EMC's quarterly results show it printing money at an increasing rate, fuelled by software, especially VMware. Quantum's revenues are flat but its gross margin is up and losses much reduced.

EMC

The expanding money generation game that is EMC revealed terrific quarterly results. We can't get enough of EMC's products.

The highlights are quarterly (Q3 07) revenue of $3.3 billion, up 17 percent on the Q3 06 total. EMC says its net income at $492.9 million, $0.23 per diluted share, was up 77 percent on the year-ago quarter.

Of course the burning bright star was VMware with its IPO and quarterly performance. Quarterly revenue increased 90 percent compared to the year-ago quarter.

EMC's systems revenue increased 9 percent. They were 43 percent of overall revenue. Its software licence and maintenance revenues increased 25 percent, forming 41 percent of revenues, and services revenues increased 25 percent as well, providing 16 percent of the quarter's overall revenues.

In its Information Storage business there was strong growth for Clariion and Celerra arrays, the Disk Library for Backup, Avamar for data de-duplication and RecoverPoint for CDP. SMARTS and Rainfinity had double-digit growth.

EMC's content management and archive business also had double-digit growth. (Think Documentum and Centera.)

RSA security revenues grew 22 percent too.

Symmetrix wasn't singled out so we might conclude growth in the high-end drive array business wasn't stellar. InVista, the storage area network (SAN) fabric-based management software, wasn't mentioned either; two flattish spots then.

Joe Tucci, EMC charirman, president and CEO, talked of 'solid global execution.' However, in a sign that EMC thinks the company's shares are still under-valued by the stock market it doubled its share buy back programme from $1 billion to $2 billion.

EMC is on a roll and has been for 17 quarters. Where is it going to end? This VMware-fuelled rush shows no sign of stopping and companies that were closer to EMC in size a year or two ago, must now be scratching their heads about what to do.

Quantum

Like its sales revenue measured quarter on the year-ago quarter, Quantum's fiscal Q2 revenues were flat at $249 million. (This, by the way is a mere 13.25 percent of EMC's quarterly revenue) There were good and bright spots though. The Q2 08 net loss was $20 million dollars, down a third on Q2 07's net loss of $31 million. Since revenues were flat the improvement was helped by a gross margin increase from 28.2 percent to 31.5 percent, reflecting a shift to higher margin products, plus a $17 million cut in operating expenses compared to the year-ago quarter.

More than half the net loss was attributed to costs involved in re-financing the ADIC acquisition debt on better terms.

Is this it? Is this all Quantum can hope for from the ADIC acquisition: flat revenues and debt?

The company, "...increased (our) disk systems and software revenue by nearly 100 percent year over year, with growing momentum behind our DXI-Series disk-based solutions featuring data de-duplication and replication," said CEO and chairman Rick Belluzzo.

There was, the company inferred, insufficient branded product revenue growth and much more focus would now be put on that.

Product revenues actually fell, from about $195 million in Q2 07 to $185 million in Q2 08. The tape automation (up $5 million), disk systems and software revenues rose (up $7 million) and offset declines in low-margin products (like OEM-branded tape automation) and non-royalty media revenues.

Revenue from devices and non-royalty media was a substantial $60 million. Tape automation systems brought in most money, $110 million, with disk systems and software contributing the least, at $15 million.

That's the rub. There is a vast overhang of low-margin commodity device and media sales which brings in a lot of cash, a quarter of Quantum's revenues, but little or no profit. The promising disk systems and software are a fraction of Quantum's revenues and it hasn't sold enough tape automation systems to make the extra cash it needs, which is $20 million to prevent a loss and, say, $10 million to make a profit.

We might say Quantum needs to find another $30 million from somewhere.

Maybe service revenues could help? This was another bright spot, up $12 million from Q2 07 to $39 million. Royalty revenues decreased $3 million to $25 million.

So the probable outlook is:-
- continued automated tape product revenue decline, offset by margin growth
- increased disk-based product and software sales
- increased service revenues
- flattish royalties.
- continued decline in commodity device and non-royalty media sales.

There is bound to be continuing pressure on costs and much management energy focussed on ramping up sales more and more. The sales centre of gravity will swing more to the disk systems and software. Tape is not dead, not by any means, but its growth prospects are much lower than those of disk-based products for data protection.

This is largely due to the acquired ADIC technology. Quantum's statement made much of the DXI disk-based product line's prospects. It has to convert these prospects into sales and ensure that it doesn't lose rank in the disk-based data protection market which has no shortage of suppliers. Back-end integration with tape libraries has to be a key strength which needs capitalising on.

If progress continues in this fashion then Quantum in Q2 09 should be reporting no red ink at all.