Recent news reports have alleged that RSA Securities, owned by EMC (NYSE:EMC), had a deal with the National Security Agency (NSA) that allowed the NSA to create a “back door” in the encryption of products, allowing them to access confidential data of EMC’s clients.  Although EMC hasn’t commented on the situation and the existence of such a deal could be just a rumor, consumer confidence could be significantly affected by these associations. In this article, we take a look at the RSA security division and how important it is to our $35 price estimate for EMC.
RSA Security Division
RSA Security is a network security company which was acquired by EMC in 2006, and is now one of EMC’s fastest-growing businesses. In the last quarter, in which EMC missed its revenue guidance and posted nearly stagnant revenues from its core information storage business, RSA’s revenues grew 11% year-on-year (y-o-y) to reach $252 million. Even though RSA contributed just 4.5% to the company’s net revenues last quarter, it contributes to more than 5% of our price estimate for the company owing to its high growth and healthy margins.
RSA offers solutions in security management and compliance, data loss prevention, network monitoring services and fraud protection services to enterprises. RSA’s recent acquisitions, most notably the Aveksa acquisition, is indicative of the fact that EMC is keen to expand its securities business going forward.
The Alleged $10 Million Deal
Over the last few months, there has been skepticism by the general public about data stored in the cloud. This came into greater perspective with the revelations made by former NSA contractor Edward Snowden about the NSA monitoring public data, popularly referred to as the “Snowden effect.” 
According to Reuters, RSA had a $10 million deal with the NSA that had a provision for the latter to access data that RSA was responsible for keeping secure. Since RSA’s security software is used throughout EMC’s product line, this could raise questions regarding the privacy of the data stored by EMC. Even if these allegations are overblown (or even false), customers may be affected by such rumors and opt for internal data storage or private clouds rather than involving a data storage company such as EMC.
Impact Outside The U.S.
In the most recent quarter, EMC’s overall revenues grew by 2.5% y-o-y from U.S. sales, whereas the growth rate across Asia-Pacific was more than 7.5%. The company mentioned in its earnings call that the revenues from emerging markets, which they defined as BRIC+13 (Brasil, Russia, India, China and 13 other growing economies), grew by a massive 19% y-o-y.  The company’s management stated that geographic expansion, specifically in Asia-Pacific, is among EMC’s major targets in the upcoming years. 
In the aftermath of the Snowden leaks, the Chinese government’s intention to restrict the presence and dependence of American IT companies in China could severely affect EMC’s Asian channel.  It could also lead international clients to possibly switch to domestic players in their own markets. Since the attempt of Chinese telecom giants Huawei and ZTE to enter the American market has already been thwarted by the U.S. government, it is likely that the Chinese government takes a similar approach at least where data security is concerned. 
Besides China, other markets such as Brazil, Russia and even Germany could be impacted by similar probes. Although the apprehension among foreign clients is mostly related to public cloud rather than enterprise storage, the alleged direct link between EMC-owned RSA and the NSA could lead to a loss of trust, causing EMC to lose business across international markets.  This could directly impact revenues generated by the security division of EMC as well as through its other channels – Cloud Computing, which is contributed by VMware (NYSE:VMW) and EMC’s Information Storage business.
We do not expect EMC’s stock price to be immediately affected, since the RSA security division accounts for only 5% of our valuation for the company. However, since most of the value contributed by RSA to EMC’s total price estimate is based on future growth of this division, the potential loss of business in emerging markets could inhibit RSA’s contribution to EMC’s total value.Notes:
- Secret Contract Tied NSA And Security Industry Pioneer, Reuters, December 2013 [↩]
- Is Personal Cloud As Disruptive As The Personal Computer, Information Week, December 2013 [↩]
- EMC Q3 Earnings Call Transcript, Seeking Alpha, October 2013 [↩]
- Asian Companies’ Rising Demand For Big Data, BBC News, February 2013 [↩]
- China Seen Probing EMC, IBM, Oracle After Snowden Leaks, Reuters, August 2013 [↩]
- Huawei Officially Gives Up On The US Market, The Diplomat, December 2013 [↩]
- Snowden Saga To Impact EMC’s Brazilian Branch, Huffington Post, January 2014 [↩]