EMC & VMware Show Strong Q1 Results

VMware (NYSE:VMW), owned by EMC (NYSE:EMC), leads the virtualization software market with a share of 45% and competes with players like Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL) and Citrix (NASDAQ:CTXS). VMware reported strong earnings for Q1 2011, which raised its stock price by almost 11% in the past week and also boosted EMC stock by 6%. VMware is crucial for EMC as it constitutes around 40% of its stock price, by our estimates.

As a pioneer in virtualization software, VMware’s virtualization software share has been declining slowly over the years due to lower pricing of competitor offerings and the growth in adoption of open source software. While we anticipate VMware’s share will continue declining to 34% by the end of our forecast period, Trefis members forecast the share will increase for the next few years and eventually decline to current share levels. The member estimates imply an upside of 4% to our EMC stock price estimate.

We currently have a Trefis price estimate of $35.11 for EMC’s stock, about 30% above the current market price of $26.91.

Increasing Competition & Competitive Pricing

Firms like Microsoft, Citrix and Oracle have become active in the virtualization market with their own versions of virtualization software and have taken share from VMware which once comfortably dominated the market. VMware had a share of 50% in 2005, which has declined to 45% in 2010. Even in terms of pricing, VMware’s virtualization software package is one of the more expensive in the industry. Few of its competitors offer similar software at a fraction of that price. VMware is also challenged by open source products that are usually available for free.

VMware Reports Strong Q1 Results

VMware reported license revenues of $419 million for the first quarter of 2011, an increase of 34% year on year (YoY). The company saw growth across all geographies – a good sign. The U.S. and international revenues grew 26% and 44%, respectively, compared to first quarter of 2010. ^[1] During the quarter, VMware introduced new offerings like Cloud Foundry and vCenter Operations, which again boosted the overall performance of the company. If VMware continues to maintain this pace of growth in the following quarters, we can expect it to notch a few market share points higher in coming years.

Our complete analysis for EMC’s stock is here.

1. VMware Reports First Quarter 2011 Results, Press Release, April 19, 2011 [↩]