EMC Earnings Preview: Storage Hardware Sales To Remain Suppressed, Services To Drive Growth

July 15th, 2016 by Trefis Team
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EMC (NYSE:EMC) is scheduled to announce its second quarter earnings on Monday, July 18. [1] Over the last couple of years, EMC has witnessed a slowdown in its core information storage business, with its subsidiary VMware (NYSE:VMW) driving much of the growth. The net revenues generated by EMC’s information infrastructure segment, which includes product and services revenues for storage hardware, content management and information security, fell by 6% on a y-o-y basis to $3.4 billion through March quarter. On the other hand, the combined revenues of VMware and Pivotal were up almost 7% to $1.7 billion in the same period. The trend is expected to continue through the June quarter given the weak global spending on storage hardware. [2] The company has not provided any guidance for 2016 due to the pending acquisition by Dell, which is likely to be completed by Q3 this year. [3]

See our full analysis for EMC’s stock

Top-line growth within EMC was observed for services rather than product sales. Combined product sales were down by 8% on a y-o-y basis through the March quarter, while combined services revenues were up by 3% on an annual basis. Pivotal has been the fastest growing revenue stream for EMC – a trend likely to continue over the next few quarters.

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EMC_Q1Earnings2

According to IDC-reported data, EMC’s share in the storage systems market has fallen considerably 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). EMC’s share in the market stood at 24.9%, roughly 5 percentage points over early 2015 levels. EMC’s revenue decline in the March quarter this year outpaced the industry-wide decline.

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Correspondingly, EMC’s Information Storage revenues have declined as a proportion of EMC’s net revenues over the last few years. We forecast EMC’s information storage revenues to decline from 73% of net revenues in 2011 to about 66% in 2016 and subsequently to around 60% in 2021. Comparatively, VMware’s contribution to EMC’s top line and operating profits has increased over the past few years.

InSto2

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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. EMC To Announce Second-Quarter Financial Results On July 18, EMC Press Release, July 2016 [↩]
  2. EMC Reports First Quarter 2016 Results, EMC Press Release, April 2016 [↩]
  3. EMC Q1 2016 Earnings Call Transcript, Seeking Alpha, April 2016 [↩]