VMware announces Q2 2010 earnings

Yesterday VMware announced its financial results for Q2 2010.

Interestingly, the company started the call reporting a record growth in the SMB segment. VMware expects to accelerate this trend even more with the inclusion of vMotion in the vSphere 4.1 Essential Plus SKU. At the moment the vSphere Essentials business is growing 100% sequentially.
VMware added 20,000 new customers in the last two quarters, reaching 190,000 customers total, but it doesn’t say how many are in the SMB segment.

The company closes the Q2 quarter with $2.8B cash and $1.5B of deferred revenue, a year-over-year growth of 33%. 
Total revenue for the Q2 was $674 million, up 48% from Q2 2009, while total license revenue was $324 million, an increase of 42% from the Q2 2009. 
Software maintenance and support revenue was $290 million, an increase of 54% from last year, but the revenue decreased sequentially. Customers continue to buy on average more than 24 months of support and maintenance with each new license purchase.
Professional Services revenue was $60 million, an increase of 54% from last year, and up 11% sequentially, but VMware doesn’t expect a strong growth in the PSO revenue because of the investments in the partners ecosystem (VKernel seems to disagree here).

VMware reported a great performance in the Americas: US revenues increased 43% from a year ago to $334 million, representing half of total revenue, and Latin America scored a 85% year-over-year growth.

Interestingly, in US the total order value of renewed Enterprise License Agreements (ELAs) for the quarter exceeded the original contract value, even if the company didn’t share any specific number.
International revenue grew 53% to $340 million. Enterprise license agreements were approximately 20% of total bookings, and transactions with order values less than $50,000 represented approximately 44% of total bookings.
VMware reported a mixed performance in Europe: losing ground compared to Q1 2010 in those countries that heavily adopt virtualization, UK and Germany, and improving in more challenging markets like France, Ireland and Russia.  
APAC performance has been much better, with a 80% year-over-year growth, especially in China, Japan, India and Australia. 

Total operating expense, including costs of services and costs of licenses, increased 6% sequentially to $487 million.

The acquisitions of Rabbit Technologies (April 2010), of GemStone Systems (May 2010), and of the EMC’s Ionix division (March 2010) increased the VMware’s headcount of 400 new people. On top of them, VMware hired another 450 people, raising the total number of employees to approx. 8200.

R&D expenses increased sequentially to $136 million, or 20.2% of revenues, as compared with 19.5% in the Q1 of 2010.

Sales and marketing expenses were $215 million or 31.9% of revenues, compared with 31.6% in the prior quarter.

Q3 revenues are expected to be within a range of $680 million and $705 million, or year-over-year growth of between 39% and 44%. VMware expects license revenue to be flat to slightly down from Q2.
The company currently forecasts the 2010 revenue between $2.725 billion and $2.8 billion, equal to a growth of 35% to 38% compared to last year.

Beyond numbers, as usual, it’s interesting how the VMware’s executives are changing their message in each call, to adjust to the new go-to-market strategy.
Tod Nielsen, the company’s COO, is now calling the SpringSource Spring framework as “the programming model of the cloud”.

Another interesting detail emerged during the Q&A session of the call is the forecast for the server growth in 2011:


Question from Merrill Lynch:

…As you give consideration for the first half of the year, clearly the results are very impressive. There’s been a big rebound in several markets. And how does your business look as you start planning for 2011? Should we expect a continuation of these kinds of growth rates or should we expect some moderation given that you have proper comps for the server market ahead?…

Answer from Mark Peek, VMware’s CFO:
… You know, certainly the first half of 2010, we saw a rebound in the economy and we, like most of the IT industry, benefited from this rebound. Sever growth rates were in the 20% range; they’re forecasted to grow at somewhat similar rates although moderating a bit in the second half. The early indications for 2011 on server growth rates is that they’ll decline somewhat significantly in 2011. So that said, our business, although it’s influenced by server growth and also is impacted by installed bases which are moving to virtualization, and then on the other side of that is enterprise agreements that we’ve sold in which companies have inventoried some of their licenses…

Last but not least VMware’s commented on the new per-VM licensing model that will be introduced for all management tools except vCenter Server starting September 1st:

…The per-VM pricing is something that we introduced in reality as a response to how customers consume the products and to make it easier for them to consume and to build their own ROIs on the value proposition that it adds. At this point we don’t expect it to have a material impact on the near-term economics for us, but certainly we introduced per-VM pricing to help both us and our customers.


Thanks to Seeking Alpha for the earnings call transcript as usual.