"Clearly, this is an endorsement of virtualization," said Brenon Daly, a financial analyst with The 451 Group in San Francisco. "We were absolutely blown away by how strong it came out."

Portfolio managers -- the major buyers of the stock today -- "understand the value virtualization offers, being able to wring more productivity out of existing technology," Daly said. VMware sales have grown from "nothing in 2003" to $750 million last year to $1.2 billion this year. "It's growing faster than any major software company."

Virtualization is creating sparks in data centers and CIO offices, and VMware currently has the market to itself. "Keep in mind the value proposition," Daly said. "When VMware comes in, they say, 'You've already sunk that money into data centers. Now for a marginal dollar you can get four times, five times, eight times, 10 times in performance .'"

With CIOs under pressure to do more with less, virtualization is "a very compelling pitch," Daly said. "You're not talking about a huge capital-intensive server rack. You've already spent that money. Why not get more bang out of what you already spent?"

Will Microsoft Catch Up?

Where is VMware's major competitor -- Microsoft -- in all this? "Microsoft has been slow to develop its own virtual machine technology," Daly said. In fact, it seriously considered buying VMware itself in 2003. Since Microsoft passed on VMware, it has been in a catch-up position, Daly said.

As Microsoft has shown time and again, however, it doesn't have to be first in a market to be the ultimate winner. When Netscape wowed Wall Street with its IPO, few predicted the ultimate result: Netscape out of business and Microsoft with the lion's share of users. "Microsoft has tremendous resources. They can afford to miss deadlines and not get it right on the first release," Daly noted. (continued...)

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