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EMC, VMWare Holding Steady

Posted on Thursday, Aug 6th 2009

A recent Gartner report said that IT spending is likely to fall 6% in 2009, compared to a previously forecast drop of 3.8%. Despite such reports, which paint a gloomy picture for all IT sectors, there are players such as EMC and VMWare that are continuing to hold steady.

EMC’s (NYSE:EMC) revenues fell 11% to $3.26 billion with EPS of $0.18. The market was looking for revenues of $3.2 billion with EPS of $0.16. Information Infrastructure segment revenues fell 13% over the year but grew 5% sequentially on account of some customers easing technology budget restrictions. RSA Security revenues grew 3% sequentially and 2% over the year as the demand for identity protection and verification products held out, seeing as information security remains one of the top priorities for companies everywhere. The Content Management and Archiving division saw revenues grow 3% sequentially but fall 12% over the year.

EMC continued their product innovation across all segments through significant R&D investments. They recently announced RSA software tokens for iPhones, which will be a cost-effective way to use two-factor authentication.

EMC is making good use of declining market valuations. They recently announced their successful bid for Data Domain; the acquisition will enable them to expand their de-duplication market. Data Domain’s technology helps corporates reduce the number of times the same file gets stored in their data centers. EMC paid $2.1 billion for the company.

EMC is looking to grow the de-duplication revenues to nearly $1 billion in the coming year. They already have the Avamar software, and partnerships with Quantum and FalconStor in this space. Analysts believe that EMC might just be evaluating the acquisition of Quantum next.

EMC’s stock is trading at $15.31, taking its market capitalization to $31 billion. A good chunk of the market cap is due to VMWare.

VMWare’s (NASDAQ:VMW) Q2 revenues managed to remain flat over the year at $456 million — a big achievement in the current economic climate. EPS, however, fell from the $0.13 earned a year ago to $0.08.

By segment, Services revenue grew 32% over the year to $228 million, while License sales fell 20% to $228 million. VMWare saw significant growth in their software maintenance renewal rates, with a 57% increase in renewal bookings over the year helping grow revenues 39% to $189 million. Professional Services revenue grew 8% to $39 million.

In terms of region, revenues from the US fell 3% over the year to $234 million and international revenues grew 3% to $222 million. There was double-digit growth in bookings in the key international markets of China, Japan, Canada, Brazil, and the UK.

The company was upbeat about the coming quarters and expects revenues for the fiscal year to grow 1% to 3% over the previous year’s revenues of $1.88 billion. For Q3, they expect revenues to be relatively flat at $465 million to $480 million.

VMWare successfully completed the transition to their next version of products – vSphere 4. vSphere will help transform virtualization from being a capital outlay for organizations to full-fledged system software that will allow customers to reduce both their capital and operating expenses.

In the coming quarters, the company is looking at releasing a series of management add-ons for common usage scenarios such as test and development, application or SLA level management, business continuity, and the internal cloud. These products will enable the operational benefits of virtualization and will speak to the maturity of VMWare’s existing product line.

They are also building the next major version of their desktop virtualization product suite, VMware View, which will incorporate the new protocol that they have been jointly developing with Terradicci and will leverage the performance and scalability of the underlying vSphere foundation. Additionally, they are working with their service provider partners to build public clouds based on vSphere; these clouds are expected to be launched by August of this year.

Gartner expects the virtualization market to grow 43% in the coming year to $2.8 billion. The market has already invited competition in the form of Microsoft, Oracle and of late, even IBM. While VMWare still commands nearly 80% of the market, Microsoft is slowly eating into their share of the pie. Microsoft is looking at providing the virtualization software free with their next release of the Windows operating system, Windows 7, to expand their existing 15% market share. Many believe that VMWare’s product is better than Microsoft’s, making it a tough market for the competition. VMWare is also believed to be on Cisco’s acquisition target list, although EMC may not be willing to sell.

The stock is trading at $33.2 with a market capitalization of $13.1 billion.

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