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VMware Might Not Bounce Back This Time

Weak guidance and layoffs are a very real concern


VMware (NYSE:VMW) is a habitually volatile stock that tends to rebound, so normally, one might shrug off Tuesday’s horrendous 20% haircut.

But this time, I’m worried it might be different.

The top provider of virtualization software was hammered big-time Tuesday despite a pretty strong fourth quarter. Revenues of $1.29 billion were up 22% year-over-year and better than Street expectations for $1.28 billion, and earnings improved 3% to $206 million (81 cents per share), also topping forecasts.

The negativity stemmed from the lookahead. VMware expects current-quarter revenues to range from $1.17 billion to $1.19 billion, which translates into a growth rate of only 11% to 13%. For the full year, it’s forecasting revenues of $5.23 billion to $5.35 billion, a growth rate of 8% to 11%. Meanwhile, the Street was looking for Q1 revs of $1.25 billion and full-year sales of $5.42 billion.

In an attempt to get back on track, VMware said it will cut 900 jobs — about 7% of the work force — although the company still plans to hire 1,000 people for the year, too. It’ll also dump some nonmaterial businesses. In all, good for profits, but that’ll do little to get the company back into a growth phase.

More disconcerting is how much pressure VMware is facing right now. The competitive landscape for the virtualization market continues to be tough and varied, including megacorporations like Microsoft (NASDAQ:MSFT) as well as a growing number of startups. VMware’s efforts to move into cloud applications has also been a dud.

Meanwhile, demand from key customers — including the federal government — has slowed amid budget cutbacks. That bell is being rung in Europe, too. Though, this problem is being felt across the enterprise software business, as evidenced by BMC Software‘s (NASDAQ:BMC) tepid earnings report and subsequent selloff.

All told, it’s getting harder to believe in a bounceback. VMware’s revenues are approaching levels where it will be difficult to generate double-digit growth. And dwindling prospects for growth will make it increasingly difficult to justify VMW’s hefty valuation. Expect further downside ahead.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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