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[[Image:VMWrevs.png|thumb|right|350px]] [[Image:VMWrevs.png|thumb|right|350px]]
-VMware Inc. provides a range of [[virtualization]] products and services. Such solutions separate a computer's operating system and other applications from the underlying hardware in order to improve efficiency, often by a substantial amount. Virtualization enables companies to aggregate their technological resources, allowing them to better utilize their existing hardware and reduce spending on additional, unnecessary capacity. Though the virtualization market is relatively young, there is significant potential for growth as efficiency becomes increasingly important to businesses. As of December 2006, VMware had already installed 24.6 million x86 servers and 489.7 million business client PCs for a wide range of customers, including all of the ''Fortune 100'' and 840 of the ''Fortune 1,000''. +VMware Inc. provides products and services for [[virtualization]], a technology that separates a computer's software from its hardware in order to improve efficiency. Virtualization lets customers run multiple applications from one computer or server, which can reduce spending on additional, unnecessary capacity. Though the virtualization market is still small, there is significant growth potential as businesses look to improve efficiency and cut IT costs. As of December 2006, VMware's software had already been installed on 24.6 million x86 servers and 489.7 million business client PCs for customers across various industries (including all of the ''Fortune 100'' and 840 of the ''Fortune 1,000'').
-VMware uses a multi-channel distribution model to expand its presence in numerous different markets. The firm derives a significant majority of its revenues from indirect sales through a system of more than 4,000 partners, including distributors, resellers, and system vendors and integrators. VMware's strategic relationships with such tech giants as [[Intel (INTC)]] and [[Cisco Systems (CSCO)]] allow the company to reach new customer bases; likewise, VMware's partners benefit from the company's established name in the virtualization industry.+VMware uses a multi-channel distribution model to extend its presence into various markets. The firm derives the majority of its revenue from indirect sales through a system of more than 4,000 partners, including distributors, resellers, and system vendors and integrators. VMware's strategic relationships with such tech giants as [[Intel (INTC)]] and [[Cisco Systems (CSCO)]] allow the company to reach new customer bases; likewise, VMware's partners benefit from the company's established name in the virtualization industry.
-VMware has grown substantially over the past few years, reflecting the growing penetration of and demand for virtualization solutions. The company's total revenues were up 82% in 2006 from 2005, and software license revenues increased 71% in 2006.+VMware has grown substantially over the past few years, reflecting the growing demand for virtualization products and services. The company's total revenues were up 82% in 2006 from 2005, and software license revenues increased 71% in 2006.
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===License=== ===License===
-VMware licenses the use of its software products, a venture that generates most of the company's revenues. The licenses are usually sold on a perpetual basis (customers pay a one-time, non-recurring fee for the license) and are priced based on the number of physical computers that will be using the software. VMware used to provide software updates free-of-charge until early 2004. The company then began charging customers for updates on a stand-alone basis, providing an extra source of revenue generation. VMware still uses this model today, meaning that each copy of software licensed has the potential to continue bringing in revenue long after the initial sale.+VMware generates most of its revenue by licensing its software to customers. VMware's licenses are usually sold on a perpetual basis (customers pay a one-time, non-recurring fee for the right to use the product) and are priced based on the number of physical computers that will be using the software. VMware used to provide software updates free-of-charge until early 2004. The company then began charging customers for individual updates, providing an extra source of revenue. VMware still uses this model today, meaning that each copy of software licensed has the potential to continue bringing in revenue long after the initial sale.
===Services=== ===Services===
-VMware provides a range of services, including software maintenance and various professional services. Typically, the company's service contracts last from one to five years; revenue from multi-year contracts is reported in equal annual amounts over the course of the contract. For example, a $10, 2-year service contract would count as $5 in revenue for two years in a row. These service plans offer various levels of product support, ranging from basic coverage to exhaustive technical support. Maintenance contracts also give customers the right to receive future product upgrades at no additional charge.+VMware also provides several types of services, including software maintenance and various professional services. Typically, the company's service contracts last from one to five years; revenue from multi-year contracts is reported in equal annual amounts over the course of the contract. For example, a $10, 2-year service contract would count as $5 in revenue for two years in a row. These service plans offer various levels of product support, ranging from basic coverage to exhaustive technical support. Maintenance contracts also give customers the right to receive future product upgrades at no additional charge.
-Professional services include solutions for the design and implementation of [[virtualization]] technology, as well as training for end users. Both types of services, maintenance and professional, have been increasingly important to VMware's bottom line over the past few years. From 2004 to 2006, the Services segment grew to account for 30% of revenues, up from around 18%. Services generally provide higher profit margins than sales, which could help boost the company's overall performance if this trend continues.+VMware also provides professional services for the design and implementation of [[virtualization]] technology, as well as training for end users. Both types of services, maintenance and professional, have been increasingly important to VMware's bottom line over the past few years. From 2004 to 2006, the Services segment grew to account for 30% of revenues, up from around 18%. Services usually provide higher profit margins than licensing, which should help boost the company's performance if this trend continues.
==Trends and Forces== ==Trends and Forces==

