Reuters says the the Justice Department has hired a litigator to look into antitrust issues at Google (GOOG).

The Boeing (BA) strike is having an impact on suppliers and customers around the world, according to Reuters.

Reuters reports that Nokia (NOK) is looking for more acquisitions for its internet business.

The Wall Street Journal reports that BG Group said it will let its offer to buy Australia’s Origin Energy lapse, a day after the target company agreed to sell a half share of key assets to ConocoPhillips (COP)

The Wall Street Journal reports that the CEO of Ford (F) is expecting help from the US government.

The Wall Street Journal reports that a survey of hedge funds shows 35% lost assets through August

The Wall Street Journal reports that O3b Networks plans to launch as many as 16 satellites to bring internet to hundreds of million of poor people.

The New York Times reports that the firing of the head of VMWare (VMW) is still hurting the company.

The FT says that the oil minister of Saudi Arabia cast doubt on a production cut at OPEC.

The FT reports that a new survey of companies shows 43% are cutting their rate of IT spending.

Douglas A. McIntyre

As part of Sun Micro’s xVM portfolio, VirtualBox will have the support of Sun’s global development community, field resources and partners to make VirtualBox even more compelling to developers and end users, driving greater adoption across a broad set of communities.  This will also enable desktops or laptops to run Windows, Mac, Linus, or Solaris O/S side by side.

This is after Sun announced it would acquire MySQL last month.  Financial terms were not disclosed, although this is listed as "not material" to earnings.

• See our exclusive interview with Ed Walsh of VirtualIron, a virtualization competitor.

Citrix Systems (NASDAQ: CTXS) saw a brief rally after it acquired XenSource for virtualization and we all know how the hotter-than-hot VMware (NYSE: VMW) IPO brought virtualization front and center in the investment community.

Jon C. Ogg
February 12, 2008

Here is the language from the S-1: "In addition, we have agreed with the underwriters that we will require, as a condition to participating in the exchange offer, participating employees who receive options to purchase our Class A common stock and restricted stock awards of our Class A common stock in the exchange to agree to the foregoing lock-up restrictions, subject to certain exceptions, for a period of 180 days from the date of this prospectus."

We contacted a representative of the company and have confirmed this data, although we would note the possibility at least exists of extensions.  The 180 day lock-up period would put Saturday, February 9, 2008 as the date.  That puts the lock-up date on Monday, February 11, 2008 as the date insiders and employees can finally unload a portion of their stock.  If you read below there does appear that there were clauses that could extend the lock-up date, although after a 100% gain even after the huge pullback it is hard to imagine that underwriters would not honor the original lock-up period dates. 

Frankly, we are surprised that the underwriters didn’t allow an early expiration for at least some of the shares in the lock up period.  We’d also note that as of last look, the short interest in VMware was more than 19 million shares, which is huge when you consider the total IPO (plus overallotment) was only 37.95 million shares.

What you can take to the bank is that many employees will be taking some of their money to the bank.  These are mostly former EMC employees that transferred their EMC stock options into VMware options, and despite the huge sell-off after earnings many of these employee stock options are up well over 100%.  It still appears that some shares and options didn’t get converted into VMware shares for some reason.  We’d also note that certain shares held (but apparently not all) by Intel (NASDAQ: INTC), Cisco Systems (NASDAQ: CSCO) will be unlocking; and depending on the limits, even some of the majority holdings held by EMC Corp. (NYSE: EMC) will be available.  The company has said in the recent past that it wants to hold shares rather than sale, but we have noted how we and others have predicted that EMC will look to begin divesting this either late in 2008 or at some point next year.   

These option conversion and share sales will be staggered as most company plans have restrictions on how much can be sold at any given time, so do not expect a sudden and massive five-fold increase in the public float.  Conversely, the public float is about to get much larger.  Please see below on the actual number of shares that can be available.  These numbers may have changed and there are restrictions on certain numbers here.  Below is the data on certain "shares eligible for future sale":

• ….we have reserved 35,679,411 shares of our Class A common stock issuable upon the exercise of stock option awards,subject to vesting, which were granted in June and July 2007 with anexercise price of $23.00 per share, 365,740 shares of Class A commonstock issuable upon the exercise of stock option awards, subject tovesting, which were granted in July 2007 with an exercise price of$25.00 per share, and 537,676 shares of our Class A common stockissuable upon the vesting of restricted stock units……

• We, our directors and executive officers, EMC, Intel and Ciscohave agreed that, for a period of 180 days from the effective date ofthe IPO, we and they will not, without the prior written consent ofCiti, JPMorgan and Lehman Brothers, offer, sell, contract to sell,pledge or otherwise dispose…..

