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Technology Stocks : VMware, Inc. (VMW)

VMW 142.48

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Nov 22 4:00 PM EST

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To: stockman_scott who wrote (250)	7/25/2012 7:51:11 AM
From: Glenn Petersen	2 Recommendations of 358

Cisco's Virtual Challenger By ROLFE WINKLER Wall Street Journal July 24, 2012, 7:05 p.m. ET With friends like VMware, Cisco hardly needs enemies. Shares in the networking giant tumbled 6% Tuesday after VMware—a joint venture partner of Cisco's—announced that it would buy software start-up Nicira for $1.3 billion. Though Nicira's current sales are tiny—in the single-digit millions, according to a person close to the company—the potential for its software looks big. It has the potential to do to network switching what VMware already has done to servers. The key word is "virtualization." VMware's software helps turn a single server into multiple virtual servers, enabling them to perform more functions simultaneously and run closer to capacity. Similar to the way VMware virtualizes servers, Nicira enables users to carve up their networks in a way that is much more efficient, notes IDC analyst Cindy Borovick. If that happens, customers won't have to buy as many switches as would otherwise be the case. That business accounted for 31% of Cisco's revenue in the quarter ending April. The other risk is to Cisco's margins. Analyst Brian Marshall of ISI Group estimates that Cisco generated a gross margin of 66% in that business in the April quarter. A big reason for those high margins is the functionality that Cisco builds into its switches. But Nicira customers will, in effect, be able to take some of that functionality out of the switch and put it into servers. That could weigh on Cisco's margins as customers push back on the prices they are willing to pay. Cisco already faced a growth problem, as evidenced by its languishing stock and the new round of layoffs it announced Monday. VMware's move to gobble up a part of its business doesn't help. Write to Rolfe Winkler at rolfe.winkler@wsj.com online.wsj.com

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