Thread,
Re: EMC
As if to answer my question with a sense of perfect timing I ple of hours of posing it.received this in my i-box within a couple of hours of posing it.
For personal Use Only
KEY POINTS:
1) Yesterday, EMC hosted an introductory conference call with
investors. The main driver of the call was to do an EMC 101.
2) There was not a lot of new news on the call. Given the fact that
many of EMC's competitors have been doing proactive conference calls
this quarter and the fact that investors are nervous about EMC's
Hewlett-Packard relationship and Y2K, the lack of new news may be seen
as a near-term negative.
3) The company underlined its market position and the market
opportunity - both are positives for EMC shareholders, in our opinion.
EMC was steadfast in its argument that it is very well positioned and
that its market lead can be sustained with focus and execution.
4) We continue to rate EMC shares Outperform with a target of $75.
This is one of our favorite stories for C1999 and while high P/E
technology shares are churning at the moment, we think that EMC has
plenty of positive drivers that should play out over the next few years
and continue to make this a must-own stock.
5) We have transcribed below our general notes from the conference call
as an EMC 101 review. We have tried to point out our opinions as MSDW
in order to clarify the company's statements vs. our analysis.
DETAILS:
EMC 101 BASIC INTRODUCTION.
- EMC is the market share and technology leader in enterprise storage.
- The industry drivers for storage are strong. In fact, corporate
storage capacity needs appear to be doubling every 12-18 months.
- EMC's position is very good.
THE INFORMATION AGE.
- EMC pointed out that all-day and all-night access to data is
imperative for corporations. This includes things such as phone
systems, travel booking systems, and ATM card systems.
- Industry estimates point to approximately 90% growth in Terabytes of
storage from 1997 to 2002 with acceleration from 2000 forward.
- Unix and NT are driving increased storage demand and are growing as
storage platforms.
- EMC operates in both of these operating systems plus more. EMC
positions itself as independent of what you might be using for server
technology.
PER EMC SURVEYS THE INTERNET IS THE OPPORTUNINTY TO WATCH
- Per a Find/SVP survey from C1998, the #1 and #2 uses of storage by
corporations were new on-line applications and data warehousing. The
Internet/Intranet was #3 and electronic commerce was #8.
- These results change every time EMC does the survey and this year EMC
believes it is likely the Internet will rise in ranking.
- In C1999, many more of EMC's deals have been Internet related and the
Internet looks like it will be a huge growth driver going forward.
- With the Internet, the proliferation of data in the enterprise market
continues.
THE DATA STORAGE MARKET
- The storage systems market was sized at $12-14B in 1998. EMC sees it
growing to $35B by 2001.
- The market may be larger if you include more of the software and
service opportunities (potentially near $50B).
- The market expansion above these numbers often has to do with where
features and functions are added to storage systems.
GLOBAL COMPANIES' STORAGE NEEDS
- The median Global 2000 company tended to have roughly 40 Terabytes
(TB) in C1998of online storage on hand. This is equal to the amount of
information in a small college library per EMC.
- This 40 TB base is likely to grow to more than 300TB per company by
2002.
- Given the size of this information load and its increasing importance
to everyday operations, it is critical to manage, protect and save this
data in an enterprise class manner.
- In today's non-EMC environment, one storage manager can handle only
about 100 GB of storage. This means that IT headcounts to manage
storage are very high - and very expensive.
- If you think about the growth in terabytes of storage this will mean
a ton more people to be hired which will create real problems to IT
organizations.
MSDW take: From our perspective, it is possible that the storage nees
of corporate customers could be larger than this estimate. Either way,
it is good for EMC. As for headcount savings it is a real need with
large companies where more than 50% of IT cost is people. With IT
salaries at all time highs, this sales argument is real.
EMC SOLUTION FOR GLOBAL COMPANIES
- EMC provides central storage that can talk to the many different
systems in the enterprise and the company believes that this positioning
is strategic and unique to EMC.
- Characteristics which EMC features such as mirroring and backup and
recovery are also very important to clients and a key selling point.
- EMC believes that with its' approach, one manager can manage almost
750GB of information. As compared to the 100GB per manager in
competitors' environments, this represents a real cost of ownership
benefit with EMC. The company believes customers look at their storage
purchase from more than just a raw price point perspective.
- EMC believes its total cost of ownership benefit will continue to be
very important in F2000 as competitors continue to try to market against
it.