Revision as of 15:09, August 16, 2007

VMware Inc. (NYSE:VWM) is the leading provider of virtualization products and services aimed at helping customers operate their networks and servers more efficiently. VMware has seen explosive growth in recent years, as its strategic relationships with partners and the growing popularity of virtualization have boosted demand for its products. In addition to its software applications, VMware also sells services, which include maintenance and upgrade agreements and a range of development, implementation, and training services. Services have grown increasingly important to VMware's overall sales, accounting for 30% of the company's revenue in 2006.

The virtualization industry is young, and there aren't many competitors in the market yet. As such, the growth potential for VMware and other companies in the market is large. Especially as more companies seek to improve efficiency and cut IT costs, the demand for virtualization products will grow stronger over time. VMware currently holds a commanding lead of the server virtualization market, but the entry of Microsoft and other firms could cause competition to intensify dramatically over the next few years. VMware will have to continue to offer cutting-edge virtualization products to maintain its lead in the marketplace, which is no easy task.

Corporate Overview

VMware Inc. provides products and services for virtualization, a technology that separates a computer's software from its hardware in order to improve efficiency. Virtualization lets customers run multiple applications from one computer or server, which can reduce spending on additional, unnecessary capacity. Though the virtualization market is still small, there is significant growth potential as businesses look to improve efficiency and cut IT costs. As of December 2006, VMware's software had already been installed on 24.6 million x86 servers and 489.7 million business client PCs for customers across various industries (including all of the Fortune 100 and 840 of the Fortune 1,000).

VMware uses a multi-channel distribution model to extend its presence into various markets. The firm derives the majority of its revenue from indirect sales through a system of more than 4,000 partners, including distributors, resellers, and system vendors and integrators. VMware's strategic relationships with such tech giants as Intel (INTC) and Cisco Systems (CSCO) allow the company to reach new customer bases; likewise, VMware's partners benefit from the company's established name in the virtualization industry.

VMware has grown substantially over the past few years, reflecting the growing demand for virtualization products and services. The company's total revenues were up 82% in 2006 from 2005, and software license revenues increased 71% in 2006.

Financial data, in millions 2004 2005 2006 First Half 2007
License revenue $178.9 $287 $491.9$373.6
Service revenue $39.9 $100.1 $212$181.9
Total revenue$218.8 $387.1 $703.9$555.5
Operating income $35.2 $93.6$120.6$93.1
Operating margin 16.09% 24.18%17.13%16.76%
Net income $16.8 $66.8$85.9$75.3
Profit margin 7.7% 17.3%12.2%13.55%


License

VMware generates most of its revenue by licensing its software to customers. VMware's licenses are usually sold on a perpetual basis (customers pay a one-time, non-recurring fee for the right to use the product) and are priced based on the number of physical computers that will be using the software. VMware used to provide software updates free-of-charge until early 2004. The company then began charging customers for individual updates, providing an extra source of revenue. VMware still uses this model today, meaning that each copy of software licensed has the potential to continue bringing in revenue long after the initial sale.

Services

VMware also provides several types of services, including software maintenance and various professional services. Typically, the company's service contracts last from one to five years; revenue from multi-year contracts is reported in equal annual amounts over the course of the contract. For example, a $10, 2-year service contract would count as $5 in revenue for two years in a row. These service plans offer various levels of product support, ranging from basic coverage to exhaustive technical support. Maintenance contracts also give customers the right to receive future product upgrades at no additional charge.

VMware also provides professional services for the design and implementation of virtualization technology, as well as training for end users. Both types of services, maintenance and professional, have been increasingly important to VMware's bottom line over the past few years. From 2004 to 2006, the Services segment grew to account for 30% of revenues, up from around 18%. Services usually provide higher profit margins than licensing, which should help boost the company's performance if this trend continues.

