The Virtualization Room

Oct 21 2008   8:25PM GMT

VMware enterprise license agreements stall

Alex Barrett Alex Barrett Profile: Alex Barrett

Bucking market trends, VMware posted “another solid quarter,” said CEO Paul Maritz on a conference call with investors, with revenues of $472 million for the third quarter of 2008. That represents an increase of 32% over the third quarter in 2007, which sent the stock soaring over 20% in after-hours trading.

But whatever growth the sales team managed to eke out, it wasn’t because of increased enterprise license agreements (ELAs), which grant customers the right to deploy unlimited VMware licenses across an organization. Instead, customers have turned their backs on those.

“The trend that we’ve seen is that customers that aren’t necessarily ready to pull the trigger on an ELA, but still have needs for their planned deployment,” said Mark Peek, VMware’s CFO. “So they make a smaller transactional purchase,” he said.

In fact, Maritz said that beginning in Q208 VMware had seen hesitancy concerning ELAs, although most of its customers had come around. Asked if customers were “dropping out” of ELA discussions, Maritz responded that discussions were “rolling from quarter to quarter.” Of the ELA deals that slipped from Q208, “we were able to close 90% of those deals in Q3,” Maritz said.

How does VMware explain its customers’ reticence? Competition from Microsoft or the economy? The latter, Maritz said. This fall, “uncertainty set in in a big way. Customers are adopting a buy-as-they-go approach instead of [purchasing] for the long term with an ELA,” he explained.

Microsoft’s entry into the market, meanwhile, has barely registered. “We did not see any major losses to Microsoft. We did see a couple of customers indulge in bake-offs. But by and large, those worked to our favor,” Maritz said. In short, “Microsoft is still behind in terms of product roadmap, and I don’t see them catching up until the next 12 to 24 months.”

Whatever the competitive pressures, Maritz remained cautiously optimistic about VMware’s financial prospects. “Virtualization remains at the top of [companies'] priorities going forward because it can bring levels of efficiency only more important in the forthcoming economic environment,” he said. “I expect VMware will be one of the companies that weathers this storm well, and we will emerge from it stronger and able to take advantage of new opportunities,” he said.

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