EMC Earnings Preview: Emerging Storage And Cloud To Drive Quarter As Core Business Stagnates

by Trefis Team
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EMC (NYSE:EMC) is set to announce its fourth quarter earnings on January 29. In the previous quarter, the company registered revenues of about $5.5 billion, around 5% lower than what they had expected at the beginning of Q3. [1] During the first three quarters of 2013, the company saw a 10% year-on-year growth in revenues from emerging markets such as Asia-Pacific and Latin America, whereas growth in the United States was just 4%. We expect the fourth quarter results to reflect a similar revenue growth across geographies on the back of growing demand for big data storage from emerging markets. [2]

EMC owns 80% stake of virtualization and cloud computing market leader VMware (NYSE:VMW), which continues to benefit from growth in cloud computing. The information security business is expected to continue to outpace the overall revenue growth with continued requirements for intelligence-driven security analytics for RSA Security.

See  our full analysis on EMC

Profit-Making Businesses To Continue Growth

At the end of the third quarter, EMC talked about focusing more on emerging storage solutions such as network attached storage (Isilon), virtualization and private cloud (VPLEX), cloud storage (Atmos) and other flash based storage. The year-on-year growth in revenues for these emerging storage solutions was 66% in Q3 and 44% for the first three quarters. We expect a similar revenue growth in this segment in Q4, more so because EMC furthered its flash product line with the launch of its all-flash storage array during the quarter.

Other fast growing segments of EMC’s business include the RSA Security division, which generated the highest gross margin among the company’s various divisions. The information security industry is growing with customers allocating more of their security budgets to intelligence-driven analytics, where RSA excels. However, recent news reports have come up alleging a secret deal between the NSA and RSA Security, which could complicate attempts by EMC to capitalize on the fast-growing information security market.

Stagnating Core Business

EMC’s core business includes the information storage segment, which contributes to 70% of the company’s revenues. This division has been growing at low single-digit percentages over the last few quarters. The company attributes this to a cautious IT spending environment, and this trend should continue in the near term. EMC intends to focus on new technology such as flash storage arrays and software defined data centers going forward. Secondly, the company expects its high-margin businesses such as VMware and RSA Security to drive its margins in the near term.

Based on EMC’s performance in the first three quarters, the company revised its full year revenues guidance to $23.25 billion from $23.5 billion it expected before Q3. Due to industry trends and seasonality, the company expects fourth quarter revenues to be sequentially higher than the third quarter at around $6.7 billion, which is an 11% y-o-y increase. The lower growth core business and a weak IT spend across the industry could make EMC to miss its full-year guidance, but the company should continue to do well in its growing cloud and flash-based storage businesses going forward.

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Notes:
  1. EMC Q3 Earnings Call Transcript, Seeking Alpha, October 2013 []
  2. Asia-Pacific Big Data To Grow, IDC, October 2013 []
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