EMC: Strong Earnings and a Deep Bench

by Susan J. Aluise | January 31, 2012 12:16 pm

“Data is a precious thing and will last longer than the systems themselves,” World Wide Web creator Tim Berners-Lee once said.

It’s no secret that Big Data (which includes everything from voice and video to cell-phone GPS coordinates to electronic health records) is a big deal — big enough to pull focus at this year’s World Economic Forum at Davos[1]. That’s why storage vendor EMC (NYSE:EMC[2]) and its majority-owned virtualization and cloud-computing subsidiary VMware (NYSE:VMW[3]) are looking pretty good.

Both companies, which help organizations manage their data explosions, reported strong fourth-quarter earnings last week. EMC’s earnings rose 32%, to $832 million (49 cents a share), beating analysts’ estimate of 46 cents. The profit was driven by a 14% rise in sales, to nearly $5.6 billion. With a market cap of nearly $52.9 billion, EMC is trading at around $25.75, up nearly 30% from its 52-week low last August.

Meanwhile, VMware, the biggest gun in the virtualization market, reported that its fourth-quarter earnings rose 67% last week, to $200 million (62 cents a share), beating the Street by 2 cents. Sales during the quarter rose 27%, to almost $1.1 billion. With a market cap of $38.7 billion, VMW is trading at around $91, up 23% from its 52-week low last April.

Information technology trends also heavily favor both companies. A new report from IT market researcher IDC shows that EMC had a 62% share of the Purpose Built Backup Appliance (PBBA) market in the first half of 2011. That market grew an estimated 65% last year, and IDC forecasts that it will grow by up to 25% a year through the end of 2015.

One of EMC’s key competitors is Hewlett-Packard (NYSE:HPQ[4]), which was a little distracted last week by the very public departure of webOS guru Jon Rubenstein[5]. CEO Meg Whitman’s planned makeover of the company to cash in on EMC’s cloud-computing infrastructure niche is ruffling some feathers — particularly those who had been committed to the company’s ill-fated TouchPad venture[6].

EMC also competes with IBM (NYSE:IBM[7]), Unisys (NYSE:UIS[8]), Hitachi (NYSE:HIT[9]) and Network Appliance (NASDAQ:NTAP[10]). Apple’s (NASDAQ:AAPL[11]) recent acquisition of Israeli flash-memory comapny Anobit also could have an impact on EMC’s storage business.

Big Data is driving VMware’s growth, too. The company is the leader in virtualization, which lets organizations run the applications and operating systems from many different computers on a single machine. That’s important because companies can save lots of money by consolidating multiple servers into a single machine.

Virtualization software for the cloud-computing service market alone is forecast to grow from under $6 billion in 2010 to $16 billion by 2017, according to WinterGreen Research. That’s why competitors such as Microsoft (NASDAQ:MSFT[12]) and Citrix (NASDAQ:CTSX[13]) are stepping up their activity in the space and are now head-to-head rivals with EMC.

To that end, MSFT has increased its market share among mid-market customers that are new to virtualization. Last year, Citrix acquired Cloud.com to jump-start its Project Olympus private cloud infrastructure.

Despite tough competition, EMC and VMware are well-positioned for the eye-popping growth that is expected in Big Data storage, virtualization and cloud computing. A lot of the credit goes to EMC chief Joe Tucci, who has been president and CEO since 2001 and chairman since 2006. Tucci, who turns 65 this year, had planned to retire in 2012, but he announced at last week’s earnings conference call that at the EMC Board’s request, he will stay on the job until December 2013.

With the strong growth prospects in EMC’s key business lines over the next two years, continuity of leadership makes sense. Another reason the board wants to keep Tucci in place is that EMC has not one but four potential successors warming up in the bullpen: COO Pat Gelsinger, CFO David Goulden, cloud-services President Howard Elias and VMware CEO Paul Maritz.

