VMware forecast disappoints, shares tumble

By Jim Finkle

BOSTON (Reuters) - Business software maker VMware Inc (VMW.N) issued a revenue outlook on Tuesday that fell far short of expectations, saying customers were delaying purchases or opting for smaller contracts due to a weak economy.

The company's new chief executive, Paul Maritz, also cited competition from a product launched last month by rival Microsoft Corp (MSFT.O) as a factor behind the revenue outlook.

Shares of VMware tumbled 14 percent in after-hours trading as the third-quarter forecast overshadowed the company's second-quarter results, which were in line with expectations.

"In a word: disappointing," said Jefferies & Co analyst Katherine Egbert. "They might be trying to lower the bar for the new CEO."

VMware shocked investors two weeks ago by cutting its full-year revenue target and replacing CEO and Co-founder Diane Greene with Maritz, a former Microsoft executive.

The shares have lost a third of their value since then.

VMware, which is majority owned by EMC Corp (EMC.N), said it expected to report third-quarter revenue of between $462 million and $468 million, below the average analysts' forecast of $497 million, according to Reuters Estimates.

It also forecast full-year revenue growth of 42 percent to 45 percent, compared with its July 8 forecast of growth "modestly below" 50 percent.

In 2007, VMware's revenue rose 88 percent.

WEAK ECONOMY

Despite talk of the greater competition, VMware primarily blamed the state of the economy for its weak outlook.

Maritz, who was head of EMC's cloud computing division prior to being named CEO of VMware, said in an interview that the situation had caused a slowdown in signing large deals with corporate clients.

"The key term is uncertainty. I don't think we are alone. I think the whole industry does not know where this thing is going," Maritz said, referring to the economic slowdown. "Uncertainty breeds hesitation."

Some corporate customers are taking longer to sign contracts on large deals for $1 million or more because they are getting more scrutiny from senior company executives who are anxious about spending as the economy weakens.

Other customers are choosing to buy in smaller quantities, making purchases only as they need the software, rather than buying in large quantities and stocking up to get discounts, he said.