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VMware sales up 14 percent in its first quarter

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April 23, 2014

VMware reported stronger earnings and revenue yesterday that beat analysts expectations. The Palo Alto-based company made $1.368 billion in sales in its first quarter, up 14 percent on the previous year's quarter.

VMware reported an operating income of $241 million, up 51 percent on the $160 million it reported in Q1 of 2013. Non-GAAP earnings per share was $0.80, versus expectations of $0.79.

VMware made $561 million from licenses in the quarter versus $799 million in maintenance, representing a growth-heavy start to a year that VMware executives believe will lead to significant growth for the company.

"Our strong financial results reflect VMware's unique position in helping customers transform their IT infrastructure," said VMware's CEO Pat Gelsinger.

"As the industry shifts from client server computing to the mobile-cloud era, customers are choosing our solutions because we have the most complete vision and offering for navigating this evolving world," added Gelsinger.

During the 1st quarter, VMware spent $77 million on additions to property and equipment, compared with $78 million in the same quarter last year.

Those purchases support the infrastructure that goes into VMware's strategically important vCloud Hybrid Service, which launched in August 2013 and is meant to compete with rivals Amazon, Microsoft and Google.

But it's important to note that VMware's competitors have been spending a lot more on capital expenditures in the last year, and that's something that VMware needs to look into if it wants to continue growing at the same pace.

VMware's COO Carl Eschenbach said that the company's cloud services grew greater than 100 percent year-on-year, including both the vCHS service and VMware's service provider partner program.

Toward the end of its last quarter, VMware acquired mobile management and security company AirWatch, which executives on the call following the earnings release said they expect will become a multi-million dollar per quarter business for VMware in 2014.

AirWatch is one of VMware's big bets, alongside software-defined data center acquisition Nicira, whose technology is now known as NSX, that it can not only make money from virtualization, but the next one-- mobile devices and software-defined data centers.

VMware said it expects its full 2014 revenues to be between $5.94 and $6.10 billion, or up 14 to 17 percent year-on-year.

In other IT news

Microsoft said earlier this morning that it has been given the green light to build a $1.1 billion data center just outside Des Moines, Iowa which, when taken together with its existing data center infrastructure, will raise the company's investment in the area of close to $2 billion.

On Friday, the Iowa Economic Development Authority (IEDA) approved a $20.3 million sales tax rebate on construction materials for the project, available until 2021, a sum that's in addition to $18 million in infrastructure improvements already promised by the city.

But naturally, Microsoft isn't getting off that easily. In return for those improvements, Nadella & Co. have agreed to a minimum taxable assessed value of $255 million once the project is completed – an amount that The Des Moines Register reports will bring the city of West Des Moines an annual tax revenue of about $8 million.

The state of Iowa also will require Microsoft to create 84 permanent jobs when the project is completed, and that 66 of those jobs must pay at least $24.32 per hour.

The data center will be built on a 154-acre site, with the facility comprising 1.16 million square feet. The data center project has been finding its way among the appropriate decision-makers, but under the code name of "Project Alluvion" – it wasn't until last Friday's meeting that Microsoft was revealed to be the company behind the development.

Project Alluvion was originally scheduled to have been on the IEDA's agenda in Mid-March, but was pushed forward to last Friday's meeting at the last minute.

The delay was caused by Willow Creek needing more time to ensure that it could acquire enough land. We'll keep you posted on this and other stories as they happen.

In other IT news

Now that Windows XP's end-of-life support is behind us, system admins will soon have another critical date to watch out for, this time it will be next year.

If you're still using Windows Server 2003 R2, Microsoft's product lifecycle advisories say that support for that operating system expires on July 14, 2015. That's only 449 days from today.

Both the Standard, Enterprise and Datacentre versions of the operating system, in 32-and-64-bit versions, will receive their last Windows security update on that date.

However, the obsolescence of Windows Server 2003 won't be as big an issue as the EOL (end of life) of Windows XP, and for two main reasons.

The first is that servers tend to be be upgraded more often than PCs, because the former are cared for by knowledgeable and skilful server technicians who understand the need to migrate from decade-old operating systems and have therefore probably already made the move.

The second reason is that there are many fewer servers than PCs. Gartner estimates that about 2,581,724 servers shipped in 2013's 4th quarter.

That's still a lot of servers, but also a lot fewer potentially-troubled machines to deal with than PCs that were impacted by Windows XP's EOL support.

In other IT news

As many industry analysts had already expected, IBM's lower first quarter storage revenues dragged down Big Blue's revenues from the rest of its operations. The storage business is getting more competitive.

Revenues from IBM's Systems and Technology unit (STG) were $2.39 billion for the quarter, down 23 percent compared to 2013's 1st quarter.

IT industry analyst Stifel Nicolaus' Aaron Rakers says-- "IBM’s storage results have posted year-to-year declines for the past ten consecutive quarters."

In a series of prepared remarks Martin Schroeter, IBM’s senior vice president and CFO, Finance and Enterprise Transformation, said-- "Looking at hardware, as expected, the combination of secular and cyclical challenges continued."

Additionally, secular changes are the long-term ones, while cyclical changes refer to quarter-to-quarter differences, Schroeter pointed out.

Then he added-- "Our flash solutions contributed to some growth again this quarter, but we saw substantial weakness in high-end storage."

That means the DS-8000, primarily, Big Blue's monolithic array that competes with EMC's VMAX and Hitachi/HDS' VSP (which is OEM'd for Hitachi by HP as the XP).

Rakers had this to say about the flash revenues-- "Gartner estimates a $46.7 million revenue contribution from FlashSystem during the December quarter, up from $37.1 million in the prior quarter. This compares to EMC’s XtremIO at $49.5 million, albeit including beta customer revenue recognition, and NetApp’s EF-540 at $14.6 million in the December quarter."

And that flash revenue portion is a very small part of STG's storage revenues. IBM has previously committed to spending a billion dollars to increase its flash business.

Schroeter continued-- "We are selling our industry standard server business to Lenovo. We are repositioning Power and building an ecosystem around OpenPOWER, and we’ve taken actions across Power and Storage to right-size the business to the market dynamics we took actions to align our structure to the demand profile we are currently seeing."

So IBM is right-sizing its storage business, meaning possible or probable headcount reductions and product line shrinkage.

In IBM's view, there's no prospect of growth in any of its storage product categories in the short term, at least sufficient to get storage revenues overall growing in a meaningful way.

And it's not just cuts in storage. Schroeter added-- "Our focus for STG this year is to stabilise the profit base. The repositioning of the Power platform, the announcement of POWER8, new announcements in storage, and the right-sizing of the business will all contribute, as we move through the rest of the year."

Source: VMware Inc.

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