Crunch time for EMC stock
- 17 July, 2007 09:28
Since 2003, when EMC launched its transformation from a simple hardware storage vendor to a multifaceted information-infrastructure provider, it has racked up 15 straight quarters of double-digit revenue growth and strong profits.
However, the company's stock price has been essentially flat over that period, an indication that for Wall Street at least, the jury is still out on whether EMC can deliver on its grand vision of information management.
Customers and industry analysts agree that the company has made great strides over the past few years in laying out its strategy and in making key acquisitions aimed at filling out its portfolio.
But they also agree that EMC still has work to do. Specifically, the company needs to:
-- Integrate its many acquisitions into a coherent product line.
-- Project a clear marketing message to customers and shareholders alike.
-- Retain the high regard it has from customers by making it easy for them to buy products and get service and support across product lines.
-- Deliver more profits.
Integration
Since its buying binge began with the acquisition of backup vendor Legato in 2003, EMC has pieced together components that will help its customers not only store data, but manage and secure enterprise data no matter where it resides on the network.
In addition to Legato, EMC has snapped up security vendors RSA Security, Network Intelligence and Authentica, virtualization players VMware and Rainfinity, content-management providers Documentum and Acartus, and management vendors ProActivity and Smarts. All told, EMC has spent US$7 billion to get more than 20 companies.
This dizzying pace has some customers wary. "It concerns me that so much acquisition will eventually cause integration difficulties for us," says Ann-Marie Horcher, senior groupware specialist at Dow Corning in Midland, Mich. She uses VMware and Documentum. "You can't expect everything to play together nicely," she says.
EMC appears to be on the same page as its customers when it comes to the integration issue. The company hasn't made any major acquisitions this year and Mark Lewis, executive vice president and chief development officer, says the buying spree is, for the most part, over.
"We're phenomenally well positioned with the assets we've built internally and those we've acquired over the last several years. Aside from smaller technology 'tuck-in' acquisitions, there are no large deals on the drawing board,'' Lewis says. (EMC did make one of those tuck-ins in early June, when its RSA division picked up tiny identity-verification services vendor Verid.)
"Integration of all this technology, woven together in a seamless orchestration -- what we refer to as information infrastructure -- is our strategic move, and will steer the way for the future of information management,'' he adds.
Integration is no small challenge, but EMC has made announcements indicating that it is a top priority. For example, at its May user group meeting, the company announced that by year-end it will begin delivering a common platform for managing the company's myriad storage lines.
Page Break
Marketing
On paper, EMC has been successful in transitioning from its core storage hardware business, which is becoming more of a commodity, into faster-growing and higher-margin software and services.
"In 2001, up to three of every four dollars in revenue were from hardware sales,'' says Brian Freed, an analyst at Morgan Keegan & Co. In 2006, software and services accounted for about 52 percent of EMC's business, compared with 48 percent for hardware.
Ultimately, however, success involves more than just adding new software revenue streams from acquired companies. EMC has to sell its vision of information management and demonstrate how the recently acquired software technology fits into the company's existing product lineup.
Since 2003, EMC has led the industry in promoting the concept of information life-cycle management (ILM). These days the term ILM is taking a back seat to the concept of information management, a broader concept that encompasses not only managing data through its life cycle, but also protecting and securing it.
For some customers, the message remains murky. "Their new marketing strategy is not clear to me," says Chris Carter, director of enterprise technology services at PPL Corp., an electricity-generation company in Allentown, Pa. "They have the IT mind-share in storage hardware, but the big question is can they gain mind-share in the virtualization market, with VMware and other markets."
Carter says he wonders where Documentum, Smarts, RSA and other recently acquired technologies fit into EMC's overall product plans. "EMC has a credible story, and when they do articulate it, they're successful. If they can say, 'Storage is about infrastructure, but information is about business,' as a way to break out of the core storage view that people have of them, they'll be successful,'' Carter says.
But Carter says he isn't ready to entrust EMC with all of his information-infrastructure needs. "It would be a leap of faith -- one that I don't have yet -- to say that EMC has done so well with storage that they'll be equally good with information security. Just because they've been good at spinning disks doesn't imply that they can also be our only infrastructure-management vendor," he says.
Page Break
Sales, service, support
EMC faces another challenge when it comes to the basic blocking and tackling of sales, service and support.
"Against their peers, they have the advantage of being focused on storage. But one area they need to move up in is the services side of the organization,'' Freed says. "IBM and HP are very established from a services standpoint. The acquisitions have expanded EMC's technology, and they have to build that out to their services organization.''
That's what Horcher is hoping for with her Documentum and VMware products. "If they assume most of the integration burden, we don't have to spend as much time developing software links between applications -- they'll do standard integration, and we can customize it further."
Brian Babineau, an analyst at the Enterprise Strategy Group, cautions, "Integrating all the companies and becoming more efficient at getting into new markets can be expensive at the field level, where you might need multiple offices, and that can impact business metrics.''
On the plus side, if EMC can successfully bring the new technologies into the fold and convince users that it will continue to offer the same support and technical help, it will have an opportunity to sell acquired software to satisfied existing customers.
"It will be challenging for them,'' says Kevin Westover, a systems engineer at NuSkin Enterprises, in Provo, Utah. NuSkin has invested US$10 million in EMC's Symmetrix storage platform, including TimeFinder storage replication and ControlCenter storage resource-management software.
