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
Mon, Jul. 18, 5:35 PM
Wed, Apr. 20, 12:54 PM
- With EMC (EMC +3%) shareholders getting part of their Dell deal payout in the form of a VMware tracking stock, EMC is posting solid gains as VMware rises 13.6% in the wake of a Q1 beat, strong Q2 guidance, and news of a $1.2B buyback.
- EMC itself missed Q1 estimates, thanks to a 6% Y/Y drop in Information Storage revenue to $3.45B. Within the segment, product revenue (drives future services revenue) fell 10% to $1.96B, while services revenue rose fractionally to $1.49B.
- EMC says sales were hurt by "a higher than expected build in unshipped storage product orders of approximately $75 million due to the timing of bookings within the quarter." Cloud storage adoption and an industry mix shift away from high-end storage arrays have also been headwinds. An 8% Y/Y drop in operating expenses for EMC's core Information Infrastructure unit (includes Information Storage) allowed EPS to remain flat Y/Y.
- CEO Joe Tucci reiterates EMC expects the Dell deal to "happen on the original terms and within the originally announced timeframe." EMC has previously guided for the deal to close by October.
- EMC's Q1 results, earnings release
Wed, Mar. 2, 12:05 PM
- Pure Storage (PSTG +2.7%) is up 16% on the week ahead of this afternoon's FQ4 report. Shares are still ~$1.50 below their $17 October IPO price.
- Pure's gains come after EMC unveiled the first all-flash array from its DSSD unit (acquired in 2014 for a reported $1B) on Monday morning. EMC shared impressive specs for its first DSSD array, known as the D5: Up to 10M IOPS and 100GB/s of bandwidth, 144TB of storage in a 5-rack-unit form factor, and - with the help of direct PCIe links to servers - just 100 microseconds of latency (on par with PCIe server flash cards). However, given the hype surrounding DSSD over the last two years, some Pure investors might be breathing a sigh of relief.
- DSSD's arrays target performance-intensive analytics, database, and data-processing applications. EMC also services the all-flash array market via its XtremIO arrays, and has just launched (in tandem with the D5) all-flash offerings for its high-end VMAX array line. The company thinks all storage used for production apps will be flash-based by 2020, with hard drives used mainly for bulk and archive storage (Pure is unlikely to disagree).
- Elsewhere in the market, NetApp is set to buy Pure rival SolidFire for $870M, and Nimble Storage (has traditionally sold more to SMBs than enterprises) recently showed off its first all-flash arrays.
Wed, Jan. 27, 3:29 PM
- "We have a binding, solid merger in place," said EMC (EMC -1.2%) CEO Joe Tucci on his company's Q4 earnings call, insisting Dell's acquisition of EMC will occur in spite of the decline seen in both EMC shares and the value of EMC's 80% VMware (VMW -9.3%) stake. "We are confident we’ll meet contractual terms. There are significant penalties in place both ways if this doesn’t happen ... The banks have told us they can raise the money."
- With all eyes on the Dell deal, EMC didn't bother providing formal guidance in its Q4 report. The company's core Information Infrastructure unit saw revenue drop 4% Y/Y in Q4 to $5.07B (-1% exc. forex), with Information Storage sales dropping 4% to $4.65B.
- Exec David Goulden: "Customers are buying ‘just enough’ and ‘just in time’ for their traditional environments." Cloud storage adoption and the growth of upstarts such as Nutanix and Pure Storage have been weighing on sales.
- VMware, meanwhile, has been downgraded to neutral ratings by Baird and Summit Research in response to its soft Q1/2016 guidance (was accompanied by a Q4 beat, a job cut announcement, and news of CFO/COO Jonathan Chadwick's departure). Summit's Srini Nandury: "While the billings will likely be better, we do not expect license revenue growth to return to mid-single digits until middle of next year."
- Pac Crest's Rob Owens (Sector Weight rating): "Emerging businesses showed some bright spots, but the core compute business remains a large portion of the revenue mix, which sets up 2016 for declines in growth. Investor concerns also are likely to persist over the Dell acquisition and the issuance of a tracking stock. We wait for signs of stabilization before becoming more constructive on shares.”
- Weak sales for VMware's core vSphere/ESXi server virtualization platform continue weighing: On its earnings call (transcript), VMware stated compute license bookings (server virtualization) fell by a low-double digit % Y/Y in Q4, and forecast declines will continue. Management license bookings, which include cloud management, the NSX SDN/network virtualization platform, and the vSAN storage virtualization platform, rose by a low-teens %.
- End-user computing license bookings (PC virtualization/enterprise mobility) were a strong spot, rising over 20% Y/Y. The NSX annual bookings run-rate is now above $600M (up ~3x from a year ago), and the vSAN run-rate "well over" $100M.
