Despite EMC’s hardware heritage, we estimate that about 57% of EMC’s stock is attributable to the company’s software. EMC’s software includes the company’s storage software and virtualization software from VMware (NYSE:VMW), a company that was spun out of EMC and in which EMC has an 84% ownership stake.
The surprisingly large contribution of software to EMC’s stock is attributable primarily to the higher gross margins on software. Below we discuss the margins for EMC’s storage software business and how the software business relies on the success of EMC’s storage hardware.
High Storage Software Gross Margins
EMC had about $6 billion of storage hardware revenue in 2009 compared to about $2.6 billion of storage software revenue. Despite high storage hardware revenues, the contribution of software to EMC’s stock is higher due to software gross margins that exceed hardware margins.
Software Depends on Hardware
Although software is a large driver of EMC’s value, it depends on EMC’s less profitable hardware business. EMC generates software revenue by selling new licenses bundled with the its storage hardware and by providing maintenance for the licensed software.
The correlation of storage software revenues and hardware revenues is exemplified by the recent declines in both. Software revenues declined from $3.2 billion in 2008 to about $2.6 billion in 2009 while storage hardware revenues took a dip from about $6.6 billion to $6 billion over the same period.
As a result of software’s dependence on hardware, EMC’s storage hardware market share is important for the company’s software revenues. We estimate storage software revenues will remain around $2.6 billion in 2010 as EMC’s market share improves by 1%.
For additional analysis and forecasts, here is our complete model for EMC’s stock.
Disclosure: No positions