EMC Earnings: Information Infrastructure Business Continues To Stumble As Dell Merger Edges Closer

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EMC (NYSE:EMC) announced its Q4 earnings on January 27, reporting net revenue of $7 billion, which was roughly flat over the prior year quarter. Keeping up the trend observed over the last few quarters, EMC’s combined product revenues declined by 5% y-o-y to $4.1 billion, while combined services revenues rose by 6% y-o-y to $2.9 billion. The combined revenues generated by EMC’s core information infrastructure division – including storage, RSA information security and content management – were down by over 4% on an annual basis to $5.1 billion. Comparatively, revenues generated by VMware and Pivotal combined offset the decline in core storage business with an 11% y-o-y growth rate to $1.9 billion. [1]

EMC came to an agreement with IT giant Dell in early Q4, under which the latter will acquire EMC for $67 billion. According to EMC’s management, the deal could close any time between May and October this year. As a result of the ongoing transition, the company has not provided any guidance for revenues for the coming quarters. The combined entity could realize revenues of over $80 billion a year combining EMC’s enterprise information storage capabilities with Dell’s strong presence in the small and medium business (SMB) space. Moreover, VMware will continue to operate as a separately listed company.

See our full analysis for EMC’s stock

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Information Infrastructure Segment Remains Suppressed

EMC’s core information storage product and services revenues for Q4 stood at just under $5.1 billion, which was a 4% decline over the year-ago period. As a result, full year EMC Information Infrastructure (or EMC II) revenues were 2% lower than the year ago period at $17.9 billion. Within EMC II, product revenues (hardware and software combined) fell by 8% y-o-y to $3.3 billion for the December quarter and by 6% y-o-y to $10.8 billion for 2015. On the other hand, services revenues grew by 3% to $1.8 billion in Q4 and by 4% to $7.1 billion for the full year. Services revenues were largely driven by a majority of EMC customers restricting their expenditure on new storage, which led to them spending on hardware maintenance renewal bookings and services throughout the year. The slowdown in combined product sales of storage hardware, content management and information security solutions was primarily attributable to pressure from competition in high-end and mid-level product ranges. Despite weakness in product sales, the company continued to witness strong demand in emerging storage solutions (which includes flash storage arrays) and converged infrastructure segments.

EMC’s XtremIO all-flash array sales crossed the $1 billion mark through the year. According to EMC’s management, XtremIO’s Q4 revenues were higher than full year revenues generated by EMC’s closest competitor in that domain. [2] Corresponding to the revenue decline in product sales, EMC’s share in the external storage systems market fell from over 31% in 2014 to about 28.8% through the first three quarters of the year. This was evident across major storage systems providers including NetApp (NASDAQ:NTAP), IBM (NYSE:IBM) and Hitachi, which lost share to original design manufacturer (ODM) direct sellers in recent quarters. [3] [4] This was a direct result of customer preference shifting to low-cost ODM storage boxes, which is cutting into the addressable market for large vendors. [5]

After the Dell-EMC merger closes, the combined entity can offer combined compute and storage solutions with integrated servers, storage and virtualization with a potential combined share of over 35% in the external storage systems market. However, the looming threat from small vendors is a huge concern for the company, given the scale at which they can provide customizable solutions to small and medium-sized businesses.

The other key area of growth for EMC over the last few quarters is converged infrastructure. The company generated roughly $750 million from VCE sales in the December quarter. EMC reported that it had multiple customers willing to spend more than $10 million on converged infrastructure solutions, with its largest customer spending over $70 million on the implementation. As more customers begin to save IT costs due to a relatively low total cost of ownership of VCE blocks, the company will continue to generate higher revenues on this front. According to EMC’s estimates, roughly one-fifth of information storage sold by EMC on a capacity basis will be as a part of converged infrastructure. EMC’s capacity growth in storage sold through converged infrastructure was about 3-4 percentage points higher than 2015 levels.

VMware, Pivotal Services Sustain Robust Growth

VMware’s revenues grew by over 10% year-on-year to $1.9 billion in Q4, with its services division driving much of the growth. License booking revenues were up by 7% on a year-over-year basis to $823 million, while services revenues rose by about 13% to just over $1 billion. Management expects continued growth in software-defined networking, hybrid cloud and end-user computing, as evidenced by its 2015 results through 2015 thus far. Going forward, VMware’s management expects Q1’16 revenues to be only about 3-5% higher than prior year levels (on a constant currency basis) at under $1.60 billion.

Pivotal continued to witness solid growth, with Q4 revenues increasing by 28% y-o-y to $83 million. Product revenues were up by 43% to $30 million, while services revenues rose by 20% y-o-y to $53 million. The company attributed the rise in revenues to a higher number of subscription-based sales as compared to standalone licenses, in addition to Pivotal increasingly becoming key to cross-EMC solutions. EMC growth to continue through the coming quarters, further boosting the revenues of Pivotal Labs and Pivotal Cloud Foundry.

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Notes:
  1. EMC Reports Fourth-Quarter and Full-Year 2015 Results, EMC Press Release, January 2016 []
  2. EMC Q4 2015 Earnings Call Transcript, Seeking Alpha, January 2016 []
  3. Worldwide Quarterly Disk Storage Systems Tracker Q2 2015, IDC Press Release, September 2015 []
  4. Worldwide Quarterly Disk Storage Systems Tracker Q3 2015, IDC Press Release, December 2015 []
  5. The Rise Of White-Box Storage, Network Computing, August 2014 []