EMC Earnings Review: Core Storage Struggles As Emerging Storage, VMware Drive Top Line Growth

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EMC (NYSE:EMC) announced its Q1 earnings on April 22, reporting a 2% year-on-year rise in net revenues 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. EMC observed a fall in storage product revenues, in keeping with the trend observed through 2014. [1] On the other hand, revenues generated by VMware and Pivotal increased, which offset the decline by information infrastructure revenues.

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, out of which 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.

See our full analysis for EMC’s stock

Core Business Struggles As VMware, Pivotal Sustain Growth

According to the latest IDC report, total worldwide spending on storage hardware declined by 0.4% in 2014 to $24.5 billion. [2] Consequently, growth in revenues generated by the company’s information storage was as low as 2% through 2014. The company’s storage revenues declined during the quarter, which the company attributed to several factors. Firstly, EMC witnessed a soft demand across certain Asian and European markets, particularly Russia and China. Geopolitical issues contributed to the revenue shortfall in Russia, while Chinese authorities increased scrutiny on American products (especially data storage) leading to a tight quarter for product sales in China. The other major reason for shortfall was the fact that certain EMC customers are waiting for a refreshed product line for high-end storage to come out in the latter half of the year, due to which some demand subsided.

The company continued to witness solid industry-wide demand for its all-flash array XtremIO, which saw triple digit y-o-y growth through the March quarter. Moreover, the company witnessed healthy demand for its software-defined storage platform ViPR implementations (both standalone and integrated with XtremIO). EMC had lost share in the storage systems market to flash storage competitors such as Pure Storage, Violin Memory, Nimbus Data and Solidfire over the last few quarters. [3] However, EMC’s management mentioned that the company won various contracts over flash startups during the March quarter owing to a more “complete vision” and a better storage portfolio.

Some of EMC’s top-tier offerings also include Isilon, the scale-out network attached storage platform, ScaleIO, the converged storage infrastructure and Atmos, the object-based cloud storage platform. Combined sales of emerging storage solutions including XtremIO, Isilon and Atmos stood at about $2.3 billion in 2014, or about 20% of storage revenues. The company witnessed a 14% y-o-y increase for these products during the quarter. EMC penned a large deal for Atmos during the March quarter last year, excluding which the company had a 40% y-o-y growth in its emerging storage offerings in Q1 this year. EMC expects revenues generated by emerging storage to continue to outperform core storage with an expected 30% y-o-y growth through 2015.

Pivotal was the fastest-growing division for EMC last year, with a 27% growth in net revenues to $227 million. Although product sales remained flat over the previous year at $65 million, services revenues were 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.

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). 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 about two-fifths to EMC’s net value, according to our estimates.

EMC identified six key areas of long-term growth for the company including AirWatch, VMware NSX, Pivotal, ViPR, ScaleIO, DSSD and XtremIO. According to the company, these six businesses could collectively generate $2 billion in revenue through 2015, representing 100% year-over-year growth. These businesses grew by over 100% y-o-y in Q1’15 and seem to be on course to achieve the targeted goal of $2 billion goal in 2015.

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Notes:
  1. EMC Q1 2015 Earnings Call Transcript, Seeking Alpha, April 2015 []
  2. Worldwide Quarterly Disk Storage Systems Tracker Q4 2014, IDC Press Release, March 2015 []
  3. All-Flash Arrays Offer Strong Opportunity For NetApp Despite Competition, Forbes, June 2014 []
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