By Charles King, Pund-IT, Inc. April 30, 2014
EMC’s annual customer, user and partner conference—EMC World—kicks off next week in Las Vegas. So it seems like a good time to compare/contrast the company’s current position in the marketplace to its competitors and even to its own history, a point that was clarified in EMC’s recent earnings announcement.
Being in a state of constant change is common in many businesses, but it’s a fact of life in an information technology (IT) industry that continues to be roiled by elemental issues and events. Some of these are largely external, like the massive suffering triggered by the global economic crisis and depression in 2007-2008 and resulting regional political turmoil. But those events occurred less than a decade after the tech-inspired euphoria of the dot.com bubble infected and sickened broader markets and economies.
Other points focus far more specifically on IT. Once-dominant data center technologies continue to be swept aside by new solutions. The shift from mainframe systems to client/server/PC computing is just one such example. Still others are sparked by changes in IT-enabled user behavior, like the huge uptake in mobile computing products and social networking mechanisms. But all of these trends feed a fundamentally larger and more disruptive move away from centrally located/managed IT to far more flexible mobile, cloud, big data and social solutions.
The Third Platform
EMC refers to this shift as the “third platform,” a subject that was explored in depth by company executives, including chairman and CEO Joe Tucci and David Goulden, CEO of EMC’s Information Infrastructure organization at the company’s Q1 2014 earnings call on April 23.
You could say that EMC has been preparing for the Third Platform for over a decade. The company’s acquisition of VMware (completed in January 2004 for $625M) certainly allowed EMC to expand its sights far beyond its traditional data storage roots. But the deal also qualified as the opening salvo in what would eventually become a revolution in cloud computing.
Virtualization obviously isn’t the only technology required for cloud but it is a central enabler of those and related processes. VMware’s continuing strong virtualization leadership (despite opposition from formidable opponents, including Microsoft and Citrix) has also allowed EMC to maintain a central role in cloud and other Third Platform markets, like software-defined data center (SDDC) solutions.
Overall, we agree with Joe Tucci’s assessment that VMware will continue to drive SDDC and hybrid cloud markets and implementations. We also expect EMC’s Third Platform position to strengthen and gain momentum via company technologies such as Pivotal’s Cloud Foundry open source platform-as-a-service (PaaS) initiative and Foundation with partners, including IBM, HP, Pivotal, Rackspace and SAP.
Taking the Long View
Though EMC’s acquisition of VMware (which drove over $5B in revenues during the past 12 months) qualifies as the literal gold standard of IT deals, it reflected a broader strategy that essentially transformed the company through innovative external purchases and organic development. After VMware, EMC pursued and completed numerous acquisitions that have since become sources of inspiration, revenues and commercial opportunities, including Avamar, Data Domain, Isilon, RSA, Greenplum, XtremeIO, and Pivotal Labs.
The critical importance of those moves was clear in EMC’s recent earnings announcement. Year over year (YoY) Q1 revenues from EMC’s Information Infrastructure (EMCii) organization, including traditional storage platforms declined 3% (with particular softness in the company’s enterprise Symmetrix VMAX sales). But some areas fared better, like dedicated back-up and recovery solutions where its Data Domain continues to lead the market. Plus, EMC’s emerging storage solutions, which include Isilon, Atmos, VPLEX, ViPR, XtremIO and other products grew at 81%. Third Platform- and SDDC-related technologies also performed well. In particular, YoY revenues from Pivotal grew 41% and VMware rose 16%.
EMC’s emerging businesses also contributed measurably to its bottom line. For example, David Goulden noted strong momentum in the company’s 20TB XtremeIO systems which helped drive over 17PBs of flash capacity sales in Q1 (up over 70% YoY). Another crucial area is converged virtualized infrastructures which EMC pursues with its own VSPEX solutions and via its partnership position (along with Cisco and VMware) in VCE. In fact, VCE exited 2013 in strong fashion with a demand run rate of $1.8B and then saw Q1 sales of its Vblock systems grow 50%+ YoY, with over half of those sales going to new customers.
Though there were ample high points in EMC’s earning announcement, the company also faces considerable current and future challenges. Many of these affect every IT vendor—continuing economic woes in key existing and emerging markets and disruptions related to the rise of Third Platform solutions and services. This last point is particularly painful to storage vendors who have seen market opportunities erode as cloud players abandon traditional hardware channels for “white box” storage arrays manufactured by ODMs in a dynamic similar to that affecting the server industry.
But there are some issues that impact EMC more specifically. For example, the company’s sizable 80%+ stake in VMware has delivered technological and financial benefits. But when the company suffers disappointing results it tends to bring pain to EMC’s doorstep, as in VMware’s bookings weakness during the most recent quarter. Additionally, though the robust growth in emerging solutions is heartening, the actual benefits they deliver to EMC’s bottom line are still modest, especially when compared to its mature storage businesses.
Those issues aside, it is difficult to think of a storage vendor that is better positioned to shoulder through existing barriers and capture potential opportunities than EMC. Along with continuing to grow share in traditional storage hardware and software markets, the company’s strategy of tempering external acquisitions with continuing internal investment has resulted in an innovative collection of technologies, solutions, services and partnerships that has and should continue to benefit both existing and potential customers.
It’s common to find the sobriquet “built to last” used liberally in IT and other industries, but less attention is paid to what companies must do to achieve that goal. We believe that a close examination of EMC’s activities over the past decade and its most recent quarterly results provide a primer on building an IT organization to last. We expect these points to provide a foundation for the events and news the company will share next week at EMC World 2014.
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