The Wall Street Journal-20080130-VMware Slumps on Outlook- Drags EMC

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VMware Slumps on Outlook, Drags EMC

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The specter of slowing growth at VMware Corp. pushed down its shares by more than a third and clipped 6% from those of majority owner EMC Corp., despite robust sales and earnings growth at both companies.

Analysts said the declines at both companies show the skittishness of investors about technology spending as the U.S. economy slows.

VMware, which makes virtualization software and based in Palo Alto, Calif., was last year's hottest IPO after a minority stake was spun out by storage systems maker EMC last summer. But after the market closed Monday, it reported fourth-quarter sales of $412.5 million, up 80% but $5 million below analysts' estimates. Although earnings doubled, topping analysts' expectations, the stock fell 34%, or $28.13, to $54.87 as of 4 p.m. yesterday in New York Stock Exchange composite trading.

EMC fell $1.02 to $15.89 on the NYSE, largely reflecting the decline of the value of its 87% stake in VMware. Shebly Seyrafi, an analyst at Caris & Co., said EMC's share price should fall $1 for every $6 decline in VMware's, so the relatively small EMC decline "is a celebration" of EMC's results by investors.

EMC Chairman Joseph Tucci said in an interview that "both EMC and VMware are performing very well." He said that VMware has "vast opportunities" and that its projected 50% growth rate this year "isn't too shabby." He said the stock decline at VMware "blows my mind," adding, "$5 million isn't much of a miss -- about 1.2%." But Mr. Seyrafi who downgraded his rating on VMware stock after its earnings report, said he was concerned because accounts receivable grew rapidly in the fourth quarter, indicating much of the business occurred at the end of the quarter and might result in a slowdown in the current quarter. Mr. Seyrafi and Caris don't own stock in either company.

Mr. Seyrafi said he thinks competitive pressure from Microsoft Corp. and "to a smaller extent" from Oracle Corp. and Citrix Systems Inc., will grow this year as those companies introduce virtualization products and expand their sales efforts.

VMware has had the virtualization market mostly to itself, and sales have boomed as corporate computer planners discovered they could virtualize servers, making a single computer act as if it were five or ten different computers. That reduces the need to buy more hardware and cuts energy costs while saving floor space in corporate computer rooms.