MSDW take: Cost of ownership is incrediblly important on a global
basis. EMC has something here and we believe that it can continue to
use this argument as a selling weapon over time.
NEXT STEP IN STORAGE EVOLUTION IS ENTERPRISE STORAGE NETWORKING - EMC IS
THERE
- Network storage is in essense a concept of a networked storage cloud
where servers can access information anywhere in the network without
reducing network performance.
- Fibre Channel Networking is an enabling technology in enterprise
storage networking.
- EMC believes that over time, customers will need more than one
storage system (i.e. multiple EMC boxes) and they will want storage to
reside on its own network.
- Enterprise storage networks allow customers to get the same world
class storage management around the enterprise.
- EMC has open interoperability and has done extensive equipment
testing which it believes is a strategic positive.
MSDW take: Storage networking is the way of the future. We are hearing
similar things from EMC competitors and customers as well. Providing
the ability to create networked storage is a must going forward. The
positive here in our opinion is that EMC has been creating mini storage
networks for a long time with its multi-platform connections. We think
this experience can be a value-add going forward.
INFORMATION INFRASTRUCTURE PROBLEMS PLAY TO EMC'S STRENGTHS
- EMC pointed out that there are many issues to be concerned about in
the data center. Users have mainframe, Unix, and other operating
systems all in place. Plus they have multiple software products at the
same time. Making all these products work together and enabling them to
share data makes IT infrastructures increasingly complex.
- EMC indicated that it tries to bring software, mainframe, Unix, and
NT all together in one easy to manage offering. This tactic is a great
selling tool.
- From EMC's perspective, it is trying to position itself as the
Switzerland of the data center. Per EMC, it doesn't matter what
platform you are on or what platform you may be headed to it can
interoperate with all platforms in a more flexible fashion than the
competition.
RELATIONSHIPS WITH IT LEADERS ARE IMPORTANT SALES AIDES
- EMC is partnered with a number of powerful IT leaders/integrators who
help it gain sales momentum. These partnerships plus the company's
world class sales force make a powerful selling asset.
- Examples of these relationships include Anderson Consulting, KPMG,
EDS, and CSC.
- EMC is trying to surround their customers with EMC presence (direct,
resellers, partners) and they believe these partnerships help give
assurance that EMC solutions are the best ones.
MSDW take: This reminds us of some of the things that Dell (rated
Outperform) has been saying for a long time. Dell has often argued that
it doesn't want a big channel partner because it believes that some of
these players (mentioned above) are more helpful to it in terms of
guiding infrastructure choices at big companies and Dell has good
relationships with a few. If that is true for Dell it is even more true
for EMC in our opinion as an EMC installation is a true infrastructure
choice. Generally we believe direct and partners are becoming more
important at EMC.
EMC HAS A GOOD TRACK RECORD OF GETTING INTO NEW MARKETS
- EMC's expansion beyond mainframe storage is a good example of the
company's ability to enter new markets and grow rapidly.
- Prior to 1995, EMC was primarily focused on the mainframe. However,
the company realized that storage was strategic and that it could spread
storage across operating systems to open systems (Unix and NT).
- Open systems storage started at $177MM in 1995 and quickly grew to
$1.5B in 1997.
- Software, another new market, has shown a 181% CAGR from 1995 to
1998, ending 1998 at more than $450MM in revenue.
- Another good example of getting into a new market is EMC's entrance
into the Fibre Channel connectivity market, or 718% Y/Y growth.
- EMC started shipping systems in 1997 with FC connectivity and ended up
last year with over $800MM in systems shipped with FC connectivity.
- As for new markets, EMC is constantly in touch with customers trying
to figure out what they need and want and developing products to fit
their needs.
MSDW take: This is a real asset and a great way for the company to
defend itself against competition. As the company has a physical
service connection to virtually all of its customers it has one of the
best feedback loops in the business.
WHERE IS EMC HEADED WITH NT STORAGE? - FORWARD!
- Per a Find/SVP study quoted by EMC, 83% of IS executives believe that
they will implement NT for critical applications.
- EMC indicated that Microsoft has said that more than 100,000 NT
servers are being shipped monthly.
- EMC communicates with NT today and the company believes that this
positioning is good for the time when NT begins to scale.
- NT storage, at approximately 5 TB per company in 1997, is predicted
by IDC to grow to greater than 35 TBs by 2002.
