Investopedia: Can VMware Manage Its Own Partisans?

Managing growth is hard enough, but managing the expectations of growth investors can be downright impossible. It may prove to be the toughest challenge for VMware (NYSE:VMW). While the company has a commanding share of the server virtualization market, rivals are gearing up to take some of that share away and the company's investor base is full of twitchy growth/momentum investors that may bail on the first sign of disappointment. 

A Great Finish to the Year
To the extent that it is the responsibility of public company management to manage the business, there is little to complain about with VMware. Revenue jumped 37% this quarter, handily surpassing both the average estimate and the highest published estimate. Growth was certainly helped by very strong licensing, as license revenue rose almost 39% to $422 million and again easily surpassed expectations. Not surprisingly, growth was helped by solid ELA renewals, as well as strong sales of vSphere.

VMware also once again translated revenue strength into operating leverage. Operating income grew strongly for the quarter, whether an investor chooses to look at GAAP numbers (where operating income rose 84% to $131 million) or non-GAAP (where operating income grew 57% to $248 million). (For more, see Zooming In On Operating Income.)

The Road Ahead
The first concern to address is the company's ongoing operating leverage. While the company grew revenue 23% on a sequential basis, the non-GAAP operating income grew a bit less than 22%. So where is the incremental operating leverage? Moreover, the management's commentary on the call suggested that there was not likely to be much further operating leverage in 2011. That makes it a fair question to ask whether the company is going to max out at around 30% in non-GAAP operating margin.

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