- EMC: Q4 results, earnings release. VMware: Q4 results, earnings release.
Tue, Jan. 26, 5:51 PM
- VMware (NYSE:VMW) has guided on its earnings call for 2016 revenue of $6.8B-$6.9B and EPS of $4.07-$4.16, below a consensus of $7.21B and $4.20. Q1 EPS guidance of $0.83-$0.85 is below a $0.92 consensus.
- Initially up after hours in response to VMware's Q4 beat, shares have now fallen to $46.09, making new 52-week lows in the process. The results/guidance have been accompanied by news CFO/COO Jonathan Chadwick is leaving (he'll be replaced as CFO by EMC CFO Denis Cashman) and that the company is cutting 800 jobs (100 less than previously reported).
- Parent EMC, whose shareholders are due to receive a VMware tracking stock as part of their Dell acquisition payout, is down 1.8% after hours to $23.86 ahead of tomorrow morning's Q4 report.
Tue, Jan. 26, 4:26 PM
- VMware (NYSE:VMW) uses its Q4 report to state CFO/COO Jonathan Chadwick "has decided to leave VMware and expands his advisory roles, working with a number of companies as a non-executive board member."
- He'll be replaced as CFO (but not COO) by EMC CFO Zane Rowe. EMC vet Denis Cashman is the storage giant's new CFO.
- VMware is higher in response to its Q4 beat; license revenue rose 6% Y/Y, towards the high end of a 3%-7% guidance range. EMC is up 0.6% after hours. VMware typically provides guidance during its earnings call (starts at 5PM ET).
- VMware's Q4 results, earnings release
- Update: VMware has also confirmed its rumored job cuts. 800 positions will be eliminated, slightly less than the 900 previously reported. A $55M-$65M charge is expected. (8-K filing)
Tue, Jan. 19, 4:20 PM
- Though the Nasdaq fell just 0.3%, a healthy number of beaten-up tech names tumbled to new 52-week lows today, often on strong volume. Margin calls, panic selling, and fund liquidations are on the list of potential culprits.
- The casualty list once more includes action camera vendor GoPro (GPRO -7.8%) and video processor supplier Ambarella (AMBA -6.3%). It also features threat-prevention tech provider FireEye (FEYE -6.8%), virtualization software giant VMware (VMW -6%), and driver-assistance system provider Mobileye (MBLY -5.4%).
- The list also features unified threat management appliance vendor Fortinet (FTNT -6.4%), microcontroller maker Cypress Semi (CY -6.1%), card-reader/payments provider Square (SQ -7.8%), security software/services provider Rapid7 (RPD -9.7%), and enterprise cloud-storage/file-sharing service provider Box (BOX -7.7%).
- EMC (EMC -2.6%), still set to be acquired by Dell (with part of the payout consisting of a VMware tracking stock), felt the effects of VMware's selloff. Mobileye saw Citron Research take another shot via Twitter. "$MBLY CItron not making the $GPRO mistake, stock is still overvalued as a teenager. At $10 it is still an EXPENSIVE $1.8 bil company."
- Square, meanwhile, is now less than 6% above its $9 IPO price, and 15% below a post-IPO opening trade of $11.20. Rapid7 is 11% below its $16 IPO price, and 47% below an opening trade of $26.75.
- Also falling hard today: Solar stocks, Twitter
Wed, Jan. 6, 6:09 PM
- Gabelli & Co. has put out its "Best Ideas" analyst roll-up for 2016, and in the technology, media, telecom area, it's highlighting a set: CBS, TRCO, TMUS, LMCA and EMC.
- The company's analysts see T-Mobile (TMUS -0.4%) as an attractive acquisition candidate -- “essentially the only way for a domestic or foreign company to enter the U.S. wireless market in a meaningful way" -- and Sergey Dluzhevshiy names Dish Network (DISH -2.3%) or Charter (CHTR -0.5%) as possible suitors.
- Meanwhile, the analysts see "more things that can go right for Tribune Media (NYSE:TRCO) than wrong," and echo Les Moonves' frequent assertions that CBS is "uniquely positioned to compete in a more fragmented and competitive U.S. TV ecosystem.”
- And Gabelli reiterated its Buy rating on EMC (EMC -1%), which it calls the market leader in enterprise storage.
- After hours: DISH +0.4%; CHTR -0.2%; EMC flat.
Nov. 24, 2015, 2:55 PM
- Re/code reports EMC (EMC +0.7%) and VMware (VMW +5.8%) shareholders are pushing for a series of moves meant to make Dell's planned acquisition of EMC more palatable.
- Specifically, they want VMware to buy back up to $3B worth of shares, EMC and VMware to unwind their Virtustream public cloud services JV (believed to be hurting VMware's shares due to Virtustream's expected losses), and shareholder rights and protections for the proposed VMware tracking stock (part of Dell's payout) that more closely match those of VMware's common shares.
