EMC (EMC) reported a strong set of Q4 results on January 29, as EMC-owned VMware (VMW) sustained growth in its high-margin businesses. EMC had witnessed stagnation in its core Information Storage segment during the first three quarters owing to cautious global IT spending, with revenues staying flat compared to the same period in 2012. However, the company's focus on its emerging storage solutions - such as network attached storage (NAS), virtualization and private cloud, the all-flash array and cloud storage - led to 10% growth in the Information Storage division in the last quarter. [1]
Almost a quarter of EMC's annual revenues came from VMware, which grew at 17% year-on-year (y-o-y). VMware's sturdy growth helped EMC meet its revised full year revenue guidance of over $23 billion, 7% more than last year. The company's full-year gross margin stayed flat at 64%. However, VMware's margins jumped 200 basis points to 86%, thus contributing positively to overall profitability. [2] We are in the process of updating our price estimate for EMC to account for these earnings.
Stagnating Core Business Bettered By Emerging Storage
EMC's core Information Storage business was flat through the three quarters of 2013, with a revenue growth of only 2.5% over the same period in 2012. Comparatively, the information storage segment generated revenues of $4.75 billion in Q4, a 10% year-on-year increase, helped by 70% growth in emerging storage business sales. The fast-growing emerging storage solutions include network attached storage (Isilon), virtualization and private cloud (VPLEX), cloud storage (Atmos) and the all-flash storage array (XtremIO). Although the business only contributed about 10% of the $16 billion generated by the overall segment, EMC intends to focus on emerging storage going forward.
However, a point of concern for the company could be the gross margins of its storage division, which declined by 2% y-o-y in the fourth quarter. The company attributed the decline in margins to the tougher pricing environment, especially in the storage services division. Going forward, the company intends to increase sales of its higher-margin products, including VMware's products. But since it expects higher field service costs and pricing pressures to continue, it anticipates flat gross margins over the next few quarters.
Profit-Making Businesses Show Positive Results
EMC has had success with its acquisitions in the past. Starting from the VMware acquisition about a decade ago, the company has since taken over companies such as RSA Security, Data Domain, Isilon and XtremIO. All these acquisitions are currently fast-growing and profit-generating businesses within EMC.
VMware's revenues jumped 17% in 2013 on the back of a healthy customer response to its hybrid cloud offerings and network virtualiztion. We expect VMware's strong quarter and robust outlook to continue contributing significantly to EMC's earnings. Sales of EMC's security analytics division, RSA, rose 17% y-o-y in the fourth quarter, bringing its full year revenue growth of 11%. While RSA Information Security showed encouraging growth, it is a small portion of EMC's revenue.
For the first three quarters, the profit-making business grew significantly more than the core business. In the last quarter, the core business also picked up slightly with new offerings in emerging storage solutions. The future of the EMC XtremIO flash array seems bright with industry-wide growing demand for Big Data and cloud storage. VMware's increasing impact on the company's earnings, coupled with EMC's focus on network attached storage and software defined storage, should drive revenues over the next few quarters. EMC has given revenue guidance of $24.5 billion for 2014, which is a 6% increase from 2013, although its margins should stay flat.
Disclosure: No positions.
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