Over 20% Upside For EMC
Chris DeMuth Jr. • 43 Comments
Chris DeMuth Jr. • 43 Comments
EMC: As Growth Begins To Accelerate, Shares Remain Undervalued
Helix Investment Research • 12 Comments
Helix Investment Research • 12 Comments
Aug. 31, 2015, 3:58 PM
- On day one of VMware's (VMW +2.1%) annual VMworld conference, CEO Pat Gelsinger has downplayed reports EMC's (EMC -0.4%) board is mulling a downstream merger through which VMware would acquire its parent company using a mixture of stock and cash/debt. Gelsinger reiterates the company line that EMC/VMware's current "federation" structure is preferable to alternatives.
- VMware sold off last Wednesday on a Re/code report stating a downstream merger is being seriously considered. Elliott Management, whose standstill agreement with EMC ends tomorrow, was said to be willing to support such a deal, though it still prefers EMC fully spin off VMware.
Aug. 26, 2015, 12:54 PM
- EMC's board is "taking a second and closer look" at the idea of having VMware (VMW - 80%-owned by EMC) acquire the company, Re/code reports. The site, which originally reported such a deal (known as a downstream merger) was being considered in early August, adds a VMware purchase is "gaining favor" among director following EMC's recent selloff.
- Also: Sources state the board has decided CEO Joe Tucci "must step down from that role" before year's end. Tucci, who has delayed his retirement, reportedly opposes a downstream merger.
- The report comes ahead of the Sep. 1 expiration of a standstill agreement with activist Elliott Management, which (though still preferring a spinoff of VMware by EMC) has reportedly indicated it would support a downstream merger. The deal would involve VMware issuing ~$50B worth of shares, and making a cash payout by issuing ~$10B worth of debt.
- Yesterday: EMC hit hard as markets give back gains; VMware sees execs depart
Aug. 26, 2015, 9:14 AM
Aug. 25, 2015, 4:31 PM
- EMC fell 4.6% on a day the Nasdaq fell 0.4% and the S&P 1.4%, after (like many other names) opening the day with solid gains. 26.6M shares were traded, topping a 3-month daily average of 14.8M. Subsidiary VMware (NYSE:VMW) was down a relatively modest 1%.
- VMware has seen a couple of high-profile executive departures in recent days: CTO Ben Fathi recently told CRN he left the company, and Chuck Hollis, VMware's chief strategist for storage and availability, announced over the weekend he's departing. Fathi was only named CTO in early 2014; Hollis joined VMware in 2013, following 19 years at EMC proper.
- Separately, VMware has launched Fusion 8 and Workstation 12, the latest versions of its PC virtualization products - Fusion allows Windows to run on Macs, while Workstation allows multiple virtual machines to run on Windows systems. Both Fusion 8 and Workstation 12 offer Windows 10-related enhancements and an improved graphics engine.
Aug. 18, 2015, 6:20 PM
- Paul Maritz, VMware's (NYSE:VMW) CEO until 2012 and rumored to be a potential successor to Joe Tucci as EMC's CEO, has stepped down as the CEO of EMC and VMware's Pivotal analytics/cloud app platform unit. He'll remain Pivotal's executive chairman.
- Rob Mee, co-founder of the unit's Pivotal Labs division (provides software/services for businesses looking to embrace Agile software development), is the new CEO. Maritz, 60, suggests he'll now spend more time advising companies he has invested in, and working on a non-profit.
- Pivotal, spun out of EMC/VMware in late 2012, had Q2 revenue of $64M (+19% Y/Y). The unit's IPO plans have been put on hold as it works to grow sales and fend off rivals such as Microsoft, IBM, Red Hat, Hortonworks, and Cloudera. In 2013, GE paid $105M for a 10% stake.
Aug. 10, 2015, 1:32 PM
- VMware (NYSE:VMW) CEO Pat Gelsinger has told Israel's Calcalist his company has no interest in acquiring parent EMC (EMC +0.5%), arguing the status quo suits both companies well.
- Re/code reported last week EMC is considering a deal in which VMware would buy its parent, along with other strategic options. VMware sold off on the report, while EMC rallied.
- Echoing a common view, UBS' Steve Milunovich argued today such a deal would be a positive for EMC shareholders, and a negative for VMware shareholders. Last week, BMO's Keith Bachman noted either a VMware purchase of EMC or the opposite could be accretive (depending on financing), but called both potential deals "suboptimal compared with splitting up the company and selling the pieces."
- VMware has rallied back above $87. EMC is up modestly on an up day for stocks.
Aug. 5, 2015, 3:57 PM
- Two days after Re/code speculated EMC may be close to acquiring the ~20% of VMware (NYSE:VMW) it doesn't own, the site reports (citing sources) EMC is considering a scenario in which VMware would acquire EMC proper, along with other strategic options.
