EMC Earnings: Information Storage, VMware Drive Revenue Growth

EMC (NYSE:EMC) announced its Q4 earnings on January 29, reporting a 5% year-on-year rise in net revenues to just over $7 billion. The company witnessed growth in both combined services revenues, which rose by 8% y-o-y to $2.7 billion. and consolidated product revenues, which rose by 4% y-o-y to $4.3 billion for the quarter. EMC’s key divisions – including VMware, Pivotal, RSA Security and core information storage grew – on an annual basis. EMC observed a rise in storage product revenues for the second successive quarter after two consecutive quarters of declines at the beginning of 2014. Information storage products include both storage hardware and the integrated software within storage systems. ^[1]

EMC’s consolidated gross margin (GAAP) was up by 70 basis points annually to 63.9% in Q4, mainly due to a favorable product mix and an increasing contribution of high-margin VMware revenues. EMC’s margins for the full year were flat over the previous year due to weakness in preceding quarters. EMC’s full year revenues were also up by 5% to $24.4 billion, just shy of the midpoint of the company’s guided range. Consolidated services revenues rose by almost 9% y-o-y to $10.4 billion, driving much of the top line growth. Management expects net revenues to rise by 7% to over $26 billion in 2015, despite a possible negative impact of foreign exchange. According to management, FX could impact net revenues by as much as $550 million through 2015.

See our full analysis for EMC’s stock

Information Storage, VMware, Pivotal Sustain Growth

In the first two quarters of 2014, EMC lost market share in the external storage systems market. This was the first time since 2008 that EMC lost market share on a y-o-y basis. EMC’s share in the external storage systems market was a percentage point lower than the prior year quarter at 30.1% in Q2. ^[2] However, product sales picked up in the third quarter, with storage product revenues rising both sequentially (+2%) and annually (+7%) to $2.6 billion in Q3. ^[3] Storage product revenues in Q4 were significantly higher than Q3 owing to seasonality. Revenues were up both sequentially (+25%) and annually (+2%) to $3.3 billion in Q4 as the company continued to gain share.

Growth was driven by the all-flash array XtremIO, software-defined storage platform ViPR, scale-out network attached storage platform Isilon and converged storage infrastructure ScaleIO, with XtremIO sales crossing the $500 million mark on an annualized run-rate basis during the quarter. Sales of emerging storage solutions including XtremIO, Isilon and Atmos stood at about $2.3 billion for the full year, or about 20% of storage revenues. XtremIO product sales almost doubled from Q3 levels to about $300 million in the December quarter. The company expects the strong momentum for XtremIO sales to continue through 2015 after a solid debut in 2014. Similarly, solid customer response to Big Data analytics led Isilon’s customer base to rise to over 600 customer – up from 400 in Q3. Given that emerging storage is growing at a rapid pace, the company expects the contribution of emerging storage to be around 30% of total storage revenues in 2015.

Pivotal was the fastest-growing division for EMC this quarter, with a 18% growth in net revenues to $65 million. Both product sales (+16%) and services revenues (+19%) witnessed annual growth over the prior year period. The company attributed this rise to a higher number of subscription-based sales as compared to standalone licenses in addition to Pivotal increasingly becoming key to cross-EMC solutions. The company expects the growth to continue through the coming quarters, further boosting revenues of Pivotal Labs and Pivotal Cloud Foundry.

VMware’s revenues grew by over 16% year-on-year to nearly $1.7 billion, with its services division driving much of the growth (see: VMware Ends The Year On A High Note: Strong Outlook For 2015). Management expects continued growth in software-defined networking, hybrid cloud and end-user computing, as evidenced by its results through 2014. VMware generates about 25% of EMC’s consolidated revenues, yet the highly-profitable business contributes about two-fifths to EMC’s net value, according to our estimates.

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1. EMC Q4 2014 Earnings Call Transcript, Seeking Alpha, January 2015 [↩]
2. Worldwide External Storage Market Q2 2014, IDC Press Release, September 2014 [↩]
3. Worldwide Quarterly Disk Storage Systems Tracker Q3 2014, IDC Press Release, December 2014 [↩]