VMWare shares corrected significant

VMware Inc.'s second-quarter profit dropped 38% as sales of virtualization software to large corporate customers remained challenging.

Shares in VMware, which makes software designed to help customers improve computer efficiency by allowing multiple operating systems to work on the same processor, spiked Wednesday on relief that the company beat its quarterly guidance after a challenging first quarter.

By 7 p.m. EST, VMware shares were trading up almost 7% at $33.48, in the after market, after closing at $31.25.

Like many technology companies, VMware is shoring up earnings through cost management, despite falling or flat revenues.

But concerns remain that the Palo Alto, Calif.-based company, one of the investor darlings of 2008 after a stellar IPO in 2007, will have difficulty getting revenue growth back to the super-charged levels of previous years.

"It's not clear whether the market's got more saturated or whether big companies are simply taking a pause," Joel Fishbein, an analyst with Lazard Capital, said, but its clear that much of the "low hanging fruit" in the virtualization market has already been gathered. Fishbein believes the company's stock, which has rallied 15% since the end of June, is overvalued and he currently has a sell rating.

VMware dominates the market in virtualization technology, but growing competition from Microsoft Corp., Citrix Systems Inc. and the Linux community has remained a concern for VMware.

VMware, majority-owned by EMC Corp., reported earnings of $32.5 million, or 8 cents a share, down from $52.3 million, or 13 cents a share, a year ago. Excluding stock-based compensation and other items, earnings fell to 20 cents from 23 cents.

Revenue slid 0.1%, to $455.7 million, as U.S. revenue decreased 3% and international revenue grew 3%.

In April, the company said it expected revenue to be "flat or even down."

Wall Street was looking for per-share earnings of 19 cents on revenue of $452 million, or down 1%.

Analysts have been skeptical about the growth prospects offered by a flagship new product, VSphere. The launch and possible disruption to the sales channel were cited by the company when it gave revenue guidance for the second quarter that was lower than expectations.

Tod Nielsen, VMware's Chief Operating Officer, said that larger customers were still spending money with VMware, but that there were fewer large deals than in previous quarters. Enterprise license deals -- large volume deals -- made up 15% of total bookings in the second quarter, compared with 20% in the comparable quarter.

Revenue from software license deals fell 20%, to $228 million, while revenue from services, which include subscriptions, consulting and information technology support, increased 32%, to $227.7 million. VMware's services segment has picked up a larger share of total revenue in recent quarters.

Operating margins slumped to 8.3% from 13.4%.

Looking ahead, the company projected third-quarter revenue of $465 million to $480 million. Analysts polled by Thomson Reuters expected $471 million. The company also expects full-year revenue to grow 1% to 3% from 2008, compared with analysts' view of $1.91 billion, or up 2%