VMware shift to services revenue continues

Second-quarter results are out and, once again, company's services revenue was up, while licenses were down.

Gordon Haff

Gordon Haff is Red Hat's cloud evangelist although the opinions expressed here are strictly his own. He's focused on enterprise IT, especially cloud computing. However, Gordon writes about a wide range of topics whether they relate to the way too many hours he spends traveling or his longtime interest in photography.

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Gordon Haff

July 22, 2009 5:20 p.m. PT

2 min read

VMware's financial results from the second quarter of 2009 are out. They beat revenue and income estimates but those estimates were far less euphoric than during VMware's spectacular growth days of a few years back. Second-quarter revenue was $456 million, flat from the second quarter of 2008. Operating income on a GAAP basis was down 38 percent from the year-ago quarter and down 14 percent non-GAAP.

International revenue saw about 3 percent growth but this was counterbalanced by a similar decline in the U.S. International revenue is now almost equal to those in the U.S.--$222 million compared to $234 million.

One notable facet of the earnings release is that the shift to services revenue--including both software maintenance and professional services--continued at a rather rapid pace. The company is best-known for its virtualization products that relate to server infrastructure. Services revenue was up 32 percent from the year-ago quarter while licenses were down for the same period. We saw a similar trend last quarter as well.

In fact, VMware's services revenue now equals the revenue that it gets from software licenses. To some degree this reflects more software maintenance dollars coming from a bigger installed base. However, in general, software companies like to see revenue coming disproportionately from licenses because the cost of selling an additional license is relatively small.

VMware's financial statements back this up. The cost of license revenue was about $23 million last quarter; the cost of services revenue was $54 million. A heavy shift toward services is not where VMware wants to go long term.