Times are tough even for companies leading the field in 'hot' technologies. Despite the growing interest in virtualisation, market leader VMware has reported a drop in both new licence revenue and profit, the company's first decline since going public two years ago.

Revenue was flat from the year before, at $456(£277) million, while net profit declined to $33 million, from $52 million in the second quarter last year, the company said Wednesday.

New license revenue, which is seen as an indicator of future growth, declined 20 percent from a year ago to $228 million, VMware said. It blamed "the challenging macroeconomic environment." The decline was offset by a 32 percent increase in service revenue, which climbed to $228 million.

The results beat the expectations of financial analysts. VMware had warned in April that revenue might be flat or down slightly for the quarter, and analysts had been forecasting a 1 percent drop in sales, to $452 million.

This marks the first time that VMware's revenue hasn't grown since the company was partially spun-off by its owner EMC. The growth rate had been slowing gradually each quarter, as VMware became larger and the initial wave of adoption for server virtualisation started to slow.

Separately however, VMware rival Citrix Systems reported second-quarter revenue of $393 million, up a fraction from last year, and a profit of $43 million, up from $35 million. Product licence revenue declined 15 percent, however, the company said.

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During the quarter VMware launched vSphere, a major update to its core virtualisation software. The company bills it as a "cloud operating system" that will allow customers to manage and provision server, storage and network resources as if they were a single large computer.

The software includes fault tolerance and a more scalable hypervisor that should allow customers to run large databases and other enterprise applications on virtualized servers, according to VMware.

With the basic tools for virtualisation now a commodity, analysts say vSphere is important for VMware to help it retain a technology lead over Microsoft and Citrix.

VMware is increasing its front-line customer support staff by 20 percent to help ensure the upgrades to vSphere go smoothly, said chief operating officer Tod Nielsen. Executives said the rollout has been going well.

VMware plans a further upgrade that will allow companies to transfer virtual workloads between their own data centers and those of cloud service providers such as Terremark and Savvis. It didn't say when that product would ship.

It is also working on some management add-ons for vSphere, the first of which shipped this month, and a big update to its desktop virtualisation software, VMware View. The update will include a new PC-over-IP remote display protocol developed with Teradici.

Executives didn't say when those new products would ship, only that they plan to make "a set of announcements" in August at VMworld or before.

Customers continued to shy away from large deals in the quarter because of the uncertain economy, executives said on the call. For the first time in two years, deals valued at less than $50,000 made up more than half of VMware's orders during the three months.

The company has introduced a "back maintenance programme" designed to get smaller customers - those who made purchases of about $10,000 or less - current with their software licence agreements. Those customers apparently fell through the cracks while VMware focused on larger deals.

"Renewals of some of these customers may have been lost in the jet stream of the tremendous growth we've experienced over the years," Nielsen said.

Also during the quarter, VMware paid $20 million to buy a 5 percent stake in Terremark, a close partner that uses VMware's software for its managed hosting services.