- Under such a scenario, known as a downstream merger, VMware would issue new shares in exchange for EMC shares, and also deliver a cash payout financed via debt.
- Re/code also notes EMC has considered selling itself to HP (previous) and Cisco, as well as making big acquisitions. The likely catalysts: CEO Joe Tucci wants to leave EMC on better footing before stepping down, and the company is looking for ways to lower its dependence on a core storage business pressured by public cloud storage growth and competition from flash/hybrid array upstarts.
- EMC has risen on the report, while VMware is off sharply.
Aug. 3, 2015, 2:52 PM
- A mid-day Re/code column stating EMC (EMC -2.4%) "may be getting close" to potentially acquiring the ~20% of VMware (VMW +1.6%) it doesn't own (i.e. do a spin-in) has led the latter's shares to rise. The former's have remained lower on a down day for equities.
- Re/code notes EMC CEO Joe Tucci mentioned on the Q2 earnings call (transcript) EMC could reap over $1B in synergies if EMC gets "tighter aligned" with VMware. It also speculates Tucci may want a "grand exit" ahead of his expected retirement.
- RBC's Amit Daryanani estimates fully merging EMC and VMware could yield nearly $950M in 2016 cost savings, and (thanks partly to the fact EMC would own 100% of VMware's earnings instead of 80%) boost EMC's EPS by $0.40-$0.50.
- Activist Elliott Management has, of course, been calling for EMC to fully spin off its VMware stake. EMC officially decided against making such a move earlier this year, citing product synergies between the companies. The fact VMware (Q2 revenue +10% Y/Y) continues to grow much faster than EMC's core Information Storage ops (Q2 revenue +1% Y/Y) might have also influenced EMC's decision.
Jul. 31, 2015, 8:40 AM
- EMC (NYSE:EMC) declares $0.115/share quarterly dividend, in line with previous.
- Forward yield 1.72%
- Payable Oct. 23; for shareholders of record Oct. 1; ex-div Sept. 29.
Jul. 23, 2015, 10:01 AM
- Four months after downgrading EMC (EMC +2.1%) to Market Perform in the wake of its investor meeting - a lack of near-term catalysts was cited - Wells Fargo's Maynard Um has upgraded back to Outperform in the wake of the storage giant's Q2 report, while setting a $29-$31 valuation range.
- This time, Um cites the potential for positive strategic moves by year's end, including (curiously, given many others have argued a full spinoff would be a positive) a buy-in of the ~20% of VMware EMC doesn't own.
- Meanwhile, during yesterday's earnings call (transcript), CEO Joe Tucci stated EMC has launched a program to lower its cost base by $850M/year by the end of 2016. Only $50M worth of cost savings are expected this year.
- Tucci also mentioned EMC's board is "deeply engaged in a smart navigation" of its CEO succession process. Three years ago, Tucci suggested he would retire by Feb. 2015.
- Shares +4.2% since EMC posted a Q2 EPS beat and offered light guidance on Wednesday morning.
Jul. 22, 2015, 10:22 AM
- With expectations low going in - a raft of downgrades have arrived in recent months, EMC is higher in spite of guiding for 2015 revenue of $25.3B and EPS of $1.87, below a consensus of $25.6B and $1.90. Full-year free cash flow guidance has been cut by $100M to $4B.
- Product revenue remained under pressure in Q2, falling 3% Y/Y to $3.22B. Services revenue (driven by past product sales) rose 8% to $2.77B. Gross margin fell 190 bps Y/Y to 61.9%, and op. margin fell 320 bps to 19.4%.
- EMC's core Information Storage ops saw revenue rise 1% Y/Y to $4.03B. High-end storage sales fell 13% to $892M and unified & backup/recovery sales (mid-range) fell 9% to $1.43B, but emerging storage (flash, scale-out NAS, object storage) rose 49% to $718M, "other" storage (includes VCE's converged systems) rose 18% to $496M.
- VMware (up 3.6%) saw revenue rise 10% Y/Y to $1.6B, with license revenue rising 4% to $638M; guidance was in-line. End-user computing (PC virtualization/enterprise mobility), NSX (networking virtualization/SDN), and VSAN (storage virtualization) were strong points for VMware, while traditional vSphere server virtualization licenses were soft. RSA Security revenue fell 2% to $238M, and ECD (content management software) revenue fell 3% to $155M.
- $718M was spent on buybacks. EMC still plans to buy back $3B worth of shares in 2015.
- Q2 results, PR, earnings slides (.pdf)
Jul. 22, 2015, 7:01 AM
- EMC (NYSE:EMC): Q2 EPS of $0.43 beats by $0.02.
- Revenue of $6.1B (+3.7% Y/Y) in-line.
