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VMware has been cautious with its guidance, because it wanted to see how the situation in Europe was playing out, and the worries have not turned into realities yet, says Sanford Bernstein analyst Mark Moerdler. He rates VMware market perform with a $101 price target.
Since the beginning of the year, shares of VMware have lost almost 4 percent and have fallen 14.4 percent since the start of July, when the broader markets focused attention on European government debtconcerns.
VMware reported third-quarter earnings on Oct. 17, and the company beat the high end of the revenue guidance it gave during the second quarter, when it was especially cautious about the outlook in Europe.
Some companies are seeing a slowdown in Europe, particularly names like CA, says Moerdler. He also believes that there is some slowdown in Europe from Salesforce.com, but the company has not commented on it as of yet.
CA's CEO Bill McCracken said on the company conference call in October that EMEA (Europe, Middle East and Asia) was a "work in progress, made more challenging by the macroeconomic climate."
Ghai was a bit more optimistic on Europe, as the rate of adoption is only around 30 percent to 40 percent (compared to 50 percent in the U.S.). He said the concern is that once virtualization is in place, you need to adopt management tools, and the value proposition shifts from flexibility and automation, a company like VMware might not be as successful as it has previously been.
Virtualization offers a quick return on investment, from a budget standpoint. It could be revenue neutral or revenue positive in the first few years, as companies have a need for fewer servers and less space, and productivity measures go up, Moerdler noted. "It allows you to do more with less."
Taleo generates 8 percent of its revenue from Europe, while VMware has a much higher exposure, somewhere between 30 percent to 35 percent, according to JPMorgan, although the company does not break out revenue by region. JPMorgan rates shares of VMware neutral with an $85 price target.
The move to virtualization and cloud computing as a whole is a multiyear story, between five and 10 years' worth of adoption, as people and companies get more comfortable with keeping data outside of their control area.
Financial services, despite being the second largest adopter of cloud services outside the government, have shown some apprehensiveness with keeping certain sensitive data in the cloud. Sony experienced a major security breach earlier this year, when its PlayStation network was hacked, exposing millions of customers' account data.
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