 88% growth this year. The company mentioned competition (a.k.a., Microsoft) and the perennial weak-growth excuse: “big numbers.” The guidance does not take into account price concessions, which some analysts expect VMware will be forced into making.  The guidance also assumes that services revenue will continue to outpace licence revenue, which means licence revenue will grow even slower.
  • 2008 Margin guidance was lower than expected.
  • Q4 software licence revenue growth was only 75% (vs. 80% overall revenue growth). This lagged services revenue growth and was a continued deceleration. Momentum investors only pay up for licence revenue, as this is where the huge earnings leverage comes from.
  • US revenue grew only 64%, a major deceleration. The company said the US weakness was the result of “big numbers” not economic weakness or competition, but this isn’t a satisfying answer.
  • Big deals ($50,000+, many of which are site licenses) accounted for 42% of licence revenue, up from a third a year ago. This suggests the company’s licence revenue will be increasingly “lumpy,” making the quarters riskier.
  • Deferred revenue was weak (usually a red flag for enterprise software companies).

Analysts understandably fired away at why the company expected licence revenue growth to fall off a cliff. Management gave no answer other than “law of big numbers.” This rings hollow, and one suspects that the company is concerned about competition and pricing pressure.

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