VMware Revenues Continue Upward in Q1

Published: May 4, 2006

by Timothy Prickett Morgan

VMware, the server virtualization subsidiary of disk array maker EMC, continues to grow and benefit from being the de facto standard for server virtualization on X86 and X64 platforms.

When EMC reported its financial results for the first quarter of 2006 yesterday, VMware said that it had boosted sales for its Workstation, ESX Server, and related virtualization products to $131 million, up 64 percent from the $80 million in sales VMware booked in the first quarter of 2005. While this is stellar growth, as we pointed out last year, VMware's growth has slowed from the triple-digit growth it had in 2004, when its market was younger and it had less competition.

EMC said in a statement last week that VMware was running at an annualized rate of about $500 million in sales. For all of 2005, the VMware subsidiary brought in $387 million in sales, up 78 percent from the $218 million in sales for 2004. In 2003, VMware had sales of just under $100 million, which means annual growth was on the order of 120 percent in 2004.

EMC has not said how profitable the VMware business was, and because VMware never went public, no one but EMC has any idea how profitable the subsidiary is. But given that it is a software company, the odds are that it has very high gross margins and is contributing to EMC's bottom line.

The question that still remains unanswered is what effect the launch of VMware Server, the free version of GSX Server, the subsidiary's entry product, will have on future sales when it comes out of beta? While big companies deploying virtualization tend to pick ESX Server, which deploys a hypervisor on bare metal rather than inside an instance of Windows or Linux (which introduces a single point of failure), the commercialization of the open source Xen hypervisor and Microsoft efforts to make its own Virtual Server 2005 product more flexible in that it supports Linux and freely available to combat Xen and VMware Server. The effects of Xen and VS2005 are still not in VMware's financials, but it will be under pressure in the coming months as Xen gets rolled into Linux and Solaris and gains Windows support and Microsoft turns up the marketing heat. VMware is betting that by boosting the installed base of GSX Server and becoming the de facto virtual machine it can continue to pump up sales by having a much larger installed base to peddle ESX Server into. It's a good bet, and about the only one that VMware can make. But it is by no means a safe bet. There aren't any of those in the IT industry.