In the month leading up to today's IPO, VMware
Back in the 1990s, a group of super-smart computer scientists from Stanford dusted off the concept of virtualization, which was once popular with mainframes during the 1970s. The technology made it possible to create more than one virtual machine on a single physical server.
It was a "eureka!" moment. With data-center space running about $1,000 per square foot, and power usage at about $560 per server, the cost savings of using virtualization can add up fairly quickly for customers. As a result, VMware has enjoyed crushing demand, roughly doubling its revenue every year since 1999.
More than midway through 2007, that demand continues apace. In Q2, total revenue spiked 90% to $296.8 million, while license revenue rose an impressive 80% to $204 million. License revenue is critical, since it tends to lead to ongoing service and maintenance fees. Operating income climbed 81% to $46.7 million. I suspect the amount could be higher, but VMware has continued to invest in research and development and marketing/sales to continue its growth ramp.
VMware does more than simply helping customers slash costs. The company has essentially created a core platform that assists with security, change management, systems availability, desktop management, and more, and it undoubtedly plans to further augment that list.
With the help of more than 5,000 distribution partners, VMware's 20,000 total customers now include all of the Fortune 100, and 840 of the Fortune 1,000.
VMWare's main rival is Microsoft
VMware's revenue run-rate is about $1.2 billion, giving the company a price-to-sales multiple of 16. Even for a company with strong barriers to entry and enticing growth prospects, that's not cheap, particularly given the considerable hype surrounding its IPO debut. In other words, Foolish investors are probably best off waiting for things to calm down before thinking about grabbing some shares.