EMC (EMC) recently reported its first-quarter results. It posted revenue of $5.39 billion, rising 5.4% year over year. This result was slightly below consensus estimates of $5.43 billion, but it came as a relief for investors, as its other peers reported worse results. Its information storage system, which mostly contains its flagship VMAX products, grew more than 10% year over year. This was mainly because of the increased spending from its customers for deploying private and public cloud. However, there have been concerns about its unified and backup/recovery products, as the revenue from this segment dropped 2% on a year-ago basis.
What lies ahead in storage?
EMC is currently going through a product transition on its VNX product line. This has caused consumers to pause from purchasing in the first quarter, as they were waiting for new products to assess their requirements. This was also one of the reasons for its negative performance from unified and backup/recovery products, as VNX products sales declined by 10% year over year in this quarter. VNX products were launched in 2011 and have since been gaining traction in the market.
Earlier it was expected that these launches would take place in the second quarter, but the company recently announced that it will happen in the second half of this year. This creates a risk for EMC, as customers may look for other options meanwhile.
NetApp (NTAP) seems to be in a better position to gain out of this situation, as it has recently refreshed its FAS storage product line, which is in direct competition with EMC's VNX line. Analysts expect that NetApp is benefiting from high end FAS6250 and FAS6290 products, which were launched in February 2013. Also, it is estimated that its midrange 3000 series products are experiencing better sales because of its launch of new products FAS3220 and FAS3250 in November 2012. It will be interesting to see if EMC's VNX refresh results in a decline of NetApp's sales, once its new VNX products are launched.
Pivotal a long-term opportunity
EMC recently created a new company named Pivotal, which is made from business units of EMC and VMware (VMW). It will focus on providing infrastructure for big data cloud applications. According to a report, it is expected that big data revenue will grow to $53.4 billion in 2016 from $5.1 billion in 2011, showing cumulative growth of a whopping 58%. It is expected that this growth will increase demand for applications developed in this market. Pivotal is expected to generate revenue of $300 million in 2013, which will grow to $1 billion within 5 years. Though this is a long term opportunity for EMC, it won't generate cash for EMC until 2015. EMC has mentioned that Pivotal will require an investment of $400 million in 2013 and 2014.
In a recent development, Pivotal got funding of $105 million from General Electric (GE) in exchange for a 10% stake in the company. This funding is seen as positive for both companies. Through this investment, GE will be able to deploy big data applications for its industrial customers, which are generating huge data. GE expects to create applications for analyzing data generated from these machines to help its customers increase efficiency. This is an addition to GE's current focus on software development. In 2012, GE opened a new facility dedicated to software development for its industrial service offerings.
EMC's slight miss of quarterly results came in due to difficult macro environment and purchasing delay because of its expected product update. These updated products should boost sales once they are launched. On a longer term, Pivotal provides huge opportunity for EMC when it comes to big data growth. However, in the short term, it will require funding for the initial two years.
One more positive catalyst to be considered is its huge cash flow. EMC generated free cash flow of $1.44 billion in the first quarter and expects to generate $5.5 billion in this year. As the management has mentioned that it is looking to return cash to shareholders, we can expect a dividends announcement soon. This is expected to take place before the end of 2014.
Considering all these factors, I recommend buying this stock for long-term growth and gaining dividends.