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Hit the deck! 2011 enterprise sales may be in trouble, says VMware

Virtualization software provider VMware posted strong fourth quarter and yearly results, but a trimmed outlook from the company indicates that enterprise spending could be weaker in 2011 now that pent-up demand for software and hardware that grew during the economic recession is mostly sated.

VMware saw a record fourth quarter, making $131 million off $836 million in revenue. Its fourth-quarter revenue was up 37 percent from $608 million in the fourth quarter last year, and its income more than doubled from $56 million last year. VMware brought in $2.9 billion in revenue for 2010, up 41 percent from $2 billion in 2009.

It seems 2010 was a good year for most enterprise companies, with companies looking to buy up new hardware and renew contracts left and right as the recession eased. That led to record-breaking quarterly revenues for other enterprise companies like Oracle as well. But that means the next year will probably see a marked decline in new contracts and hardware orders.

So VMware has toned down its guidance for 2011, forecasting growth in the range of 21 to 24 percent — or around $3.5 billion in revenue for 2011. That’s still a reasonable chunk of change, but it’s not going to match the kind of success the company saw this year.

A large part of VMware’s bump in revenue came from renewals or extensions of contracts signed in 2007, when the company first went public. About 80 percent of VMware’s customers chose to renew contracts or enter into new licensing agreements, with only 3 percent terminating their agreements with VMware. Customers renewing their contracts with VMware typically renewed them at a higher dollar value as well, Peek said.

As per the usual on Wall Street, investors didn’t like the weaker outlook by VMware. Its shares shares were down almost 5 percent in extended trading after the company’s quarterly conference call.