Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 2Q16 Earnings Update
Prev. Ed.: May27, 2016: 1Q16 Earnings Update
Brokers’ Recommendations: Positive: 38.1% (8 firms); Neutral: 61.9% (13); Negative: 0.0% (0) Prev. Ed: 10, 11, 0
Brokers’ Target Price: $29.47 (Unchangedfrom last edition; 15 firms) Brokers’ Avg. Expected Return: 3.3%
Note: A Flash Update was done on Jul 19, 2016
Portfolio Manager Executive Summary
EMC Corporation (EMC)offers a comprehensive portfolio of enterprise storage systems and software.The companyprovides services toorganizations to manage, protect, analyze and secure vast quantities of data, improve business agility, and enhance their competitive advantage within traditional data centers, virtual data centers and cloud-based IT infrastructures.
Firms’ Opinions:Firms’ opinion is bimodal with 38.1% being positive on the stock and the remaining 61.9% beingneutral.Target prices for EMC range from a low of $26.00 to a high of $32.00 per share, with the average being $29.47.The average expected return on the current share price is 3.3%.
Bullish Stance – (Equivalent ratings: Buy, Outperform, and Overweight) – 8 firms or 38.1%: The firms are positive on the Dell-EMC merger and the associated synergies. Apart from that, the firms believe that EMC is well positioned with its strong product base, ongoing storage capacity growth, operating leverage and unique composition of technology assets. A strategic focus shift toward cloud computing and Big Data is also seen as a strong catalyst for EMC. The company remains focused on key areas of IT spending including virtualized data centers; cloud computing; virtualized desktops and clients; and next-generation backup, recovery and archive solutions. This apart, the company is focused on its emerging technologies portfolio comprising software-defined storage, elastic cloud infrastructure, next generation flash storage and open source software. The firms believe that the company’s strong product portfolio remains a major positive. Additionally, the firms believe that EMC’s majority ownership stake in VMware will aid its growth trajectory going forward. The company has also initiated an open source project based on one of its commercial software offerings, which is likely to drive growth.
Neutral Stance – (Equivalent ratings: Hold, Sector Perform, and Market Perform) – 13 firms or 61.9%: These firms consider the Dell-EMC deal to be a positive. Further, the company received the required a thumping approval from its shareholders for merger with Dell. However, approval from China remains pending. Also, the firms remain concerned about the weak enterprise IT spending. The ongoing sluggishness in the traditional storage market due to growing competition from flash storage peers is also an area of concern.
Key factors for evaluating an investment strategy for EMC are as follows:
- EMC is the leading provider of data storage hardware and software solutions to mid- and large- enterprise customers throughout the world.
- Significant acquisitions over the last five years have strengthened EMC's leading share in storage management software.
- EMC has the broadest portfolio of storage systems, with a leading share in the SAN (storage area networks) and NAS (network attached storage) market segments.
Competitive Position: EMC competes against Tier 1 vendors, such as NetApp Inc., International Business Machines Corp., Hitachi and Hewlett-Packard Co., as well as potential new and emerging vendors such as CommVault and various other competing technologies. Such fierce competition exposes EMC to significant pricing pressure.
Conclusion:EMC is expected to continue its aggressive product rollout to help organizations worldwide tackle relentless information growth, improve productivity, lower technology and operational costs and simplify information infrastructures.However, increasing competition and sluggish IT spending are the major headwinds in the near term.
Aug18, 2016
Overview
Hopkinton, MA-based EMC Corporation (EMC) offers storage and security solutions for every layer of the IT architecture. Apart from being a leading provider of data storage systems, software and services, mid-range enterprise disk arrays and storage resource management, the company has a significant presence in high growth areas of cloud computing, including information infrastructure, virtual infrastructure technologies, enterprise content management, security and network monitoring.
The company operates in three segments: EMC Information Infrastructure, VMware Virtual Infrastructure and Pivotal.
EMC distributes and markets products through various distributors, systems integrators, resellers and original equipment manufacturers, hardware vendors for information storage and management, and virtualization infrastructure software markets in North America, Latin America, Europe, the Middle East, South Africa and the Asia-Pacific. Its products and services are used in various computing platforms, storage systems and software applications, including transaction processing, enterprise resource planning, customer relationship management, data warehousing, electronic commerce, content management, business intelligence, e-mail and web hosting.
On Oct 12, 2015, EMC Corp announced that Dell Inc., along with private equity firm Silver Lake, will take over the company in a record $67 billion deal.
Key investment considerations as identified by the firms are as follows:
Key Positive Arguments / Key Negative Arguments- EMC has a broad portfolio of products that range from networked storage to big data.
- Its software business is an important component of EMC’s total solutions approach to storage, which is a key for winning cost-sensitive enterprise accounts.
- New product launches are expected to simulate margin leverage through low product costs and increased software and services sales.
- EMC’s solid free cash flow generation ability adds to its robust fundamentals.
- Aggressive competition and imminent product refresh cycles in the storage space from systems vendors and others could exert pressure on the company’s margins.
- Weak enterprise spending and a tepid macroeconomic environment continue to be major headwinds.
For further information, please visit:
Note:EMC’s fiscal year coincides with the calendar year.
Aug18, 2016
Long-Term Growth
EMC Corp. had announced that Dell Inc., along with private equity firm Silver Lake, will take over the company in a record $67 billion deal. As per the latest update, the deal remains on track and is likely to be closed between May and Oct 2016. EMC shareholders are to receive $24.05 per share in cash along with tracking stock related to a portion of EMC’s economic interest in VMware.
The company'sdefinitive agreement to be acquired by Dellis a positive as the combination is expected to create the world’s largest privately-controlled, integrated technology company. With this gigantic acquisition, Dell intends to become a key player in the cloud services and data storage market to compete with the likes of Amazon, Alphabet, etc.
