October 18, 2010 / 8:31 PM / 9 years ago

UPDATE 2-VMware cash flow disappoints; shares fall

* Q3 bookings declined in third quarter

* Q3 cash flow from operations disappoints investors

* Sees Q4 rev $790 mln-$810 mln vs Street view $774 mln

* Q3 EPS ex-items 39 cents vs Street view 35 cents

* Shares tumble 6 percent in after-hours trading (Adds details on bookings, valuation; adds byline)

By Jim Finkle

BOSTON, Oct 18 (Reuters) - VMware Inc’s (VMW.N) sluggish software sales growth and disappointing quarterly cash flow pummeled shares, casting a shadow on one of the technology sector’s most richly valued stocks.

Its shares plunged as investors also punished technology giants Apple Inc (AAPL.O) and International Business Machines Corp (IBM.N) for less-than-stellar earnings reports. [ID:nN15272312]

Investors grilled executive of VMware on the reasons for the shortfall at the maker of virtualization software in a conference call. But Chief Operating Officer Tod Nielsen and Chief Financial Officer Mark Peek said business was on track with the company’s internal plans.

“All told we had a great September quarter,” Chief Financial Officer Mark Peek said in the conference call.

His optimism did not resonate with Wall Street analysts.

“A lot of people are fixated on the change in deferred (revenue),” JP Morgan analyst John DiFucci said on the same conference call. He was referring to a steep decline in deferred revenue, or the portion of a sale that has been completed but not booked as revenue on a company’s income statement.

VMware’s bookings, or new sales, dropped about 3 percent in the third quarter from the second quarter. They had climbed more than 15 percent in the second quarter from the first quarter.

The company posted cash flow from operations of $197 million, far below what most investors were expecting, said Pat Walravens, an analyst with JMP Securities. He had forecast cash flow from operations of $311 million.

Laxmi Poruri, an analyst with Primary Global Research, said investors reacted so strongly to the news because VMware is an expensive stock based on cash flow, a key metric that investors use to value shares.

VMware shares closed trading on Monday at about 24 times next year’s average analyst forecast for the company’s cash flow per share. Rival Microsoft trades for eight times next year’s cash flow per share, while Oracle Corp ORCL.O trades at a multiple of 11.

The stock trades at a premium because its sales are growing faster than those of many other technology companies. Server virtualization products are used to build virtual data centers and cloud computing systems, two of the computer industry’s fastest-growing areas.


VMware’s results otherwise looked positive and the virtualization software maker’s revenue forecast beat Wall Street projections.

The company said it expects fourth-quarter revenue of $790 million to $810 million, ahead of the $774 million average forecast of analysts, according to Thomson Reuters I/B/E/S.

“Third-quarter results were driven by strong demand across products and regions, led by the U.S. federal sector,” Chief Financial Officer Mark Peek said in a press release.

VMware reported third-quarter profit, excluding items, of 39 cents per share, above the average analyst forecast of 35 cents.

Revenue climbed 46 percent from a year earlier to $714 million, beating the average analyst forecast of $698 million.

Still, Peek warned on the conference call that revenue growth could slow sharply next year. “I believe we can deliver 20 percent growth in 2011,” he said.

Shares of VMware, which is majority-owned by data storage equipment maker EMC Corp EMC.N, fell 6.1 percent to $73.56 in extended trade after closing at $78.35 on the New York Stock Exchange. (Reporting by Jim Finkle. Editing by Phil Berlowitz, Robert MacMillan, Gary Hill)

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