EMC Warns Of 'Difficulty Managing' Move Into SMB Channel, Gross Margins May Be Negatively Impacted

EMC is warning investors that a push into the small and mid-size business channel once it is acquired by Dell could adversely affect its business.

In a recent filing with the U.S. Securities and Exchange Commission, EMC, which says it does about 60 percent of its business through the channel, is predicting that an increased reliance on channel partners "may negatively impact" gross margins.

"As we focus on new market opportunities and additional customers through our various distribution channels, including small-to-medium sized businesses, we may be required to provide different levels of service and support than we typically have provided in the past," EMC said in the filing. "We may have difficulty managing directly or indirectly through our channels these different service and support requirements and may be required to incur substantial costs to provide such services, which may adversely affect our business, results of operations or financial condition."

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The Hopkinton, Mass.-based data storage giant has traditionally focused on high-end enterprise customers while Dell, its soon-to-be parent company, used its renowned supply chain to become a leader in the consumer, small business and mid-market arenas.

Scott Miller, director of data center at World Wide Technology, a St. Louis, Mo.-based solution provider that works with EMC, said it's unlikely EMC would have significant difficulties adjusting to doing business in the SMB space, and the warning is likely part of the company's effort to maintain its position as an up-market vendor.

"I don't really see that much difficulty," Miller said. "Maybe it's fear of the unknown, or trying to position themselves so they stay upmarket."

After Dell completes its more-than $62 billion acquisition of EMC, the companies are likely to focus on their traditional strengths: Dell on the midmarket and EMC on the high end, Miller said. To the extent that those efforts overlap, Miller said he is confident Dell will have processes in place to mitigate any hardships.

EMC, Miller said, "might have to onboard new partners that don't have established lines of credit to sell into those markets, but Dell already has all that in place. There may be some exceptions where EMC has a better down-market product than Dell, like maybe Unity or VxRail. But if they do the acquisition right, all that's going to work out through the processes Dell has to go to market. That's what [Dell Chairman and CEO] Michael [Dell] is bringing. He's already made those investments."

Likewise, Patrick Moorhead, president and principal analyst at Moor Insights and Strategy, said the risks outlined by EMC simply illustrate why the merger is a good idea: The combined company has strength from consumer PCs to high-end enterprise infrastructure. "The statement actually reinforces a reason why it's a good thing," Moorhead said. "EMC has optimized their distribution and support model for the top enterprises, not the SMB space. Dell is very good at [the SMB space]."

For EMC's second quarter ended June 30, perhaps its last as a stand-alone, publicly traded company, EMC's revenue was essentially flat year-over-year at $6.03 billion while its profit jumped more than 21 percent to $630 million or 29 centers per share.

The Dell-EMC merger, which will result in the creation of Dell Technologies, is expected to close before the end of October.

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