As reported in a Seeking Alpha quarterly call transcript, EMC’s storage unit had a $75 million shortfall in Q1.
CEO Joe Tucci said
. . . we were disappointed that we fell a bit short of our Q1 revenue plan, approximately $75 million short. This $75 million revenue shortfall occurred in our storage business. That said, our storage product backlog did increase by $100 million year-on-year, right on plan.
About two-thirds of this miss was due to the fact that we didn’t execute as crisply as we normally do. The other third was due to negative geopolitical effects in Russia and China that slowed down bookings.
He also cited CIO’s changing priorities: a focus on enterprise-wide “digitization” and cyber security. As a result:
. . . CIOs are searching for ways to reduce cost and increase efficiencies in their current infrastructures and legacy applications, while maintaining and even enhancing overall quality and performance.
Reducing costs for current infrastructure is a big problem for legacy vendors, most of whom are locked into high-gross margin business models that guarantee customers high costs and frequent forklift refreshes. EMC’s Information Infrastructure business knows that very well, as they laid off 1500 employees this quarter.
Evidently that layoff hit muscle and bone as well as fat, according to David Goulden, EMC II CEO. About a third of the $75 million storage shortfall was attributed to the layoffs:
In the course of the first quarter inside EMC information infrastructure, we reduced about 1,500 positions. Obviously when you do something of that size, it did impact some of our field-facing parts of the business and that caused a bit of a slowdown in terms of how quickly we got out of the gate in the first quarter on the go-to-market side.
But VMAX customers may not welcome Goulden’s (old) news that EMC is milking VMAX to fund new business:
. . . the remaining factor, which was again one-third of the miss, relates to the cost optimization cost management we’ve been doing inside of the company. As you know, we’re aggressively driving cost in our traditional business to fund investments in our newer businesses.
Good news – for EMC – on XtremeIO
Goulden expects that XtremIO will reach $1 billion in revenue this year, at excellent gross margins.
Actually the XtremeIO gross margin profile is actually quite attractive for a couple of reasons. First of all, it sold as an appliance and hardware/software combined. Secondarily, because it’s an appliance model, we start charging maintenance on basically day one for that product. So we don’t have to accrue for a multiyear warranty. So over the life cycle of an XtremIO system, the gross margin profile is actually quite good and very comparable to our traditional VMAX, VNX blended margins.
Goulden on DSSD
First of all, DSSD coming to market later this year, we couldn’t be more excited about that. I did mention though I expect to see some exciting news around XtremIO at EMC World as well. So the flash agenda is alive, well and strong, and they’re positioned quite differently. Basically XtremIO is a SAN attached Block Storage Device designed to make existing applications run much, much faster. DSSD is aimed more at the NextGen in-memory third platform applications. It’s well-handled. Protocols like Hadoop as well as the native protocols designed to be basically an extension of memory and the applications that we’re using the assistance for are actually quite different. So they’re both based upon flash technology, but the applications they are aimed for are different and quite complementary. So couldn’t be more excited about the flash agenda. You’ll hear a lot more about XtremIO in two weeks time, a little bit more about DSSD as well.
The StorageMojo take
The analysts weren’t happy about EMC’s failure to meet or beat the Street EPS expectation of 36¢, but EMC toughed it out, saying that their 31¢ met “internal expectations.”
I wonder about that $75m shortfall, of which some 2/3rds evidently migrated to the “expected” $100m backlog. If they were expecting $100m, why didn’t the orders shifted to this quarter increase it to $150m?
On the DSSD front EMC seems to be confident that DSSD is coming out this year, and since it is almost May, they should have a good idea by now. But, of course, EMC’s definition of “coming to market” is fluid: it could mean beta; or announce; or, least likely, shipping v1.0 product for revenue. (For more StorageMojo analysis of DSSD see What is DSSD building?, EMC goes all in with DSSD and EMC’s DSSD FUD.)
As the largest and most diversified storage vendor, EMC is admirably positioned to survive the current tsunami of new technologies and companies, unlike some of their less well-positioned competitors (see How doomed is NetApp?). But they are counting on being able to “brand” commodity hardware with a combination of proprietary and open-source software while maintaining 60-70% gross margins.
This may work for a while, but ultimately scale-out object storage will win file-based workflows. The first vendor to offer a scale-out software solution that doesn’t require costly hand-holding to install and manage will hit the Pivotal business model hard.
This game isn’t over by a long shot.
Courteous comments welcome, of course. I’m probably one of the only – if not the only – analyst who hasn’t taken a freebie from EMC in years. Boo-hoo!