VMware last night released Q2 2008 earnings report in which it reduced its outlook for the third quarter, investors responded by shedding shares and caused a drop of 14% in share price.

BOSTON (Reuters)—Business software maker VMware Inc issued a revenue outlook on Tuesday that fell far short of expectations, saying customers were delaying purchases or opting for smaller and shorter contracts due to a weak economy.

“In a word: disappointing,” said Jefferies & Co analyst Katherine Egbert. “They might be trying to lower the bar for the new CEO.”

VMware replaced Chief Executive and Co-founder Diane Greene with former Microsoft Corp executive Paul Maritz two weeks ago while at the same time cutting its full-year revenue target.

Since then the stock price has dropped from over $53 to its present pre-market price of $33.01

VMware is facing stiff competition from many rivals including Microsoft who have recently launched a cheaper alternative in Hyper-V.

“We are not aware of having lost any deals to them (Microsoft),” Chief Financial Officer Mark Peek said on a conference call. “But there is potential their marketing and sales efforts will slow decision cycles, while customers sort the facts out for themselves.”

This may however be a short term problem as yesterday they announced that they are going to be giving there thin ESXi 3.5 hypervisor away for FREE starting the 28th July.

Also in the news was that VMware have won the “Best of Tech·Ed 2008″ award in the Virtualization category as awarded by Windows IT PRO for the VMware Infrastructure 3, the industry-leading virtualization and management suite.

Troubled times for the Virtualization specialist or just another bump in the road?