VMware Q1 Earnings Preview: What We Are Watching

VMware (NYSE:VMW), owned by EMC (NYSE:EMC), is expected to release its Q1 2012 earnings on April 18. It leads the virtualization software market and competes with players like Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL) and Citrix (NASDAQ:CTXS). We expect lower IT spending, pricing issues and increasing adoption of cloud computing will be key factors determining its performance in 2012.

See our full analysis on VMware

Management Lowers Outlook

VMware has lowered its outlook for 2012 citing lower IT spending and sever shipment compared to 2011. We currently estimate the global server market to reach 50.8 million by the end of our forecast period. If the growth rate slows down to reach 48 million units instead, we expect a downside of 6% to our current Trefis price estimate.

Short-Term Trends Driving Virtualization Business

IT spending is expected to be sluggish in 2012 mainly due to the Eurozone crisis impacting investments in technology. As cloud computing becomes more popular, we expect larger players to enter this market, driving down prices. This is likely to be offset by a short-term increase in volume driven by growth markets. Due to a strong Q4, we may see a flat quarter-on-quarter growth; however, on a yearly basis, we expect the company to deliver strong growth.

Competitive Pricing Environment

As a pioneer in virtualization software market, VMware has control over its pricing, and we expect this to stabilize as more players enter the market to tap into cloud computing. We currently estimate a market share of around 44% for VMware, and expect this decline to 40% by the end of our forecast period. We however expect prices to stabilize at $5,500 per server.

We have a $96 Trefis price estimate for VMware, which is around 13% below the current market price.

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