MSDW take: NT is still a bit early in its evolution to enterprise class
and to its need for huge enteprise class storage. However, it is headed
that way and so is EMC. The great news for EMC is that its success is
not tied entirely to one platform or another. Therefore if NT takes
longer than expected to scale, EMC can still do quite well.
INTERNET - THE ULTIMATE STORAGE OPPORTUNITY - TAKE TWO
- Moving to the Internet as a sales medium is an obvious trend, per
EMC, and it should be a tremendous sales opportunity.
- Storage drivers on the Internet include the billions of e-mails that
are sent and saved every day. E-mail is now considered a mission
critical application.
- EMC views e-commerce as a tremendous opportunity as e-commerce could
reach $1 Trillion worldwide of on-line sales by 2002. EMC wants to be
an enabler of e-commerce.
- EMC believes that the number of Web pages will grow from 300MM today
to 1B over the next 18 months - this too is a critical storage driver.
- Lots of Internet companies are buying large storage systems. In
fact, some of the purchases by small Internet companies rival the
storage in the Forture 1000 data centers today.
- EMC is positioned in the important infrastructure companies today and
is positioning with Internet players as well. EMC has as customers 90%
the of Fortune 100, 95% of the top 50 telecoms worldwide, 90% of the
world's major airline reservation systems, 95% of the top 25 US banks,
95% of the Business Week 50, and 8 of 10 largest Internet service
providers.
MSDW take: Capturing the flag in large companies that stand to move a
lot of their business to the Internet post Y2K is important, and EMC is
already there with solutions that work and scale.
We believe that if the Internet continues to expand along the current
path, the amount of data storage required could be huge. We also think
that it is possible that Y2K is and has been holding back storage
spending as big companies are afraid to take new sales systems live
before they get through Y2K. If this is true, we believe that there is
a huge opportunity in storage post Y2K that could be bigger than most of
the industry estimates indicate today.
WHERE DOES THAT BRING EMC?
- EMC believes it is on the road to its $10B revenue target by 2001.
- EMC looks at its opportunity as a law of 35. EMC has 35% market
share (per internal and external share) and believes its market share is
defendable. As the market is expected to grow to $35B by 2001, this
translates into a $10B revenue opportunity for EMC.
- Interestingly, EMC has gained share in each of last 3 years. Most of
the share gains have been against IBM. At the same time, EMC notes,
others (like Compaq, Sun, Hitachi, and HP) have not gained share.
- EMC is not planning the business as if they are going to be in a
slower growth mode than the market.
- With systems, management and infrastructre, EMC is getting on track
to ensure it can become a $10B company.
- EMC believes that its results show its ability to execute. At the
same time, EMC believes that the opportunity in front is larger than
that behind.
- EMC continues to drive to grow net income at a rate faster than
revenue. By the way, in CQ1999, revenue was up 36% Y/Y, net income was
up 51% Y/Y, and EPS was up 46% Y/Y.
- Over the last 5 years revenue was up 38% CAGR and net income was up
44% CAGR.
MSDW take: This is in line with our thinking and yet still not entirely
in our model. If we extrapolate out our C2000E revenue estimate of
$6.8B and our 30% Y/Y revenue growth rate we get $8.9B in C2001 (we do
note that EMC talks about the $10B as a run rate number so our model
should be slightly below $10B). We do however, think this provides some
upside to our model.
WHAT ARE THE POTENTIAL BUMPS IN THE ROAD?
- EMC could be wrong on the market size.
- An issue in the global economy could hurt EMC. The company noted
that the Asian crisis of last year had no impact on it because Asia was
not a big portion of sales.
- A new technology could be competitive. EMC has its eye on technology
in development around the world and belives that it will continue to
have a lead. EMC spent $1.2B in storage R&D to date and plans to spend
at least that much over next 3 years.
- Competition could be a problem. EMC believes its market position is
good and defendable. Moreover the company has a healthy paranoia about
competition and plans to be aggressive about staying ahead. Lots of
competitors are making noise but few have delivered wholesale on their
marketing message.
- Execution mis-fires could be an issue. EMC is really focused on this
every day but being in such a strong growth environment is always a
challenge. The company is planning as if it will be a very large
entity and is trying to rapidly expand is systems and infrastructure to
support the business.
MSDW take: Of these issues, we worry most about outrageous competitive
pricing at certain points in time when one or another competitor gets
aggressive. We agree that EMC's quality and cost of ownership argument
is real. However, there could be a quarter here or there where a
competitor causes issues by essentially giving storage away. Typically,
these giveaways have not impacted the long term market as you often get
what you pay for.