• Citi, JPMorgan and Lehman Brothers, in their sole discretion, mayrelease any of the securities subject to these lock-up agreements atany time without notice. In addition, we have agreed with theunderwriters that we will require, as a condition to participating inthis Offer, participating employees who receive options to purchase ourClass A common stock and restricted stock awards of our Class A commonstock in this Offer to agree to the foregoing lock-up restrictions,subject to the foregoing exceptions, for a period of 180 days from thedate of this offer to exchange. We may release the securities subjectto these lock-up agreements only with the prior written consent ofCiti, JPMorgan and Lehman Brothers in their sole discretion. Suchrelease may occur at any time and without notice. In addition, bothIntel and Cisco have agreed not to sell their shares of our Class Acommon stock for a period of one year from their respective stockpurchase dates without our consent…..

You can also look on page 161 and beyond on the SEC link here to see the certain percentages that would be applied etc….

Jon C. Ogg
February 8, 2008

Some data herein has been sent to our open email distribution list.  Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

If the company offers guidance in the conference call, Next quarter’s estimates are $0.24 EPS and $436.41M in revenues; if the company offers 2008 targets, those estimates are $1.17 EPS and $2.08B in revenues.  This was only the second earnings report out of the company and its first full quarter as a public company.   Analysts had an average price target on VMware of $105.88, and we’d likely expect many analysts to have more cautious comments that this looks "near full value" based upon today’s numbers.  Its former parent, EMC Corp. (NYSE: EMC) is set to report its earnings tomorrow.

Diane Greene, president and chief executive officer of VMware: "We begin 2008 with more than 100,000 customers, 500 technology and consulting partners, nearly 10,000 go-to-market partners, and more than 5,000 employees. As others begin to enter the market, VMware and our partners are continuing to broaden and deepen our highly reliable end-to-end virtualization solutions."

• Jim Cramer had recently noted these in overlooked tech and we noted just last week how some of the estimates from William Blair were conservative compared to the pack of analysts for 2008.

VMware stock closed down 1.2% to $79.55 in normal trading and its shares had mostly traded in a $76 to $83 trading range over the last five trading sessions.  This is the worst event-risk trading seen on this with a drop of 25% to $62.37 in after-hours trading. In fact, this essentially wipes out most of the post-IPO gains.  VMware will need to show some huge guidance to make this initial reaction a bit less violent.

You can imagine the headlines for Tuesday: "VIRTUALIZATION CRAZE ENDSAS FAST AS IT STARTED"….. That might prove true for VMware, althoughthis trend will be a huge savings boon for every large and mediumenterprise out there.

EMC shares are down some 9% or more to $15.30 in after-hours trading after a mere 1% gain in regular trading today. 

Jon C. Ogg
January 28, 2008

WARNING from 24/7 Wall St.: logic can still fall victim to the VMware conundrum we have explained.  We gave a scenario of what current $100+ stock prices actually look like on the valuation front.  That VMware stock conundrum is going to exist for some time until the float catches up.

If VMware offers guidance, the street is at $0.19 EPS & $382.8 million for next quarter.  Watch the guidance closely, because that is a part of what caused the hit to Citrix Systems (NASDAQ:CTXS) shortly before completing the XenSource purchase to enter its virtualization phase.

Traders are still using stock options as a stealth trade to playVMware.  It traded 4.4 million shares of stock today, but the NOV putshad over 5,000 contracts of the six closest active strike prices andthe NOV calls traded over 10,000 contracts of the seven closest strikes.

