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Conference call mystery: Why did VMWare set up an $11 billion stock drop?

I'm doing a plain copy and paste here as it is a bit too sensitive to comment on this one right now:

But it looks like executives at Palo Alto, Calif.-based VMware recently thumbed their noses at this ignoble tradition, giving up $11 billion in market capitalization for the privilege and leaving some employees and analysts wondering what the company’s chief executive and her CFO are really up to.

VMware, all of 10 years old, is the leading maker of something called “virtualization software,” which makes it possible for a computer server to run many different operating systems at one time. This is especially useful stuff now, because it means one server can perform the functions of many, allowing companies to scale back data center costs. (The VM in the name stands for “virtual machine.”)

Read the rest here at Financial Week

And analysts have been very harsh last Tuesday:

With metrics like that, VMware’s conservatism seemed outsized. And it prompted incredulous words from analysts on the earnings call that Tuesday evening.

“Fairly extreme,” Credit Suisse First Boston’s Jason Maynard said of the guidance.

“Pretty dramatic,” added Toni Sacconaghi of Sanford Bernstein & Co.

RBC Capital Markets’ Tom Curlin pressed Mr. Peek, the CFO: “On the top line, how do you recommend that we get you to 50% year-over-year [revenue growth]? If I assume that that’s not falling off a cliff. So we’re going to have to decelerate the revenue down to 30%, 40% year-over-year growth by the end of ’08?”

One thing that may have made the news hard to accept is the fact that VMware has more than $550 million in deferred revenue on its balance sheet. (Deferred revenue is the portion of sales from a multiyear license or service agreement that is moved over to the income statement incrementally over the life of the contract. In VMware’s case, license agreements are typically two-year contracts.)

To grow 50% by year-end 2008, from $1.3 billion in total revenue to $1.9 billion, as Mr. Peek advised, VMware needs to generate $650 million in new sales over the next 10 months. But as analyst Mr. Sacconaghi took care to note to Mr. Peek, “a lot of that revenue is in the bag for 2008” in the form of deferred revenue. If less than half the current deferred revenue carries over by December, or $200 million, half of VMware’s sales teams can go on vacation and the company will probably still make its goal—they just put up $412 million in revenue for the fourth quarter alone.

Merrill Lynch’s Kash Rangan was direct: “It just doesn’t seem to add up. Maybe we’re missing something?...[The] magnitude of the deceleration that you’re talking about, it just doesn’t jibe with people’s expectations. And I’m wondering if it’s just plain old conservatism with [economic] macros and other things that are related to forecasting revenues for a company with limited public history, or there is something else?”

Straining for an explanation, Mr. Rangan pressed CEO and co-founder Diane Greene about whether the shift in outlook could be attributed to concern over Microsoft, which will release its virtualization product, Hyper-V, in June. “How do you feel competitively with Hyper-V?” he asked. “I know you still have the lead over the competition and what not, but are you seeing any impact?”


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