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EMC, VMWare And The Cloud

Posted on Tuesday, May 11th 2010

According to a recent Morgan Stanley report, technology spending is beginning to grow again. After having fallen 1.8% last year, spending is poised to increase 3.2% in the current year, suggesting a return to normal spending patterns. Analysts expect that storage equipment and virtualization software will attract a bigger portion of these funds. IDC’s Worldwide Quarterly Software Virtualization Tracker reported that 18.2% of all new servers shipped in Q409 were virtualized, compared with 15.2% a year ago. For 2009, new virtualized server shipments declined 5% over the year. However, for Q409, the number increased for the first time in the year to over 352,000 units. This is good news for VMWare (NYSE:VMW), the leader in the segment.

VMWare’s revenues for Q1 grew from $470.3 million a year ago to $633.5 million and shattered the market’s expected $592.5 million target. By segment, Software Licensing revenues grew 21% and Services revenues were up 51%. EPS for the quarter came in at $0.32 compared with the Street’s projected earnings of $0.28.

VMware claims to have benefited from “pent-up demand” from previous quarters in addition to growth in overseas markets, especially in Japan, China, and Europe. U.S. markets grew 30% over the year compared with international market growth of 40%. An increasing number of customers are now moving toward a private cloud. VMWare’s goal is to offer the software to build, manage, and develop these clouds in addition to offering core services that will sit on top of them, and to enable hybrid clouds that span both private and public clouds.

VMWare recently acquired the open source email service, Zimbra, from Yahoo!. The company is looking to further its mission of “taking complexity out of the datacenter, desktop, application development and core IT services, and delivering a fundamentally more efficient and new  approach to IT” through the acquisition. Zimbra already has over 55 million mailboxes and has seen growth of 86% overall and 165% among small and medium business (SMB) customers during the past year.

Am I reading the signals right, that VMWare wants to get into the SMB hosted applications space? That is otherwise known as SaaS or the cloud!

In the coming year, VMWare is looking to release significant new updates of its core vSphere product line. The new release will increase scalability and deepen the level of automation that the company currently offers in the data center. It is also working to extend its vCenter management product line and has already acquired assets from EMC (NYSE:EMC) to help configuration control, compliance management, application discovery, and service management. The company is also working to integrate assets with its current management offerings to offer a more complete solution for managing both private and hybrid clouds.

VMWare is busy making acquisitions as well. Earlier last month, it announced the acquisition of Rabbit Technologies, a UK-based firm that has an open source messaging platform for systems across the infrastructure clouds. VMWare also announced last week that it is buying GemStone, an in-memory Java cache maker. GemStone’s technology helps to scale applications for enterprises without major architectural changes. GemStone uses distributed memory cache to handle high volumes of data queries while providing storage-related functions including partitioning and replication of block data.

VMWare also entered into a tie-up with Salesforce.com. The two are working together on a new venture, VMForce, to expand the reach of cloud computing in applications such as mobile devices and social networking. The new hosted service will enable companies to write and run custom applications via the Web using Java.

Ah, and here, we see VMWare exploring cloud infrastructure!

VMware predicts Q2 revenues of $635 million–$665 million, better than analysts’ projection of $607.7 million. For the year, the company expects revenues of $2.63 billion–$2.73 billion, compared with analysts’ predicted $2.53 billion.

The stock is trading at $60.64 with a market capitalization of $24.76 billion. Earlier last week, it touched a 52-week high of $63.81.

EMC also saw Q1 revenues grow 23% over the year to $3.9 billion compared with the market’s projected $3.7 billion. The company’s earlier cost control measures helped to drive net income to $0.26 compared with the market’s expected $0.24.

For the quarter, EMC’s Information Infrastructure business grew 22% over the year to $3.3 billion. The growth was driven by strong customer demand and growth in the company’s high-end Symmetrix storage product portfolio. U.S. sales led growth with revenues increasing 29% to $2.1 billion. Revenues from the rest of the world grew 17% over the year to $1.8 billion.

EMC has been focusing on driving growth through cloud technology,  and that strategy seems to be working. During the quarter, information storage revenues grew 24% over the year as more of the company’s customers migrated to virtual data center infrastructures.

Within the high-end segment, Symmetrix revenues grew 28% over the year. The V-Max transition is mostly complete, and customers will soon be able to benefit from the more efficient flexible and cost-effective technology.

EMC is also seeing a trend of customers increasingly looking for mid-tier storage that is capable of supporting multiple information types and communication protocols. In Q1, mid-tier storage product revenues grew 32% over the year to $800 million. EMC continued to grow in the segment and expanded its relationship with Dell to include additional mid-tier products.

The company expects at EPS for the year at $1.18 with revenues of $16.5 billion. The market was expecting EPS of $1.14 with revenues of $16 billion.

EMC’s stock is trading at $18.76, taking its market capitalization to $38.56 billion. It touched a 52-week high of $20 last month.

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Interesting insights! I agree, Vmware and EMC are poised to gain share with the increased tech spending. In fact, EMC’s focus has changed from providing storage to your datacentre to replacing your datacentre with a private cloud! (EMC CEO: “Our first and largest opportunity is help CIOs transform their data centers into private clouds”). Key to their strategy is virtualization, through which they can offer products beyond storage.
VMforce seems to be another smart move- Java has traditionally been the language of applications programming. By pitching it as the best choice for cloud apps programming, we might see a community built around Vmware/EMC products.

Saurabh Mallik Tuesday, May 11, 2010 at 10:57 AM PT