The customer appetite for data storage has been constantly increasing. The need for speed has been the prime constraint for the customer application with voluminous data existing in applications like data warehousing and data mining. Flash drives are being unanimously preferred by customers for their storage solutions and deploying the application in a cloud computing environment. Flash drives provided speed, which can be almost three times that of conventional storage disk devices. The declining price of the flash drive is again a constraint that has enabled flash drive or the Solid State Drives (SSD) to be a favorite choice for customers.
Various chip manufacturers are now focused on their flash drive storage portfolio to leverage their top and bottom lines. EMC (EMC, Financial) is one such company that is a market leader in storage solution provider with global foot prints. EMC also provides various solutions like security, big data, and hybrid cloud solution. The company’s emerging business is its storage business with high end solutions and performance. The size of data has been exponentially growing and this growth has enabled companies like EMC to flourish. Market research company IDC and EMC had jointly estimated global data size to be around 2,837 Exabytes (EB) in 2012, and it is estimated to reach 40,000 EB by 2020. As the digital world continues to expand, it is anticipated that by 2020, average storage requirement would be around 5,200 Gigabytes (GB) per person.
1 Exabytes (EB) = 1000 Petabytes (PB) = 1 million Terabytes (TB) =1 billion Gigabytes (GB)
Overview of the financial quarter
The company recently posted its second quarter results for the fiscal 2014. The company recorded revenue of $5.9 billion for the quarter, up by 5% year-over-year. Product sales were up by 1.9% year-over-year, while services gained 8.7% as compared to same quarter last year. Operating cash flow gained 2% year-over-year to record $1.3 billion and free cash flow was up 10% year-over-year to record $930 million.
Revenue growth for the company was mainly due to strong demand of XtremIO all flash storage, Isilon & ViPR products. These are the storage product portfolio of the company and revenues were up by around 52% year-over-year.
What looks good for EMC is that the total revenue is uniformly distributed (U.S & International); 52% is from US while the remaining 48% is from international operations. This looks good since a badly performing region can always be counter balanced by another region to maintain revenue growth. The company is seeing growth both in the U.S. and overseas, which exemplifies EMC’s footprints are expanding. Revenue from U.S operation was up 3% year over year, to record $3.1 billion, while outside the U.S., revenue was up 7% year over year to record $2.8 billion.
Payout Policy
Shareholders of any company are always influenced by the share repurchase policy and dividends. EMC always safeguarded investors' interest with repurchase policy and declaring regular dividends. The share buyback policy always helps the company in maintaining a healthy EPS, also signifying a good cash balance which helps in share buyback and dividends.
In the second quarter, EMC repurchased shares worth $600 million and also paid $200 million in the form of dividends to its shareholders. The company has also revised its share repurchase budget from $2 billion to $3 billion for 2014 with an accelerated buyback plans. The company also anticipates of returning around $7.0 billion (share repurchase and dividends) in the tenure of 2013 to 2014.
Outlook
Looking at the market growth, the company is optimistic about its future revenue growth. The company anticipates consolidated revenue of $26.4 billion for fiscal 2014, 5.5% higher as compared to previous fiscal year. The target revenue for fiscal 2014 is also much higher than the analyst estimate of $24.58 billion. The company also anticipates its operating margin to increase anywhere between 24% to 25.5%, this will influence the bottom line. Growth in the operating margin is mainly due to high margin storage products. EPS is expected to be around $1.94 for 2014, much higher than the consensus estimate of $1.56.
Conclusion
EMC is a cash-rich company with around $14.6 billion in cash and investments. It also increased its share buyback budget, which again is good news for investors and can leverage growth in stock prices in future with a positive influence on EPS. The company’s guidance is also much higher than the consensus estimate which shows the confidence of EMC. The forward P/E of 13.75 is also good from an investor's point of view, and this stock can be in your portfolio if you're looking for long term growth returns.
