EMC Earnings Will Show The Storage Market Is On Fire

EMC (NYSE:EMC) is due to release its earnings on July 24. Q1 saw strong y-o-y growth of 11 percent with revenues of $5.1 billion. It earned a profit of $586.84 million, up 23% from $477.1 million last year. Driving this growth has been customer demand for its VNX unified storage, Backup Recovery Systems (BRS) and RSA Information Security. During this quarter and for the rest of 2012, expect the XtremIO acquisition to improve its flash storage device sales and the EMC Velocity program to offer storage for private clouds to drive sales.

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Backed by a strong Q1, the outlook for this year has been set at $22 billion in revenues or greater. It hopes to achieve this as revenues from its Isilon acquisition has doubled y-o-y. Geographically, revenues from US made up 52% and grew at 11% year on year and revenue growth from Asia Pacific and Japan grew at a record 20% y-o-y.

As more companies demand cloud computing capabilities we can expect a strong demand for its mid-tier storage products to grow. Growth in the high end storage purchases have slowed due to anticipated new releases and this is expected to pickup in the coming quarters. Signaling faith in its stock, it has announced a plan to repurchase $700 million worth of common stock in 2012. ^[1]

Services To Drive Growth

In Q1, services revenue grew 21% y-o-y to $2 billion while product sales grew 4% y-o-y to $3.1 billion. Services margins have traditionally been high (56%) and we expect this to drive growth in the near future. Information storage is the most valuable division of EMC according to our calculations and constitutes 47% of our price estimate. EMC’s results were also helped by the popularity of VMware’s virtualization software which helps cut costs by putting multiple applications on a single server. Going forward, we expect services to be the largest growth opportunity for EMC.

Trends to Watch For

EMC has acquired XtremIO to improve its flash memory storage offering. Flash memory arrays are designed to be faster and more energy efficient than traditional disk drives and this enables EMC to charge a premium over traditional devices. EMC’s revenues have been growing at an average of ~15 percent over the past five quarters on a year-on-year basis. This momentum is driven by larger corporations moving to the cloud and to tap the private cloud storage market, EMC has designed the EMC Velocity program and has signed up major providers such as Verizon – Terremark, Singapore Telecommunications and AT&T. EMC is already the market leader in global external disk storage systems market, and we expect it to maintain this position.

We currently have a $45.55 Trefis price estimate for EMC which is significantly higher than the current market price.

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1. EMC SEC Filings, www.sec.gov, April 19, 2012 [↩]