Jefferies downgraded its rating on shares of VMware Inc. (NYSE: VMW) to hold from buy on less conviction of upside revisions. The brokerage also lowered its price target to $90 from $100.

Our channel work and guidance led us to believe there would be more upside to numbers. We are concerned about the lack of a license beat for the first time in nine quarters, said Ross MacMillan, an analyst at Jefferies.

Billings/cash flow from operations (CFFO) growth was impressive, but we model more moderation ahead. Overall we see risk of less upside to estimates than previously assumed and given valuation, that's not enough for us, MacMillan added.

MacMillan said his industry work plus the third quarter guidance led him to believe in more upside to numbers. The third quarter of 2011 numbers were not bad, with good billings and CFFO growth. But he views license billings as broadly in-line, while license revenue was below his estimate and in line with consensus the first time in nine quarters.

Guidance of 20 percent license growth for the fourth quarter of 2011 was also in line (yet likely conservative), but he has less conviction he would be revising numbers much higher in the coming quarters.

He has highlighted the cause that changed his views, which includes license sales in line with consensus for the first time in nine quarters, and United States revenue growth of 22 percent, the slowest in seven quarters.

The change in MacMillan's view also includes license guidance in line for the fourth quarter of 2011 at 20 percent growth and implied further deceleration in the first quarter of 2012 (likely conservative, but he believes less so than previously assumed), moderation of CFFO growth in coming quarters, and early yellow flags such as shorter maintenance terms on some deals.

MacMillan highlighted the positive that includes 47 percent year-over-year billings growth that was 16 percentage points ahead of the Street (88 percent of billings is maintenance and pro services), CFFO of $524 million blew away Street's estimate of $360 million (but including a $100 million tax refund), International revenue growth of 37 percent year-over-year, fourth quarter total revenue and operating margin guidance ahead of Street estimates, and positive commentary on management tools.

We continue to view VMware's strategic position as compelling, but we have less conviction on the stock following the third quarter of 2011 results. We are loath to change a rating off earnings, but in this case we think it is the right thing to do, said MacMillan.

The brokerage raised its 2011 EPS estimate to $2.15 from $2.10 and its 2012 estimate to $2.57 from $2.53. The brokerage marginally increased its 2011 revenue estimate to $3.747 billion from $3.746 billion, while lowering its 2012 estimate to $4.562 billion from $4.582 billion.

VMware stock is trading down 3.49 percent at $86.40 in the early pre-market trading on the NYSE.

Nyse Management