This aside, EMC is expected to continue its aggressive rollout of new products to help organizations around the world tackle relentless information growth, improve productivity, lower technology and operational costs, and simplify information infrastructures. Furthermore, the ongoing shift of consumers from traditional platforms like LAN/Internet, Client/Server, PC to more promising platforms like mobile, cloud, big data and social media is likely to bode well for the company.
The firms believe that in the long run the networked storage market will outgrow overall IT spending trends given increasing regulatory and compliance needs, fueling storage demand and explosive growth in digital content as legacy data and media content migrate to digital formats.
With the growing complexity of storage solutions, the bullish firms believe that EMC is well positioned to gain market share, given its position as a single vendor capable of offering storage hardware, add-on software and professional services.
The firms believe the storage software market is expected to grow faster than the overall storage market and EMC being the market leader in this segment, shall benefit to a great extent.In addition, the imminent shift to higher margin solutions in the storage software space should also bode well for the company in the long run.
Thefirms also believe that EMC's majority ownership stake in VMware, a virtualization software business, is likely to aid the company's growth profile. Moreover, the firms believe that EMC's shift toward software sales improves profit margins and strengthens customer loyalty by tying storage products together with management software for a complete portfolio of storage solutions.
Banking on these factors, the firms believe that EMC is in an advantageous position to capitalize on the emerging trends in storage, cloud (both public and private clouds), big data and analytics. EMC looks set to benefit from Big Data in the long run as its fundamentals (in the form of enterprise storage systems and services) appear to be pretty strong.
Also, the firms believe that acquisitions form an integral part of the company’s long-term growth strategy as is evident from the fact that it acquired as many as 11 companies in 2014, a significant number of these were in emerging sectors like cloud computing and mobile management. However, such acquisitions may weigh on the margins of the company going forward.
Some firms believe that EMC’s public cloud will be exposed to pricing pressure due to fierce competition, which in turn may adversely affect the profitability of the company in the long run. Further, these firms believe that the disk storage market will be transformed by flash, public cloud and Big Data in the long run and believe that EMC is well positioned to leverage these trends.
Nevertheless, most of the firms believe that the deep product portfolio, stable results from VMware, frequent product launches, strong growth opportunity from big data, cloud, flash storage, and next generation data centers and solid free cash flow yield are the major growth factors over the long term.
.
Aug 18, 2016
Target Price/Valuation
Provided below is a summary of valuation/ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 38.1%↓
Neutral / 61.9%↑
Negative / 0.0%
Avg. Target Price / $29.47
Digest High / $32.00↓
Digest Low / $26.00
Firms with Target Price/Total / 15/21
Risks: A macro-driven slowdown in tech-spending could adversely affect EMC. Among the other factors, the company-specific risks include slower-than-expected uptake of new products; lower-than-expected software revenues that could increase the mix of low-margin hardware business; greater-than-expected share price dilution; lower-than-expected results from distribution deals; and a downtrend in storage virtualization revenues.
Recent Events
OnJul 19, 2016,EMC announced that its preliminary results indicate that it has received nearly 98% of votes in favor of the merger at the Special Meeting of Shareholders.
On Jul 18, 2016, EMC reported its 2Q16 results. Highlights are as follows:
- Revenues were flattish at $6 billion
- Non GAAP EPS was up 5% y/y to $0.45.
- EMC generated $1.6 billion in cash flow from operations.
Revenues
As per thepress release, 2Q16 revenues of $6 billion were almost flat year over year. Management again blamed unfulfilled orders for mediocre revenue growth.
EMC revealed that its Information Infrastructure business remained strong driven by robust all-flash array offerings demand, which increased 100% year over year in the quarter. Demand for its Virtustream Enterprise Cloud services also grew in triple digits year over year while that for the hyper-converged products also remained strong.VMware sales increased 11% year over year to over $1.68 billion.
Product sales decreased 2% year over year to $3.161 billion, while Services increased 3% to $2.856 billion from the year-ago quarter.
EMC Information Infrastructure segment revenues fell 4% year over year. RSA dropped 5% and Information Storage revenues fell 4% year over year. The Enterprise Content Division decreased 4% year over year.
VMware Virtual Infrastructure registered growth of 6% year over year to over $1.678 billion. Pivotal reported revenues of $96 million, up 49% year over year driven by the strength in its cloud and big data subscription software.
On a geographical basis, revenues from North America were up 1% while in Europe, Middle East and Africa, revenues grew 3%.However, revenues from Latin America region were down 5% and that in Asia Pacific and Japan fell 4%.
Outlook
On account of the impending merger with Dell, EMC didn’t provide any outlook and also did not host an earnings conference call.In the earnings press release, the company had noted merger is likely to be completed within the original expected timeframe following shareholder meet as well as well receivingChinese regulatory approval and closing of other customary conditions.
On Jul 19, 2016, the company’s shareholders have approved the deal with a thumping majority but the regulatory approval from China remains pending.
Margins
As per 10 Q, consolidated gross margin came in at 62.1% compared with 59.8% reported in the year-ago quarter. EMC reported operating income of $882 million, up 29.7% year over year.
Total operating expense came in at $2.854 billion, down 1.8% year over year.
Earnings per Share
EMC’s 2Q16 adjusted earnings (including stock-based compensation expense but excluding other items) of $0.34 increased 3% on a y/y basis.
On a non GAAP basis, the company reported earnings of $0.45 per share, up 5% year over year.
Research Analyst / Vaishali DoshiCopy Editor / Debasmita Banerjee
QCA / Sejuti Banerjea
Lead Analyst / Vaishali Doshi
Content Ed. / Sejuti Banerjea
Reason for Update / 2Q16Earnings