Post IPO Review Report (August 28, 2007)

Current outlook :- Outperform

Status :-  Hold

Ranking**: 5 on scale of 1 to 5 (5 for best)

*Hold represents fully to overpriced

Company in a industry leading and most advance virtualization solution provider. Company recently come out with IPO and got listed on NYSE under symbol "VMW" and since listing has shown a tremendous growth in valuations.

Revenue

Company earns revenue by providing virtualization solution and related services like installation, implementation and training. In last few years company introduce products that give virtualization new dimensions and more acceptability in market. To fulfill the more sophisticated needs of its end customers, company develop many follow up products that perform more sophisticated jobs for it's virtual infrastructure/machine like data recovery, data backup, access control, handling multiple virtual machine/platform at same time etc.

Company/Industry outlook 

(these are just assumptions and company can perform differently) 

• Over 100% (average annual) growth in virtualization industry in next 3-4 years.

• Being industry leader company will be the biggest beneficiary of such an exceptional growth, so we expect company to grow at Nearly 90-100% for next one year and at 50% per year for next 2-3 years and at 25-30% thereafter.

• We expect margins to rise by 4%-5% from these levels due to rising revenues.

*Hold represents fully to overpriced

Financials  ($ in million)

Company's financial year ends on December 31.

*Quarter ended March 31

Company's revenues show's a growth of nearly 82% and 101% in FY 2006 and Q1, 2007 respectively as compare to corresponding periods.

Company's operational income show's a growth of nearly 29% and 53% in FY 2006 and Q1, 2007 respectively as compare to corresponding periods.

Its operational income show's less growth as compare to its revenue growth due to rise in R&D expenditures and also to some extent due to, rise of services share in total revenue which yield less margins as compare to licensing.

Positives

• High growth rate of industry
  Virtualization industry is set for a exceptionally high growth rate in future with nearly 100% growth in near future. Virtualization market is rising and rising very very rapidly and by 2010 the market addition per year will be one and half time more than present market size.

• Rising acceptance
  Company's virtualization solutions due to their usefulness are finding high level of acceptance in corporate world.

• Vast range
  Company offers vast range of solutions from entry level to advance level for more sophisticate needs. More advance Virtualization Solutions introduced by company in last few years, give virtualization totally new dimensions and more acceptability in market. Many follow up products introduced recently  perform more sophisticated jobs for a virtual infrastructure/machine like data recovery, data backup, access control, handling multiple virtual machine/platform at same time etc. These advance products are expected to be prime growth driver.

• Very strong R&D team
  Company manages a 1100 person strong professional and experienced R&D team which will  lead to constant product enhancement and new product introduction which is prime requirement for a company's success.

• Strong business relationships
  Company is providing virtualization solutions for last few years and has a strong relationship nearly 200 technology partners including leading servers, processors, software, storage and networking vendors. These relationships are extremely useful for company as it help company to develop and enhance its products according to ever changing needs of hardware and software technology.

• Its pioneer position in industry
  VMware in a industry leading and most advance virtualization solution provider and is currently enjoying near monopoly in virtualization. Being industry leader company will be the biggest beneficiary of an expected exceptional growth in industry.

• Its relationship with EMC, Cisco & Intel
  EMC, Intel and Cisco all are one of the biggest corporate of world, leader in their respective fields and one way other their services/products serve computer infrastructure industry. Their relationship with VMware will help them to understand virtualization better and to create more virtualization friendly products which will increase acceptance of virtualization in marketplace and help VMware to grow.

• Its market reach
  Company has nearly 4000 channel partners that includes distributors, resellers, x86 system vendors and system integrators company currently derive significant revenues from these channel partners.

• Its existing relationship with clients 
  Company's clients includes almost all big corporate of world and these existing relationships help company to understand the need and expectation of corporate world and help it to put it's R&D effort in correct direction.

• Strong cash flow
  Company cash flows are strong enough to support its R&D efforts, a key requirement for any R&D base company.

Concerns

• Industry growth rate
  Currently industry is showing nearly 100% growth rate due to very low base. Virtualization industry’s growth rate will come down with time due to bigger base. Growth rate is expected to come down to 50% in next 2-3 years.

• Company's market share can decline from current level
  Company is currently enjoying near monopoly in virtualization but as the time pass by, competition will rise and can effect Company’s market share in virtualization industry. Main competition is expected to come from Microsoft Corporation which already is working on entry level virtualization solutions.

• Slowdown in addressable market
  The main demand for virtualization is expected to come from corporate sector, that usually had to run multiple application on same infrastructure. Any event that can effect corporate sector growth like economic slowdown will also effect the virtualization industry.

• Acquisition of "XenSource" by "Citrix Systems"

  Acquisition of “XenSource, Inc” by “Citrix Systems, Inc” can bring in competition for VMware much earlier than expected because “Citrix Systems, Inc” is a big and cash rich company that can lead to increase spending on R&D and thereby more and better product development.

  “XenSource, Inc” is probably only other virtualization solution provider in industry with commercially active virtualization products.

  “Citrix Systems, Inc” is the global leader in application delivery infrastructure and had recently announced a definitive agreement to acquire “XenSource, Inc” For approximately $500 million in a combination of cash and stock.

  More over both companies has an existing relationship with Microsoft corporation.

What can go wrong

• Any decline in margins.

• Any introduction of new competitive technology.

• Introduction of better products by competitors.

• Economic slowdown.

**These ranking represents, long term view in current business situation and can go up and down with changing business environment and company's performance.

This article reflects personal view of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment decision