VMware (VMW) is up 14% so far this year, an accomplishment considering that the S&P is up only 1% YTD. Why is VMware outperforming the market when blue chip companies like IBM (IBM 1.05%) and Microsoft are fighting to maintain the status quo? Can the growth continue, or will seasonality follow through from the fourth quarter?
Expectations are low for the quarter
Last quarter, VMware announced higher-than-expected revenue just days before its scheduled conference call. Revenue of $1.48 billion edged out expectations of $1.47 billion. The company went on to warn that it was expecting a greater-than-seasonal decline into the first quarter, but said that shouldn't impact the expected 15% growth for the full year.
Hybrid cloud is driving growth today
Why is VMware on track when others are falling behind? It acts as the bridge to cloud computing for companies that are trying to transition to a hybrid cloud. Since VMware allows its clients to separate the hardware from the application or data by placing the instance in a virtual container, information can reside on external servers or internally. Whether a company is using the cloud for external computing power, network capacity, or storage, compartmentalizing the resource with VMware allows customers to dynamically select the best hardware resources for the project.
Legacy vendors like IBM can't compete on an even footing
The key word here is hybrid, which is also why companies like IBM are lagging behind VMware. IBM is maintaining a legacy installed base, where VMware facilitates the transfer between vendors or even technology service providers. IBM would cut its own throat facilitating the transfer of processing power to other vendors, even if it generated some income on the software sale.
Virtualization is a maturing technology within the data center, but that doesn't mean that there aren't facets that still have room to grow. The hybrid cloud service is the most tangible today, but there are other solutions as well, including virtual desktops and mobile device management.
Virtual Desktop could be a growth driver
Virtual desktops have been around since the 90s with Citrix and Windows NT, but VMware has made it into a server instance that seems set to compete with Citrix on an even playing field. If Gartner Group's Gunnar Berger is excited about it, maybe there is a new leg of revenue coming for VMware. Last October, VMware acquired Desktone a month after the company launched a special federal program for Desktop as a Service, in partnership with IBM.
Perhaps this is the time for desktop virtualization, with Windows XP support being retired this month. The Department of Energy conducted a 500-user VDI pilot that is expanding to 2,000 users, which include federal employees as well as service contractors. This is large for a VDI installation that has been typically rolled out to 10%-20% of an organization and could be an indicator that the government is beginning to accept the technology.
Airwatch acquisition indicates a move into remote device management
VMware also acquired AirWatch for $1.5 billion in what could be another incremental product to sell as a part of the end user computing group. AirWatch is a leading provider of enterprise mobile management and security solutions. The company has 8,000 customers that span multiple geographies, but is generating only $85 million-$100 million in sales, making the acquisition pricey at 15 times revenue.
Expectations are low, but there is a lot in the product pipeline.
Heading into earnings on Tuesday, the numbers to look for are revenue within the guided range of $1.33 billion-$1.37 billion, along with EPS of $0.79. Strategically, analysts will be looking to see expansion of the company's cloud computing product line and indications of new incremental revenue sources such as VDI and remote computing.
