VMWare: Uncertainty or Diversification?

VMWare has a long history of double-digit growth and operational efficiency in the virtualization platform and software industries. Yet, following a rough quarter, continued competition against Citrix , and a slew of new ventures that includes competing against Splunk , is VMWare full of uncertainty, or is it creating diversity?

What does VMWare do?
VMWare's core business is in server virtualization, which allows virtual computers to run different operating systems and applications on one physical computer. That improves business efficiency and the utilization of data, and it saves on costs. Quickly, it has become a fast-growing business, one that's derived from licensing and service revenue.

WMWare's licensing revenue continues to perform nicely, growing 15% in the first quarter. But when it's combined with bookings, the company's Americas revenue grew just 10%. These numbers were hardly bullish for long-term investors. But one bright spot was end-user computing in desktops, which grew 35% year over year.

A more broad battle emerges
With that said, VMWare's core vSphere product has faced increased competition amid competitive pricing and more options. Therefore, with uncertainty, VMware has recently thrown itself in many different directions to enter different industries.

First off, VMWare is directly targeting the PC virtualization leader Citrix, which was the single brightest area of VMWare's quarter, with 35% growth. VMWare has launched new platforms like Horizon 6, which adds new monitoring and automation tools to its existing managed server platforms.

Yet, Citrix seems to be holding its own; the company recently beat first-quarter earnings estimates by a significant margin, and upped its EPS guidance. As VMWare takes aim of Citrix's PC virtualization business, VMWare's core server virtualization platform vSphere has faced competition from Citrix in recent quarters. Therefore, Citrix is growing slightly slower than VMWare, but these two companies appear to be going back-and-fourth while trying to take bites out of each other's market share.

In addition to WMWare straying from its core server virtualization space, the company also made a $1.54 billion bet on acquiring mobile device management company AirWatch, which really fits into the same scheme as server and PC management. However, this is a highly competitive market, one in which countless big tech companies have a presence, Citrix included. But, as Gigaom's Cormac Foster explains, much of this market remains unused or essentially wasted due to problems with integration, security, and making the technology works with different operating systems.

A move of little logic
With all things considered, it's easy to see why VMWare would seek market share in server, PC, and mobile management. The three industries interconnect in many ways. Yet, the company's attempt to tackle Splunk in machine data analytics software is a real head-scratcher, one that doesn't fit with VMWare's other initiatives.

Specifically, Splunk operates in the fast-growing big-data space, gathering and analyzing data found on websites, servers, networks, mobile devices, etc. VMWare has launched a version of vCenter to compete against the market-leading Splunk.

The problem is that Splunk is more than just one application -- it is a collection of more than 500. These applications include security, IT operations, and software, thus giving Splunk a big head start. Also, Splunk is a company that's growing revenue 50% annually, but also one that has operating margins of negative 33% in the last year. VMWare might like Splunk's growth, but is it willing to sacrifice margins to achieve similar growth?

Final thoughts
If you sit back and look at VMWare's recent moves, you might think it is diversifying its business, but it creates doubt with its core server business and gives the illusion of uncertainty. At 25 times forward earnings, uncertainty is a word that's tough to hear, but seems appropriate. As a result, Citrix at 16.5 times forward earnings might be more attractive, with 9% annual revenue growth expected in the next two years.

After all, Citrix already has a growing presence in the industries that VMWare is trying to enter, with the exception of a Splunk-like business. That means less uncertainty at a better price.