How Valuable Is EMC’s Information Storage Business?

-8.60%
Downside
29.05
Market
26.55
Trefis
EMC: EMC logo
EMC
EMC

EMC (NYSE:EMC) has witnessed a slowdown in its core information storage business over the last couple of years – a trend consistent across most large storage vendors, including NetApp (NASDAQ:NTAP), IBM (NYSE:IBM), Hitachi Data Systems and HP Enterprise (NYSE:HPE). As a result, EMC’s Information Storage division has become the second most valuable division for the company after VMware (NYSE:VMW). Information Storage includes product sales for storage systems, related software product sales and post-sale services and hardware maintenance. Allied storage products and services including information security product suites and content management software are included in other divisions.

InSto1EMC Information Storage contributes 33% to EMC’s total value even though it generated over two-thirds of EMC’s net revenue in 2015. Moreover, its EBITDA contribution was also over 50% in the same period. However, as you can see in the table below, Information Storage’s revenue and EBITDA contribution have fallen over the last five years, and the trend is likely to continue.

InSto2The division’s forecast revenue growth – a CAGR of 2.1% – is slower than the overall company’s projected growth of roughly 3.5% in the next five years. Moreover, the EBITDA of the low-margin product business is expected to decline while the company-wide adjusted EBITDA is likely to grow over the coming years.

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InSto3Slow growth for EMC’s core information storage business is expected due to weakness in its hardware business. Storage hardware revenue could decline slightly over the next few years even as the overall industry grows at a modest pace. EMC and other large storage systems sellers are increasingly facing competition from smaller vendors and flash-storage startups. Over the last six to eight quarters, customer preference has been shifting to low-cost original design manufacturer (ODM) storage boxes, which is cutting into addressable market for large vendors. [1] As a result, most established large vendors are only left with enterprise customers, which have limited scope of growth in demand. Newer IT and tech startups are opting for “white-box” storage systems. [2]

InSto4

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to  Our Full Analysis For EMC.

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Notes:
  1. The Rise Of White-Box Storage, Network Computing, August 2014 []
  2. Gartner Says Data Center Infrastructure ODMs Are a Key Threat to Data Center OEMs’ Direct Business, Gartner Press Release, September 2014 []