But Westover adds that EMC is capable of rising to that challenge. "We've dealt with their software people in their professional services group when we've installed software related to Symmetrix systems. We've had good experiences with the software-support side. From what I've seen and heard, if they can somehow leverage their hardware with the software they are acquiring, integrate that and say, 'We have great hardware, and all this software works with our hardware,' they should succeed.''
EMC's Lewis hopes to lay those worries to rest. "We appreciate and understand customer concern. EMC has been very successful at acquiring technology, and it's a track record we're proud of, in terms of not only what we've done, but how we've done it. In acquisition through acquisition, some of which might be different technology than EMC's, we did need to retrain the sales force, while not breaking what we bought," Lewis says.
At Johns Hopkins University's Applied Physics Lab (APL) in Baltimore, EMC's support group has already proven itself. The APL implemented Rainfinity file-virtualization software just months after EMC bought the company in 2005, and EMC's support has remained strong for the new product.
"They haven't been too distracted yet by all the acquisitions. We still have contacts at Rainfinity that I can get hold of. We've had problems, and they got them done quickly. Now, Rainfinity's service number is the same as the main call center, which I was always a fan of. If you need to talk to someone, you can get them on the phone within 15 minutes," says Bill Fleming, director of infrastructure planning at APL.
Page Break
Profits
Despite the fact that EMC has grown to become an US$11 billion technology giant with 31,000 employees, 100 sales offices and 50 distribution partners worldwide, the company has been getting no love from Wall Street.
EMC stock has bounced around in a narrow band between US$10 and US$17 a share for the past few years, and shareholders have become restless. After all, EMC stock had been a high-flyer in the 1990s, skyrocketing from around US$10 a share in January 1998 to more than US$100 a share in 2000. Then came the dot-com crash, and EMC stock has never recovered.
In March, the country's largest pension fund put EMC on its annual list of underperforming stocks. And shareholders have complained that EMC spent too much on RSA.
EMC CEO Joe Tucci in March acknowledged that the company overspent for RSA, which he says was valued at US$1.6 billion when it was acquired -- US$500 million less than EMC paid. Tucci added that he is confident that the RSA acquisition will prove itself over time.
"Over the last three years, their stock has gone nowhere. In 2007, one of the questions will be how will they grow at two times IT budget growth in light of analyst reports that in terms of the macro economy, there are cuts in IT budgets. Those are the questions people will look to,'' Morgan Keegan analyst Freed says.
Paul Mansky, an analyst at Citigroup, adds that investors generally agree with EMC's acquisition strategy. But he adds that its performance has lagged behind expectations.
In an effort to boost the company stock price, EMC has undertaken several initiatives, including a recent recapitalization and staff cuts (a modest reduction of around 1,100 people).
Another challenge for EMC is to increase employee productivity. "Revenue per employee actually declined about 2 percent last year, while operating expenses per employee increased by about 6.5 percent, which equates an 8.5 percent decline in employee productivity. Compare this to the prior two years in which the delta was a net positive 2.4 percent and 1.9 percent, respectively," Mansky says.
According to Lewis, it will take a combination of marketing its new technology and image, a well-run product strategy and creative financial management to spur upward movement in EMC's stock.
"In addition to continued articulation of -- and execution against -- our information-infrastructure strategy, which the industry is embracing nicely, we are continually evaluating ways to unlock value for investors. For instance, in 2006, EMC invested approximately US$3.8 billion in share buybacks. We also recently announced our intent to IPO a portion of VMware," Lewis says.
In addition, there are signs that EMC's bid to step up in class and compete against such heavyweights as IBM and HP is starting to show results.
EMC's stock has been on a steady, upward course since August, doubling from a low of US$9.44 a share to the current price of about US$18 a share. (However, as bloggers on financial messages boards are quick to point out, EMC was selling at US$17 a share in January 2002, so a US$1-a-share increase in more than five years is nothing to write home about.)
The latest earnings report was mostly positive. Information storage kept up its steady growth at 7.7 percent, and VMware continues to lead the way at 95 percent growth over 2006, but content management and archiving slumped to a paltry 2.9 percent increase. Overall revenues were up 16.6 percent for the first quarter of 2007.
Analysts are predicting that the upcoming mini-IPO of 10 percent of VMware might help to jump-start EMC's stock price.
Analysts also are impressed with the way the company is taking a leadership position in the marketplace. "EMC and IBM are at the forefront of bringing infrastructure management together, but EMC is forging the way,'' says Joseph Martins, an analyst at Data Mobility Group in Nashua, N.H.
He adds, "EMC started the information-management talk, and they continue to bang the drum louder. They're successfully uniting two fields in a way that's meaningful. EMC has acquired all the pieces, and they have the money and the professional services to make it work.''
One final factor in EMC's favor is that customers remain onboard. "Over the past two and half years, they have already proven to me that their quality is great -- they're the best in the industry when it comes to large-scale arrays, and we love their support. As we become more aware of the new software products they're beginning to offer, we'll take a serious look at them," says Kenneth Deans, vice president and CIO at Bassett Healthcare, in Cooperstown, N.Y.
He adds, "I think with the growth of any company there are always challenges. My take is it's positive. If I went down our list of 80 vendors, they are in the top three in terms of quality, performance and service now, and they will remain so looking down the road. They've been stellar in every way. As long as they can continue with that, I'm happy.''