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From the Value Line 600: EMC
EMC’s (EMC) business is organized under two categories, the first of which is its broad Information Infrastructure group, accounting for about 80% of its revenues. The lion’s share comes from its Information Storage segment. EMC’s portfolio of information storage systems, software, and services includes its high-end VMAX systems and mid-tier VNX unified storage family, as well as backup and disaster recovery products. Also under the Information Infrastructure umbrella are EMC’s RSA Information Security segment (products to ensure the security of digital information and monitor risks) and its small Information Intelligence group (content management and other software).
Slightly more than 20% of EMC’s revenues are generated by VMware (VMW), a rapidly growing provider of agile virtualization software. EMC acquired VMware in 2004 and, via an initial public offering, spun off 13% of VMware in 2007. EMC now maintains its interest in VMware at about 80%.
Numerous small acquisitions over many years and substantial research and development spending (running at nearly 12% of revenues) went into the building of EMC’s product lines. The company operates worldwide and markets its products via its direct salesforce and through channel partners, distributors, and original equipment manufacturers. Its employee count exceeds 53,000. Competitors include companies like NetApp (NTAP) and International Business Machines (IBM - Free IBM Stock Report).
The Opportunity: Cloud Computing
EMC is said to operate at the intersection of Big Data and Cloud Computing. Big Data refers to the exponential growth in the amount of information that organizations now must store, manage, and analyze, with the biggest growth in unstructured data, like videos and Web logs, which are not handled well by traditional information technology systems.
It’s hard for laymen to get their arms around the concept of Cloud Computing. In a nutshell, cloud computing aims to be more responsive to the needs of businesses and other organizations than less flexible traditional computer hardware. It does this by, in the words of EMC, “creating shared pools of network, storage and compute resources that any application can access”. VMware’s virtualization software is part of that process, allowing one to run multiple virtual machines on a single physical machine, with computing resources shared among the virtual machines. EMC estimates that there are more than 75 integration points between EMC infrastructure products and VMware products.
The advantages claimed by proponents of cloud computing include making computing systems more nimble, minimizing the amount of computer hardware that a company needs to purchase, and enabling companies to direct more of their spending to projects that increase innovation rather than for systems maintenance. EMC expects most companies to first build a Private Cloud within their existing data centers. It expects many to eventually also make use of Public Clouds, “delivered by trusted service providers able to run business applications at a lower cost”, a utility-like arrangement.
The Outlook For EMC
The company was hurt by the technology sector meltdown back in 2001-2002, but has dramatically changed its product lineup since then, adding VMware, among many other niche firms, to the mix. The current information technology spending climate is less than ideal. Economic uncertainty has caused customers to more carefully scrutinize technology purchases. EMC now expects global information technology spending to grow slightly less than 3% in 2012, down from its earlier forecast of 3%-4%, and less than half of the 7% pace logged in 2011. Nonetheless, EMC believes its markets address customer priorities, like data storage and information security, and will expand considerably faster than IT spending overall. While EMC is not immune to economic pressures, it expects its own revenues to rise about 10% this year and at a 13% compound annual growth rate over the pull to 2014.
To be sure, in the opening quarter of 2012, revenues from high-end storage systems compared unfavorably with the very strong year-earlier figure (which benefited from the introduction of EMC’s FAST VP software in conjunction with high-end VMAX systems in early 2011). But high-end system revenues rebounded in the June period (up 3%), reflecting a refresh of the VMAX product line. Meanwhile, mid-tier storage systems revenues advanced 10%. Total storage systems revenue was up only 3%, but this number includes third-partly products that EMC resells.
The RSA division, which was the target of a sophisticated cyber attack in early 2011, has since hardened its systems, and the division enjoyed double-digit revenue growth in both the March and June quarters of this year. Meanwhile, VMware’s revenue growth exceeded 20% in the first half of 2012.
EMC’s gross and operating margins also expanded in the first half of 2012, reflecting volume growth and a richer product mix. EMC expects its faster-growing, higher-margin businesses, like VMware, to make up an increasing portion of its revenue mix. It looks for reported earnings per share, which includes stock-based compensation and acquisition costs, to advance nearly 14% in 2012.
Summing It All Up
EMC is a powerhouse in the virtual storage systems and software arena, its finances are strong, and we like the company’s prospects to 2015-2017. EMC shares are also not as volatile as many other technology company issues. Long-term investors may want to consider taking a position in the stock on any temporary pullback in the share price.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.