VMware, Inc. (NYSE: VMW) is set to report perhaps its most important earnings announcement out of the company since its IPO in August 2007 after the close of trading today.  At the end of 2007 all anyone could talk about was virtualization, but a 70% price correction has taken some of the wind from those sails.  Some of this weakness has also spilled over into parent EMC Corp. (NYSE: EMC) of late.

First Call has estimates for the virtualization behemoth pegged at $0.23 EPS on $458.6 million in revenues.  If the company clarifies its guidance, estimates for Q3-2008 are $0.25 EPS on $497.3 million and estimates for Fiscal December-2008 are $1.02 EPS on $1.96 Billion in revenues.

There have been many issues going into this earnings report which make this the most crucial earnings report in the company’s history as a public company.  First off, the CEO was a founder of the company and she "recently left" the company.  The reports vary on whether this was her leaving because she wanted a standalone VMware or whether it was over the forward light-ish guidance.  The other thing that brings up issues is that the company already started a process to reprice employee stock options.

What is most critical here is the forward estimates, and this becomesmore problematic when you consider that shares are now actually downmore than 70% from its post-IPO highs of 2007.  The company is now dealing with Microsoft as a formal competitor.

Analysts appear to have an average price target north of $48.00 andoptions traders appear to be braced for a move of slightly more than$3.50 in either direction today.

At $35.64, this is actually a 52-week low for a closing level (technically about a 48 weeklow since its IPO).  If the company clarifies its guidance andhypothetically guides right in line with fiscal 2008 estimates, basedupon a $13.6 Billion market cap and $35.50 stock price it trades withcurrent year forward multiple of 34.8-times earnings and 6.9-timesrevenues. 

If you expect that stock to double again, you can double thosemultiples in an environment where traders are treating even good newswith skepticism.  With a short interest of about 17.2 million sharesand an average daily volume of about 2.4 million shares, you can expectsome serious reactions whichever way this trades.

Majority owner and parent company EMC Corp. (NYSE: EMC) is set to report its own earnings tomorrow morning before the open.

Jon C. Ogg
July 22, 2008

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