Why strong financials support EMC’s leadership position

Strong financials

EMC Corp. (EMC) along with VMware (VMW), Pivotal, and RSA Security offers a suite of applications and services including virtualization infrastructure, cloud platforms, data storage, and data security. EMC holds a dominant position in high-end information infrastructure solutions for enterprises. However, sensing the curtailment in IT spending and organizations deferring purchases, EMC has combined into small and medium businesses (or SMB) and internet service providers through its affordable SA or NAS solutions. As a result, under EMC a complete suite of services for high-end, mid-level and growth segments are provided.

The previous chart shows EMC’s revenue and margin growth since 2009 until recently. For the six months ending 2014, margins took a dive due to the decrease in information storage product margins.

Operating segment’s performance

Information storage forms the core business of EMC, contributing to 65% of the total revenues. The sluggish IT spending environment and organizations deferring equipment and solutions purchases have impacted this segment. This is expected to continue into the near future.

Strong cash and free cash flows

As of June 30, 2014, EMC generated free cash flows of $1.88 billion. It holds cash reserves worth $7.7 billion and a net debt of $5.5 billion.

Investments in research and development and acquisitions

From 2009–2013, EMC has spent $9.3 billion on technology acquisitions and $11.5 billion on research and development. It’s very rare for the companies to focus on external as well as internal growth. However, EMC has managed to focus on both. Its peers like Symantec (SYMC) make huge investments in research and development. SAP (SAP) invests roughly 13–14%, while IBM (IBM) allocates only 5–7% of its revenues on research and development.

Focus on rapid growth areas

The company has shared its intent to focus on emerging storage solutions. The fast-growing emerging storage solutions include network attached storage from Isilon, virtualization and private cloud from VPLEX, cloud storage from Atmos, software defined storage with ViPR, and the all-flash storage array from XtremIO. Emerging storage business revenue grew 52% and 65% for 2Q14 and six months ending 2014, respectively.

EMC’s diversified business operations, its focus on growth and high margin technologies, strong cash reserves, steadily increasing free cash flows, and low debt levels let EMC perform in the competitive business environment and hold its leadership position.