VMware and the law of large numbers: How long can heady growth last?

As VMware prepares to announce its third-quarter earnings, experts assess its short-term growth prospects and whether cloud computing can fuel company growth over the long term.

VMware will report its earnings results for the third quarter of 2010 today, and Wall Street analysts are bullish on what the numbers will reveal about the company's current health. But in the long run, the law of large numbers suggests that substantial company growth will return to the mean, even for a market-leading juggernaut like VMware.

No one predicts a crash for the Palo Alto, Calif.-based VMware Inc. anytime soon. In the first quarter of 2010, VMware reported $634 million in revenue, up 35% from the same quarter of 2009. In the second quarter of 2010, revenues were $674 million, representing year-over-year growth of 48%.

For this quarter, analysts predict similar numbers: Technology Business Research Inc. (TBR) expects revenue of $700 million for the quarter, an increase of 43% over last year. Wedbush Morgan Securities' expectations are roughly the same, calling for 42% growth over last year.

Following last year's recession, many companies can boast growth that looks impressive on paper because it's being compared with meager 2009 numbers. For VMware, the second-quarter comparison is especially misleading, as the second quarter of 2009 was its worst of the year, where growth essentially fell flat, at a 0.1% decline.

But according to Jessica Breen, enterprise software analyst for TBR, adjusting for the recession by looking at 2008's numbers, VMware's 2010 earnings compare favorably, showing 47% growth.

"Believe it or not, VMware is still like a $3 billion startup," said Kaushik Roy, a Wedbush analyst.

The short term picture: Room to grow
All the talk about virtualization might make it seem like the technology is ubiquitous, but industry watchers say the market for virtual infrastructure products isn't saturated, giving VMware room to keep raking in profits.

Believe it or not, VMware is still like a $3 billion startup.

Kaushik Roy
analystWedbush Morgan Securities

"Virtualization is still only [about] 30 to 40% penetrated in servers, and much less in desktops," said Dan Gordon, director of research for Boston-based venture capital firm Valhalla Partners. Gordon also noted that according to IDC, VMware still sported 35% market share in 2009 vs. 11.8% for Microsoft, and all others left in the dust of single digits. Right now, Gordon said, "It's not a law of big numbers; it's a law of big percentages of TAM [total addressable market]."

Moreover, if the virtual infrastructure piece of the puzzle is still nascent, the cloud computing market remains embryonic, and represents another growth opportunity for VMware. The company has "managed the remarkable trick of conflating 'cloud' and 'virtualization' in a way that puts [it] right at the center of the cloud," observed Gordon.

But the short term outlook isn't without its risks for VMware, say technology analysts, particularly when it comes to the areas its product offerings remain weakest: virtualization management tools and virtual desktops.

"Companies are increasingly eliminating redundant vendors and starting with the management portion of the data center and then moving down into the underlying components [of the infrastructure]," said Rob Enderle, an analyst at the Enderle Group. "VMware is not strong in that kind of 'control point' software, the console that handles the vast variety of things that need to be managed."

As for VDI, Wikibon.org analyst David Vellante says VMware should try to leapfrog the "desktop conversation" altogether and focus on mobile applications. "VMware's Spring acquisition and a new middleware platform are potentially huge," he said. "But VMware has to figure out how to get rid of the desktop notion and move into mobile computing. That's a game changer, and VMware doesn't have it right yet."

The long term picture: Competitors wait in wings to capture public cloud
TBR estimates the market size for overall cloud computing (public, private and hybrid) will be about $250 billion by 2015. But TBR's Breen predicts VMware's slice of that pie will be dwarfed by the likes of Oracle Corp., Microsoft and even partner Cisco Systems Inc.

VMware will probably continue to dominate the private cloud market, which Breen pegs at $50 billion out of the overall $250 billion market. Of that $50 billion private cloud market, Breen expects VMware's take to be about 10%, with another potential $5 billion coming from the public cloud.

But when it comes to the $200 billion left in the overall market, Breen sees it being carved up among bigger infrastructure players; she estimates Microsoft will capture $50 billion, Oracle $60 billion -- "particularly if they acquire one of the other virtualization players, like Citrix," according to Breen -- and Cisco at $60 billion. "This is why VMware is driving its cloud strategy through the Acadia alliance with Cisco and EMC."

Wedbush's Roy says it's too soon to tell how VMware will finish in the cloud race. "[VMware itself is] trying to figure out what markets and products [it] want[s] to play in two to three years down the road, or what those markets may look like," he said. "That makes it very challenging for us financial analysts to forecast their revenues, because we don't even know what markets they would address … down the road."

Beth Pariseau is a senior news writer for SearchServerVirtualization.com. Write to her at bpariseau@techtarget.com.

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