On Thursday, October 25, we’ll see how this impacts EMC Corp. (NYSE:EMC) and we’ll follow up with a more combined and interfaced preview for EMC separately tomorrow.  Below are the other key issues you’ll want to know regarding VMware:

• EMC & VMware are part of the window dressing stock plays;
• Analysts have to play catch-up to original price targets;

Jon C. Ogg
October 23, 2007

Jon Ogg is the editor of the 24/7 Wall St. Special Situation Investing Newsletter; he does not own securities in the companies he covers.  We just released our first part of two of our "Small Cap Internet Watch List" for subscribers to see which stocks we think could be acquired (and by which suitors) under the right circumstances in the space. This year alone we have discussed how aQuantive, 24/7 Real Media, and Web.com were acquired off this list;and you can see samples of this.

• Citrix EasyCall allows organizations to communication-enable any application delivered via Citrix Presentation Server or Citrix NetScaler;
• Organizations using Citrix Presentation Server can now record and play-back any user application session with Citrix SmartAuditor;
• Citrix and HP team to offer a unique new PowerSmart capability designed to help customers reduce datacenter power consumption as a core property of their application delivery infrastructure.

Citrix is also seeing shares trade up on an analyst upgrade.  Deutsche Bank raised its Hold rating to a "Buy" rating based on its conviction that XenSource is a legitimate vendor in the virtualization market behind VMWare (VMW).  Deutsche Bank also noted that XenSource could contribute more than expected to the company’s fourth quarter.

As a reminder, Citrix saw shares down briefly about as much as 10% after its earnings report last week.  Shares are up 1.5% at $40.24 in pre-market trading.

Jon C. Ogg
October 22, 2007

There is no doubt that this one is a beneficiary of ongoing window dressing and the tech-markup with the other key tech stocks outlined as we enter the end of the year for many fund managers in October.  But even with what we labeled as the "VMWARE CONUNDRUM" because of a low float exaggerating it’s price moves, money managers’ and traders’ demand for stock in the virtualization king seems tireless.

There is no doubt that the company is the leader in virtualization and there is no doubt that the company wants to exceed its targets and will do whatever it can to beat targets.  It has already made itself an acquirer and will likely do so at each new virtualization conference it attends.  But at a closing price of $101.61 what does this stock look like in valuation?

Wall Street has estimates set at $0.65 EPS & $1.27 Billion revenuesfor fiscal December 2007, and has $0.92 EPS and $1.84 Billion revenuesfor fiscal 2008.  With the hype of virtualization and the ever-cheaperprices of multi-core processors and ever-cheaper DRAM prices, you knowthose numbers are probably way too low if you are like myself and muchof Wall Street that believes virtualization is "the next next thing"for the IT sector and investors. So lets pretend that the companymanages 30% better earnings and 20% better growth in revenues using thecurrent expected growth rates.  You’d have nearly  $0.84 EPS and $1.6Billion in revenues for 2007, and then using the same upside surpriseAND the expected growth rates on top of these new hypothetical numbersyou would end up with a magical $1.54 EPS and $2.78 Billion in revenuesfor fiscal 2008.

Forget the 2007 projected P/E ratio of 156right now and the 2008 projected P/E ratio of 110.4.  Use the newmagical "upside surprise" numbers and the new forward P/E ratio is120.95 for 2007 and ‘only’ 66-times for 2008.  These almost becomeacceptable at this point.  But with a roughly a $38.9 Billion marketcap and even with the sustained upside surprise to revenue growthmodels, this would have an implied forward revenue multiple of 24.3 for2007 and 14 for 2008.

At today’s current valuations, it ispossible that VMware stock is trading at anywhere from over 3-times tounder 5-times the sales of the entire virtualization marketindustry-wide to 2010.  These levels aren’t just starting to look likemagic.  They are starting to look like wizardry.  It is even nearlyimpossible to blame traders for using stock options as a "less risky way" of having  exposure to the stock.

This isn’t one of Cramer’s "new four horsemen of tech"but it may be the horse trader.  When you start calculating EMC Corp.’s(NYSE:EMC) 86% ownership valued on paper before flooding the marketwith VMware shares at $33.45 Billion and compare it EMC’s own marketcap of $45.7 Billion, you will begin to scratch your head evenconsidering EMC ran more than 50% since announcing the partial spin-off.  The math starts getting fuzzy.

