Can VMware Escape Earnings Noose? (VMW, EMC, CTXS)

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Virtualization leader VMware, Inc. (NYSE: VMW) is set to report earnings after the close of trading today.  This earnings will likely have an impact on EMC Corp. (NYSE: EMC) and Citrix Systems, Inc. (NASDAQ: CTXS).

Analysts are looking for the virtualization leader to report $0.26 EPSand $512.3 million in revenue.  We are not sure if the company willfollow the lead of others in not issuing guidance.  Analysts nextquarter are looking for $0.24 EPS on $496.5 million in revenue.

As far as the fiscal DEC-2009, analysts expect $1.10 EPS and$2.19 billion in revenue.  If those numbers can be hit, that shows growth rates of almost 16% for earnings andmore than 16% for revenue.

What is interesting is that parent EMC Corp. (NYSE: EMC) did not rockethigher after reiterating guidance.  We still do not have any formalexit from EMC to dispose of the majority stake it has inVMware. 

VMware was originally one that was expected to blow through estimates.  But that sentiment has shifted and now the analysts’ estimates have moderated. They are seen as "middle of the road."  But the stock is still down more than 80%from its post-IPO highs, and it has a limited operating history and isalready under new management.

This is a hard stock to analyze because of the limited float.  Itstill has an overhang because it is almost a subsidiary or a trackingstock, which means that a huge supply of stock could come to market ifEMC ever decided to unload it. 

Many traders used to use call options or put options as their way to besynthetically long or short the stock.  The open interest in theoptions declined since this was the most volatile techstock in late 2007 and for much of 2008.  Based upon the move we haveseen, we feel that options traders are braced for a share price changeof up to 8% in either direction.

Citrix Systems, Inc. (NASDAQ: CTXS) is about the only othervirtualization stock to watch because of its XenSource acquisition toget a virtualization play, which is now part of the XenApp.  This onehas also fallen from its post-virtualization highs.

Jon C. Ogg
January 26, 2009