EMC Had Big Year-Over-Year Growth, but Its Future Is Virtual

Last Updated Jul 21, 2010 4:00 PM EDT

This morning, EMC (EMC) reported 24 percent year-over-year revenue growth. But the real story is that EMC's future will probably be far more in software than in its traditional storage hardware.

The key to EMC's future is VMWare, which EMC bought back in 2003. And a smart purchase it was. VMWare is the biggest name in virtualization -- software that lets companies create virtual machines that can be moved from one server to another. The reason virtualization is big in large corporate computing is that it solves a number of problems. IT departments can put multiple virtual machines on one server. Instead of buying more hardware for each new business need, companies can make far better use of the capacity of servers, storage, and networks than they once did. Depending on who you ask, without virtualization, utilization runs anywhere from about a third of capacity down to ten percent or less.

Use virtualization, and you've got a chance at reducing capital expense and getting things done faster (a lot easier to click some buttons than to order and physically set up new equipment). Also, one of the problem problems that companies have faced is running out of physical room and adequate electrical power and cooling for new equipment. Building out a data center is expensive.

Virtualization has been a buzz word for a while, but it's actually catching on in a bigger way -- one reason that VMWare's 47.8 percent year-over-year growth has outpaced everything else at EMC, as you can see from the graph below:

In tech, growth is everything. But, for EMC, VMWare is more. As companies move to virtualization, they will need to buy less hardware. After all, that's one of the big reasons to do it. Add cloud computing, and suddenly you have capacity even more efficiently used and spread among many companies, reducing the potential for hardware sales even more. If you can't sell the hardware, you want to sell the software, which is exactly what EMC does. If software will eventually cannibalize hardware sales, EMC wants to be the big name on the virtualization front.

There's another advantage as well. Software costs a lot less to reproduce. If you've any doubt, compare Apple (AAPL) and Microsoft (MSFT). Apple's revenue in the quarter it reported yesterday was higher than Microsoft's last reported quarter. (Microsoft's latest earnings come out tomorrow.) But who made more profit? Apple saw $3.25 billion in net income on $15.7 billion in revenue. Microsoft had $14.5 billion in revenue, but $4 billion in net income.

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Image: Qingqing Chen, public domain, Wikimedia Commons
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.