Emerging Storage Driving EMC’s Hardware Sales, Price Estimate Revised To $30

by Trefis Team
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EMC (NYSE:EMC) has maintained its market leading position in the data storage systems arena over the last decade. In recent years, the company has cemented its top spot with a growing share in the external disk storage market. According to IDC estimates, EMC’s market share in the storage hardware segment was over 30% in 2013, which was about two-and-a-half times that of its nearest competitor, NetApp (NASDAQ:NTAP), at 13%. [1] [2] [3] [4] The global storage hardware market (external storage as well as the overall market) witnessed a slight decline in sales during 2013, attributable to the fast growing adoption of software-defined storage, which reduced dependence on pure hardware. With the increasing popularity of cloud-based storage solutions and Software-Defined Data Centers (SDDC), storage companies need to shift their focus toward developing suitable hardware that can be integrated with software-based solutions.

In spite of sluggish sales in the storage hardware market, EMC’s core Information Infrastructure segment was boosted by 4% growth in storage hardware revenues. EMC’s external storage hardware revenues were $7.7 billion in 2013, which translates to a market share of 31.4% – up from 30% in the previous year. This was especially evident in the last quarter of 2013, when EMC’s external storage hardware revenues were up by 10% year-over-year (y-o-y,), as compared to growth of only about 2% in the overall market. EMC’s major competitors such as NetApp, IBM (NYSE:IBM) and Hitachi had mostly flat or even declining revenues during the quarter, compared to the prior-year quarter. [5]

See our full analysis for EMC

EMC’s Hardware Division Driven By Emerging Storage

The strong growth in the company’s hardware division was almost all due to a 54% annual increase in sales of Emerging Storage products, which include XtremIO, Isilon, Atmos and VPLEX. The revenues generated by the company-defined Emerging Storage sub-segment grew from under $1 billion in 2012 to $1.5 billion last year. Although this sub-segment constitutes only about 10% of the company’s Information Storage division, there was appreciable growth only on this front. Not counting the Emerging Storage dollars, the Information Storage segment was flat for the full year. Below we take a look at the Emerging Storage sub-segment and the areas of growth for the company.

  • The newly launched EMC XtremIO flash array was the main driver of sales during the last quarter of 2013. The company said that its first all-flash array out-performed other existing storage arrays in the market and is now a market leader. [6] Driven by a growing need for high input/output operations per second and a better throughput provided by solid state-based storage, IDC expects the solid state-based flash storage array market to generate around $1.2 billion in 2015. [7] Given the strong start to the XtremIO product sales, we expect EMC to comfortably dominate this market segment over the next couple of years.
  • EMC acquired clustered file system hardware maker Isilon in 2010 to bolster its Big Data storage offerings. EMC Isilon currently offers a scale-out network attached storage (NAS) platform. The platform includes Isilon OneFS operating system, which allows NAS to integrate with object-based storage such as EMC Atmos and OpenStack. [8]
  • EMC’s Atmos is an object-based cloud storage platform, which deals with multiple petabytes (1 petabyte = 1 million gigabytes) of unstructured data existing across various geographic locations on a single system. Anticipating the growth in cloud-based storage, EMC enhanced its hardware in December 2012. This provided customers the ability to migrate applications to the Atmos-powered public clouds, or so-called “private clouds.” Consequently, EMC’s combined product sales for Atmos and Isilon more than tripled in 2013, as compared to the previous year. [9]

When most storage hardware companies posted flattish sales, EMC’s strong hardware performance in 2013 was mainly due to strong integration of software-based storage with its hardware offerings. Given that the company owns a stake of around 80% in virtualization and cloud-computing giant VMware (NYSE:VMW), it is easier for EMC to integrate VMware’s cloud-based technology on its existing storage platforms.

In recent years, the market for external disk storage systems has grown at a CAGR of about 8%, albeit with declines in the growth rate every year. In fact, the market remained nearly flat last year. We expect the hardware market to stagnate at current levels as pricing declines offset most of the growth in unit GB shipments. As a result, we have revised our long-term growth rate for the storage hardware market to nearly flat, more appropriately reflecting our stance about software sales cannibalizing the hardware market. However, we expect the company to continue to outperform rivals in the hardware division, with continual market-share increases through the end of our forecast period. We have a revised $30 price estimate for EMC which is about 10% higher than the current market price.

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Notes:
  1. Worldwide External Storage Market Q4 2013, IDC Press Release, March 2014 []
  2. Worldwide External Storage Market Q3 2013, IDC Press Release, December 2013 []
  3. Worldwide External Storage Market Q2 2013, IDC Press Release, September 2013 []
  4. Worldwide External Storage Market Q1 2013, IDC Press Release, June 2013 []
  5. Worldwide External Storage Market, IDC Press Release, March 2014 []
  6. EMC Earnings Call Transcript, Seeking Alpha, January 2014 []
  7. IDC’s First All-Flash Array Forecast, IDC Press Release, April 2013 []
  8. Isilon’s OneFS Software Expands Scope Of EMC’s Scale-Out NAS, PC World, May 2013 []
  9. EMC 10-k 2013, U.S. SEC, February 2014 []
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