VMware Earnings Aren't Growing Fast Enough

VMware (NYSE: VMW  ) will release its quarterly report on Tuesday, and on its face, expectations of double-digit percentage growth would seem to be more than adequate to keep investors happy. But in the high-growth world of cloud computing, investors demand much more, and without faster growth in VMware earnings, the stock could well keep trading near three-year lows well into the future.

VMware's expertise in virtualization software has given it a strong position in the cloud-computing space, as businesses seek to improve the efficiency of their IT systems. Yet the company has faced the tough task of defending its leadership role in the space against a rising tide of competition. Let's take an early look at what's been happening with VMware over the past quarter and what we're likely to see in its quarterly report.

Stats on VMware

Analyst EPS Estimate

$0.77

Change From Year-Ago EPS

13.2%

Revenue Estimate

$1.23 billion

Change From Year-Ago Revenue

9.7%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can VMware earnings finally perk up this quarter?
Analysts have actually gotten a bit more optimistic about VMware earnings in the past few months, holding their estimates for the June quarter steady but raising their full-year 2013 calls by a nickel per share. That hasn't done much to help the stock, though, as shares have fallen almost 8% since mid-April.

VMware faces huge amounts of competition in the virtualization and cloud space, as industry goliaths duke it out for the hosting niche that Amazon.com's (NASDAQ: AMZN  ) Amazon Web Services currently occupies. For its part, VMware and majority owner EMC (NYSE: EMC  ) announced more details in April about its Pivotal spinoff, with the venture formally starting April 1 and including assets from both VMware and EMC that will give users an alternative to being locked into proprietary systems from Amazon or other companies. General Electric (NYSE: GE  ) bought into the venture, buying a 10% stake at prices that value the company at roughly $1.05 billion.

To try to drive new business, VMware has also looked to some smart strategic partnerships. Joining with partners including Intel (NASDAQ: INTC  ) , Red Hat, and Dell back in March, VMware become part of a project to let hospitals use Linux servers to implement IT solutions. The project hits at the key health-care segment, which has huge potential especially for smaller hospitals that often escape the notice of more dedicated IT services companies.

VMware also took steps to streamline its operations. The company sold off its Zimbra unit to privately held Telligent Systems last week, saying that Zimbra's email and collaboration products needed a different owner in order to maximize their potential.

Still, the key for VMware is to find new ways to differentiate itself from the growing pack of competitors serving the cloud-computing and virtualization space. Especially as new initiatives like Big Data start to emerge, VMware needs to stay relevant to hold its position.

In the VMware earnings report, watch for the company to flesh out its growth strategy not just for the immediate future but for years to come. Without a strong vision of where the company's going, VMware is vulnerable to the same doubts that have held its growth back in recent quarters.

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