EMC Registers Steady Growth In Q2 Though Momentum Should Pick Up

by Trefis Team
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EMC (NYSE:EMC) reported its Q2 results on July 24. The company’s revenues grew 6% on a year-over-year (y-o-y) basis to $5.6 billion. [1] Overall Information Storage revenues increased 4% on a y-o-y basis on the back of higher revenues from services. Within its Information Storage segment, revenues from unified and backup recovery business, which includes key products like VNX and data domain, felt the pressure from overall weak IT spending. However, EMC attributed a part of this weakness to clients’ wait for a new product version of VNX. Revenues from VMAX high-end and emerging storage, continued to register decent growth. [2]

Revenues also got a boost from continued double digit growth registered by virtualization software market leader VMware, in which EMC owns around 80% majority stake (Read VMware Jumps On Robust Growth From Stronger Overall Bookings). The Information Security business also saw continued growth driven by continued customer requirements for RSA encryption and trusted IT solutions. With 12% growth, Asia Pacific and Latin America were the other markets which grew by 4-6%. [2] Operating margins (after excluding one time items) improved slightly to just above 24% as cost cutting measures offset a slight decline in gross profit margins. [1]  In the last six months, EMC generated $2.3 billion in free cash flow, which was slightly lower than last year with higher capital expenditure.

The company expects IT spending growth for the full year to be around 3% and maintained its projection of a topline growth of 8% this year. We are updating our $42 Price Estimate for EMC, represents nearly a 60% premium to the current market price. Below we discuss what factors will drive the growth for EMC.

See our full analysis on EMC

External Storage Demand To Continue To See Rapid Growth

Rising Internet penetration and digitization are causing phenomenal growth in the amount of data generated and stored. While the companies are seeing relentless information growth, their capital expenditure on information infrastructure has been declining due to dwindling confidence in the economy. EMC, being the largest player in the external storage market, has been facing headwinds due to this factor. However, we expect the storage sector to get back on the growth track as economic recovery picks up and companies focus on simplifying information infrastructure. EMC is the largest player in the external storage market and has continuously been gaining market share. We expect it to benefit the most from the aforementioned trend as it is the only company which has the breadth of products and services to target all types of customers from large enterprises to small and medium businesses. Further, it has been launching new products at an aggressive pace. Full launch of the next generation of VNX, which has already gained huge traction among customers, is due this quarter. This will continue to boost its market share going forward.

Preserving data is a critical compliance and a competitive requirement for large enterprises, and hence we believe that large enterprises are less likely to move around vendors given that they have ongoing maintenance and service contracts for both hardware and software for their storage devices from EMC. This generates recurring revenue stream for the company.

Further, companies which are in early phase of cloud computing transition, are expected to soon move to next phase. While first phase mostly involved virtualization of servers, the use of flash memory to improve utilization and performance while automating a part of the virtualization process will be the critical part of next phase. We believe EMC is doing a nice job of positioning itself to tap this area. EMC acquired XtremIO in mid 2012 to improve its flash memory storage offerings. Its emerging storage businesses have been showing strong growth (around 40% in Q2). Further, as public clouds continue to grow, the company will continue to benefit from providing support to workloads running in public clouds.

Further, in the second half of 2012, EMC and Lenovo Group entered into a strategic partnership under which Lenovo will resell storage equipment and servers made by EMC. The companies have also formed a joint venture to sell storage equipment to small and mid-sized businesses. While China is seeing some slowdown in its growth, the partnership will help EMC once economic activity picks up in the country.

Continued Growth In VMware Will Add To Growth

VMware has reported a good set of numbers in Q2, and this performance is expected to continued going forward with license bookings and total bookings up by 10% and 20%, respectively. Further, the company is planning to launch several new products, which are expected to become major growth drivers. Early access program for the vCloud hybrid service is seeing a good response. Its efforts to tap the potentially huge network virtualization market through its new product, VMware NSX, are also gaining momentum. Please read our note VMware Jumps On Robust Growth From Stronger Overall Bookings.

Pivotal Starts On A Strong Note

Pivotal, which is a joint venture of EMC and VMware (a subsidiary of EMC), started its operations on a strong note. Through Pivotal, EMC and VMware are aiming to focus on Big Data and Cloud application platforms. Revenues from Pivotal grew by 11% to $70 million with services showing 15% growth. However, we believe that this is just the beginning. IDC cloud research shows that revenue from IT cloud services is expected to reach $73 billion in 2015 at a compound annual growth rate (CAGR) of over 25%. In its first year of operation, Pivotal is expected to garner almost $300 million in revenues in 2013, and up to $1 billion by 2017. [3]

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Notes:
  1. Q2 earnings, EMC, July 24 2013 [] []
  2. EMC’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 24 2013 [] []
  3. EMC, VMware To Launch Pivotal Initiative As Separate $300M Firm, CRN, March 13 2013 []
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