John F. Kennedy, the 35th President of the United States once said that “A rising tide lifts all boats”. This was in reference to a strong economic growth, which benefits most if not all participants in that economy. While the entire economy has not be exceptionally strong of late, companies related to the virtualization technology sector have been chalking up increasingly strong results. For Q1/2010 here are some recent revenue and earnings reports:
- Intel reported revenues of $10.3B up 44% vs. the same quarter laster year. Earnings were 43 cents per share up 290% vs. the same quarter last year.
- EMC (VMware’s parent company) reported revenues of $3.9B up 24%. Earnings were 17 cents a share up 70% from the same quarter last year.
- NetApp reported revenues of $1B up 36% vs. the same quarter last year. Earnings were 30 cents a share up from a loss of 25 cents a share in the same quarter of last year.
Let’s drill down into the two of the more important software vendors in this space VMware and Citrix. In the table shown below, the growth percentages are relative to the same quarter in last year (compares the first quarter of this year to the first quarter of 2009).
|Q1/2010 Total Revenue||$634M||35%||$414M||12%|
|Q1/2010 Deferred Revenue||$1,368M||48%||$636M||18.9%|
|Q1/2010 Earnings Per Share||19 cents||5.5%||25 cents||525%|
VMware’s revenues grew by an impressive 35% from $470M in Q4/2009 to $634M in Q1/2010. A contributing factor appears to have been a 50% price cut in vSphere Essentials which has fed strong growth in the low end market in competition with Microsoft Hyper-V. What is interesting is that Deferred Revenue (created when a multi-year maintenance agreement is sold) grew even baster by 48% (it had grown by 54%% in Q4/2009 relative to Q4/2008), and that earnings were only up 5.5%. There are several important changes to VMware’s business that are hinted at by these numbers. The first is that the upgrade cycle to vSphere appears continuing at a rapid pace. In the last half of last year, VMware was aggressively discounting the license fees associated with new vSphere sales and upgrades to vSphere in order to lock customers into multi-year maintenance agreements. This appears to have continued in Q1/2009 which will continue to feed good earnings numbers in the future as Deferred Revenues are converted on a quarter-by-quarter basis to Current Revenues.
The earnings picture is even more interesting. Earnings (profits) grew only 5.5% relative to a 35% growth in revenues. So where did the money go? Research and Development expenses grew by 31% a bit less than the growth in revenues, so while VMware is spending more on building products, the “extra” revenue did not go into R&D. Sales and Marketing grew by 41% (from $154B to $217B) so it is clear that a substantial investment is being made on this front by VMware. This is a good thing, because it shows that VMware believes that it has the product portfolio and the product differentiation to penetrate its existing customers more deeply and to also penetrate adjacent markets like the SMB/SME market for server virtualization, the desktop virtualization space, and the cloud platform space.
In summary this was another blockbuster quarter for VMware. As was said last time VMware reported results, Microsoft may well be selling Hyper-V, but whatever success Microsoft is having it appears to be expanding the market as a whole, and not at all coming out of VMware’s hide.
Citrix’s revenues grew by 12% to $414M in Q1/2010 when compared to Q1/2009. Interestingly the Deferred Revenues at Citrix grew faster than current quarter revenues at 18.9%. This suggests that Citrix is in a cycle of growing its base of maintenance contracts at a fairly rapid rate. This says that Citrix is having success locking customers into long term contracts for its XenApp and XenDesktop products, which solidifies Citrix’s leadership position in the broadly defined segment of delivering end user’s computing environments to them via centralized means. Citrix appears to be successfully leveraging its massive installed base of XenApp customers towards the goal of providing customers a choice of getting their applications via XenApp (the traditional Terminal Services method), XenDesktop (the new virtualized desktop method) or even applications streamed to a locally installed OS.
The growth in earnings was impressive, but is mainly due to a comparison with a severely depressed and difficult quarter a year ago.
Virtualization as a whole and all of it constituent parts (processors, storage, and various kinds of software solutions) seems to be doing very well, and in fact seems to be helping the technology sector lead the economy out of the recession. This pace of growth should only accelerate as global economies improve and these companies can start to grow all over the world at the same time as they have grown in the few regions that have lead the growth out of this recession.
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