EMC (NYSE:EMC) recently introduced the EMC Proven Solution for private cloud computing. The new solution will enable EMC's customers to move their SAP solutions to their private cloud infrastructures. The product will revolutionize the organizations by simplifying the work of the infrastructure equipped with the newest EMC, SAP, and VMware technologies. In this article, I want to show how a rise in the worldwide spending on the private cloud services sector will help EMC to increase its virtualization and cloud division revenues by 10% with the new product.
Why will the company accomplish this feat? As many companies search for a means to transform the way they provide a quality service to their customers, they increase their spending on the private cloud services sector as a backbone for a new set of infrastructural services. According to the International Data Corporation (IDC), the worldwide spending in the hoisted private cloud sector will be more than $24 billion in 2016. As a global leader in the virtualization and cloud sector, EMC will benefit from this trend with its new product. This will increase the revenues of the company's virtualization and cloud division.
EMC is well-positioned to grow in the private cloud sector and evolve to capitalize on its future opportunities. In the first quarter, its virtualization and private cloud division revenues grew 13% year-on-year through its subsidiary, VMware (NYSE:VMW). The cash flow for the division was $676 million, an increase of 17% from the first quarter of 2012.
"I am incredibly energized by the strength of our business model and the way we have positioned the company to lead this transformative era in information technology," said Joe Tucci, EMC CEO.
In the fourth quarter, the EMC virtualization and private cloud division recorded a revenue increase of 22% year-on-year. Its converged cloud infrastructure products enjoyed a rapid adoption among EMC's customers and patrons.
"We believe EMC is well-positioned to expand our leadership in the market segments we serve, deliver on our triple play again in 2013, and leverage our balance sheet to invest heavily in leading edge technology for cloud computing, Big Data, and trusted IT," said Tucci.
EMC And Private Cloud
EMC has unveiled a few strategies to extend its dominance in the private cloud sector in the recent past. In February, it introduced a range of the programs aimed at helping its partners to complete the cloud solutions that simplify their IT infrastructure. In March, EMC outlined its plans to extend the data centers of its customers with its private cloud offerings.
The newly introduced Proven Solution for private cloud computing will enable EMC partner organizations to simplify their IT management. It will reduce their cost of acquiring other products and increase their competitive advantage. It will also support a private cloud environment running on the SAP solutions.
"SAP and EMC embarked on a journey two years ago when we announced we would change the course of IT for our customers with game-changing solutions and services and we did. Together, we're ushering in a new era of IT transformation with our collaboration on private cloud technologies and SAP HANA. Through our shared visions and investments, we will continue to transform the way our customers leverage IT," said Prasad Rampalli, Senior Vice President, Solutions Group, EMC.
EMC is introducing the new products to meet a 2013 virtualization and cloud division revenue expectation in the range of $5.12 billion to $5.24 billion. Fortunately, the worldwide spending on the private cloud sector is increasing.
Looking at EMC's revenues, we note that the virtualization and cloud division made an impressive gain year-on-year. It is clear the revenues of EMC have been improved by the division. So it can be said that it is operating efficiently.
With a price-to-earnings ratio of 14.10, EMC is trading reasonably, especially given that it has a gross margin of 61.21%. The introduction of the new product will increase the revenues of the virtualization and cloud division by 10%, enable EMC to meet its revenue targets, and improve the company's earnings per share.
With price-to-sales of 2.18, compared with 3.85 for Microsoft (NASDAQ:MSFT) and 4.58 for Citrix (NASDAQ:CTXS), gross margin of 61.22%, compared with 76.64% for Microsoft and 82.92% for Citrix, EMC does appear to be operating at a competitive level. Microsoft and Citrix are EMC's great rivals in the private cloud market because they have competing product lines. However, EMC's new solution will make the company even more competitive and able to maintain its reputation for delivering a range of innovative private cloud solutions.
There are risks in buying EMC. Due to the turbulence in Europe, the company's revenues from the continent fell by 1% in the first quarter. However, its revenues from nations like India, Brazil, and others increased by 20%. And based on the quality of EMC's new product and the revenue prospects arising from the private cloud sector, we can say EMC will increase the revenues of its virtualization and cloud division. Looking at the company's price multiples, we still say its investors should buy EMC for the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.