Trends and Forces

The Need for Efficiency

VMware serves companies in a variety of industries. Basically any company that operates its own servers or network infrastructure can benefit from virtualization services. The benefits of increased efficiency, lower IT management costs, and maximum hardware utilization, make virtualization a particularly viable option for large companies that maintain equally large networks. Some of VMware's largest customers are firms in the telecommunications, pharmaceutical, and technology-related industries; as these industries become more competitive, VMware could stand to benefit. According to some research, a typical x86 server (the standard for business networks) utilizes only 10% to 15% of its capacity; companies often run only one application per server to minimize the risk that a problem with one application will affect numerous others. While this is perhaps the safest method to ensure that one faulty program doesn't bring the whole system down, it is also rather expensive. Using VMware's virtualization technology, companies can run more than one application per server without having to worry. By allowing them to more effectively utilize their existing capacity, virtualization can cut both hardware and IT management costs substantially. Firms in competitive industries are likely to seek every cost savings they can find, which could be a boon to VMware's bottom line.

Breakdown of the ~$900 million virtualization market
Breakdown of the ~$900 million virtualization market

The Microsoft Effect

Currently, VMware dominates the virtualization market, which is estimated to be worth near $1 billion. The next leading player, however, is Microsoft (MSFT). Microsoft's offerings in the virtualization market are currently limited to entry-level products that compete with only a small portion of VMware's total product line. It has, however, announced its intention to launch enterprise-class products in the future, which would put it in more direct competition with VMware for sales. While the virtualization industry is relatively young, with plenty of room for more than one company to expand significantly, going up against Microsoft can be a daunting prospect. Even though Microsoft only competes with a few of VMware's products at present, it has already started paving the way for its future plunge into the virtualization industry. Microsoft recently implemented agreements with a number of server and software vendors to distribute certain operating systems, which just happen to disallow the use of any non-Microsoft virtualization format. If Microsoft decides to make a big push into this industry, VMware could see its market share, and sales, fall considerably.

Intellectual Property

As a software developer, much of VMware's assets are intangible. Intellectual property forms the base of the company's product and service offerings; as such, any theft of this IP can seriously damage the company. Some of VMware's products have patent protection, which provides some security from the risk of intellectual property violation. Nonetheless, these patents, if granted at all, can be contested, circumvented, or revoked at a later date. Litigation over intellectual property rights, even if ultimately successful, can be quite costly. Additionally, VMware has to constantly monitor the marketplace for products that infringe on its patents, which diverts time and resources away from product development.

At the same time, claims by VMware's competitors that it has infringed on their proprietary technology could negatively impact the company. It could be forced to pay damages or remove certain technologies from its products. On top of this, the litigation expenses could add up to a substantial amount. One particular risk is VMware's use of open source technology in its products. There are few legal precedents regarding the use of open source material for profit, and this uncertainty could prove detrimental to VMware. Among the risks are potential requirements that VMware offer its products that use open source material free of charge, that it publish the source code for its products for modification by others, or that it pay damages to the software's original author for violating the open source license. Any of these would be harmful to VMware's operations.

Exchange Rates

In 2006, VMware made about 44% of its revenue from customers outside the U.S. As such, it receives payment in a wide range of currencies; its revenue, however, is reported in U.S. dollars. Any change in the exchange rates between the dollar and other currencies in which VMware conducts business could have a significant effect on reported revenues. If the value of the dollar declines against other currencies, VMware's revenues would be boosted, as every unit of foreign currency would translate to a larger number of U.S. dollars. The same applies in reverse, however; a rise in the value of the dollar would make international sales look relatively smaller. Recently, the dollar has been pretty weak in comparison to other major currencies; a continuation of this trend would be beneficial for VMware and other companies that do business outside of the country.

Competition

Currently, VMware leads the server virtualization industry by a substantial margin. The next largest competitor is Microsoft (MSFT), which looks poised to make a strong push into the market over the next year or two. Apple (AAPL) also offers its own form of virtualization software called Parallels (which allows Intel-based Macs to run Windows operating systems in addition to OS X), though this is aimed primarily at consumers. Other, smaller competitors include Novell (NOVL), XenSource, and Red Hat (Linux), though none of these companies holds more than a 2-3% share of the virtualization market. The still-growing market has plenty of growth potential for all, however; there are so many untapped customer bases that it'll be a while before the firms really start fighting over business.

One distinguishing characteristic of VMware is that it's dedicated to the virtualization industry, whereas all of its major competitors have extensive operations in other areas of the technology industry. This puts VMware in a relatively more leveraged position; if virtualization takes off, it stands to benefit more than say, Microsoft, whose bottom line would look about the same either way. On the other hand, if virtualization were to fail for some reason, VMware wouldn't really have any revenue sources.

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