VMware (NYSE:VMW) isn't acting like your average company in this recession. When I look at the virtualization expert's second-quarter report, I see rock-solid business results -- and clear signs of cheerful optimism.
Here's the evidence:
- $456 million in revenue, flat year-over-year. (Boring!)
- Pro forma earnings of $0.20 per share, down from $0.23 per share a year ago. (You call that progress? Maybe for a lobster.)
- $198.7 million in free cash flows, a 129% annual increase. (Now I get it!)
- A 3% increase in headcount during the quarter. (All right, you don't have to rub it in.)
So while IBM (NYSE:IBM) is celebrated for growing earnings amidst massive job cuts and even Google (NASDAQ:GOOG) seems to have joined the cost-cutting party, VMware is hiring new people to make sure that its future business growth has the fuel and fire it needs. And the company sure can afford to spend a little money now to make a lot of money later.
And I do believe that what VMware is doing is the best course of action. Virtual computing is still in its infancy, and even though VMware has the first-mover advantage our Rule Breakers team loves so much, the company is under attack from well-heeled giants like Microsoft (NASDAQ:MSFT) and Oracle (NASDAQ:ORCL). Even if VMware's virtual server platform is better than the competition -- which seems to be the case -- nobody will buy it if you're not spreading the word to potential buyers.
For this reason, when I look at the marketing expense item for a company in a hot sector like virtualization, I don't see a number. I see a gas pedal.
Push that pedal to the metal as long as hard as you can afford to. The only reason to ease off is if your market is all grown up and ripe for a more subtle approach. Online video rental pioneer Netflix (NASDAQ:NFLX) has been doing this masterfully for years. Internet-based phone service provider Vonage tried hard, but got tripped up by litigious rivals and harsh court orders. I see VMware following the Netflix path to a T.
And that, my friends, is why I think we ain't seen nothing yet out of VMware. The real growth story still lies ahead.
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