EMC Results Better Than Peers But Patience Has Run Out

EMC Corporation reported first quarter 2013 revenue and EPS just barely below street estimates. Revenue of $5.39 million was just below the $5.43 billion estimate. EPS of 39 cents was a penny below estimates. Growth in revenue and EPS was 6% and 5%, respectively. Against recent reports from IBM and other companies serving very large information technology customers, these results are decent. Furthermore, the results are consistent with the guidance the company laid out in January for 8% revenue growth and 9% EPS growth in 2013. Management reaffirmed 2013 guidance in conjunction with the report.

All that said, I have decided to sell the stock for Northlake clients. EMC just never worked. Despite outperforming other enterprise focused technology companies and being the leader in must have storage technologies, investors do not seem willing to reward the company just for being better than its peers. Growth is not accelerating as I expected and headwinds to meeting management growth targets remain as large corporation and government entities face restrictions on their IT budgets. Austerity in government spending that began in 2011 with over $1 trillion in budget cuts and now another $1 trillion due to sequestration has proved costly to EMC and its peers.

As noted in my review of Apple’s latest earnings, there is a long history of great technology companies going unrewarded by investors after their high growth phase is over. Microsoft, Intel, and Cisco Systems come to mind. EMC fits in that category as well.

Previously, I believed the company’s opportunity in storage -- arguably the most important byproduct of the internet revolution beyond bandwidth -- could give EMC another period as a growth stock. I am no longer willing to wait despite the quality of the EMC management as evidenced by the decent performance in the most recent quarter. Sometimes you just have to admit you can find a better idea elsewhere. I was wrong on EMC and will look for that better idea to reinvest the proceeds.

No positions in EMC

QUALCOMM looks good as EMC continues to struggle

Last week two of Northlake’s stock holdings in the technology sector reported earnings. The verdict was mixed with QUALCOMM (QCOM) reporting another outstanding quarter and issuing guidance for 2013 above Wall Street expectations. EMC Corporation (EMC) reported earnings in line with recently lowered Wall Street estimates but issued slightly disappointing guidance.

As would be expected, QCOM shares responded well to the company’s earnings and guidance, rising more than 5%. Interestingly, after an initial sell-off, EMC shares firmed up. In fact, backing out a 20% drop in the shares of EMC’s 80%-owned subsidiary VMWare (VMW), the implied valuation of EMC’s 100%-owned storage businesses ended the week higher. Of course, a significant part of EMC’s valuation is VMW but it could be a positive sign for future performance of EMC stock that the shares held firmly on generally disappointing news. This is often a sign that expectations have been lowered to a beatable level and that sellers of the stock are done. In other words, EMC shares may be in strong hands with better news to come and expectations low.

I do not want to get bogged down in recapping the numbers from QCOM and EMC, so let’s focus on the big picture. Northlake’s long-term approach to individual stocks emphasizes big picture themes, similar to thematic approach used by Northlake’s Market Cap and Style models.

QCOM’s results show the company’s leading position as the most important semiconductor supplier to smartphone industry. There was worry that Apple’s recent market share losses and cautious guidance for the March quarter would negatively impact QCOM. Apple could be as much as 15-20% of QCOM’s business. However, the beauty of QCOM is that it is a critical supplier to all of the major smartphone companies, including Samsung, the current market share leader. QCOM is also expanding its addressable market with products for all mobile devices including tablets and possibly laptops and ultrabooks in the near future. The investment thesis for QCOM is simple: riding the wave of smartphone adoption and mobile internet all over the world. High end, low end, emerging markets, industrialized markets. For QCOM, its does not matter. Think Intel back in the halcyon days of the PC adoption cycle. I think the stock can reach $80 this year, up more than 20% from Friday’s close.

EMC is a little trickier. Frankly, the stock has been disappointing, trading at about the same level as when it was initially purchased for Northlake clients in the fall of 2011. EMC has a similarly strong secular growth story to QCOM as it provides products to manage the massively growing storage needs driven by the internet revolution. Cloud computing, big data, virtualization…EMC is the leader in many next generation trends. The problem for the stock has been that the bulk of the company’s revenues come from large enterprises and governments. These purchasers have been under a lot of pressure to control budgets in a slow growth economic environment amid large Federal and State budget deficits.

EMC management has done a good job and the company has been growing. Growth has lagged Wall Street estimates, however, placing a stiff headwind on the shares. I am encouraged by the action in the shares since the company reported. It is consistent with a bottoming pattern often seen in stocks. EMC’s valuation is cheap and it is not a stretch at all to see the stock return to the $30 level in 2013. I am keeping EMC on a short leash but my current position is to hold on for one more quarter expecting that guidance will have proven conservative and expectations are low setting up a positive surprise and renewed enthusiasm for the shares.

