Tomorrow's quarterly earnings announcement from VMware (NYSE:VMW) promises to be anything but boring. After all, the software giant is currently selling its strongest portfolio of products yet, with nearly complete coverage of management's key target areas: software defined data centers (SDDC), end-user computing, and hybrid cloud computing. 

Vmw

Source: VMware.

However, competition in the industry is also more intense than ever right now. Microsoft remains a threat in the SDDC market, and VMware now competes with major players such as Amazon and Google, along with a host of smaller rivals that want to establish a leadership position in the emerging mobile cloud world. 

Given those crosscurrents, it's no wonder that VMware's stock is looking for direction. We are more than three quarters through the year, and shares are sitting at just about exactly where they began 2014. 

VMW Chart

VMW data by YCharts.

The expectations game
VMware's fiscal third-quarter earnings report could go a long way toward breaking that stock stalemate when the announcement posts on Tuesday, Oct. 21. Wall Street, as usual, isn't providing much in the way of long-term perspective. The 40 analysts who cover the company are projecting an exact repeat of last quarter's sales results, with revenue improving by 17%. That's as compared to the prior quarter's 17% jump, and the 18% gain that VMware managed in Q1. Earnings are expected to come in at $0.83 a share, or just a shade below the $0.84 that the company booked a year ago.

That EPS target has held steady during the last 60 days, which suggests that analysts are confident in their short-term projections. But investors shouldn't be surprised if VMware manages a slight beat on this metric. The company has come in ahead of profit projections by $0.01 or $0.02 in each of the last four quarters.

What investors should watch
For management's part, executives forecast in July that sales will rise by as much as 18% in Q3, led by strong growth in license revenue. Carl Eschenbach, VMware's Chief Operating Officer, provided a bit more detail in his conference call with analysts, saying that the quarter might benefit from a large enterprise licensing agreement with a government client. VMware's sales team has been working on that particular contract for about a year, Eschenbach said.

Management also said back in June that overall profitability should hold steady in Q3. That would be good news for investors for two reasons. First, it would show that the company hasn't had to resort to big price cuts as competition heats up. And second, it would keep VMware's operating margin within reach of an all-time high. That figure was an impressive 20% of sales in Q2, and would just need to climb higher by another percentage point to set a new company record.

In terms of potential risks, competition could, of course, eat into VMware's growth trajectory. And investors will want to keep an eye on its international business. Weakness in Europe threatens to offset at least some of the gains from the company's growing Americas and Far East regions.

Foolish bottom line
No matter which way Wall Street decides to read VMware's report next week, long-term investors should stay focused on the company's vision of leading in its target cloud and infrastructure software markets. VMware has been making solid progress on that goal lately, both with its growing product portfolio, and in building up its global sales and support network. Those will be critical pieces to have in place as the company keeps laying the groundwork for sustained sales and profit growth in the years ahead.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (C shares), and VMware. The Motley Fool owns shares of Amazon.com, Google (C shares), Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.