EMC Misses Revenue Guidance Despite Growth From VMware

by Trefis Team
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EMC (NYSE:EMC) reported a mixed set of Q3 results on October 22, as sustained growth in VMware’s high margin businesses offset a slowdown in its core Information Infrastructure segment. Almost one-fourth of EMC’s revenues came from VMware, which saw 17% year-on-year growth in its net revenues. However, EMC’s core Information Storage business revenues, which accounts for almost 70% of its top-line, grew by only 1.3% y-o-y as stagnation crept in owing to cautious global IT spending. As a result, the company’s total revenues of $5.5 billion were 5% short of its expectation at the start of Q3.

The company recorded an overall gross margin of 62% this quarter – mostly unchanged from last year. VMware posted a strong quarter with 88% gross margins, up from 84% last year, helping to boost EMC’s consolidated gross margins. [1]. We are in the process of updating our price estimate for EMC to account for these earnings. 

See our full analysis for EMC

EMC Information Infrastructure Stagnant

EMC’s core Information Infrastructure business has had a comparatively lackluster year with revenue growth of 2.5% in the first three quarters. While the security analytics division, RSA Information Security, had an encouraging 11% y-o-y growth with revenues climbing up to $252 million, this is only around 5% of EMC’s internal revenue.

The company’s management attributed the shortfall in revenues this quarter to outliers like spending cuts by the U.S. Federal Government and late timings of bulk orders. Q3 is typically a strong quarter for EMC’s government business. However, federal spending suffered this time in anticipation of the government shutdown which happened in the first half of October. EMC’s federal revenues from the U.S. Government took a 40% hit, and as a result the revenues dropped by around $120 million. EMC did receive $300 million worth of late orders towards the end of the quarter, which it couldn’t fulfill completely. This created a backlog of about $100 million, which should be reflected in results next quarter.

The fourth quarter is generally the strongest quarter for EMC in terms of revenues. The company’s revenue guidance for Q4 is around $6.7 billion, which would be an increase of 11% y-o-y, and full-year revenue guidance was revised to $23.25 billion from the $23.5 billion given previously.

Profit-making Businesses Improve

Among EMC’s businesses, VMware has posted a positive 17% growth over the same period last year, bringing EMC’s y-o-y revenue growth to around 5%. Pivotal, and EMC’s Information Infrastructure as a whole, remained largely stagnant in terms of revenue growth this quarter. VMware’s strong quarter (VMware Posts Strong Growth) and bright future is likely to continue contributing significantly to EMC’s earnings.

The Information Security industry is growing with customers allocating more of their security budgets to intelligence-driven analytics, where RSA Information Security excels, rather than static prevention. This is reflected in RSA’s quarterly and year-to-date figures. RSA registered an 11% y-o-y growth in revenues and has also generated the highest gross margin among EMC’s internal divisions. The Archer GRC within RSA Security suite grew 35% y-o-y, while the new EMC-VCE venture grew by more than 50%.

EMC’s Emerging Storage offerings like Isilon, Atmos, VPLEX and Flash were among the fastest-growing divisions, with revenues increases of around 65%. These divisions had net revenues of only around $400 million, but seem to be a point of focus for the company going forward.

Due to industry trends and seasonality, EMC’s Q4 revenues are likely to be much higher than Q3. The addition of the backlogged orders from Q3 and improved government spending should only add to that. EMC management believes that the consolidated business will grow by around 7% this year and have a better year relative to competitors, despite the fact that this year’s enterprise IT spending is expected to be around 3% lower than last year.

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  1. EMC’s Earnings Call Transcript Q3 2013, Seeking Alpha, October 22 2013 []
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