VMware shares fall after full year outlook expressed

VMware’s stock price took another beating on the street today as the company announced significantly lower revenue guidance for the second half of the 2008 fiscal year. Why the gloomy outlook? The company said that customers weren’t signing up for enterprise software licensing agreements because of a weakened economy.

Total revenue for the second quarter was $456 million, up 54 percent from the previous year. Second quarter U.S. revenues grew 43 percent to $240 million from the second quarter of 2007. International revenues grew 68 percent to $216 million from the second quarter of 2007 driven by strength in Europe and Australia. Software license revenue grew 39 percent to $284 million from second quarter of 2007. Service revenues, which include support, subscription, and professional services, were $172 million, an increase of 85 percent from the second quarter of 2007.

“VMware had another solid quarter, proving that the quality of our products and the immediate return on investment that they yield is delivering high value to customers,” said Paul Maritz, president and CEO of VMware. “I am personally excited to become part of a company that has the potential to become one of the truly important and enduring companies in the software industry.”

So, things sound positive, don’t they? After all, these are good numbers by most estimates; but of course, the street was hoping for more.

And then there is the forward looking financials. Morgan Stanley analyst Adam Holt warned that the cuts to consensus estimates for 2008 and 2009 are so severe that they raise questions about VMware’s sustainable growth and the associated multiple.

VMware expects third quarter revenue to be within a range of $462 to $468 million compared with Wall Street’s view of $497 million. The company said that 2008 revenue is now targeted to grow approximately 42 percent to 45 percent, compared with the 48 percent growth that analysts had expected. Earlier this month, the company announced management changes and said the company’s 2008 revenue growth would be “modestly below” its prior target of 50 percent.

On the conference call today, VMware’s CFO Mark Peak said that the sales cycle was seeing evidence of lengthening because of a worsening economic environment. He added that companies were taking longer to sign deals and that some customers were opting for lower priced enterprise license agreements. Unfortunately for VMware, enterprise license sales have been slowing and competition for these economically challenged dollars is growing.

VMware (VMW) shares closed up 2.79 percent to $37.97, but after hour trading reacted to the financial news negatively causing shares to drop all the way down to $32.39. At that price, VMware stock hits an all-time low since going public.