Flash, Cloud Computing Boost EMC's Q2 Earnings

By Pedro Hernandez

EMC announced record second quarter sales today of $5.9 billion, a 5 percent year-over-year increase, beating Wall Street estimates of $5.83 billion.

The Hopkinton, Mass.-based data storage company also reported a profit of $882 million or $0.43 per share, in line with analyst expectations. CEO Joe Tucci said business was brisk overall, despite a drop in demand for the company's high-end storage products.

"New customers are coming to EMC for the first time, and existing customers are investing more heavily, because of our expanded capabilities across EMC Information Infrastructure, VMware and Pivotal, said Tucci in prepared remarks.

VMware, the company's virtualized computing subsidiary, generated $1.45 billion in revenue during the quarter, a 17 percent year-over-year gain. The business unit is reportedly the target of activist investor Elliott Management.

After snapping up $1 billion worth of stock in EMC, roughly 2 percent of the company, Elliott Management is pressuring the IT giant to sell its 80 percent stake in VMware. "We have not heard from Elliot Management, other than their call to us stating that they are, or intend to be, one of EMC's larger investors," said Tucci in a July 23 conference call, before revealing that he had agreed to meet with them as he does with all big shareholders.

Stifel analysts Aaron C. Rakers, Joseph Quatrochi and Andrew Shinn are skeptical the EMC is ready to part ways with the virtualization heavyweight. "We believe it is unlikely that EMC would be willing to spin-off its 80 percent ownership (97 percent voting right) stake in VMware," they said in an email to InfoStor.

Pivotal, the platform-as-a-service (PaaS) solutions provider behind the open source Cloud Foundry platform, racked up $50 million in second-quarter sales for EMC, a healthy 29 percent increase over the same period last year. Tucci said the 29 percent figure actually "understates their growth" as Pivotal's has shifted to a paid subscription model. "So looking at them on a bookings demand basis, the year-on-year growth rate was closer to 60 percent."

EMC's high-end storage hardware businesses didn't fare as well. Enterprise-grade storage systems like the current VMAX lineup failed to spur demand, leading to a 14 percent dip in sales ($1.03 billion) compared to the same quarter a year ago.

A refreshed VMAX3 lineup, which was officially launched on July 8, is due to ship in September, reminded Stifel analysts. Describing the VMAX3 launch as "very important to us," Tucci said during the call that "without a doubt, the pause ahead of this product was hurting us."

The company's Emerging Storage segment showed strong growth, however. The product category, which includes XtremIO flash storage arrays, ViPR software-defined storage (SDS) software and Isilon, experienced a 52 percent increase in sales during the quarter, year-over-year, reaching $470 million.

EMC acquired XtremIO in 2012 for $430 million. In its second full quarter on the market, XtremIO surpassed "a $300 million annualized demand run rate," boasted EMC. Earlier this month, the company unveiled an entry-level version of the hardware called the Starter X-Brick.

All told, EMC delivered "better-than-feared 2Q14 results," said the analysts at Stifel.

EMC's board also kicked the company's stock buyback plan for 2014 into high year, to $3 billion from the previous $2 billion goal. The company plans "to return more than $7 billion to shareholders over the course of 2013 and 2014" as a result of the new stock buyback plan and dividends.

Pedro Hernandez is a contributing editor at InfoStor. Follow him on Twitter @ecoINSITE.

This article was originally published on July 23, 2014