We worry least about the size and growth of the market. It just seems
unreasonable to us that storage isn't a huge market, particularly with
the Internet and e-commerce.
We actually see the market as a huge opportunity for many players.
QUESTIONS AND ANSWERS..
Q: Wasn't there a lot of storage pre-purchased for Y2K?
A: Many large EMC customers purchased storage in 1998 for Y2K testing.
Most EMC customers are Fortune 1000 and Fortune 2000 companies and these
are the most sophisticated users. EMC believes that they are well on
their way to using up the storage in these solutions.
Moreover, EMC talks to their customers all the time. The feedback that
the company is getting from customers is that if there is any slowdown,
storage would be the least impacted. EMC reminded investors that just
because Y2K is coming around, IT organizations can't just ask their
users to stop collecting data.
>From EMC's perspective, customers may not be adding new applications in
front of Y2K.
Per EMC, Y2K is a non-issue on the Internet and for Internet storage.
The Internet will be a significant factor in revenue going forward with
online information growing at almost 100% per year.
- What about HWP and the competitive arena? Won't pricing compression
get more aggressive?
While EMC has a reseller agreement with Hewlett Packard (HWP, $85 7/8,
Outperform, covered by Thomas Kraemer, target $110), Hewlett Packard has
announced they are selling a different storage product at the high-end
(Hitachi).
EMC pointed out that storage is often an independent decision from the
server. While the Hewlett Packard channel was important to EMC a couple
of years ago, EMC's infrastructure growth has made it less dependent on
HWP.
EMC has 2 times the sales people it had 18 months ago. This is a
powerful team worldwide and around the world, people know that EMC is
competitive storage.
Per EMC, when HWP shows up to sell storage they are showing a product
that has been out in the market before.
Per EMC, they have already made relationships with the HWP installed
base. EMC was touching in excess of 90% of HWP customers before this
fall-out and plans to use its relationships to help hold its position.
As for pricing, EMC believes it is in the end of the market where
pricing comes down about 20% per year which is benign by EMC's
definition. EMC indicated that it will see the 20% rate continue in
short term. It is possible that the company may make a re-adjustment
when it gets to 2000.
From EMC's perspective, an EMC purchase is about functionality and lower
cost of ownership. It is important to remember that there are more
factors behind storage than sticker price.
EMC has always been going against price.and has typically won anyway.
Aggressive pricing by competitors determined to get in the market is not
new to storage.
Moreover, while competitors are still struggling with interoperability,
EMC is moving forward.
MSDW take: We agree with EMC here but admit that it is going to be a
tough leap of faith for investors to make during the summer. In our
view, EMC may need to prove its competitive capabilities for a few
quarters to really get investors whole-heartedly on board. Near-term,
the HWP issue is probably not a big deal - we will need to do some close
watching with Thomas Kraemer, MSDW Enterprise Hardware analyst to
determine the longer term impact.
Interestingly, we have never heard EMC say that it might re-look at
pricing in C2000. We think this means that they will continue to be in
a state of healthy paranoia regarding competition - but this bears
watching.
- Why is EMC in only 8 of 10 ISPs?
While EMC won't name names it believes it can still penetrate these
accounts.
The players are not on EMC's customer list partly owing to price.
However, EMC pointed out that it is typically called in for what it
calls "second surgery." In other words, people who choose to go
without EMC owing to price have not always but often come back to EMC
when they want reliability and scalability.
Sometimes it takes getting burned by a competitor's storage once or
twice for EMC to get a potential customers' attention. Often the costs
of unexpected downtime are far greater than the premium the customer
might have had to pay EMC.
- If the fastest growing area is NT and Unix, what type of market share
are you looking at in those markets?
EMC likes to talk to it as overall market share. However, it is
certainly above 35% in the mainframe and below 35% in Unix and NT today.
Today, NT is not mature enough to have lots of EMC storage. Ultimately,
EMC hopes to get greater than 35% share in this market.
Still, 80% of all stored data remains in the mainframe. Unix and NT are
still in evolution mode as enterprise platforms for storage.
Fibre channel and EMC's Connetrix product (a Fibre Channel Switching
product) opens a new market and enables EMC to better serve Unix and NT
platforms.
- Where are most of EMC's NT sales being made?
NT sales are pretty even through direct and indirect channels. However,
EMC does think that direct customer touch creates a better vision.
Thomas Kraemer is a contributing analyst on EMC.
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