- "They have to improve the deal, and if they don’t, we’re going to vote against it — and a lot of other people are going to vote against it," says a shareholder whose firm is said to own several million EMC shares. A source "familiar with Dell and Silver Lake's thinking" states the tracking stock demand is the one least likely to be met. By contrast, Bernstein thinks the Virtustream JV could soon unravel.
- VMware, battered this fall due to soft Q4/2016 guidance and the impact of a tracking stock on its public share supply, has risen following the report. Re/code reported two weeks ago IRS tax issues related to the tracking stock plans could derail the Dell deal.
Nov. 10, 2015, 3:38 PM
- "Regarding the IRS treatment of the VMware (VMW +2%) tracking stock, the Re/code reporter is wrong/wronger/wrongest," says Seeking Alpha contributor Chris DeMuth.
- "Will Dell attorneys be well compensated for handling the tax issues associated with this tracking stock? Yes. Will it ultimately prove to be a problem for the deal? No.”
- EMC -2.15%
- Previously: Report: VMware tax issues could derail EMC/Dell deal (Nov. 10)
Nov. 10, 2015, 11:34 AM
- Dell is worried it could "end up being on the hook for a tax bill of up to $9 billion" related to its planned acquisition of EMC (EMC -1.7%), Re/code reports. At issue is the potential for the IRS to treat Dell's plans to create a VMware (VMW +1.3%) tracking stock to partly pay for the EMC deal as a taxable distribution, given VMware is an EMC subsidiary.
- If the IRS was to make such a ruling, Dell would have to take on even more debt to finance the EMC deal. As it is, the post-merger company stands to have $50B in debt. Sources state the deal could be derailed entirely in a worst-case scenario.
- Tax lawyer Michael Solomon thinks Dell has to convince the IRS it's effectively giving EMC shareholders (through the VMware tracking stock) a stake in Dell. "The deal raises a factual question as to whether or not the EMC shareholders are basically getting stock in Dell as the result of this merger. If yes, then I expect the IRS would approve it. If it’s deemed to be a constructive distribution of the VMware subsidiary, in that case the deal fails."
- EMC has moved lower following the report, while VMware, which tumbled when the deal was originally announced due to the tracking stock's potential to significantly boost its available public shares, has risen.
- Dell's planned payout to EMC has a present value of $30.75/share - $24.05/share in cash and $6.70/share worth of VMware tracking stock (worth less than at the time of the deal announcement due to VMware's October post-earnings selloff). EMC currently trades at $25.42.
Oct. 21, 2015, 8:34 AM
- Throwing in the towel with downgrades from Buy/Outperform following last night's results and guidance are BAML, Susquehanna, Pac Crest, RayJay, Maxim, Sterne Agee, Atlantic Equities, and Monnes, Crespi, Hardt.
- The one defender at the moment is Barid, which reiterates its Outperform rating, though cutting the price target to $80 from $95. "Management cited a secular shift related to cloud computing adoption as a contributor to lower-than-expected billings growth in the quarter. This is not a new challenge for VMware (NYSE:VMW) ... We continue to view VMware as the best positioned software infrastructure provider for the software defined data center and hybrid cloud computing."
- Shares -11.4% to $60.90 in premarket action. EMC -2.8% to $26.71.
- Previously: VMware, EMC creating cloud services JV; VMW falls due to guidance (updated) (Oct. 20)
- Previously: VMware beats by $0.02, beats on revenue (Oct. 20)
Oct. 20, 2015, 5:44 PM
- In tandem with VMware's (NYSE:VMW) Q3 report, VMware and parent EMC (set to be acquired by Dell) announce they're forming a cloud services JV (each company owns 50%) under the brand of enterprise cloud infrastructure (IaaS) services and software provider Virtustream (recently acquired by EMC for $1.2B).
- In addition to Virtustream's IaaS services, the business will contain VMware's vCloud Air IaaS platform, VCE's Cloud Managed Services business (provides cloud services running on VCE's converged infrastructure systems), and EMC's managed storage services. The new Virtustream promises to ""will integrate these assets to provide customers with a unified infrastructure-as-a-service offering," and to "integrate and extend existing on-premises EMC Federation private cloud deployments into the public cloud."
- Virtustream CEO Rodney Rogers will run the business, which is expected to produce "hundreds of millions of dollars" in 2016 revenue, and will face stiff competition from the likes of Amazon, Microsoft, and IBM. Meanwhile, VMware will create a cloud software unit servicing vCloud Air and other service providers, and which will contain both existing VMware tools and Virtustream's software.
- The new Virtustream is separate from EMC and VMware's Pivotal JV (created in 2012, IPO plans still on hold), which provides cloud app platform (PaaS) software/services, software development tools, and analytics hardware/software.
