Analysis EMC shareholders concerned about the stagnant nature of the company's shares should open up a new document file right now. They should address it to CEO Joe Tucci, and they should title it "Spinoff VMware and unlock precious shareholder value."
EMC has done a remarkable job of posting double-digit revenue gains over the past two years, while most other hardware rivals have struggled to achieve any level of consistency. Investors, however, have not rewarded EMC for this performance with its share price hovering close to $14 during the two-year span. Concerns about EMC's inability to grow software revenue without major acquisitions and to defend a slower-growing hardware business haunt the company.
This makes a spinoff of EMC's VMware subsidiary so attractive.
In its most recent quarter, VMware reported revenue of more than $100m for the first time in its history. EMC noted that it's "continuing to be one of the fastest-growing major software businesses in the world." No other start-up in the server software realm enjoys such a stranglehold on the market leader position or the incredible margins VMware achieves by selling its products for thousands of dollars per processor.
As a comparison, Red Hat recently posted second quarter revenue of $65.7m. That marked a 42 per cent year-over-year rise and sent Red Hat's shares up to 20 per cent higher in just 24 hours.
One year ago, VMware pulled in $61m, which was a 200 per cent rise over its pervious third quarter. Moving from $61m to this year's $100m also gives VMware more than a 60 per cent year-over-year revenue surge - far better than say, Red Hat.
At $100m, VMware also makes more money slicing and dicing Red Hat's operating system than Red Hat makes selling and supporting its flagship product. That's a huge edge for VMware, as its proven to be one of the few software makers that can capitalize on the open source model. The rest of the Linux server money goes to hardware makers such as IBM, HP and Dell.
Reasons to stay at home
Without question, VMware has benefitted by becoming part of EMC.
VMware's management has always been engineer rich. CEO Diane Greene is an incredibly successful businesswoman holding, with her husband, more than a 50 per cent stake in VMware, but she's a geek at heart. Before the EMC buy, VMware spent little on marketing and depended on word of mouth.
In addition, the nature of the server partitioning market demands that customers trust that their software supplier will be around for a long time. You're not going to slice up hundreds of systems and pray that VMware stays in business or has the support you need when something goes wrong. You have to know that for certain.
EMC helps on both fronts by putting its full marketing weight behind VMware, adding muscle to its support staff and slapping a big, trusted name on the VMware products. EMC gives VMware a more mature, solid presence.