Jul. 21, 2015, 9:35 PM
- After posting a Q2 beat, VMware (NYSE:VMW) guided on its CC for Q3 revenue of $1.645B-$1.665B (+9%-10% Y/Y) and EPS of $0.98-$1.00, in-line with a consensus of $1.66B and $1.00. Likewise, full-year guidance is for revenue of $6.575B-$6.685B (+9%-11% Y/Y) and EPS of $3.97-$4.03 vs. a consensus of $6.65B and $3.99.
- License revenue (drives future services revenue) rose 4% Y/Y in Q2 to $638M, at the high end of a 3%-4% guidance range. VMware forecasts 6%-7% Q3 license growth, and 5%-7% full-year growth (prior guidance was 4%-7%). Services revenue (fueled by past deals) rose 14% in Q2 to $959M.
- Notably, VMware's costly enterprise license agreements (ELAs) made up 39% of bookings, up from Q1's 30% and matching seasonally strong Q4's 39%. Seven $10M+ deals helped out.
- The NSX networking virtualization/SDN platform now has 700+ paid customers, up from 400+ at the beginning of the year. VSAN storage virtualization customers have doubled over the same time to 2K+.
- End-user computing (EUC) license bookings rose over 30% Y/Y; desktop and AirWatch (enterprise mobility) license bookings respectively rose over 15% and 60% Y/Y in constant currency. When contrasted with VMware's total license growth, the EUC, NSX, and VSAN numbers suggest traditional vSphere server virtualization license sales remain under pressure.
- The unearned revenue balance rose 10% Y/Y to $4.8B. $412M was spent on buybacks; VMware expects to buy back $1.25B in 2015. Forex had a 4% impact on revenue growth.
- VMW +0.7% AH to $83.75. Parent EMC reports Wednesday morning.
- Q2 results, PR, earnings slides (.pdf)
Jul. 21, 2015, 5:30 PM
Jul. 14, 2015, 11:05 AM
- Summit Research has downgraded EMC (EMC -1.4%) to Hold ahead of the storage giant/VMware owner's July 22 Q2 report, and cut its target by $8 to $26. OTR Global has downgraded from Mixed to Positive.
- Shares are less than $0.60 removed from a 52-week low of $25.07. They now trade for 12x a 2016 EPS consensus of $2.12.
- Yesterday: Einhorn exits EMC position in Q2
- Update: EMC closed down 3.2%.
Jul. 13, 2015, 4:32 PM
- "When the company announced a confusing merger with Alcatel-Lucent ... we used the opportunity to exit with a healthy gain," writes David Einhorn in his Q2 letter, explaining Greenlight Capital's unloading of its Nokia (NYSE:NOK) position.
- Regarding his decision to exit EMC, Einhorn cites "the reduced odds of any favorable change to the corporate structure and increasing concerns about a lack of growth in the storage business." EMC is 4 months removed from formally stating it doesn't plan to spin off its 80% VMware stake.
- Regarding Marvell (NASDAQ:MRVL), a position held for years, Einhorn cites weak PC demand as a reason for exiting following a 15% compounded annual return. His disclosure comes on a day Marvell rose 5.4% thanks to a report of buyout interest from a Chinese investment firm.
- Echoing the bullish arguments he has made for rival Lam Research (NASDAQ:LRCX), Einhorn says he took a small position in Applied Materials (NASDAQ:AMAT) out of a belief AMAT's core etch/deposition equipment markets will outgrow the broader chip equipment industry "due to the increased use of 'multi-patterning' to produce chips at geometries below [20nm]." He predicts results will improve as management turns its attention from the abandoned Tokyo Electron merger towards "growth and cost savings opportunities." With Einhorn's help, AMAT rose 2.9% today.
- "It's a cyclical business and, regrettably, we missed the turn of the cycle," says Einhorn about Micron (NASDAQ:MU), Greenlight's biggest Q2 loser. However, he still thinks the DRAM industry is acting more rationally following consolidation, notes shares trade at "less than 12x annualized trough earnings and less than 5x prior peak earnings," and predicts future cycles will have higher peaks and troughs.
- Over the long run, Einhorn expects Micron ($19.1B market cap) to be worth more than Netflix (NFLX - $42.9B market cap), whose recent surge he considers quite unjustified. "In today's market, the best performing stocks are companies with exciting stories where accountability is in the distant future." He adds Season 3 of House of Cards "appeared to be scripted to compete with Ambien,"
- Worth noting: While Einhorn has a good track record going long, his short picks have been more hit-and-miss.
EMC Corp. is an information technology company, which develops, delivers and supports a range of information infrastructure and virtual infrastructure technologies, solutions and services. It enables businesses and service providers to transform their operations and deliver information... More
Industry: Data Storage Devices
Country: United States
Other News & PR