UPDATE: VMware 3Q Profit Down 54% On Margins; 4Q View Strong

VMware Inc. (VMW) showed some reassuring signs in its third-quarter earnings Wednesday: Although profit slid 54% on higher research and marketing costs, revenue beat expectations and the company said customers were becoming more positive on spending.

Third-quarter revenue of $490 million cleanly topped Wall Street's views and the company projected fourth-quarter revenue of $540 million to $560 million, ahead of the $523 million expected, according to a Thomson Reuters poll. VMware also said the first quarter would be "down sequentially," but declined to provide a range. Analysts expected $513 million.

Shares rose 1.2% to $45.45 in after-hours trading. The stock has risen by more than three-quarters this year.

Palo Alto, Calif.-based VMware, which is majority owned by EMC Corp. (EMC) dominates the market in virtualization technology, a software-based technique for allowing one computer to do the job of several, which is considered a good way of reducing IT costs.

But in recent quarters, VMware's previously runaway revenue growth has stalled as corporate customers cut spending in response to the recession, and amid growing challenges from companies including Microsoft Corp. (MSFT) and Citrix Systems Inc. (CTXS).

Speaking on a conference call Wednesday, VMware executives said that although corporate spending remains tough, there are some positive signs emerging.

"We're beginning to get better visibility in their business and it appears more customers are moving forward with their IT investment plans," Mark Peek, the company's chief financial officer, said on a conference call. In particular, customers are showing a renewed appetite for signing longer term bulk licensing deals than in previous quarters, he said.

During the quarter, VMware acquired software maker SpringSource in a deal that will help speed development of products in a hot market for enterprise software.

VMware reported earnings of $38.2 million, or 9 cents a share, down from $83.3 million, or 21 cents a share, a year ago. Excluding stock-based compensation and other items, earnings were flat at 24 cents. Analysts expected 20 cents, excluding items.

Revenue rose 3.7% to $489.8 million, down 1% in the U.S. and up 9% internationally. In July, the company said it expected $465 million to $480 million, below Wall Street's expectations.

Revenue from software license deals decreased 16%, while revenue from services, which include subscriptions, consulting and information technology support, jumped 33%. VMware's services segment has picked up a larger share of total revenue in recent quarters.

Operating margins dropped to 4.7% from 21.4%. Research and development costs jumped 56%, while sales and marketing costs were up 10%.

-By Jessica Hodgson and John Kell, Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com

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