EMC Still Has Room To Run Despite VMware’s Weak Results

EMC: EMC logo

Despite its subsidiary VMware stock taking a tumble in the market on lowered guidance, EMC (NYSE:EMC) reported solid numbers for Q4 and FY 2012 on January 29. The company’s revenues grew 9% in 2012 to $21.7 billion with a record full year operating cash flows of $6.3 billion and free cash flow of $5 billion. The company is benefiting from storage growth as Q4 was the first quarter to break the $6 billion revenue mark, and the company attributes it to increasing market share and investments in successful businesses. Backed by these factors and the growth in big data and cloud computing, the company has provided a guidance of $23.5 billion for 2013. [1]

See  our full analysis on EMC

Outlook For 2013

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In 2013, the company expects revenues to grow by 9% and provided a revenue guidance of $23.5 billion, with operating income coming in at $4.2 billion. The company expects that growing security requirements related to cloud storage and the growth in big data analytics will drive new sources for revenue in 2013. [2]

EMC Will Grow Despite VMware

While VMware is a significant revenue contributor for EMC, the company expects its core storage business to grow by 6%, excluding VMware in 2013. This is a higher guidance compared to the 5% ex-VMW growth previously provided, and this is due to the fact that the network storage market grew faster than IT spending in 2012, and this trend is expected to continue in 2013. The company also expects IT spending to experience an uptick from 2% in 2012 to 3% in 2013, due to better macro-economic conditions expected in 2013. The high end storage products are also expected to grow 6% in 2013.

Changes To Our Model

We have revised our model based on the guidance provided by VMware for slowing growth and reducing storage hardware margins in the latter part of our forecast period as the competition catches up to EMC in the high end storage business, leading to commoditization. We have also reduced our estimates for storage gigabytes sold and maintenance revenue as a percentage of storage sold in the outer years as storage density increases.

We have a $41 Trefis price estimate for EMC, which is significantly higher than the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. EMC Earnings, www.sec.gov, Jan 29 2013 []
  2. EMC Investor Call Transcript, www.seekingalpha.com, Jan 29 []