EMC (EMC) and Verizon (VZ) have just announced a new cloud computing partnership that will involve EMC, the giant data storage company and Verizon's managed IT infrastructure subsidiary, Terremark. Terremark will provide standard offerings in its private cloud business on EMC infrastructure for public and hybrid cloud deployments by its customers. In addition, the two companies are expected to work together on the development of new cloud-based services and products that use EMC storage, backup and replication. Verizon paid $1.4 billion last year for Terremark as an entry into the potentially lucrative infrastructure and cloud services business. The companies have been working together for almost 10 years now.
Earlier, EMC reported strong results for the first quarter and this is the ninth consecutive quarter in which the company has achieved growth in double digits for revenue, EPS and net income. Revenue for the first quarter was $5.1 billion, an increase of 11% on a year on year basis and net income rose by 23% to $587 million. First-quarter EPS was $.37 a share an increase of 29% over the figure of $.27 a share in the same quarter of the previous year. Operating cash flow was $1.7 billion and free cash flow amounted to $1.4 billion. The company ended the quarter with $10.7 billion in cash and equivalents. The revenues were divided roughly equally between the United States and the rest of the world. The company reported strong customer demand for its leading mid-tier storage products portfolio3 while the Isilon scale-out NAS business nearly doubled its revenue .RSA Information Security business showed an increase in revenue of 19% year over year while revenue from VMware, the global leader in virtualization and cloud infrastructure also grew substantially,
EMC is in the business of building infrastructure and virtual infrastructure to help companies to make the most of their digital information. The offerings include backup and recovery, enterprise content management, unified storage, big data, enterprise storage, archiving, security and so on. Strong demand for EMC products and services has driven their impressive growth over the last few quarters and is likely to do so in the foreseeable future. Isilon Star, an innovative product, has become a reader in the global scale-out NAS architecture businesses because of the powerful and flexible storage solutions that it offers. EMC has been aggressive when it comes to offering support to companies migrating to cloud-based services by offering an elaborate array of options.
One of EMC's major competitors is IBM (IBM) which has an impressive global market share and enormous financial strength. I believe that IBM has failed to capitalize on its impressive achievements in the past and is now facing problems such as adverse foreign exchange movements and a slowdown in growth in their services business. Hewlett-Packard (HPQ) is another major competitor that has its hands full with its own problems. Naturally HP is targeting a major growth in revenue but the result of its efforts will only become evident after the major restructuring has been accomplished. Seagate Technologies (STX) is a much smaller company that nevertheless competes fiercely. It has made a major breakthrough in technology by successfully testing hard drives with a storage density of 1 terabit per square inch which is likely to have a positive effect on earnings once it becomes more widely available.
Experts believe that EMC still has plenty of growth potential when compared to its major pure-play storage competitors such as NetApp (NTAP). Storage software is the most profitable business segment for the company and its global market share has increased significantly over a period of time. This growth is expected to continue for quite a while as the company continues to maintain its leadership position and provide new storage software solutions. Because the storage software is increasingly being bundled with hardware, the company's leading position in the global disk storage market should be of great help in driving growth and increased market share. The second important driver of growth is going to be the changing nature of storage software needs in the new phenomenon of big data and cloud computing. Business organizations will meet a stream of continuing new solutions. Naturally, competitors like IBM and HP are not going to sit back and watch and have the capability to take over market leadership. Another formidable competitor in the hardware business is Dell.
EMC has made several aggressive moves to beef up its cloud computing capabilities and the most recent one is the acquisition of Syncplicity, a provider of cloud-based file management software. This puts it in the Cloud file syncing and storage business and in direct competition with Dropbox, Microsoft (MSFT) and Google Drive. However, it should be noted that a number of large software users such as Facebook (FB) are resisting being pigeonholed into proprietary technology from companies such as EMC and Oracle (ORCL) and have started an open source initiative which has been joined by the likes of Goldman Sachs (GS) and Intel (INTC), EMC also has the financial muscle and the operating margins to put the kind of resources into research and development spending that is required to keep it right at the forefront of the race.
EMC has a solid track record of profitable growth and accomplishment and top-flight management. The problem is that the market has discounted its accomplishments completely. The stock is currently trading around the $24 level, and I anticipate the stock will rise back up to the $29 level over the next 12 months. I recommend buying this stock today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
