VMware Crashes From Wall Street Pedestal

The Palo Alto, Calif., company makes virtualization software, which lets one computer function like multiple machines running a variety of operating systems. The technology, which economizes on servers and improves the performance of corporate computer networks, is so hot that Microsoft (MSFT) and Oracle (ORCL) have decided to get in the game. VMware's results cast doubts on its ambitions to maintain market dominance.

The company posted fourth-quarter earnings of 26 cents a share late Monday. Deducting the penny derived from a lower income tax rate, VMware still beat Wall Street's 24 cents a share consensus estimate.

But it fell a little short of Street expectations on sales, reporting only $412.5 million in revenue versus the consensus projection of $417.4 million.

Sixty-nine percent of that came from licenses and the rest from services sales, said VMware CFO Martin Peek. License revenue was $284 million, an increase of 75% compared from the year-ago quarter. More than 60% of that came from transactions of less than $50,000, Peek said. Services revenue grew 90%.

Peek said 2008 revenue would grow "grow approximately 50% compared to 2007," when the company posted sales of $1.33 billion. That was an 88% increase from 2006, and the Street was counting on revenue growth of about 56% for the current year.

Caris & Co. analyst Shebly Seyrafi downgraded the stock to Average from Buy and cut the price target from $135 all the way to $60. He wasn't alone: Jefferies & Co. lowered its sights from $129 to $74, while Bear Stearns retrenched from $132 to $106.

Allan Krans, an analyst at Technology Business Research, an independent research firm in Hampton, N.H., says the market is still attempting to sort out the premium valuation VMWare has enjoyed relative to EMC, which retains an 86% stake in its offspring.

"I think there's been a question since the IPO, looking at it in the context of EMC, where there's a disparity," he says. "Is EMC undervalued, or is VMware overvalued? I think it's partially overvalued, and you're starting to see these numbers come in line and make more sense."