VMware says it's seeing strong growth in its virtual networks business, contributing to satisfying earnings expectations in the third quarter.

In its Q3 earnings call Tuesday afternoon, VMware Inc. (NYSE: VMW) CEO Pat Gelsinger said NSX is "gaining significant momentum and industry validation, with more than 250 paying customers today."

VMware is focused on building partnerships for NSX, making deals with other companies including Palo Alto Networks Inc. , F5 Networks Inc. (Nasdaq: FFIV), Arista Networks Inc. , HP Inc. (NYSE: HPQ), Dell Technologies (Nasdaq: DELL), and network security companies. NSX has proven popular in the US federal sector, said VMware president and COO Carl Eschenbach.

NSX is a popular SDN technology, used by carriers and enterprises to increase network and business agility. While not covered on the earnings call Tuesday, VMware has been working to increase sales to carriers. (See Cisco & VMware Are Apple & Google of SDN.)

Customers look to NSX for microsegmentation, network agility and network provisioning, executives said.

VMware describes microsegmentation as a means of augmenting perimeter firewalls. "You have a hard crunchy outside, but you have a soft chewy inside, so any threat that gets into the data center actually has very little lateral controls," says Rod Stuhlmuller, VMware director of product marketing, in a video. "It can move around, and it can attack machines within the data center." Microsegmentation builds a "honeycomb" of internal security barriers on the network to keep threats from spreading.

VMware executives said on Tuesday's call that it introduced NSX for channel sales last quarter. Earlier, about a year ago, it started to build a sales force of reps and system engineers to push NSX and network virtualization.

But despite strong NSX performance, third-quarter net income fell 26% due to higher expenses, including charges related to the recent $1.54 billion acquisition of mobile management vendor AirWatch LLC . (See VMware to Buy AirWatch for $1.54B.)

VMware reported a profit of $194 million (or 45 cents a share), down from $261 million (or 60 cents a share) a year earlier. Excluding stock-based compensation, acquisition-related charges and other items, earnings rose to 87 cents from 84 cents. Analysts polled by Thomson Reuters expected 83 cents.

Revenue increased 18% to 1.52 billion.

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VMware forecast current-quarter revenue below Wall Street estimates, due to delay in closing a big US government deal and lower bookings in Germany, Russia and Japan. VMware forecast revenue of $1.67 billion to $1.71 billion for the quarter ending December 30, with analysts expecting $1.71 billion.

VMware was trading at $81.95, down 7.08%, at close of trading Wednesday.

VMware is majority-owned by EMC, which is being pressured by Elliott Management Corp. to change its structure, including spinning off VMware.

— Mitch Wagner, , West Coast Bureau Chief, Light Reading. Got a tip about SDN or NFV? Send it to [email protected].