UPDATE 3-VMware warns on revenue, replaces CEO

Tue Jul 8, 2008 8:29pm BST

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(Adds comments from Tucci interview, analyst react)

By Jim Finkle

BOSTON, July 8 (Reuters) - Business software maker VMware Inc (VMW.N) issued a revenue warning that sent shares tumbling 30 percent to a historical low, and replaced its CEO, one of Silicon Valley's highest-ranking women executives.

VMware, which is facing increased competition from Microsoft Corp (MSFT.O) in the market for virtualization software, said on Tuesday its board named former Microsoft executive Paul Maritz, 53, to replace Diane Greene, also 53, as chief executive with immediate effect.

Greene, who could not be reached for comment, co-founded VMware a decade ago with her husband, Mendel Rosenblum, a Stanford University computer scientist.

Board Chairman Joe Tucci, who is CEO of EMC Corp (EMC.N), which owns 86 percent of VMware, told Reuters VMware's Greene was replaced because the board wanted a leader with more operational experience to take the software company to the next stage of growth.

Tucci said he had asked Greene to stay with VMware, but she declined to take on another post at the company.

"This economy is tough. We don't see it improving soon," Tucci said in a phone interview.

The poor U.S. economy was a factor behind VMware's warning on Tuesday that its 2008 revenue would be "modestly below" its previous forecast of 50 percent growth over 2007, he said.

When asked to elaborate on that warning, Tucci said, "modest is another way to say slight." But he declined to give more details before the company's second-quarter results are released on July 22.

COMPETITION

Microsoft charges $28 for its Hyper-V virtualization software, while VMware says it charges $495 for the most comparable product, known as ESX.

VMware's server virtualization software helps one computer do the work of multiple machines, allowing companies to save money on equipment, electricity, maintenance and other costs.

Tucci said sales were taking longer to close, but that VMware had not lost any deals.

Pacific Growth Equities analyst Kaushik Roy said he interpreted VMware's language to mean that it expects to see revenue rise 40 to 50 percent this year.

VMware shares fell to an all-time low of $36.55 on Tuesday morning before recovering to $38.82, down 54 percent for the 11 months since it began trading. EMC shares fell 10 percent to $13.56 in midday trade.

VMware went public in August 2007 in what was the hottest technology initial public offering since Google Inc's IPO in 2004.

VMware shares debuted on the New York Stock Exchange at $52 in August 2007, compared with their IPO price of $29. They reached a record high of $125.25 in October 2007.

Global Equities Research analyst Trip Chowdhry said Greene failed to anticipate the competition.

"You need a person who has a pulse on the business, a person who is able to understand the strategic implications of competitive pressures," he said.

Maritz worked at Microsoft for 14 years. He managed the development and marketing of products including Windows 95. He left Microsoft in 2000 and founded Pi Corp, which was acquired by EMC. He most recently ran EMC's cloud computing division. (Additional reporting by Eric Auchard; editing by John Wallace, Leslie Gevirtz)

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