Why VMware's Potential Is up in the Clouds

Cloud-computing-software maker VMware (NYS: VMW) seems to be on a roll. The company's first-quarter revenue managed to beat analyst expectations, as it came in at a little over $1 billion, about 25% higher than the comparable quarter last year. That's also applicable for the company's more-than-expected net income, which soared 52% to $191.4 million.

So what is it that makes VMware tick and why should it continue doing well in the future?

A cloud-driven future
The whole thing boils down to the fact that companies like VMware are benefiting from the boom in customers who prefer to cut costs by shifting to a cloud-computing-based IT system. In fact, the sheer demand for the company's cloud-based products even prompted VMware to raise its full-year revenue forecast to between $4.53 billion and $4.63 billion, in contrast to the $3.77 billion it made last year.


Despite the proprietary nature of VMware's vCloud offering, the platform allows customers to move to different cloud service providers, as and when they please. VMware already boasts more than 100 different public clouds globally, all of which run on its platform. That is staggering growth, given that this figure stood at only five service providers about 18 months ago. VMware's customers seem to have fallen in love with the "flexibility" factor.

But VMware's customers aren't just buying its cloud software. They're also buying applications that can be run on the company's cloud software -- something quite apparent from the $482 million in license fees that VMware raked in during this period, a 15% jump from the year-ago quarter. The company's bookings have also risen by 20%, more than the 14% predicted by analysts, ensuring that its cash registers will continue to ring in the foreseeable future.

Still, VMware isn't the only company with its head in the clouds. There's always competition to contend with.

A lot of cloudy competition
Cloud-computing big daddy Amazon.com (NAS: AMZN) deserves special mention here, given that it's making a killing through its Web Services, which is essentially an IaaS (infrastructure as a service) offering. Unlike VMware's offering, Amazon's close-ended system does not give its customers complete flexibility in migrating to a different provider's platform.

Speaking of flexibility, there are other open-source cloud platforms that allow companies to migrate and make special tweaks to the code if necessary. The new one on the block is CloudStack, which Citrix Systems (NAS: CTXS) has contributed to the Apache Software Foundation. So VMware may face serious challenges from such open-source platforms in the not-too-distant future.

The Foolish bottom line
VMware may be operating in a highly competitive industry, but so far, it seems to be on the right path. With its up-and-coming hybrid cloud solution and increasing focus on delivering applications atop its virtual cloud software that serves mobile platforms, VMware should see a good deal of growth in the foreseeable future. And with cloud computing set to become a $241 billion market by 2020, there's plenty of room for everyone.

The cloud-computing market is booming and continues to drive costs savings and efficiencies for businesses worldwide. We at the Fool have caught on to another technology trend, what we call "The Next Trillion-Dollar Revolution." Read our free report to find out what this revolution is and which underappreciated company we think is poised to capitalize on it. Also, don't forget to stay up to speed with the latest on VMware by adding it to your own Watchlist.

At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of VMware and Amazon.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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