EMC Salivates Over Software

NEW YORK -- At its annual analyst meeting here today, EMC Corp. (NYSE: EMC) executives put their high-powered storage hardware story in their back pockets, emphasizing the software side of the house in identifying information lifecycle management (ILM) products as the next major growth area for the company.

Joe Tucci, EMC's president and CEO, said ILM will help the company to "fatten up the storage space" by expanding its addressable market. He described ILM as the ability to provide "information about information" to help customers better manage their storage infrastructures.

"When I talk to CIOs around the world about it, they actually salivate," he said. [Ed. note: Hmm... that rings a bell.]

He said EMC's two key competitors in this space -- which includes backup and recovery, archiving, and replication software -- are Veritas Software Corp. (Nasdaq: VRTS) and IBM Tivoli. "If we execute properly in the backup market, we can be very disruptive," Tucci said.

EMC's pending acquisition of Legato Systems Inc. (Nasdaq: LGTO) will fill in key parts of the ILM strategy. Legato will bring its Networker backup software, as well as email and database archiving tools (see EMC Gobbles Legato and Behind EMC's New Software Splash).Mark Lewis, EVP of EMC's open software group, said there was an immediate opportunity to deliver point products in the ILM category. But he said EMC doesn't expect to deliver on the full promise of an integrated platform that tracks and manages all aspects of a customer's data until 2005, with broad customer rollouts in 2006.

"We're talking about changing the fundamentals of how customers access information," he said.

Lewis described EMC's vision for a "metadata server" that would provide a global data catalog of where every piece of a corporation's data resides and allow access to that information with Web-like simplicity.

On the financial front, Tucci told analysts that EMC is expecting to "accelerate growth" through the second half of the year, and he reiterated the company's previous guidance that revenues for the third quarter would be between $1.45 billion and $1.50 billion. "The spring in EMC's step is back!"

More specifically, Tucci said EMC expects to see year-over-year growth of between 15 and 16 percent compared with the third quarter of 2002. He added: "We believe we did not execute as well as we could have in the second half of 2002." A "slight improvement" in IT spending through the end of 2003 will contribute to EMC's growth, Tucci said.Meanwhile, CFO Bill Teuber said EMC's overall growth would be in the "mid-teens" over the next 18 months. Based on its expanded software play -- including the addition of Legato -- he said overall gross margins would improve to 48 percent or greater by the fourth quarter of 2004 (compared with 43.5 percent in the most recent quarter).

EMC said a major near-term push is in the backup-to-disk market. Since it introduced lower-cost ATA disk options for the Clariion in March, EMC claims it has sold 3 petabytes of ATA storage (see EMC Backs Clariion Into ATA).

The sales effort behind ATA disk is part of EMC's overall strategy to shake up the backup and recovery segment. While EMC execs disavowed any aim of wiping out tape backup, they emphasized the speed with which data can be recovered from disk. Accessing data from disk takes roughly 30 milliseconds, compared with 30 to 40 seconds to retrieve data from a tape library, said Tucci.

"It's almost like the difference between me deciding to fly back to Boston or crawl back to Boston," he said.

Dave Donatelli, EVP of storage platforms operations, said EMC doesn't see a danger of ATA disk cannibalizing sales of higher-end Fibre Channel disk drives. "That's certainly something we thought about when we brought that out," he said. "But we're finding the majority [of ATA] is going into backup-to-disk environments."At another point during the morning's presentation, Tucci noted that he thought prices of SAN switches were still too high. "The margins in the Fibre Channel switching and director space are still pretty rich," he said. "We think those can come down... That's why you heard me applaud Cisco coming into the market." [Ed. note: Stop! We're salivating!]

Tucci danced around questions about which sector the company is eyeing for acquisitions. When EMC announced its plans to buy Legato, he said it would make another sizeable deal to achieve its goal of generating 30 percent of total revenues from software by the end of 2004. For the most recent quarter, software accounted for 22 percent of revenue; including Legato, it would have been 26 percent.

"I talked about fattening the storage space," he said. "We have a lot of ideas about how to do that," which include acquisitions, partnerships, and organic growth.

Omar Al-Midani, an analyst with SoundView Technology Group, said there were no surprises from EMC, but he noted that the company articulated its software strategy well. "They were upbeat," he noted. "This is not an environment where you want to disappoint."

Other highlights from today's EMC presentation:

Todd Spangler, US Editor, Byte and Switch