QCOM and EMC are widely held by clients of Northlake Capital Management, including in Steve Birenberg’s personal accounts. Steve Birenberg is sole proprietor of Northlake Capital Management, LLC, a registered investment advisor. Regulatory filings can be found at www.sec.gov. QCOM is a net long position in the Entermedia Funds. Entermedia runs long/short equity hedge funds focused on media, entertainment, communications, leisure and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the Funds.

EMC Misses But Remains Well Positioned

EMC reported results that were slightly below Wall Street expectations and management's prior guidance. In addition, management lowered full year guidance. Interestingly, the stock is down barely over 1% today, a good performance given the huge drops at other tech companies after reporting earnings. Many stocks that have yet to report dropped a lot more than EMC in anticipation of poor reports and weak guidance.

I think EMC is taking the quarter reasonably well because it is quite clear that the primary problem the company is facing is a weak IT spending environment at major enterprises. EMC's results and guidance indicate that it is growing faster than other major IT suppliers as its focus on big data, cloud computing, flash solutions, and virtualization provides insulation against weak spending in more mature, legacy technologies. Storage and virtualization are gaining share and sit in the sweet spot of the major trends in enterprise computing.

Given EMC's excellent positioning in growth markets and a strong product cycle across most its storage solutions, I think it will pay to ride out the near-term weakness in stock. Should spending patterns actually improve or Wall Street begin to anticipate better IT spending, EMC shares are likely to reassert their leadership role we saw earlier in 2012.

Catching the timing of these sort of changes is difficult. In the meantime, EMC's strong execution and attractive end markets should prove defensive if the market or technology environment worsens. On the other hand, a lesson learned here is not to be greedy when the stock rallies again as even the best positioned companies face cyclical risks in the highly competitive and mature enterprise technology market. I am highly confident Northlake will get a chance to sell EMC at 2012 highs around $30, good for a 25% gain against today's prices.

EMC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov.

Earnings from Google, Qualcomm, and EMC Greeted Warmly

The early part of each quarterly earnings season is focused on technology companies as far as Northlake Capital Management’s strategies are concerned. Thus far, we have heard from Google (GOOG), Qualcomm (QCOM), and EMC Corporation (EMC). All three stocks reacted well to their earnings announcement, recovering a significant portion of recent share price declines. Heading into this earnings period, technology stocks sold off sharply on concerns about demand given weaker economic data around the globe. Foreign exchange was also a big worry. Technology companies are global as the language and use of technology crosses borders with ease. Furthermore, mega trends toward mobile broadband, smartphones, and big data are global.

GOOG, QCOM, and EMC each reported results that were very close to expectations. Wall Street was prepared for much worse. Guidance commentary was similar. QCOM guided lower although not as bad as feared. GOOG does not provide guidance but comments on business trends indicate no deceleration beyond the impact of foreign exchange. EMC reaffirmed its guidance, confirming the power of data storage trends. In the short-term, stocks react to news based on expectations. Expectations were low for GOOG, QCOM, and EMC due to macroeconomic fears. As it turned out, good operating execution and powerful long-term business trends allowed each company to beat the lowered expectations. In turn, the stocks rallied sharply. Let’s take a brief, closer look at each company.

The major takeaway from GOOG is that investors are growing more comfortable with the transition to mobile search. The big controversy in 2012 has been the balance between much lower average prices for search advertisements and much higher volume of searches. Both factors are due to the shift toward mobile computing. Additional influences are more searches in lower priced emerging markets, changes to Google’s ad serving technology, and foreign exchange. In the most quarter, the number of paid searches rose by 42%, while the average price per paid search advertisement fell 16%. In prior quarters, this sort of mix was greeted rudely by investors despite the company continuing to produce 20-25% revenue growth. This quarter the street reacted positively to the results. I think GOOG shares reached a positive tipping point with this quarterly report. The stock remains about % lower in 2012 and has plenty of room to make up.

