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VMware's new CEO lays out strategy on Q2 earnings call

After announcing a lowered revenue forecast, VMware's new CEO laid out the strategy for competing with Microsoft and for bulking up the company's management software portfolio.

On Tuesday, July 22, Palo Alto, Calif.-based VMware Inc. broke in its new CEO and president, Paul Maritz, by having him lead the company's second-quarter 2008 earnings call. After just two weeks on the job, Maritz detailed VMware's strategy to compete with Microsoft and its stronger focus on infrastructure management products.

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The company's CFO, Mark Peek, announced increased revenue but a lower financial outlook given a weak U.S. economy and poor enterprise license agreement (ELA) revenue.

VMware's revenues for the second quarter were $456 million, an increase of 54% from the second quarter of 2007, but the company lowered its 2008 revenue growth target from 50% to between 42% and 45%. Third-quarter 2008 revenues are expected to be within a range of $462 million and $468 million.

"We continue to close deals, though smaller in size," Peek said. "While our revenue forecast is more cautious, it is driven by customer buying patterns in a weak economy."

It's more than the economy, stupid
But the economy may not be entirely to blame for VMware's disappointing ELA revenues. One ELA customer, a director of server architecture and planning at a global managed service provider, reported to last year that VMware was overpriced and difficult to work with. "They act like Oracle did in the 1990s -- like they're the only ones" adding that "they're still totally predatory on their pricing."

While our revenue forecast is more cautious, it is driven by customer buying patterns in a weak economy.
Mark Peek,
CFOVMware Inc.

The director, who was prohibited by his employer from speaking with the press, said his company spent several hundreds of thousands of dollars with VMware, signed an ELA but hadn't experienced any savings from buying ESX licenses individually. He said he received better price quotes from value-added resellers (VARs) than by going directly to VMware.

Alex Bakman, founder and president of Portsmouth, N.H.-based VMware partner company VKernel, said that though his company has a great relationship with the company, VMware has exhibited the kind of arrogance that comes with being the only game in town. "Things will get better now that there is more competition in the market," he said.

But VMware holds firm to the notion that competitors like Citrix with XenServer and Microsoft with Hyper-V pale in comparison to VMware in terms of product integrity, and Peeks said that Hyper-V's entrance into the market was not a factor in VMware lowering its revenue expectations.

"Microsoft is seeking to displace us, but [Hyper-V] is much less mature than our products, and we are not aware of having lost any deals to them," Peek said.

VMware's new CEO spent 15 years at Microsoft when the company was just starting to establish itself in the networking, browser and database spaces, he said. "I know that Microsoft is a formidable competitor, but it is not invincible. We have a lead … and will be very hard to catch, even for Microsoft."

He added, "Microsoft's Hyper-V is new and will take time to mature. They don't have a suite of software anywhere akin to what VMware has. The key when it comes to [competing with] Microsoft … is to innovate, invest and keep increasing the customer value proposition, which we intend to do."

New strategy; infrastructure management software
Looking ahead, Maritz said VMware will focus on adding "broad software solutions that bring manageability and flexibility" into virtualized data centers. The company already has 20 products in these categories and, he said, more will be added through strategic acquisitions, technology partnerships and investments.

VMware announced a number of bundled application and infrastructure management products in the second quarter of 2008, including VMware Lifecycle Manager, VMware Lab Manager and VMware Stage Manager and VMware Site Recovery Manager.

The company also announced the acquisition of B-hive Networks, a privately held application performance management software company to offer its products as its own.

VMware's acquisition of Thinstall earlier this year also yielded an application virtualization product called ThinApp that allows customers to run multiple versions of virtually any application on any Windows operating system without conflict.

Maritz also said VMware is on a "trajectory" path and is determined to make virtualization ubiquitous throughout the U.S., and in parts of the world that the company has not yet penetrated, such as Asia. Part of this strategy involves the announcement that VMware's ESXi will be available for free.

Also, Dell Inc., Hewlett-Packard Co., IBM, Fujitsu Siemens Computers, Hitachi, and NEC all began delivering servers embedded with VMware ESXi hypervisor in Q2.

As previously reported, cloud computing will be a major focus. VMware is working with partner companies such as Pennsylvania-based SunGuard to bring its disaster recovery software to cloud environments via VMware Infrastructure, Maritz said.

The revenue and strategy news follows a major upheaval on July 7, when VMware's board of directors replaced company co-founder, President and CEO Diane Greene with Maritz.

Maritz started the earnings call by commending Greene for her accomplishments and for bringing the company to where it is today. Maritz said that he understands "the trauma a company experiences going from a founding generation to the next generation."

"The management change is a concern of mine. … I am hopeful we can weather the transition with as little negative impact as we can," Maritz said.

Let us know what you think about the story; email Bridget Botelho, News Writer. And check out the Server Virtualization Blog.

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