EMC Earnings Preview: Emerging Storage And VMware Vital

by Trefis Team
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EMC (NYSE:EMC) is scheduled to announce its Q1 earnings on April 23. EMC’s robust performance over the last few quarters has been driven by strong results posted by EMC-owned VMware (NYSE:VMW). Cautious global IT spend led to stagnating sales within EMC’s core Information Storage business in the first three quarters of 2013. However, EMC’s Emerging Storage sub-segment grew by an impressive 70% year-over-year (y-o-y) in Q4 2013, reversing the stagnation in hardware sales for the full year. [1]

Although there was only a 10% y-o-y increase in storage products revenues for the quarter, the growth was higher than the industry-wide decline. [2] Additionally, EMC’s storage gross margins declined by about 2% for the quarter, which the company attributed to a tough pricing environments. Looking ahead, the company expects margins to remain around Q4 levels in the next few quarters.

We have a $30 price estimate for EMC, which is over 10% higher than the current market price.

See our full analysis for EMC’s stock

Emerging Storage Vital For Storage Product Sales

EMC’s emerging storage products such as XtremIO, Isilon, Atmos and VPLEX were largely responsible for the growth in hardware sales during the past year. Comparatively, industry-wide revenues generated by external disk storage systems declined in 2013 – including some of EMC’s major competitors such as HP (NASDAQ:HPQ), IBM (NYSE:IBM) and Hitachi. In the chart below, it can be observed that EMC and NetApp were the only two major companies to witness growth in external disk storage revenues in 2013 compared to 2012.

Global External Disk Storage Revenues ($ mil)

2011

2012

2013

EMC

6,703

7,411

7,695

NetApp

2,911

3,054

3,207

IBM

3,182

3,155

2,946

Hewlett-Packard

2,521

2,448

2,309

Hitachi

2,065

2,209

1,985

Others

6,154

6,383

6,279

Total

23,537

24,670

24,518

Source: IDC Quarterly Storage Tracker [2] [3] [4] [5]

Although the emerging storage sub-segment constitutes only about 10% of the company’s Information Storage division, it is likely to be a major driver in the future. Going forward, we expect emerging storage to continue to grow strongly this year, as the company expects a significant demand for its XtremIO all-flash storage arrays, Islion network-attached storage platform and Atmos object-based cloud storage platform.

VMware Remains EMC’s Most Valuable Division

According to our estimates, EMC derives about 40% of its value from VMware. VMware’s contribution to EMC’s net revenues has gone up from about 15% in 2009 to 22% in 2013. We forecast VMware’s revenue contribution to continue to increase and reach the 30% mark by the end of our forecast period. This is a strong positive for EMC, given that VMware is predominantly a software company with gross margins significantly higher (89.2%) than the consolidated company average of 62.3%. A higher proportion of VMware product sales translates to enhanced profitability for the company as a whole.

RSA Security And Pivotal Likely To Witness Strong Growth

RSA Security, EMC’s information security division, grew by over 11% to almost $1 billion in 2013. The information security industry is currently growing, with customers allocating more of their security budgets to intelligence-driven analytics, where RSA Information Security excels, rather than static prevention. Moreover, EMC’s Pivotal is among the fastest growing divisions within the company, with a 20% y-o-y growth in 2013. Pivotal’s platform consists of new-generation data fabrics, application fabrics and a cloud-independent Platform-as-a-Service to support cloud computing and Big Data applications, which is likely to gain traction in the coming quarters. According to our forecasts, both these divisions are likely to grow at a rate higher than that of storage products. But since information security and pivotal combined constitute only about 5% to the company’s value, EMC’s storage division and VMware’s performance are more likely to drive its overall earnings.

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Notes:
  1. EMC Earnings Call Transcript, Seeking Alpha, January 2014 []
  2. Worldwide External Storage Market Q4 2013, IDC Press Release, March 2014 [] []
  3. Worldwide External Storage Market Q3 2013, IDC Press Release, December 2013 []
  4. Worldwide External Storage Market Q2 2013, IDC Press Release, September 2013 []
  5. Worldwide External Storage Market Q1 2013, IDC Press Release, June 2013 []
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