Should EMC Worry About FX?

In a report published Friday, FBN Securities analyst Shebly Seyrafi downgraded the rating on

from Outperform to Sector Perform, while reducing the price target from $30 to $27, citing weak storage checks, stiffening competition and adverse FX impact on FQ1. In the report FBN Securities noted, "We are rather surprised by the uniformity of negative data points about storage spending in CQ1. Reasons provided include the usual "movement to the cloud" and technologies such as data deduplication and compression hurting storage bit demand growth, but we are also hearing that IT managers are reallocating storage dollars toward security (which our checks note is a very attractive market currently)." A standstill agreement between Elliott Management and EMC could be removed in September 2015, which is a "potential positive." Following this, EMC may be pressured into undertaking some activities that create shareholder value, like increased capital return, spin-off of VMW and additional cost cuts. Seyrafi said, "…we see a difficult storage spending environment over the next few months before such possible benefits may occur. Note that we are now estimating that without VCE (which adds ~$700M to revenue this year as EMC consolidates it), EMC's revenue in F2015 will grow by only 2% Y/Y (down from our prior estimate of 6% Y/Y growth)." The company had guided to F2015 revenue of about $26.1B, of which approximately 22 percent, or $5.7B, was to be generated in FQ1. "With EMEA at roughly 29% of EMC's revenue, the euro being ~7% lower on average in FQ1 should translate into a roughly 2pp unanticipated hit to FQ1 revenue (separate from the lower revenue expected from a weaker storage spending environment)," Seyrafi wrote. EMC may miss its annual guidance. The company had guided to about 5% Y/Y revenue growth in FQ1 and 7% Y/Y growth for F2015. This implies acceleration in revenues in FH2, while EMC's comps are tougher in FH2. "There could be downside to our new F2015 revenue estimate of $25.7B (lower than $26.1B company guidance)," the report added.