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Come On! VMware`s Quarter Wasn`t that Bad


I’ve long thought VMware, both the company and its virtualization software, were in trouble, but come on, people, it’s not like the last quarter was awful.

When I last looked at the stock market – 2 p.m. EST, Jan. 29 – VMware’s stock was being beaten to death by crazed sellers. How badly? Try down $27.30 per share, or 32.9 percent since the market opened. Ouch!

And why were they throwing stock overboard like passengers tossing other passengers off an overloaded lifeboat? Because, dare I say it, the company only showed a 150 percent increase in fourth-quarter profit and an 80 percent jump in sales to $412 million, when the analysts had predicted that it would make $417 million.

Say what? My calculator tells me that VMware missed its earnings prediction by about 1.2 percent and that by all objective measures it had a great quarter. Look at those numbers again: 150 percent increase in profit. 80 percent jump in sales. I don’t know about you, but if I were a software vendor, a MacDonald’s franchiser or a plumbing supplies store owner, I’d settle for an 80 percent jump in sales.

Now, I think VMware, the company, was always a bad buy. What did you get for buying VMware? I’ll tell you, you got a small fraction of 13 percent of the company. The lion’s share, 87 percent, was kept by EMC. I’m sure EMC will put the best interests of VMware stock holders over those of EMC. Oh, and would you like to buy a slightly used bridge between Brooklyn and Manhattan? Only one owner.

Besides, VMware is a perfect example of a proprietary software company–think SCO, think Sun before it got the open-source religion–about to be overrun by open-source software. In 2006, Sunbelt, a Microsoft partner, and Yankee Group reported that VMware had a total virtualization market share of 55 percent.

That was then. This is now.

Today, open-source software virtualization programs such as Xen, OpenVZ, KVM, VirtualBox and UML (User Mode Linux) are quickly gaining traction. Others such as Parallels, which is based on open source, enable users to do things such as run multiple instances of Mac OS X on a single system that’s beyond VMware’s current ability.

While VMware offers free, low-end virtualization programs, VMware Player, for example, its higher-end software, is anything but free. Thus, the open-source programs, in the hands of administrators who know what they’re doing with virtualization, are a better (read cheaper) deal for companies.

In addition, because VMware isn’t open source, its development speed lags behind the manic pace of the Darwinian, only the best code survives, free software world.

The final nail in the coffin is that operating systems companies are integrating virtualization into their operating systems. The Linux kernel now has KVM baked in. Red Hat and Novell both offer Xen virtualization with their Linux distributions.

There’s also a little company named Microsoft – heard of them? – they’ve decided that you can virtualize any version of Vista after all. Microsoft also just bought Calista Technologies, a desktop virtualization company. Their good buddy Citrix also bought XenSource, the company behind Xen, over the summer.

Now, maybe in the long run, VMware could deal with the open-source threat. After all, look at how well Unix on x86 has done…well, maybe not. It’s also possible that it could handle Microsoft building virtualization into the operating system. I mean, aren’t we all still using the Netscape browser? No?

OK, so I’m convinced that, in the long run, VMware’s in trouble. But, in the short run, like today’s market panic about VMware? Come on, people. Save it for early 2009, when I think you’d need to be an idiot to have VMware in your stock portfolio. For today, though, get a grip! The current news is good.

P.S. I don’t own a share of any technology stock and never will so long as I’m in the technology journalism business.

A version of this story first appeared in eWEEK.

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