Keep in mind that with extremely low-float stocks of this sort, logic may not prevail for quite some time yet.  Even after lofty analyst projections,it has continued. Very soon, analysts may have to either boost their targets or make the dreaded "downgrades based upon valuation" calls that would be rather unpopular.  If the company doesn’t vote to allow employees tobreak the lock-up dates early or if EMC doesn’t vote to release Inteland Cisco (and maybe even some of its own VMW shares) early from the180-day lock-up periods, then you could literally see another 4-monthsor more of this.  Stranger things have happened, and in the stockmarket you can still go bankrupt even if your thesis ultimately provestrue.

We are getting ready to release our updated "watch list" of small cap Internet stocks to subscribers of our Special Situation Investing Newsletter,and trials are available.  Our watch list is not all only made ofactive buyout targets today, but under the right circumstances any ofthese could easily become subsidiaries of larger web-based properties.This year alone we have discussed how aQuantive, 24/7 Real Media, and Web.com were acquired off this list;and you can see samples of this.

Jon C. Ogg
October 10, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the Special Situation Investing Newsletter and he does not own securities in the companies he covers.

• Total revenue for the quarter was $127.3 million, an increase of 28% from the year ago quarter and 7% from the prior quarter. Subscription revenue was $109.2 million, up 29% year-over-year and 6% sequentially. Total revenue expectations from First Call were $117 million.
• Net income for the quarter was $18.2 million, or $0.09 per diluted share, compared with $16.2 million, or $0.08 per diluted share, for the prior quarter and $11.0 million, or $0.05 per diluted share, in the year ago quarter.
• Non-GAAP adjusted net income for the quarter was $36.9 million, or $0.17 per diluted share, after adjusting for stock compensation and tax expense as detailed in the tables below. This compares to non-GAAP adjusted net income of $33.7 million, or $0.16 per diluted share, in the prior quarter and $24.5 million, or $0.12 per diluted share, in the year ago period. Non-GAAP expectations from First Call were $0.17 EPS.
• Guidance was issued for the quarter was $131 to $133 million in revenues, and non-GAAP EPS of $0.18; estimates are $0.18 EPS and $132.5 million revenues.

Red Hat released the beta version of the Red Hat Developer Studio, an integrated Eclipse-based set of open source development tools and runtime environment.  VMware’s (NYSE:VMW) rapid launch and faster investor absorption tied with cheaper RAM and multi-core processors are both lining up to be just what the doctor ordered for Red Hat and other Linux players in general (read about that on the Red Hat site on virtualization).

In addition, Red Hat today announced that its Board of Directors had authorized the continuation of the Company’s stock and debenture repurchase program. Under the program, the Company is authorized to repurchase in aggregate up to $250 million of the Company’s common stock and in aggregate up to $75 million of the Company’s 0.5% Convertible Senior Debentures due 2024.

If Red Hat just meets fiscal FEB-2008 EPS targets at $0.70 then even after the 4% jump in after-hours prices its forward P/E ratio on a non-GAAP basis is becoming more than easy to mentally absorb at 27.5.  The company does have more competition, but this new opening up of the desktops from virtualization in 2008 to 2009 and beyond may really open up the market for this company. 

The wildcard for this one tomorrow is going to be the Wall Street research calls with upgrades or downgrades.  These numbers on the surface have no WOW-factor to them, but the flip side is that these numbers are also starting to look more normalized.

Jon C. Ogg
September 25, 2007

Jon Ogg produces the 24/7 Wall St., LLC Special Situation Investing Newsletter; he does not own securities in the companies he covers.

To throw another wrench in the machine, Friday is September stock options expiration date.  We recently noted how traders have been using stock options as a stealthy way of having exposure to VMware.  We have referred to a "VMware conundrum" and this may be contributing to the option trading as "less risky" trade if you can imagine that.

Some analysts have already started coverage, but the real researchfrom the underwriters is what Wall Street investors will be keying offof most.  Depending upon how the bulk of the analysts of theunderwriting firms initiate coverage this could be a large positive ornegative for the stock.  Virtualization is the next "next thing," andnow it will all boil down to how certain analysts are willing to valuea major growth story.

