IPO Analysis: VMware, A Virtualization Pioneer

VMware (VMW) is a leading virtualization solution provider. The company was incorporated in 1998 and acquired by EMC (EMC) in January 2004, since then operating as a wholly owned subsidiary of EMC.

As a part of EMC, the company shows much growth in its revenues and today, it has attained a pioneer position as a leading virtualization solution developer. Virtualization solutions are attractive to everyone, from home users to high end servers installed in the world's largest companies.

VMware is an R&D based company and since 1999 has introduced 16 products. As of March 2007, it employs 3000 employees with more than one third [1100] of its employees work in the R&D division. The company provides solutions for creating virtual platforms within computer infrastructure and further to automate, maintain and manage the virtual infrastructure. It also provides all related services such as installation, implementation and training.

In the last few years, the company introduced products that give virtualization new dimensions and more acceptability in market. To fulfill the more sophisticated needs of its end customers, VMware developed many follow up products that perform more sophisticated jobs for its virtual infrastructure/machine like data recovery, data backup, access control, handling multiple virtual machine/platform at same time etc.

The addressable market for virtualization solutions is large and expanding. As per estimates:

Less than one million of the 24.6 x86 servers and less than five million of the 489.7 million business client PC's worldwide are running virtualization solutions.

World wide shipment of x86 servers is expected to rise from 6.9 million units in 2006 to 8.7 million units in 2010.

All new x86 servers shipments running virtualization software will increase from 5% in 2005 to 17% in 2010.

Taking above estimates into account, it is clear that the virtualization market is rising very rapidly and by 2010 the market addition per year will be one and a half times more than present market size.

** with virtualization software installed.

The main demand for VMware's products is expected to come from the corporate sector, that usually runs multiple applications on the same infrastructure. The company is expected to capitalize on this opportunity due to:

Its pioneer position in the industry.

Its relationship with EMC , Cisco (CSCO), Intel (INTC).

Its vast and sophisticated range of products.

Introduction of new production and improvement/enhancement of existing products by its very strong R&D team.

Its market reach.

Its existing relationship with clients,including almost all major corporations.

Revenue

VMware earns its revenue from the following sources:

License revenue: Consists of revenue earned from licensing of its various software products.

Services revenue : Includes revenues earned from software supports, design, implementation and training services provided to the customers.

Customers/industries served

VMware's customers includes every major corporation, covering almost all industries. Normally its products are not developed for any particular industry and its products normally work as a hardware extension of a computer system.

Competition

The company's main competitor is Microsoft Corporation (MSFT) which competes with VMware's various entry level products. Other competitors includes newly established, emerging virtualization solution provider/developer companies.

Offer & Objects of issue

Industry details and outlook

Company Outlook

VMware's company outlook is positive due to the following:

Rising acceptance of virtualization solutions in corporate world.

Vast range of entry level and high end sophisticated products.

Very strong R&D team which will lead to constant product enhancement and new product introduction.

Strong business relationships

Its pioneer position in industry.

Its relationship with EMC, Cisco & Intel.

Its market reach.

Its existing relationship with clients which includes almost all major corporations.

Company's revenues show a growth of nearly 82% and 101% in FY 2006 and Q1, 2007 respectively as compared to corresponding periods. The operational income shows a growth of nearly 29% and 53% in FY 2006 and Q1, 2007 respectively as comparde to corresponding periods.

Its operational income shows less growth as compared to its revenue growth due to a rise in R&D expenditures and also, to some extent, due to the rise of services share in total revenue which yield less margins as compared to licensing.

Valuation/Offer value ($ In million)

At offer price of $24 per share company shares are available at PE of nearly 57 ( Annualizing Q1 2007 operating profit and detecting Tax @ 15%)

We rate this IPO 3++ on scale of "1 to 5" (5 for best)

Disadvantages

An expected increase in competition.

Possible introduction of any alternative and better technology.

Company had paid non cash dividend [in form of low interest bearing notes] to EMC amounting $ 800 million which make balance sheet look weaker than before.

Advantages

Expected high growth rate of industry .

Rising acceptance of virtualization solutions in the business world.

Vast range of entry level and high end sophisticated products.

Very strong R&D team which will lead to constant product enhancement and new product introduction.

Strong business relationships.

Its pioneer position in industry.

Its relationship with EMC, Cisco & Intel.

Its market reach.

Its existing relationship with clients which includes almost all major corporations.

Strong cash flow.

Disclosure: This article reflects personal view of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment decision.