- VMware has dropped after hours in spite of posting a Q3 beat. Guidance is the apparent trigger. VMware guided on its earnings call for high-single to low-double digit 2016 revenue growth (consensus is at 10.9%). Q4 EPS guidance is healthy: $1.23-$1.27 vs. a $1.23 consensus.
- VMware's Q3 results, earnings release
- Update (6:31PM ET): VMware's earnings slides (.pdf) are up. In addition to providing 2016 revenue guidance, the company forecasts op. margin will drop to ~28% in 2016 from 2015's 31.8%. Shares are now down 5.8%.
- Update 2: Also of note: Q4 revenue guidance of $1.825B-$1.875B is slightly below a $1.88B consensus. License revenue is expected to rise 3%-7% Y/Y in Q4, after growing 7% in Q3 to $681M.
- Update 3: VMware closed after hours trading down 3.4%.
Oct. 12, 2015, 6:32 PM
- Thanks to VMware's (NYSE:VMW) 8.1% drop in regular trading, the official value of Dell's buyout offer for EMC ($24.05/share in cash + 0.11 shares of a VMware tracking stock) fell from $33.15/share to $32.00/share. However, that's still 13% above EMC's $28.35 closing price.
- Part of the discount likely stems from expectations VMware tracking stock will trade at a discount to its regular shares, given the tracking stock will have no voting rights or access to dividends (should VMware begin paying one). Nonetheless, some M&A arb traders see a compelling opportunity, assuming the tracking stock trades at a moderate discount.
- There's speculation another tech giant could bid for EMC during its go-shop period. But there haven't been any formal reports of buyout interest, and EMC's current price suggests markets are skeptical of a rival bid arriving. HP (NYSE:HPQ) used today's news to trash-talk EMC/Dell - "Two of our largest competitors are attempting a highly distracting, multi-year merger, just as we are launching two new, focused companies." - while Dell server/networking rival Cisco (NASDAQ:CSCO) affirmed its partnership with EMC.
- Meanwhile, several analysts defended VMware as shares tumbled thanks to the EMC/Dell news and VMware's Q3 pre-announcement - revenue and EPS are expected to top estimates, but billings growth of 3% Y/Y fell short of expectations. Cowen's Gregg Moskowitz: "While we believe this deal certainly could have been better structured (i.e. there is no collar on VMW's stock), and the billings were disappointing, the selloff nonetheless looks clearly overdone, as we expect no meaningful impact to VMW's strategy or operations."
- MKM's Kevin Buttigieg: "At the current intraday price of $71, VMW is 13x CY16 consensus EPS excluding net cash of $13/share, a level we think presents tremendous value, though likely requires patience given uncertainty around the Dell deal." On this morning's conference call, departing EMC CEO Joe Tucci suggested Dell is looking to up its VMware stake over time.
Oct. 12, 2015, 9:18 AM
- VMware (NYSE:VMW) has fallen to $73.20 premarket after EMC and Dell confirmed the latter is buying the former for $67B - the deal value is now a bit lower thanks to VMware's selloff - with part of the consideration consisting of a VMware tracking stock that stands to significantly increase the company's publicly-traded share count.
- Also: In tandem with the deal, VMware has pre-announced it expects Q3 revenue of $1.672B (+10% Y/Y, +14% exc. forex) and EPS of $1.02, slightly above a consensus of $1.66B and $0.99. License revenue is expected to be at $681M (+7% Y/Y), in-line with guidance for 6%-7% growth. Total revenue + sequential change in unearned revenue is only expected to be up 3% Y/Y. Full Q3 results are due on Oct. 20.
- Though overshadowed by the Dell deal, EMC has also pre-announced: It expects Q3 revenue of $6.05B-$6.08B and EPS of $0.43, below a consensus of $6.25B and $0.45. The company partly blames "a higher than expected build in unshipped storage product orders of approximately $100 million due to the timing of bookings." Smaller peer Quantum recently reported something similar.
Oct. 12, 2015, 7:41 AM
- EMC owners will receive $24.05 per share in cash, along with a tracking stock in VMware (NYSE:VMW) linked to a portion of EMC's ownership in the company. Based on current numbers, EMC shareholders will receive about 0.111 shares of the new tracking stock for each share of EMC they own. Based on the recent price for VMW, it implies total consideration of $33.15 for each share of EMC - a deal value of about $67B. There are no financing conditions on the closing.
- The purchase is expected to close sometime between May and October next year.
- EMC and VMware are holding a joint CC starting in a few minutes, and Dell and EMC will host a call at 8:45 ET.
- EMC +4.8% to $29.20 premarket.
- Previously: EMC confirms Dell deal; call coming in 25 minutes (Oct. 12)
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
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