Investors of storage giant EMC (EMC) were not pleased after management came out with lower guidance for fiscal 2013. I felt this was more the result of potential struggles with VMware (VMW), which is 80% owned by EMC, than it was with EMC itself. But it didn't matter. The Street reacted, and the stock got punished.
However, given the state of the hardware market, EMC's outlook wasn't really that bad. And there was plenty of evidence that the company was winning the storages war despite recent pricing pressure from rivals such as IBM and Hewlett-Packard. But, following a recent "strategy day" with analysts, EMC seems poised for stronger growth down the road. And patient investors will be rewarded.
Change we can believe in
Bears remain fearful that the storage/cloud market will remain turbulent for at least 2013. In many respects, they're right. But EMC has never gotten its due credit for its ability to quickly adapt to changing trends. A perfect example was the company's recent announcement to spin-off areas of the business that, while strong in performance, were getting lost in the shuffle. By creating a separate entity, EMC feels that more value can be realized.
The company calls it "the pivotal initiative," which is, essentially, a group of assets that includes data analytics, cloud computing, and Bid Data. Although management has not fully disclosed how the new company will be structured, it did say that Paul Maritz, who is VMware's former CEO and has been running the Pivotal inside of EMC, will remain at the helm following the spin-off. The company also said that Pivotal will be jointly owned with VMware, which will take up 31% of Pivotal, while EMC will absorb the 69% majority.
EMC's Greenplum and Pivotal Labs assets will be the major contributors of the operation, while VMware will put in its Cloud Foundry, Cetas, Spring, and Gemfire groups. Analysts love the idea. Brian White of Topeka Capital Markets, who has a buy rating on EMC with a $30 price target, said that Pivotal is expected to have $300 million in revenue this year. He also projected that the total available market for Big Data, which is currently $6 billion this year, can grow to $17 billion by 2016. In other words, although EMC doesn't look like a stock that can ring in sizable gains this year, there is still plenty to love with the company in the long-term.
How much better will this make EMC?
While there is no doubt that EMC is the dominant force in storage, it's not as if the competition is just going to roll over. And I think management understands this. To that end, EMC projected just 8% revenue growth for fiscal 2013. Management also warned that revenue growth for the first half of this year will arrive slightly below 8%, while the second half will make up the difference.
However, that's not to suggest that management was down on its capabilities. Much of the downbeat guidance has to do with what is still a weak IT spending environment. And even then, EMC is still outperforming rivals like NetApp (NTAP 0.64%) in key markets. For instance, in the most recent quarter, EMC posted a 6% increase in its high-end product sales, which also jumped 14% sequentially. Meanwhile, NetApp's total revenue for the quarter arrived up 4%, with 0.18% decline in product revenue.
This means that, despite a soft-spending environment, when it's all said and done, customers are still willing to shell out the big bucks for EMC's superior equipment. So, if there ever were concerns about pricing or margin pressure, they have not been seen. I do wonder, though, how well Pivotal, which will have a "horizontal" structure, can help EMC fend off the likes of Oracle and IBM, which have "vertical" structures.
I was then reminded of a statement made by Joe Tucci, EMC's CEO, who is one of the most underrated leaders in the market today. During the company's fourth-quarter earnings announcement, Tucci said:
EMC remains squarely at the center of the most disruptive and opportunity-rich shift in IT history, propelled by the benefits of cloud computing, Big Data and trusted IT. These high-priority IT spending areas are core to our strategic focus and represent market segments where EMC has established leadership positions and competitive advantage.
These are certainly strong statements. And although Pivotal deserves the optimism shown so far, it's not yet clear how this eliminates previous concerns over the competition. EMC will still need to prove that it can withstand threats from products such as Oracle's Exadata and IBM's SmartCloud. And, considering how fast things are moving, NetApp should take cue and begin to shop itself to either Oracle or IBM. While these are certainly pivotal times for EMC, it just might have become crucial for one of its chief rivals.
