EMC Corporation (EMC, Financial) is a data storage devices company that offers enterprise storage systems and SAN, NAS, and unified storage combining NAS and SAN. The company competes with peers like NetApp Inc (NTAP, Financial) and others in the storage solutions market. EMC posted lower-than-expected first-quarter fiscal 2015 results and offered light guidance for the fiscal year. Despite this, the stock hasn’t slumped and with a roller-coaster ride it has managed to post gains of around 2.7% since then.
Looking back
North American revenues grew 5% year-over-year while EMEA declined 2%. Latin America and APAC revenues increased 8% and 1% year-over-year, respectively. As a result, consolidated revenues increased 2.4% year-over-year to $5,613 million, lagging analysts’ estimates by $140 million. The company missed its expectations by $75 million due to a shortfall in the storage business, partly because of weakness and China and Russia.
Gross margin contracted 150 basis points, or bps, to 61.3% while SG&A expenses inflated 250 bps year-over-year. As a result, adjusted earnings came in at $0.22 per share versus $0.27 per share in the year-ago quarter. Analysts were expecting $0.05 per share more. The data storage company has missed earnings estimates in two out of last four quarters.
| Earnings History | Jun 14 | Sep 14 | Dec 14 | Mar 15 |
| EPS Est | 0.43 | 0.46 | 0.68 | 0.36 |
| EPS Actual | 0.43 | 0.44 | 0.69 | 0.31 |
| Difference | 0.00 | -0.02 | 0.01 | -0.05 |
| Surprise % | 0.00% | -4.30% | 1.50% | -13.90% |
EMC exited the first quarter with cash and cash equivalents of $6.5 billion, generating $1.08 billion in cash flow from operations.
Shopping for growth
EMC announced that it is grabbing Virtustream, and this will form part of the company’s newly formed cloud services business. Virtustream is one of the fastest-rising businesses in the cloud domain, trusted by enterprises globally to migrate, run and manage mission-critical applications in the cloud, including SAP (SAP).
“Virtustream is an exceptional company and this is a critical and transformative acquisition for EMC in one of the industry’s fastest-growing and most important sectors,” said Joe Tucci. “With Virtustream in place, EMC will be uniquely positioned as a single source for our customers’ entire hybrid cloud infrastructure and services needs. We could not be more delighted that Virtustream will be joining the EMC Federation family. It’s a game changer.”
Cloud computing market is slated to CAGR of 30% from 2013 through 2018, according to a report from Goldman Sachs. With the acquisition of Virtustream bolstering the cloud services business of EMC, this will be a good growth driver in the long run.
On Merger & Acquisitions, or M&A, Joe Tucci, Chairman and CEO said during conference call:
“On the M&A front, we will continue with our string of pearls approach. Our highest priority is to assure that we augment our strong product portfolio and roadmap with additional compelling technology assets that will help make us a winner in this mobile cloud Big Data era, assets that will differentiate us from the competition, and help us win, assets that will produce a solid return on investment.”
Innovations to drive growth
EMC highlighted six new strategic products -- AirWatch, NSX, Pivotal, ViPR ScaleIO, Elastic Cloud Storage, DSSD, and XtremIO. These collectively can generate $2 billion in revenue in fiscal 2015, making it a 100% year-over-year growth. During the first quarter, the growth of these six businesses well over 100% year-over-year, and they are on target to meet the $2 billion goal.
The company unveiled XtremIO version 4.0 last month, extending its lead in the All-Flash Array market. According to Gartner’s latest analysis, EMC ranks #1 market share position in 2014, with a 31.1% share with a 10% lead over the nearest competitor. Within 18 months of release, XtremIO has risen to become the fastest-selling product in the company’s history, and this version upgrade will sustain the growth momentum.
Going forward
Looking ahead, EMC expects fiscal 2015 revenues to be $25.7 billion versus $26.1 billion projected earlier. This revision is on the back of first quarter performance and currency translation headwinds. Adjusted earnings per share are expected to be $1.91 versus $1.98 projected earlier. The company maintained that share buyback for fiscal 2015 is pegged at $3 billion.
Wrapping up
EMC posted lower-than-expected results, disappointing investors. However, with innovations in products and services, restructuring and bolstering of the cloud business segment through the acquisition of Virtustream, the company is set for growth going forward. However, investors should note that the Virtustream acquisition will be accretive from fiscal 2016 onward. However, aggressive share buyback during fiscal 2015 will boost the bottom line.
Analysts expect next five years growth to be at a CAGR of 12% versus the industry average of 10.46%. Also, forward P/E of 12.90 EMC looks like a low-risk buy at current levels. So, if you are looking at 2016 and beyond, it may be time to add some EMC shares to your portfolio.
