CAPS Rating: 5 out of 5

EMC is a leading provider of network storage, backup software, and other information technologies.


Player Avatar AllStarPortfolio (20.05) Submitted: 10/14/2009 11:58:37 PM : Outperform Start Price: $18.16 EMC Score: -4.77

On October 14, 2009 at 1:37 PM, portefeuille (99.99) wrote:

Our second largest investment is our stake in EMC. We invested in EMC because of the high
quality nature of the company’s two principal business lines – the Information Infrastructure and
Virtual Infrastructure businesses – and our ability to acquire a position at a substantial discount
to our estimate of fair value.
Each of EMC’s Information Infrastructure’s three segments – Information Storage, Content
Management and Archiving, and RSA Information Security – leads the market in which it
competes. Because of the extremely high compound growth rate in data globally – estimated by
industry experts at 60+% per annum; (think saved YouTube videos and regulatory requirements
to preserve documents and data), we believe that demand for data storage over the long-term is
largely insensitive to the economy. As a result, we expect that EMC’s dominant market position
in Information Infrastructure will continue to allow it to generate growing, and predictable free
cash flow from new product sales, recurring maintenance and warranty revenues, and the sale of
consumables. The company also benefits because of its substantial operating leverage from
economies of scale, large barriers to entry, and economies of scope, where the breadth of the
company’s product offering is a significant competitive advantage.
EMC’s customers are diverse by industry and geography and enjoy efficiencies from
concentrating their infrastructure spending on a small number of market leading vendors such as
EMC. Its customers are also highly risk averse, as data storage is a critically important function
for regulatory and competitive reasons, and customers face significant costs if they switch to an
alternative vendor.
Information Infrastructure enjoys the benefits of both the inherent operating leverage of the
software business with the high switching costs of the hardware business. Because EMC’s
Information Infrastructure hardware is built from the assembly of components manufactured by
multiple, highly competitive, third-party suppliers, EMC does not suffer the inventory risk,
capital intensity, and supplier negotiating power of traditional hardware businesses.
EMC’s off-balance sheet assets include a large base of satisfied customers that are receptive to
additional offerings from EMC, and a sales force that is considered by many to be the best in the
information technology industry. Combined, these assets facilitate EMC’s expansion into
adjacent markets.
The rapid adoption of virtualization and cloud computing led by EMC’s 84% owned, publicly
traded VMware subsidiary – we are rapidly moving to a world in which you will simply rent
your computing power and storage from third parties and you will no longer have that noisy,
heat-generating, power-consuming box under your desk – increases the demand for EMC’s
offerings, while improving EMC’s opportunity to differentiate its offerings and maintain its
VMware is driving a transformation of the information technology industry, and in that process
we expect it will capture large profits over time. We believe that the VMware can ultimately
enjoy a market position and economics similar to that enjoyed by Microsoft’s Windows x86
server and desktop operating system.
We attribute EMC’s substantial stock price appreciation in recent weeks to the market’s
recognition of a recently completed strategic acquisition, better-than-expected second quarter
operating performance, and the continued business progress of VMware.
We believe that EMC is undervalued on a sum-of-the-parts basis, and that the value of its two
core operating segments will continue to increase at an attractive rate.

(from here: Pershing Square Q2 2009 Investor Letter)

Report this Post 3 Replies
Member Avatar portefeuille (99.66) Submitted: 10/15/2009 2:44:37 PM
Recs: 1

(from here: Pershing Square Q2 2009 Investor Letter -> http://dealbreaker.com/images/thumbs/Pershing%20Square%20Q2%202009%20Investor%20Letter.pdf)

Member Avatar 08PortfolioModel (37.72) Submitted: 10/16/2009 1:58:59 AM
Recs: 1


Member Avatar ITnut (98.56) Submitted: 12/10/2009 12:07:49 PM
Recs: 2

Hard to argue against the continued potential of virtualization with the VMWare arm of the company. However, their hardware offerings will continue to decline. EMC storage systems are priced at a much higher point than all their major competitors. Changing vendors in the data center is not has hard as people make you believe. In every case I've seen in the last 5 years, EMC got replaced with NetApp, BlueArc, or Isilon offerings with minimal fuss and millions of $ in savings. The move of information to the cloud and the corresponding net reduction in storage footprint should further erode the hardware vendor business across the board but I expect EMC will fare the worst since cloud-enabled data centers tend to choose standard lower cost hardware. As for EMC's own cloud computing services, they're so far behind Amazon and Google, I'm not sure it'll ever amount to much on the bottom line.

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