EMC (EMC) is due to release its Q4 earnings on Jan. 29. Last quarter it reported growth driven by strength in its storage segment and growth in VMware’s revenues. Consolidated revenues came in at $5.28 billion, representing an increase of 6% y-o-y. The company showed a modest increase in earnings as net income attributable to EMC increased 3% y-o-y to $626 million. EPS per diluted share rose 4% y-o-y to $0.28. EMC generated strong operating cash flow of $1.44 billion and free cash flow of $1.14 billion, an increase of 12% and 16%, respectively, on a y-o-y basis. The company expects 2012 revenue of around $22 billion and also plans to repurchase $700 million of its common stock in 2012.
Additionally, EMC is likely to benefit from its hardware tie-up with Lenovo to sell storage hardware in China and other Asian markets, and we will see this come into play this quarter. The company also aims to gain share of the high-growth, hosted web services market which is dominated by Amazon. We examine some of the key industry trends below.
Outlook for 2012
The company expects 2012 revenues of $22 billion with operating income of 17.5% of revenues or $3.85 billion. Further, EMC expects consolidated operating cash flows of $6.2 billion and free cash flows of $4.9 billion for this year. It also planned to repurchase $700 million of its common stock in 2012.
Hardware Business to Get a Boost as Lenovo Opens Up the Asian Market
EMC and Lenovo Group have entered into a strategic partnership to resell storage equipment and servers made by EMC. They will test their products in China before expanding to other locations. China is the world’s second largest economy and EMC will gain a foothold in this massive market through this partnership. The partnership will also open up markets outside of Asia for Lenovo and will help it expand into products beyond personal computers in Asia. The companies will also form a joint venture to sell storage equipment to small and mid-sized businesses. Lenovo will own a 51% stake and will also contribute an undisclosed cash sum. Information storage is the most valuable division for EMC and constitutes nearly 43% of our current Trefis price estimate for the stock.
EMC acquired XtremIO in mid 2012 to improve its flash memory storage offerings, and this is reflected by growth in its high-end storage network. Through its Velocity program, the company has signed up major providers such as Verizon-Terremark, Singapore Telecommunications and AT&T to provide private cloud networks, and we expect this division to grow significantly in 2013.
The Pivotal Initiative Provides New Growth Opportunities
In an attempt to gain market share of the $2 billion and rapidly growing hosted web services market, EMC and VMware have announced the Pivotal Initiative led by Paul Maritz, Chief Strategy Officer of EMC. The companies will commit key technologies, people and programs to focus on Big Data and Cloud Application Platforms. This market is currently dominated by Amazon (AMZN) with its Amazon Web Services and Microsoft‘s (MSFT) Azure Cloud and Google Cloud Platform (The Pivotal Initiative, blogs.vmware.com, Dec 4, 2012). This will enable EMC and VMware to focus on their core competencies while pursuing the growing cloud services market.
We have a $52 Trefis price estimate for EMC, which is significantly higher than the current market price.
Disclosure: No positions.