This Cash Machine Runs on Heavy Fuel

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Virtual computing pioneer VMware (NYSE: VMW  ) reported brilliant fourth-quarter results last night, and the stock is up more than 12% this morning.

Sales increased 18% year-over-year to $608 million. While GAAP earnings shrank from $0.29 per share a year ago to $0.14 per share this time around, free cash flow ballooned by 45% to $259 million. Longtime Fools should already know that cash flows matter more than earnings anyhow, so the magical jumping stock seems to be perfectly appropriate today.

In fact, there's more good news if you dig below the surface. Product license sales actually declined by 3% from 2008 levels -- all of the growth was made up of increased service revenue. It's the old repeatable business model at work -- give away the handle and make a killing on the blades, much like robotic surgery expert Intuitive Surgical (Nasdaq: ISRG  ) or granddaddy-of-the-strategy Gillette, now an arm of Procter and Gamble (NYSE: PG  ) . If basic product sales accelerate again, that's great. If not, there's a large and growing base of existing customers all hungry for support services.

VMware may feel like a new kid on Wall Street, but don't be fooled: The management team comes from rich and inveterate backgrounds -- mostly from Microsoft (Nasdaq: MSFT  ) -- and they know what matters. CFO Mark Peek explained that VMware explicitly aims for great cash flow per share because the metric "balances operating results, cash management, capital efficiency and share dilution." Well put, Mr. Peek!

As for VMware's future business prospects, you know that cloud computing is the next big thing in the IT sector, attracting every major player from Microsoft and Cisco Systems (Nasdaq: CSCO  ) to Google (Nasdaq: GOOG  ) and (Nasdaq: AMZN  ) . As a leader in selling the virtualization software upon which much of the cloud strategy is built, VMware is perfectly positioned to benefit from that revolution.

Expect growth to continue at breakneck speed for many years as this bona fide Rule Breaker soars to new heights. Frolic in VMware's splendor by way of the comments box below!

Fool contributor Anders Bylund owns shares in Google and Intuitive Surgical, but he holds no other position in any of the companies discussed here. He has been working with virtual machines since 2001 and lives his entire life in the clouds. Microsoft is a Motley Fool Inside Value pick. Google, Intuitive Surgical, and VMware are Motley Fool Rule Breakers recommendations. is a Motley Fool Stock Advisor choice. Procter & Gamble is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft and owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2010, at 2:00 PM, Rawdoglet wrote:

    You must be kidding!!

    VMW has negative earnings growth YOY on GAAP and NON-GAAP basis. VMW trades and a P/E of 75 when the rest of the industry trades at 20 or so. VMW is massively overvalued. Microsoft just really entered into this space fully a few months ago with Windows 2008 R2 and Live Migration. Microsoft offers FREE OS and SQL licenses for virtuals running on Datacenter. Buy one Windows Datacenter license and run as many copies as you want for free. With VMWare you have to purchase a Windows license for each and every virtual server and you also have to buy thier overpriced software. Microsofts Hyper-V is FREE. VMWare may have Services growth but earnings will continue to contract. Sooner or later it will be services only if it wants to compete.

    Over hyped and over priced. I mean the stock pops 12% when it has negative earnings growth?

    Last year they reported better earnings when the stock was at $21. Now it trades at $50 and it is not even earning as much. Way Way overvalued. Stock doubled on negative earnings growth,

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