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Virtualization - VMware To Cut its Hypervisor Price To Free
Blames the Economy - Not Microsoft - for Projected Shortfall

Two weeks after its co-founder and CEO Diane Greene was abruptly dismissed, VMware – now run by one of Microsoft’s old rulers, Paul Maritz – disclosed exactly how much under its promised 50% year-over-year growth 2008 is going to be.

It’s going to be 5%-8% short of the magic number.

Reason of course dictates that since 2008 is looking more and more like Armageddon, 42%-45% year-over-year growth may some day look heroic, but the punters didn’t think so Tuesday after they did a quick calculation and realized that VMware was saying that its growth in the second half would be just 30%, down from 61% in Q1 and 88% last year.

One analyst muttered something about “shocking margin compression.”

VMware earned $52 million, or 13 cents a share, in Q2 on revenues of $456 million, up 54% year-over-year – but below consensus of $458.6 million – and it reckons that this quarter’s revenues will only be between $462 million and $468 million with a GAAP operating margin of 11%-13%.

Wall Street wanted $497 million in Q3.

So Wall Street did what Wall Street does best these days and took another 15% off the virtualization leader’s already destroyed stock price in after-hours trading, pushing it down below 33 bucks.

Not much better now, this is uncharted territory for a company that only went public last summer, opened at $52 and jumped to $125 by October even though it’s steadily eroded 70% ever since Wall Street tumbled to the fact it would have to compete against Microsoft.

Maritz, a veteran of Microsoft’s epic battles for the browser, the server and the enterprise, the guy who by his own account wrote its play books, is there to see that VMware wins this battle.

Microsoft, he said, is “formidable, but it’s not invincible.” You just have to make yourself hard to catch. Keeping technologically ahead of Microsoft, he said, is the key to besting it.

However, Microsoft’s immediate threat to VMware is the free Hyper-V hypervisor that it’s bundling with Windows Server 2008 – sure it’s a subset of VMware’s technology and less mature but free, baby, free – so matching Microsoft’s price point, Maritz intends to make VMware’s ESXi hypervisor free by the end of the month in a market-broadening play.

ESXi currently costs between $495 and $1,090 depending on the level of support that goes with it. VMware will sell its VM Infrastructure widgetry on top of the free hypervisor hoping to rob Microsoft of SMB accounts. Microsoft doesn’t yet have what VMware can put on top of the hypervisor.

According to Maritz, VMware hasn’t lost a single deal to Microsoft.

The problem, said CFO Mark Peek, is with the macro-economy and the impact uncertainty and fear are having on the behavior of enterprise accounts.

Given its experience in Q4, VMware was expecting to do a bang-up business in Enterprise License Agreements (ELAs) this year, essentially trading a margin-sacrificing discount for more product than an account could immediately use and letting it deploy at will.

But the bottom dropped out of ELAs in Q2, Peek said, denying that either VMware’s channel or OEM business was slowing down too, an assertion that analysts may or may not buy considering ELAs, something VMware started in 2Q07, only represent 20% of its revenues.

Peek, however, stuck to his story of lengthening sales cycles, delayed closings and piecemeal purchasing by corporate, offering as an example an enterprise deal that was supposed to bring in $2 million in June winding up as a $300,000 channel sale.

When asked if the weakness corresponded to verticals, he said, no, it was geographical, starting in the US and now spreading to Europe.

So to bring costs more in line with reality, Maritz has declared what he called a “hiring pause,” limiting new recruits to strategic hires after a year of exponential growth in the company’s headcount.

The company also needs to open up the BRIC countries and Asia-Pacific, he said, places where it has yet to have much penetration.

The company’s US revenues in Q2 were up 43% year-over-year to $240 million and international revenues were up 68% to $216 million, compliments of Europe and Australia.

Software license revenue were up 39% year-over-year in Q2 to $284 million and service revenues, which include support, subscription and professional services, came in at $172 million, up 85% year-over-year.

Deferred revenues stand at $721 million, up 74% year-over-year, with deferred licenses accounting for $27 million. The pipeline is said to be “healthy.”

According to Maritz VMware has all the making of a great company, one that changes the way people do computing.

It’s moved from the simple hypervisor that isolates the operating system from the underlying hardware, to a virtual infrastructure, and is now – he said, dropping the latest hot buzzword – “on the threshold of a major new opportunity – as customers begin to leverage VMware as both the on-ramp to the Cloud and for key elements of the Cloud itself.” Revenue-driving cloud announcements are set for September.

VMware’s technical people are as good as anything Microsoft’s got but now that it’s approaching $2 billion, he said, it needs to execute on multiple fronts simultaneously and “fire on all cylinders.”

Maritz tackled the “trauma” of VMware losing Diane Greene and the morale issue head on. So far, he said, the company hadn’t lost anybody and to make him more palatable the company is going to swap the staff’s underwater options for new ones – hopefully this quarter but at least by the end of the year. That ought to make him popular.

About Maureen O'Gara
Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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Trackback Added: VMware To Cut its Hypervisor Price To Free … ESXi that is, not ESX; Two weeks after its co-founder and CEO Diane Greene was abruptly dismissed, VMware - now run by one of Microsoft’s old rulers, Paul Maritz - disclosed exactly how much under its promised 50% year-over-year growth 2008 is going to be. It’s g...

Trackback Added: VMware To Cut its Hypervisor Price To Free … ESXi that is, not ESX; Two weeks after its co-founder and CEO Diane Greene was abruptly dismissed, VMware - now run by one of Microsoft’s old rulers, Paul Maritz - disclosed exactly how much under its promised 50% year-over-year growth 2008 is going to be. It’s g...

Trackback Added: VMware To Cut its Hypervisor Price To Free … ESXi that is, not ESX; Two weeks after its co-founder and CEO Diane Greene was abruptly dismissed, VMware - now run by one of Microsoft’s old rulers, Paul Maritz - disclosed exactly how much under its promised 50% year-over-year growth 2008 is going to be. It’s g...




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