Storage juggernaut EMC announced it had acquired privately held CrosStor Software for $300 million in stock. Software continues to be a key growth driver for EMC. Not only has it provided it with a more complete offering and a competitive differentiator, but it will also significantly contribute to improved financial performance.
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Storage juggernaut EMC (NYSE: EMC) announced yesterday it had acquired privately held CrosStor Software for $300 million in stock. Software continues to be a key growth driver for EMC and the latest purchase brings in additional software technologies and expertise for its networked storage systems. In particular, much of the South Plainfield, New Jersey-based company's software is used in network attached solutions (NAS) devices, where EMC is attempting to dethrone Network Appliance (Nasdaq: NTAP). EMC's commitment to software has come to life through both organic growth and acquisition. The company continues to devote nearly 80% of its total research and development budget to building software -- some $164 million in the most recent quarter. On the deal side, the company has made several other software-related acquisitions in recent history including Conley Corp. for an undisclosed amount in 1998, Softworks for $192 million in December 1999, and Terascape Software for $50 million this January. You might be asking: Why is this "box" maker devoting so much time and money to software growth? Software sales present a large opportunity for EMC because of the evolution of storage area networks (SAN) and NAS. As the adoption of these products continues, the need for software attachment tools is a must. And without them, EMC is unable to offer customers a complete storage solution. However, it's also afforded the company with a stronger financial position that should prove valuable in an increasingly competitive environment. EMC estimates the market for mainframe, network and software storage will grow to $44 billion this year, and more than twice that figure by the year 2005. This kind of market opportunity has created an intense competitive environment with companies such as Dell (Nasdaq: DELL), Compaq (NYSE: CPQ), and Sun Microsystems (Nasdaq: SUNW) all entering the mix. Dell created a new storage division for small businesses and large enterprises this fall, Sun Microsystems has entered the NAS market aggressively, and Compaq's storage unit has the special attention of CEO Michael Capellas. Meanwhile, there are other battles with Network Appliance and others. Increased competition can in part create pricing pressure. But with nearly 15% of total revenue attributed to software in the recent quarter, the company has improved its financial position. Software is an attractive space (Zeke Ashton showed why) because it's a high-margin business. The initial costs for creating software can be high, but additional expenses for licensing and renewal are near nothing. Thus, there are extremely high gross margins, which provide more incremental revenue contributing to bottom line profits. EMC's gross margin expanded to 57.7% from 51.9% in the year-ago period. Therefore, with over $2.7 billion in cash, EMC has sufficient capital to continue making software-related acquisitions. The company maintains a long-term goal of software growth in excess of 50%, and 20% of the total top-line. In the last three quarters, software revenue grew year-over-year 60%, 74%, and 96%, respectively. Not only has software provided it with a competitive differentiator -- providing value added services that others don't in the storage market -- but also significant contributions to financial performance.
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