Storage sales have come under pressure lately as many enterprises ponder their technical roadmaps. According to the IDC, high-end storage sales declined 25% in the first quarter of the current fiscal year. EMC (EMC +0.00%) has traditionally concentrated on selling high-end storage solutions to enterprises. The company has been badly affected by the lackluster sales and must now look for new high-growth areas. EMC suffered an 8.8% external disk storage revenue slump in the first quarter because of its heavy reliance on its high-end Symmetrix line.
The x86 commodity server business has been on a free-fall for several years now. Engineered systems by companies such as EMC, Cisco (CSCO +1.74%), and Oracle (ORCL 3.44%) have, however, been doing quite well. EMC's engineered systems are now the fastest-growing among the major vendors.
EMC's engineered systems fastest-growing
According to the IDC, engineered systems are made up of two subsets: integrated platforms by companies such as Oracle, and integrated infrastructure by companies such as EMC and Cisco. IDC defines the two as follows:
- Integrated platforms: These are engineered systems that come with pre-integrated packaged software as well as customized systems engineering that is optimized to enable functions such as databases, app development, testing, and integration tools.
- Integrated infrastructure: These are systems designed for general purpose and distributed workloads. Unlike their integrated platform brethren, integrated infrastructure systems are not optimized for specific workloads.
EMC's integrated infrastructure grew 100.2% during the first quarter to $179.9 million. In comparison, integrated infrastructure by Cisco/NetApp grew 49.8% to $268.4 million. Integrated infrastructure by VCE, which is a joint venture between VMware, Cisco, and EMC, grew 43.8% to $254.3 million.
EMC controls almost two thirds of VCE since it owns 80% of VMware. In effect, what this means is that EMC's total revenue for integrated infrastructure from its own internal operations, and from the VCE joint venture, clocked in somewhere in the region of $350 million during the quarter. The overall integrated infrastructure market grew 69.4% to $1.18 billion.
The integrated platform market, which is dominated by Oracle, grew at a much slower clip -- up 8.3% to $769.9 million.
Source: The Register.
Cloud powering growth in engineered systems market
Although the high-end server business has been in steep decline, rapid growth in cloud services has been driving the engineered systems market. Commenting on the company's impressive growth in integrated platforms during the third quarter of the current fiscal year, Oracle's chief executive Larry Ellison noted that customers want systems that have software and hardware integrated to make it work together.
Server, storage, and networking vendors are busy creating a set of offerings that resonate well with datacenter operations that require the next level of infrastructure efficiency to fit in with their highly virtualized environments. Research firm Canalys provided estimates in 2012 that the market for datacenter infrastructure will grow at a 5% annual clip to reach $152 billion by 2016.
The high demand for colocation hosting services is also driving demand for engineered systems. Colocation refers to the practice of hosting a company's servers and devices in a professional data center so as to access its superior infrastructure and bandwidth, lower latency, and cut costs.
The market for integrated infrastructure is expanding much faster than that for integrated platforms because integrated infrastructure systems are designed to be consumed horizontally, and can thus be applied to a wider range of enterprise functions. Integrated infrastructure support a richer integration model for diverse workloads, which seems to resonate well with many organizations that are looking for higher levels of convergence and integration rather than having their IT systems running in many isolated pockets.
The bull case for EMC
EMC recorded a $158.24 million decline in its external disk revenue in the first quarter of the current fiscal year, yielding an annual run rate of $633 million. Meanwhile, the company's engineered systems grew 100.2% to reach $179.9 million, giving a combined revenue of, or an annual run rate of, $720 million, while the overall market grew 69.4% to reach $1.18 billion.
Assuming the company's engineered systems grow around 60% through 2017, EMC will record revenue of about $3 billion from the segment, thus easily offsetting the decline in its external disk storage revenue. Note that I have not factored in EMC's stake in the VCE joint venture, which would almost double that figure. The three companies report VCE results in their individual quarterly and annual reports.
When you throw in the company's rapidly growing solid-state arrays, the outlook gets even better. EMC jumped to fourth position in SSA revenue from a standing start after the company recorded revenue of $75 million from SSA revenue in 2013, up from virtually zero in 2012. Mind you, this is a completely new revenue source for the company. The SSA market grew 182% in 2013, and Gartner predicts it will grow a CAGR of 73% through 2017.
The bottom line
In three years' time, EMC's revenue from these two important revenue streams will be almost the size of its entire external disk storage segment. By this time, the two segments will be having an affect on EMC's top line in a tangible way by adding about 3-5 percentage points to its growth.
