How EMC Lines Up Against NetApp, HP, IBM, Hitachi In Storage Systems Market

Storage giant EMC (NYSE:EMC) has witnessed limited growth in its core information storage business through the first three quarters of 2014, with storage product revenues staying flat over the prior year period at $7.5 billion. On the other hand, the information storage services division grew by 4% year-on-year to $4.2 billion through the first three quarters. EMC as a whole observed a 5% rise in net revenues over the year-ago period to $17.4 billion with much of the growth coming from non-core businesses including VMware (NYSE:VMW), Pivotal and RSA Security. As a result, both consolidated product revenues (+2%) and consolidated services (+9%) grew on a year-over-year basis to $9.7 billion and $7.6 billion, respectively.

Worldwide spend on information storage was low in the first half of the year, while demand picked up slightly in Q3. In this article, we take a look EMC’s performance in the storage market and how its performance fared against other leading storage systems providers such as NetApp (NASDAQ:NTAP), IBM (NYSE:IBM), Hitachi Data Systems and Hewlett-Packard (NYSE:HPQ). We have a $30 price estimate for EMC, which is in line with the current market price. EMC’s stock price rose by about 10% since the company announced its Q3 earnings in late October.

See our full analysis for EMC’s stock

External Storage Market And EMC’s Presence

Global spending on storage systems has witnessed a slowdown in recent years, with total factory revenues growing by 18% in 2010, 10.9% in 2011, 4.8% in 2012 and declining by 0.4% in 2013. The slump has continued through the first three quarters of 2014, with the total factory revenues for external storage systems falling by almost 2% over the prior year period to $17.3 billion. According to IDC reports, the total external disk storage systems factory revenue for Q1 this year was over 5% lower than the comparable prior year period at $5.6 billion. Low product sales were attributable to a 25% y-o-y decline in high-end storage spending, according to IDC. ^[1] Similarly, total disk storage factory revenue, which includes internal and external storage systems, declined by over 6% y-o-y to $7.3 billion. The weakness continued through the second quarter, as external storage systems revenue declined by 1.4% y-o-y to just under $5.9 billion. ^[2] The trend reversed in Q3, as demand picked up for storage arrays costing less than $100,000. As a result, external storage revenue was up by 1% y-o-y to $5.8 billion. ^[3] Below is the individual performance of storage systems providers in 2014 thus far:

NetApp

NetApp has been one of the few large storage system vendors this year to have maintained its market share through the first three quarters this year at 13.7%. The company witnessed a nearly 25% decline in its OEM revenues to $250 million through the first three quarters, owing to the termination of its agreement with one of its largest partners, IBM, earlier this year. Despite low OEM revenues, NetApp’s branded product and services revenues grew by almost 2% over the year-ago period to $2.78 billion. Furthermore, the company introduced a significant number of new products in the most recent quarter, including all-flash storage array FlashRay, the Data ONTAP 8.3 operating system, Cloud ONTAP software for usage in public clouds and the new range of products from the SteelStore acquisition. ^[4] The rate of NetApp’s Clustered ONTAP system attached with hardware increased across its storage products. We currently forecast NetApp’s external storage systems market share to gradually rise to over 15% through the end the decade.

Hitachi Data Systems

According to the latest IDC report on storage system sales, Hitachi Data Systems’ (HDS) share declined from 8.1% to 7.5% in the first three quarters of 2014. However, the Q3 figures reported by IDC excluded certain HDS midrange storage system sales. IDC reported a 9% y-o-y decline in external storage system factory sales for HDS in Q3, leading to a decline in share from 8.3% in Q3 last year to 7.4% this year. ^[5] After including those revenues, the decline in Hitachi’s share would be relatively lower than the mentioned figure, but the exact figures weren’t released by the company. Hitachi’s Content Platform (HCP) uses a distributed object storage system where customers and cloud providers can store and retrieve unstructured data,  making up a single storage platform. While this is not different from content management platforms offered by other vendors, Hitachi has been the forerunner in this domain and leads the companies in data-driven storage. ^[6]