All four are valuable, talented and qualified — perhaps making Tucci and the EMC Board’s job tougher than “Neutron” Jack Welch’s choice of Jeff Immelt over Jim McNerney and Bob Nardelli to succeed him at GE. Here’s how the potential heirs break down:

Pat Gelsinger. Gelsinger heads EMC’s Information Infrastructure product portfolio, which includes the valuable Information Storage and RSA Information Security offerings. He’s on the lookout for new acquisitions for EMC — particularly in security and IT service management. Gelsinger joined EMC in 2009 from Intel (NASDAQ:INTC[14]), where he was senior VP and co-GM of the Digital Enterprise Group and a former leader of Intel’s research labs. Gelsinger’s strengths include genuine respect from employees, leadership and peers. The industry views him as ethical, confident and with a deep understanding of products and markets.

David Goulden. As CFO, Goulden is in charge of EMC’s worldwide finance operation, but his roots are in sales and marketing. He formerly led EMC’s worldwide sales and distribution organization until Bill Teuber was tapped as EMC vice chairman in 2006 and assumed those duties. Goulden was the point man for EMC’s acquisition of VMware and held numerous strategy, marketing and executive positions at Wang Global and sales positions at Unisys. Although he has product and sales experience, he’s viewed primarily as a finance guy and that could work against him.

Howard Elias. As president and chief operating officer, EMC Information Infrastructure and Cloud Services, Elias heads EMC’s cloud-services portfolio, a major growth opportunity for the company. Elias, who leads EMC Global Services as part of this role, came to EMC from Hewlett-Packard in 2003. He also has held business and product-management positions at Digital, AST Research and Tandy. While Elias has a solid reputation, he lost part of his global hardware and software empire to Gelsinger — not a good sign.

Paul Maritz. VMware CEO Maritz came to the company in 2008 after his cloud-computing company, Pi Corp., was acquired by EMC. Before setting out on his own in 2000, he spent 14 years at Microsoft, where as the third-most-powerful executive behind Bill Gates and Steve Ballmer, he helped the Windows operating system gain — and maintain — global dominance. Maritz should be the slam-dunk choice to succeed Tucci but for one thing: He’s never been an “EMCer” — his office is in Palo Alto, Calif., while EMC’s headquarters is across the country, just outside Boston. While distance is no barrier in today’s tech world, culture is, and it remains to be seen whether software guru Maritz can lead an infrastructure-focused company.

The bottom line: Aside from an economic collapse, the biggest danger to EMC’s value is botched succession planning. Gelsinger is the safest choice because the transition would feel familiar to employees, customers and partners. Maritz could infuse the company with excitement about cloud and virtualization software, but he would be viewed as an outsider.

If necessary, Goulden would make a good interim CEO (à la Tim Morse after Carol Bartz was shown the door at Yahoo), but he’s probably not the guy to lock horns with most of the tech world for cloud and infrastructure dominance. Elias is probably out of the running, practically speaking, because so much of his empire has been carved up and redistributed of late. Of the four, he’s most likely to leave EMC if — as is increasingly likely — he fails to get the nod for Tucci’s job.

Editor’s Note: This article was updated on Feb. 2, 2012 to correct the description of Howard Elias’s role.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. pull focus at this year’s World Economic Forum at Davos: http://bits.blogs.nytimes.com/2012/01/25/at-davos-discussions-of-a-global-data-deluge/
  2. EMC: http://studio-5.financialcontent.com/investplace/quote?Symbol=EMC
  3. VMW: http://studio-5.financialcontent.com/investplace/quote?Symbol=VMW
  4. HPQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HPQ
  5. the very public departure of webOS guru Jon Rubenstein: http://allthingsd.com/20120127/rubinstein-with-webos-transition-under-way-it-was-time-to-leave-hp/?mod=googlenews_editors_picks
  6. committed to the company’s ill-fated TouchPad venture: http://investorplace.com/2011/12/meg-whitman-hewlett-packard-ceo-hpq-ebay/
  7. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  8. UIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=UIS
  9. HIT: http://studio-5.financialcontent.com/investplace/quote?Symbol=HIT
  10. NTAP: http://studio-5.financialcontent.com/investplace/quote?Symbol=NTAP
  11. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  12. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  13. CTSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CTSX
  14. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC

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