Opsware Discovers Virtual Servers

Opsware (Nasdaq: OPSW  ) shareholders have a lot to be happy about this year. For one thing, the automation software maker is crawling toward GAAP profitability, and for the past two quarters was profitable on a non-GAAP cash basis. Also, revenues are up 70% year to date. Business performance aside, the stock is up 40% over the past year, which certainly qualifies as a nice gift to shareholders. If it wasn't for the stubbornly high valuation, they'd have nothing to complain about.

The company's performance was decent, if uninspiring, this time around. Revenues were up 59% year over year to $25 million, yet were flat quarter over quarter. A non-GAAP profit of $544,000 was once again demolished by stock options and acquisition charges, coming in at a GAAP loss of $4.8 million -- similar to last quarter. However, deferred revenue did increase by $2.1 million from the previous quarter to $28.4 million, and guidance for sales of $30 million in the fourth quarter is certainly positive.

The virtual world is a new focus point for Opsware management, because virtualization promises substantial opportunities for this still-small company. Lest one think that management is trying to spin its recent virtualization push as a P.R. opportunity, I think it is the real deal, and the push makes immediate sense when considering the company's niche: data center automation. As companies from Red Hat (Nasdaq: RHAT  ) to EMC (NYSE: EMC  ) and the mighty Microsoft (Nasdaq: MSFT  ) all try to horn in on the virtualization niche, Opsware now has a potentially strong product -- Virtualization Director -- that should ship in early 2007.

Virtualization is all about creating virtual servers that do the work of real servers, allowing for massive space as well as hardware savings. However, the niche is still relatively undeveloped, with only a small number of servers deployed. One of the difficulties is that companies are struggling to manage the increased workload, because each virtual server requires the same maintenance of a real one, and if the number of servers has just quadrupled, well, it can certainly put a strain on an already-stressed IT staff.

Opsware aims to solve that problem by automating the entire virtual server creation and management process as smoothly as it does with its other data center automation products. I can't help but think that is a great move, and one that will go quite a ways toward justifying shareholders' faith in this highly valued company.

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Fool contributor Stephen Ellis does not own shares in any companies mentioned. You canview the stocks he owns and check out his99th-percentile ranking in Motley FoolCAPS, the Fool's new stock-rating community. The Motley Fool has adisclosure policy.

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