Is VMware sales model flawed?

In the last month the stellar performance achieved by VMware stock suffered a major hit:

What’s the cause for this? The general bad trend hitting the entire market, the increasing competition with Microsoft, which is about to sell Hyper-V at $28, the suddely broken alliance with Citrix, which became the second threat after XenSource acquisition, or the recent tension with Oracle about support? Or something else?

Cowen’s Managing Director, Walter Pritchard, suggests the bad performance may depend on VMware sales model instead:

Pritchard, who has a Neutral rating on the stock, this morning wrote that the medium- and long-term investment case for the stock is “still mixed.” He asserted that over the next 24 months, the stock could trade anywhere between in line with the market to 34% below the market.

He says the fourth quarter outlook is bullish, with declining days sales outstanding suggesting a healthy backlog position. “Thus we expect solid Q4 results, almost independent of Q4 business activity,” he writes.

But he is more cautious looking ahead. He notes that VMware is increasingly selling software under enterprise license agreements, which he says results in companies making larger upfront purchases, “often forward buying more capacity than they intend to deploy initially, but instead securing a more favorable price for the software through the larger and long-term commitment.” Pritchard says he does not mean to suggest that using the agreements are a bad idea; he says the company ought to use them to lock in customers in a market that will get competitive over time. But he does say that you need to be careful with the conclusions you draw about the current level of revenues and what they will mean going forward…