IBM

IBM has had a tough year, with a decline in revenues from the sale of external disk storage systems. Factory revenues fell by 12% over the prior year period to $1.8 billion through the first three quarters of 2014. As a result, its share fell from 11.6% last year to 10.4% in the comparable current year period. Furthermore, its revenues in the total disk storage systems market (internal plus external storage) declined by over 10% to $2.6 billion. Weakness in IBM’s standalone external storage systems was partially attributable to the termination of the IBM-NetApp deal in May this year.

HP

HP was the only other large company which gained share in the external storage market. Its share increased from 9.3% through the first three quarters last year to 9.6% this year, as its revenues grew by 1% to $1.6 billion. Similarly, the company’s revenues in the total disk storage systems market (which includes internal storage as well) also increased by 1% to $3.7 billion. HP’s revenues remained nearly flat over the prior year period due to higher demand in the mid-range market. However, HP gained share due to a comparatively higher decline faced by competing storage companies. HP’s management projects growth in enterprise storage segments such as converged storage, software-defined networks and cloud infrastructure, where the company can potentially excel in the coming quarters. ^[7]

EMC

EMC has been a clear leader in the external storage systems market for the last few years, with its share growing from under 23% in 2009 to over 31% at the end of 2013. However, EMC lost market share in the external storage systems market in the first two quarters of 2014. This was the first time since 2008 that EMC lost market share on a y-o-y basis. EMC’s share in the external storage systems market was a percentage point lower than the prior year quarter at 30.1% in Q2. More worrying for EMC was the fact that its decline in revenues (about 5%) was higher than the industry-wide decline (1-2%) in storage hardware sales. However, product sales picked up in the third quarter, with storage product revenues rising both sequentially (+2%) and annually (+7%) to $2.6 billion in Q3. EMC’s share in the storage systems market is at 30.2% in 2014 thus far – about 50 basis points lower than the comparable year ago period.

EMC’s Emerging Storage products, such as the all-flash array XtremIO, software-defined storage platform ViPR, scale-out network attached storage platform Isilon and converged storage infrastructure ScaleIO, were largely responsible for the growth in hardware sales during the past few quarters. The Emerging Storage sub-segment grew by 52% year-over-year (y-o-y) in Q2 2014, which the company attributed to a strong customer response for these products. Continuing the trend, XtremIO sales crossing the $500 million mark on an annualized run-rate basis in Q3. In the third quarter, consolidated sales of emerging storage solutions grew at 47% year-on-year, with the contribution of emerging storage rising to over 60% of all high-end solutions provided by the company. The company expects strong growth for emerging storage solutions on the back of solid demand for software-defined storage, Big Data analytics, cloud storage and flash arrays in the coming quarters. Going forward, we forecast EMC’s share to fall by about 50 basis points for the full year, while we expect the company to maintain a share of over 30% through the end of our forecast period. You can modify the interactive chart below to gauge the effect a change in market share of external storage systems will have on our price estimate for EMC.

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1. Worldwide Quarterly Disk Storage Systems Tracker Q1 2014, IDC Press Release, June 2014 [↩]
2. Worldwide Quarterly Disk Storage Systems Tracker Q2 2014, IDC Press Release, September 2014 [↩]
3. Worldwide Quarterly Disk Storage Systems Tracker Q3 2014, IDC Press Release, December 2014 [↩]
4. NetApp Helps Enterprises and Service Providers Build a Hybrid Cloud Foundation, NetApp Press Release, October 2014 [↩]
5. IDC Storage Tracker in Hitachi Data Systems number-fumble, The Register, December 2014 [↩]
6. Hitachi Data Systems: Measuring Up to Transformational Trends, Infostor, August 2014 [↩]
7. HP Servers, Storage Decline As Split Begins, Enterprise Tech, November 2014 [↩]