Wikibon Blog

EMC Prints Benjamins

EMC released earnings this morning and beat estimates by a penny and revenue consensus by around $70m. EMC guided analysts upward for Q4 but ever so conservatively. The stock’s off about 3% as of midday but I don’t think this was a bad quarter. The street is jittery right now because it’s October and the market has run up. Unless a company gives big upside guidance (which would be incredibly dumb) stocks generally won’t  react positively.

Coming into 2009, sharp investors were looking for two things: 1) companies that were acquisition targets and 2) companies that throw off tons of free cash. Wall Street believed EMC was both of these and the stock’s been up nicely this year. While I don’t fully agree that EMC will get acquired, it’s hard to argue with the latter. Here are some highlights:

• EMC generated $745M in free cash flow in Q3 and has thrown off $1.8 in FCF this year. This is an unbelievable number and dwarfs any other company in the storage business by a million miles.
• Revenue was down ~5% year on year and up 8% sequentially (U.S. was up 13% sequentially). VMware kicked in $489M for the quarter.
• EMC said it will do $4B in revenue in Q4 which is higher guidance than consensus.
• Gross margins and operating margins were up year on year which underscores EMC’s successful cost cutting efforts given revenues were off annually.
• Symmetrix was up 10% sequentially and V-Max accounted for 50% of the Symmetrix volume. Undoubtedly this was an easy comparison quarter for Symmetrix but it outpaced overall company growth during a product transition which is good news for V-Max.
• The Dell CLARiiON business was off 15% but EMC is shifting from a reseller to an OEM model at Dell which will be more profitable for EMC because it doesn’t incur the sales costs.
• EMC’s NAS / Celerra business grew 40%.
• Data Domain was up 40% and Avamar grew 50% year on year. This is very impressive and perhaps indicates there’s plenty of room for both technologies in the market– Tucci may prove me wrong yet.

Other tidbits from the quarter are that FAST will not be available until very late this year and won’t have a meaningful impact on revenues in 2009. FAST will, as EMC had previously stated, be available across all EMC product lines. EMC said flash is hot but didn’t provide any metrics. Earlier this month at a customer event Tucci said 90% of EMC arrays sold in 2010 will go out with flash drives.

The Macro View

Tucci said earlier this year that the second half would be better than the first and that’s the way the year is shaping up. EMC expects IT spend to be down between high single and low double digit growth this year. Looking forward, EMC expects slight growth in IT spending and believes storage will grow faster than the overall market. EMC indicated that customers are still cautious about 2010 but are loosening purse strings as we get into Q4.Tucci said EMC has four main focus areas for 2010:

1. Private cloud (internal).
2. Public cloud (external)
3. Desktop virtualization
4. Data Protection. Tucci said EMC pegs the data protection market at $10B in 2010 (wow…sounds high).

It seems to me that these growth areas, while potentially attractive, are not growing fast enough to offset softness in EMC’s core storage business. As a result, EMC is ebbing and flowing with the market and not gaining share overall. But it’s not losing share either and if its bets in the cloud pay off this could change. At the same time, the whole Private Cloud thing is going to take quite some time to unfold. Clients with legacy applications that are hardened aren’t going to start moving them quickly and desktop virtualization still hasn’t proven itself economically outside of highly secure (e.g. government and some financial) industries.

The Bottom Line

EMC undoubtedly has some issues to address. It needs to demonstrate it can grow Symmetrix and transition customers through a disruptive migration to V-Max. It must continue to simplify its midrange to compete with the virtualization upstarts and pound the file storage business. It has never had a viable storage virtualization offering (although I have to say that hasn’t seemed to hurt EMC). And it needs to make its big cloud bets pay off. Content management continues to underwhelm but it has tremendous upside in my view. And despite the awesome growth, EMC needs to figure out how to better position Avamar and Data Domain– and I think it will.

Having said all this, EMC is a cash machine. The company earned its position with superior service around its flagship Symmetrix, and it carried that ethos through its history. Competitors and analysts (including me) can criticize EMC’s products all they want but when you speak to customers they absolutely love EMC because it’s one of the best companies in the IT industry in terms of customer attentiveness– perhaps the very best in my experience. EMC will crawl through glass for its customers and this is why clients pay EMC’s premium prices and in part why EMC can increase margins in down markets. It’s all about trust and minimizing risk and that’s where EMC’s defenses are strongest.