QCOM actually slightly missed earnings and revenue estimates and issued guidance below current street estimates for the September quarter. Normally, this would have punished the stock. However, expectations were for even worse results and guidance. The stock had already fallen from the upper $60s in April, reflecting a summer slowdown in smartphone sales ahead of the iPhone 5 introduction this fall and supply constraints that leave QCOM short of inventory to meet current demand. The quarter proved to be a relief after a string of bad news. All of this is timing related. QCOM remains perfectly positioned to play the mobile broadband trend by providing the key semiconductor technology for smartphones and tablets. Relief and improved sentiment is a welcome change after a few tough months. I do not think the near-term is as bullish for QCOM as GOOG but beyond the next few months the investment thesis remains very good.

EMC preannounced its June quarter earnings and maintained full year guidance. The stock had pulled back from $30 to $23 since April as macroeconomic worries built and many other enterprise-focused technology companies reported shortfalls or cut guidance. I was remained confident in EMC for a couple of reasons. First, the trend toward management of data is as important as the trend toward broadband internet. Cloud computing is raising the demand for hardware and software solutions as requirements for data retrieval and management grow rapidly. This trend supports EMC’s business fundamentals even against the grain of a tough macroeconomic environment. Second, EMC announced upgraded products across most its product line in the spring. This was always part of the business plan but analysts apparently missed the positive impact. When the industry leader offers new products into a market with heavy demand the results can come quickly. This is the case at EMC and the upgrade cycle is protecting the company’s revenues against the deceleration in global economic growth. EMC is a boring stock compared to GOOG and QCOM but the long-term outlook is equally strong as “big data” and cloud computing are powerful and irreversible technology trends.

Disclosure: Google, Qualcomm, and EMC are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an Illinois-registered investment advisor. Filings can be found at www.sec.gov. Google and Qualcomm are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.

EMC: Mostly In Line But Lacking Pizzazz

I alwasy have viewed EMC as a core holding. I am not expecting Apple or Google or Facebook or Qualcomm. Just nice steady growth with very high visibility and consistency. EMC's storage products and solutions are absolutely critical to the world of internet based computing, communication, and entertainment. Storage is a high priority, mission critical purchase for EMC's customers, gaining share of IT budgets and outgrowing spending on most core technology products and services.

EMC's latest quarter supported this view. EPS of 37 cents was a penny better than expected while revenues of $4.04 billion fell about $50 million short of consensus. Margins were better than expected. Management stated it would "meet or exceed" prior EPS guidance for 2012. Wall Street greeted these results with a sell-off. The stock is down about 4%. The stock has done very well this year after a weak finish in 2011. Recent street research was expecting a stronger report based on channel checks and apparent business momentum.

Despite the Street's disappointment, nothing in the report, guidance, or management commentary suggests any meaningful change in the outlook. Revenues grew 11% and EPS were up 19%. The balance remains extremely strong and free cash flow in 2012 should approach $5 billion. Backing out the public stock market value of EMC's majority interest in high flying VMWare (revenue up 25% last quarter) and the company's $6 billion of cash and the stock trades about 10 times earnings. I think that is way too cheap for a company targeting at least 13% annual growth in revenue and EPS from 2010 through 2014. Furthermore, as previously noted, EMC's outlook seems quite secure giving the importance of storage to current information and communications technology trends.

Disclosure: EMC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor.

Strong Quarter for EMC Justifies Growth Story

EMC Corporation (EMC) reported better than expected 4Q11 results. Revenues of $5.57 billion and EPS of 49 cents exceeded consensus estimates of $5.49 billion and 46 cents, respectively. The company provided detailed 2012 guidance in line with street estimates. Revenues are forecast at $22 billion, up 10%, with EPS forecast at $1.70, up 13%. Given plenty of headwinds (Thailand floods, Europe economy, currency, assumed big slowdown in share buybacks), the guidance is quite solid. In fact, it looks conservative coming off much higher revenue growth and share repurchases in 4Q11 and 2011.

The latest results are the second consecutive quarter where EMC exceeded expectations while facing a skeptical street and lots of headwinds to the business. I think this suggests that EMC's core story as a play on Big Data and Cloud is intact. Given the high priority of spending on storage and virtualization, this consistent execution should result in a higher multiple for the shares.

EMC enjoyed strength across most its business lines. Large enterprises continue to spend on storage despite a generally tepid overall IT spending environment. EMC is seeing accelerating growth in small and midsize companies, a sign that complex storage needs are growing and EMC's total addressable market is broadening.

EMC trades at just 14 times earnings unadjusted for its large cash balance and 80% ownership in VMWare (VMW). VMW also reported outstanding earnings and its shares are enjoying a 7% pop so far this morning. EMC trades at single digit multiple on its core business, much too low for what is likely to be sustained mid-teens growth. A price of $28-30 seems reasonable.

Disclosure: EMC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.