VMware now also has close to the same market cap of Adobe Systems(NASDAQ:ADBE).  You will have to determine your own valuations as thecompanies are at entirely different stages in the respective businesscycles, but this is worth a review.  VMware has already made an acquisition after less than a month of its IPO.  It also has an East Coast virtualization conference in the coming days and has made its plans for its European VMWORLD in early 2008.

Here were the firms that were in the final underwriting syndicatethat can begin coverage, although investors should be well aware thatnot all are obligated to cover the stock and we have not been given anyindications from the research departments of whether they will issuefavorable or cautious coverage:  Citigroup, J.P.Morgan, LehmanBrothers, Credit Suisse, Merrill Lynch, and Deutsche Bank.  Here arethe independent brokerage firms that VMware lists on its site thatalready cover the stock (plus current ratings we have found, whichcould have changed already):  Caris & Co. "Above Average"… Cowen & Co. "Neutral"… Jefferies "Buy"… RBC Capital "Sector Perform"… R.W.Baird "Neutral"… ThinkEquity "Source of Funds"… Bernstein (pre-IPO coverage)… and Benchmark (unknown).

Here you can also see how we covered the Special Situation specificallyregarding EMC Corp. (NYSE:EMC) and how we expected the VMware to playout for holders of EMC shares before and after the IPO.  We arebelievers in the sector and are not against these companies, but wedidn’t pull out the pom-poms with simple math calculations over "EMC has X-Billion all of a sudden in hidden value on the books."  This was sent out to subscribers of the Special Situation Investing Newsletter.

Stay tuned.  Once the coverage universe from underwriters opens up,there is going to more than likely be a lot of sudden volatility aroundthe shares.  If you take a look at the manner in which Goldman Sachsmerely removed EMC from its beloved Conviction Buy List, you’ll see what sort of volatility can be created in both stocks.

Jon C. Ogg
September 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the 24/7 Wall St. Special Situation Investing Newsletter and does not own securities in the companies he covers.

Here is how the quarterly earnings and growth rates stack up against each other:

• VMware showed its financial filings of its second quarter on Monday (which were already mostly known), and the results were $296.8 million in revenues (up almost 90% over Q2 2006) and earnings rose over 100% to $34.2 million, or $0.10 on an EPS basis.
• Adobe’s earnings which were not previously known also came out on Monday.  The company posted profits of $205 million, or $0.45 EPS on a non-GAAP basis, on revenues of $851.7 million (up 41% from the same period in 2006).  The company did already acknowledge that its growth rates would slow in 2008 because it acknowledges that some growth rates are sustainable for only so long.

Market Cap Comparisons:

• Based on a 332.5 million share count on VMware and a $77.50 stock price, we get a $25.768 Billion market cap.  The calculations on the true share count create different market caps around the web: Yahoo! Finance lists $25.78 Billion as the market cap, Google Finance lists the share count at 382.94 million and gives it a $29.68 Billion market cap, MarketWatch lists the shares outstanding as 375.12 million and gives it a $29.07 Billion market cap,  and AOL Money & Finance severely undercounts the shares ate twice the free float so its market cap is only listed as $5.82 Billion.
• Adobe calculated on Monday that for the coming quarter, its share count will be 588 million to 590 million.  Lets split the difference at 589 million and with a $43.50 stock price we get an implied market cap of $25.6215 Billion.
• If you want to compare other desktop and server software companies and the market caps, here goes: Citrix (CTXS) $7 Billion; Symantec (SYMC) $17.5 Billion; Intuit (INTU) $9.9 Billion.
• The actual market caps on an exact basis is not the important part of this.  The most important part is looking at the comparison of how close each market cap is to the other.

The truth is that virtualization the next "next thing" and as a sector virtualization is going to enjoy larger growth rates for some time.  It will arguably even be immune from economic shifts in 2008 as the growth rates are coming regardless of the economy.  Maybe virtualization will grow at 50% instead of 70%, but this is still where things are going.

We still believe that if this VMware stock conundrum didn’t exist because of an incredibly low float that shares would not be where they are today.  This is an extremely valuable company and we won’t refute it or even fight it.  Just understand that this low float manipulates that price moves and we have noted already how investors and traders alike are using the various call options in multiple months and multiple strike prices to play the stock as a stealth trading basis.