Where Does VMware Go From Here?

By Paul Carton

Virtualization software leader VMware (VMW) was one of the great stock stories of 2007, skyrocketing after its IPO and ending the year up 63%. But in an abrupt reversal, investors have pummeled the stock during 2008 - including a 33% plunge immediately after VMware's latest earnings announcement.

And yet, while the software maker's 4th quarter revenue did fall slightly short of Street projections, sales still rose 80% and earnings surged more than 150% - beating the consensus forecast by 2 cents a share.

Nonetheless, many analysts appeared spooked by VMware's revenue shortfall, citing fears of competitive pressures from rivals such as Microsoft (MSFT), Oracle (ORCL), Citrix Systems (CTXS) and IBM (IBM).

But are these competitive fears, and the resulting stock meltdown, justified?

To find out ChangeWave took a close-up look at the virtualization market - including the ongoing horserace between VMware, Microsoft and other key vendors. A total of 1,368 respondents involved with IT spending in their company participated in our January 2008 survey.

Here's what we found:

The Virtualization Horserace

We asked respondents which virtualization software vendor(s) their company utilizes (note that one-in-four said their company uses virtualization software or services).
Among that group, 58% said their company currently uses VMware software - 3 points more than in our previous survey in October 2007.

Conversely, as the above chart points out, not one of VMware's top four competitors experienced a market share increase over this time period.
Importantly, VMware also maintains a lead in customer satisfaction compared to the other major virtualization vendors, with 54% of its customers saying their firm is Very Satisfied with VMware's virtualization products. IBM (51%) is also faring well.

At the other end of the spectrum, Citrix (32%), Oracle (25%) and Microsoft (20%) are all receiving significantly lower customer satisfaction ratings.

Future Purchasing

We also asked respondents about their company's future spending plans. And among the 10% who say their company will purchase virtualization products in the next 90 days, better-than three quarters report they'll be buying from VMware (76%). That's a robust 5-point jump for VMware since our previous survey in October 2007.

In contrast, the combined share of virtualization planned purchases for VMware's four main competitors declined an average 1% over the same time period. In fact, the only competitor to register an actual gain in planned purchases is Microsoft (13%) - up 1-pt.

The bottom line, according to our survey, is VMware's market share is still accelerating. Moreover, there are very few signs that its competitors currently pose a threat to the company's virtualization leadership.

There are, however, other warning signs affecting the virtualization space that may provide insight into VMware's weaker-than-expected visibility.

Warning Signs on Corporate Spending

For the first time in years, our overall Corporate Software Survey results point to negative spending growth for the current quarter. They provide clear signs of a recession in business spending.

When we looked at corporate spending on specific software categories for the next 90 days, the picture grows even tougher. For example, Security software falls 7-pts and Business Intelligence software is down 2-pts.

Virtualization spending going forward - while faring better than the other software categories - is unchanged from our October survey. In other words, Virtualization growth for the next 90 days remains essentially flat.

In sum, the survey results show the recent hit to VMware's stock price was most likely caused by the overall recessionary environment in corporate spending, and was not due to increased competitive pressures, as cited by some Wall Street analysts.

In fact, instead of losing market share, we find VMware is actually increasing its domination of the virtualization market.

This notwithstanding, investors may continue to be jittery until signs emerge that corporate spending is stabilizing.

We'll have more on the virtualization horserace, along with future corporate software spending trends, in an upcoming update.

Jim Woods co-wrote this article.