EMC Beats Q3 Expectations, Downplays Dell Relationship


EMC said new storage and nonstorage initiatives and less of a reseller relationship with Dell means that EMC will be depending more on indirect sales channels for its storage products.

EMC reported that revenue for its third quarter, ended Sept. 30, reached $3.5 billion, down about 5 percent compared to the $3.7 billion it reported in the third quarter of 2008. However, it was about 4 percent to 5 percent higher than expected.

For revenue, product sales fell about 12 percent to $2.2 billion, while sales of services rose 8 percent over the same period last year.

EMC reported income in the quarter of $298.2 million, which was down more than 24 percent compared to last year.

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Dell accounted for about 25 percent of total Clariion revenue in the third quarter, down from 29 percent in the second quarter. The $275 million in revenue that came from Dell was the lowest since 2005, wrote Jayson Noland, an analyst at Baird, in a report on Thursday.

Noland also noted that EMC's direct and channel sales were up 6 percent over the second quarter, which helped offset the weakness in sales through Dell, and that 60 percent of Clariion revenue via Dell were on an OEM basis, and 40 percent were on a reseller basis.

EMC's reseller relationship with Dell is not as strong as in the past, and increased sales of EMC's products, especially the Clariion line, through direct and indirect sales channels will make up for any difference, said Joe Tucci, EMC chairman and CEO.

"I just want to make it clear that, between Dell and us, we are extremely committed to the OEM side of the relationship. What's kind of winding down, if you will, is the reseller side of the relationship. And, of course, as that winds down on our side, we're trying to pick up that slack with our own direct sales and mostly through channel partners."

EMC had strong sequential growth in Clariion sales despite a significant drop in sales through Dell, Tucci said.

"We are certainly beyond the knee of the curve, and we will continue to work with Dell so that this OEM opportunity becomes stellar and grows, and also work with Dell on opportunities around our deduplication technology, around our NAS technology, and at the same time continue to build out other channels, and beef up our direct sales organization to make sure we can pick up the slack that we're going to lose from the reseller side," he said.

The OEM relationship is more profitable for both EMC and Dell, Tucci said. "They make better margins, but then they do virtually all the selling," he said. "When you net those two out, it actually ends up, ironically, being better for both of us, so we can get this to grow. And that certainly is the intention."

Noland wrote that Dell represents about roughly 10 percent of EMC revenues and about 25 percent of all EMC's Clariion sales. "Dell's recent acquisition of EqualLogic suggests that the Dell/EMC relationship could face pressure in the next couple years. That said, revenue headwinds from Dell could be offset by increased channel opportunity as resellers look to diversify away from EqualLogic to EMC," he wrote.

Tucci also said that, overall, EMC is pleased with its results despite the current IT spending climate.

"Our results demonstrated that the market demand for our storage, virtualization, security, and compliant backup, recovery and archiving solutions was and is solid," Tucci said. "EMC's business model has proven resilient and strong in this turbulent economic environment."

Business predictability in the third quarter was very good and close to historical business patterns, Tucci said, and 2009 is going as the company expected. Early this year, EMC predicted that IT spending would bottom out in the second quarter, and then start to grow again in the second half of the year, and this is how the year seems to be playing out, he said.

EMC plans to discuss expectations for 2010 in detail in January, but Tucci outlined some of what the company expects during the call.

Tucci said EMC expects a slow and steady IT spending recovery in 2010, with the year returning to growth, although not as strong a growth as experienced from 2004 to 2007. "We also expect the year-on-year growth in 2010 for storage, virtualization, security, and compliant backup, archiving and recovery will be above IT industry averages," he said.

EMC expects its own business to see solid double-digit growth in 2010 and beyond in four primary areas, including the building of internal or private compute clouds, the building of external or public clouds with telco and service partners, improved management and security for client computing, and the development of the next generation of backup and recovery solutions, Tucci said.

"It is important to note that for EMC to capitalize on these four initiatives, we will need a strong alliance of partners. Obviously, we will partner very closely with VMware. But I want to make it very clear that all other technology companies, and I mean all, are welcome and in fact are encouraged to also partner with VMware. And, as always, they can be assured of open and equal access to VMware's leading technologies."