EMC Earnings Preview: VMware, Pivotal To Drive Performance As Core Information Storage Continues To Struggle

+3.32%
Upside
25.70
Market
26.55
Trefis
EMC: EMC logo
EMC
EMC

EMC (NYSE:EMC) is scheduled to announce its second quarter earnings on Wednesday, July 22. [1] Despite a slowdown in global spend on information storage and stagnation in EMC’s core businesses, the company has a positive outlook for the coming quarters. Management expects net revenues to rise by 7% y-o-y to over $26 billion in 2015 despite a possible negative impact of foreign exchange. According to management, FX could impact net revenues by as much as $550 million through 2015.

The company reported a 2% year-on-year increase in net revenues in Q1’15 to $5.6 billion. The company’s combined product revenues declined by over 3% y-o-y to $2.9 billion while combined services revenues rose by almost 10% y-o-y to $2.7 billion. Revenues generated by EMC’s core information infrastructure division – including storage, RSA information security and content management –  fell by about 1% on an annual basis to just over $4 billion.

We have a $29 price estimate for EMC, which is about 15% higher than the current market price. EMC’s stock price has fallen by over 15% since the beginning of the year.

Relevant Articles
  1. Dell-EMC Deal Finally Closes: A Look At How The Merger Could Impact HPE & IBM
  2. EMC Earnings Takeaways: Flash Array, VMware, Services Continue Growth
  3. EMC Earnings Preview: Storage Hardware Sales To Remain Suppressed, Services To Drive Growth
  4. Why You Should Take A Closer Look At EMC’s EPS Growth
  5. How A Worldwide Decline In Storage Systems Sales Impacts EMC
  6. How Valuable Is EMC’s Information Storage Business?

See our full analysis for EMC’s stock

Information Infrastructure Revenues Continue To Struggle

EMC’s information storage product and services revenues combined for 2014 stood at $16.5 billion, up from $16.2 billion in the previous year. Within information storage, services revenues grew by 4.2% to $5.7 billion while product revenues (hardware and software combined) stayed flat over the previous year at $10.8 billion. The company has been a clear leader in the external storage systems market over the last few years, with its share growing from under 23% in 2009 to over 31% in 2014. However, EMC lost market share in the external storage systems market through 2014, with its share declining by 30 basis points from 2013 levels of 31.3%. This was the first time since 2008 that EMC’s share in this market segment declined on a y-o-y basis.

This trend continued through the March quarter this year, as EMC’s revenues dropped by almost 7% year over year to $1.5 billion. Correspondingly, its share in the market stood at 27.3% for Q1’15. This was evident across major storage systems providers including NetApp (NASDAQ:NTAP), IBM (NYSE:IBM), Hitachi Data Systems and Hewlett-Packard (NYSE:HPQ), which lost share to ODM direct sellers in recent quarters. [2]

Despite low product sales, the company witnessed a 14% year-over-year increase in its emerging storage product sales through the March quarter. The company remains optimistic about its emerging storage division and expects revenues generated by emerging storage to continue to outperform core storage with an expected 30% year-over-year growth through 2015. EMC’s Emerging Storage products include the all-flash array XtremIO, software-defined storage platform ViPR, scale-out network attached storage platform Isilon and converged storage infrastructure ScaleIO.

VMware, Pivotal To Sustain Growth

While the core business remains stagnant, strong growth is expected from software and services-intensive businesses particularly VMware. VMware’s revenues grew by over 12% year-on-year to nearly $1.5 billion, with its services division driving much of the growth (see: VMware Earnings: Slowdown In License Bookings, Services Drive Growth). VMware’s revenues are expected to grow by 10-11% year-on-year in Q2, with its services division driving much of the growth. Management expects continued growth in software-defined networking, hybrid cloud and end-user computing, as evidenced by its results through 2014. VMware generates about 25% of EMC’s consolidated revenues, yet the highly profitable business contributes around 40% of EMC’s net value, according to our estimates.

Pivotal was the fastest-growing division for EMC last year, with a 27% growth in net revenues to $227 million. Within Pivotal, product sales remained flat over the previous year at $65 million, services revenue was up by 43% over the prior year period to $162 million. The company attributed this rise to a higher number of subscription-based sales as compared to standalone licenses in addition to Pivotal increasingly becoming key to cross-EMC solutions. The trend reversed in Q1, as product sales rose by 45% y-o-y to $16 million while services revenues stayed flat over the prior year period at $38 million. Although standalone services were flat over the prior year period, the company expects the growth to continue through the coming quarters, further boosting revenues of Pivotal Labs and Pivotal Cloud Foundry.

Impact On Margins

EMC’s consolidated gross margin (GAAP) was down by about 160 basis points annually to 59.5% in Q1, mainly due to an unfavorable product mix and consolidation of its VCE business. VCE was a joint venture started by EMC, VMware and Cisco, and EMC acquired a part of Cisco’s stake in late 2014. According to EMC’s management, the company’s margins were flat over the comparable prior year period after adjusting for the impact of the VCE consolidation. We currently forecast EMC’s core storage gross margin (adjusted for depreciation and amortization) to continue to gradually decline through the end of our forecast period.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. EMC To Announce Second-Quarter Financial Results On July 22, EMC Press Release, July 2015 []
  2. Worldwide Quarterly Disk Storage Systems Tracker Q1 2015, IDC Press Release, June 2015 []