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EMC Q1: Channel Now Over 50 Percent Of Sales, But No Impact On Margins

EMC channel partners applauded EMC Chairman and CEO Joe Tucci's response to financial analyst concerns about the impact of increasing channel sales on margins after Tucci said the impact is neutral and channel sales are growing faster than overall sales.

The channel is turning out to be a major force at EMC as over 50 percent of the company's storage revenue now comes through indirect sales.

Comments on the growing impact of the channel sales by EMC's top two executives came as EMC on Wednesday reported good revenue and earnings growth for the first fiscal quarter of 2013, which ended March 31.

David Goulden, EMC president and COO, said during his prepared remarks on the company's first-quarter 2013 financial conference call that over 50 percent of his company's storage revenue now goes through the channel, and channel sales are growing faster than overall sales.

[Related: Q&A: Bill Scannell And EMC Make The Channel Push ]

"Our channel program continues to improve quarter after quarter, and Q1 was no exception," Goulden said. "Over 50 percent of our revenue goes through the channel, and this revenue continues to grow at a faster rate than our revenue overall."

EMC solution providers said they have benefited from EMC's growing channel business.

EMC has become a very significant partner for FusionStorm, which has built its managed services business on EMC’s technology, said Dan Serpico, president of the San Francisco-based solution provider.

"EMC is a terrific company, and very well managed," Serpico said. "I see it as one of our most important partners, and I've seen them change positively over time."

Dave Butler, president Enterprise Computing Solutions, a Mission Viejo, Calif.-based solution provider and EMC partner, said EMC is right on in its messaging about the channel.

"I'm very glad that EMC is on that message, that channel sales are growing at a greater pace than its overall business. That's a good message for the industry."

Goulden said that just fewer than 2,200 VSPEX reference architecture-based solutions have been sold in the 12 months since VSPEX was introduced. That represents a faster start for a reference architecture business than what was experienced by any of EMC's competitors, he said in likely reference to NetApp's FlexPod.

He also said that nearly 50 percent of Vblock demand in the first quarter came from new customers. Vblock converged infrastructure solutions are built by VCE, a joint EMC-Cisco venture.

Both VSPEX and VCE Vblocks are channel-exclusive solutions.

NEXT: Tucci Says 'Growing And Vibrant Channel' Important


EMC's Goulden also said that first quarter 2013 revenue from the company's service provider program was up over 40 percent compared to the first quarter of 2012.

EMC Chairman and CEO Joe Tucci, when asked by financial analysts during the conference call about the importance of the channel to EMC, said that companies that fare best in the IT market are those that have a strong direct sales force that works in harmony with a growing and vibrant channel.

"At one point, you have to worry about your channel because it's in effect an extension of your selling capability," Tucci said. "And you have to worry about their profitability. And you have to worry about are they trained properly [and] are they providing value to customers. So all those things go into the mix. But we are incredibly committed. I couldn't be more committed to the channels than I am."

Tucci also brushed aside any concerns about how sales through indirect channels might impact EMC margins.

"If we can get the channel to invest [in EMC], the margins through the channel are quite good because, when you look at operating margins, you maybe get a little less gross margin, but you don't have as much selling cost because our direct sales says, 'I have a trusted partner. I'll turn this over to them and I'll go sell something else.' And when you get a channel that can do the lifting, it turns out positive and is actually net-margin neutral."

Tucci's comments are spot-on with what is happening in the market, Butler at ECS said.

Hewlett-Packard is ECS's most strategic partner primarily because HP has for over a decade touted the same message that Tucci is saying, Butler said.

"As a partner, I wouldn't be in business if I didn't bring benefits to my vendors," he said. "We increase sales in areas where they don't go. And we lower the cost of their sales. If we go to 100 sales opportunities and sell into 60 of them, the vendors don't pay the cost of visiting the other 40."

ECS's cost of sales is lower than EMC's cost, and EMC only pays ECS for the sales that it closes, Butler said.

"A lot of people see the channel as an incremental cost," he said. "It's not. It's a displaced cost at a lower price."

NEXT: EMC Reports Revenue, Non-GAAP Growth


EMC for the first quarter reported revenue of $5.4 billion, up 6 percent from the $5.1 billion it reported for the first quarter of 2012.

First quarter 2013 GAAP income was reported at $580 million, or 26 cents per share, which was actually down from the $587 million, or 28 cents per share, reported for the same quarter last year.

However, non-GAAP income was $850 million, or 39 cents per share, up from last year's $818 million, or 37 cents per share.

EMC's Goulden called it a solid start to 2013.

"While customer caution continued into the first quarter of this year, we executed well on our mission to capture the opportunities presented by cloud, big data and trusted IT," he said.

EMC's total revenue for the quarter included $70 million from EMC's new Pivotal big data business, which was officially rolled out Wednesday.

It also includes $1.2 billion in revenue from VMware, which on Tuesday afternoon reported its financials.

On the EMC side, the company reported high-end storage revenue of $1.2 billion, up 10 percent year-over-year; $1.4 billion in unified storage and backup and recovery, down 2 percent; $250 million from emerging storage, up 24 percent; $930 million from other storage and professional services, down 3 percent; $230 million from its RSA security business, up 12 percent; and $160 million from its Information Intelligence Group (IIG), up 7 percent.

PUBLISHED APRIL 24, 2013

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