Hardware Giant To Feast On Software Line

"Joe and I have always said there are two kinds of people in this world," Wright explained to the financial analysts who had dialed in. "There are zookeepers and hunters. Joe and I are both hunters. We think we can go after the marketplace," and do right by the customers and shareholders.

The question now is not only whether EMC and Legato will do right by their customers and shareholders, but their partners and VARs as well. Legato is a backup-and-restore software company with approximately 75 percent of its revenue generated through partners and OEM agreements. EMC is a hardware company that only recently formalized a more structured partner program.

Needless to say, experts have made note of the challenges that lie ahead. Both analysts and partners wonder if a company with a culture of selling hardware can handle a sales force with a culture in selling software. EMC executives already have stated that the Legato sales team will remain a separate entity from EMC's sales force. Still, some are concerned.

"This could be a case where you have people at EMC who are now going to try to sell software. It could be a huge challenge for them," says D. George Plyler, vice president of BizTech Solutions, a Legato partner.

Research analyst John Webster echoes the same point. He does believe that EMC made a good acquisition, especially because the company intends to make software revenue at least 30 percent of its business. But a pure software company, like Legato, relishes its status as a player that does not care what hardware a customer uses to run its software. "EMC has a hardware axe to grind," says Webster, founder of Data Mobility Group. "The rule in the ISV community is, 'Never let hardware get in the way of a sale.'"

Still, this deal makes EMC the No. 3 player in backup and recovery. It means that EMC does not have to include Veritas Software--one of its partners and now main competitors--in customer deals that require an integrated solution. But, as executives from both companies emphasized, there were other compelling reasons for EMC to merge with Legato.

EMC's Tucci said he has three criteria for going after a company in an acquisition: It must have strong technology, a strong customer base and a sold distribution practice. "With Legato, we have hit all three," he said. "EMC will get the benefits of Legato's best practices and receive a healthy dose of new software DNA."

Legato has 450 software engineers, who will be brought into EMC's R&D team. Moreover, it has a customer base of roughly 31,000, along with 1,500 employees, as well as 400 active partners. Based on Legato's historical revenue, EMC expects to add another 2 percent to its software-license revenue. From Q2 '02 to Q1 '03, Legato reported software-license revenue at $138 million along with $142 million in services revenue. That will help EMC in its quest to make software a bigger revenue-generator. Software and services are expected to make up more than 50 percent of the business. At the end of the first quarter, EMC reported that services made up 22 percent of revenue, and software was 23 percent. "Software is definitely my highest priority," said Tucci, in a recent interview with CMP Media, VARBusiness' parent company. "Where we are hunting is in software."

Some of EMC's competitors were not impressed with the acquisition.

"EMC went off and paid $1.3 billion for a second-tier player, which really is a small piece of the overall puzzle," says Don Langeberg, director of marketing with HP's Storage Software division.

But storage experts disagree. While the Mountain View, Calif.-based company is known for its backup and recovery products, Legato also has been investing in technology that is targeted for a new growth area, termed lifecyle data management and content management. Those concepts provide an overall more detailed way of managing storage, but it also believes that business data should be stored on more expensive media during the early part of its life and then moved to less expensive media as it gets older. Legato's Xtender storage solution products are what people bring up to illustrate that Legato has been investing in a relatively young space in open systems.

At least 79 percent of Legato's business is generated through information protection, while 20 percent comes from high-availability data and the EmailExtender tools. Five percent comes from archiving tools.

Ray Paquet, a vice president at research firm Gartner, says the Legato merger gives EMC more credibility when trying to close software deals. Over the past year, Legato has had more than 50 large customers. "You need software salespeople to handle and close deals that are that big," Paquet says. "If you are buying multimillion-dollar software licenses, are you going to go to a hardware company for that? Is a hardware company going to even recognize the opportunity?"

Some of Legato's partners took the news of the acquisition in stride. For example, Cambridge Computing Services, a Legato VAR, has been gearing up for this business transition by beefing up its expertise of the Xtender software.

"We saw the handwriting on the wall," says Jacob Farmer, CTO at Cambridge Computing. "We didn't know when it was going to happen, but for a while now, we have been living as if it were inevitable."