VMWare (VMW) was the hot IPO of 2007. Its shares rose from $50 to $125 almost overnight. The run-up improved the fortunes of the stockholders of its majority shareholder EMC (EMC) and enriched those who got into the stock early. But, if they did not get out fairly quickly, they got murdered.

VMWare has over 80% of the market in virtualiztion software which is designed to make servers operate much more efficiently than they have in the past. Its products save enterprises substantial time and money. Microsoft (MSFT) has moved into the sector, but so far its successes have been modest.

What happens when the fastest selling business software in the world falters? It is a sign that software marketed to large companies and governments is likely to be moving into an unusually soft period, one marked by deferred purchases and a longer upgrade cycle.

Shares in VMW are now down to $38 and fell on its earnings news. By most standards, the numbers were good, but they were no match for the company’s growth rates in earlier quarters. Revenue for the second quarter was $456 million, an increase of 54% from the second quarter of 2007. GAAP net income for the quarter was $52 million compared to $34 million in the same period a year ago.

VWWare’s forecast is what damaged it. The firm said 2008 revenues are targeted to grow approximately 42% to 45% compared to 2007. The market was looking for that number to be well in excess of 50%.

The signal from VMW should send a chill though the bones of holders of shares in Oracle (ORCL), SAP (SAP), and even IBM (IBM), and Microsoft. Big business IT budgets are being squeezed, even when the case can be made that, over the long-term, new software will save money.

It is a perverse way of viewing expenditures,but a recession will do that.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.