EMC had a conference call on earnings on April 19th. While overall news for EMC is excellent – (grew revenue 11% year-over-year this quarter with non-GAAP EPS up 19% and free cash flow up 67%) – the news for IIG was something different (revenue down 4%). Previous posts about possible sale of the under-performing IIG division have been very well received by our readers due to the concern for Documentum clients. This post will present the Earning Call transcript on IIG and give our thoughts to the potential sale of the division.
Transcript Detail Q1 2012 Earnings Call April 19, 2012 8:30 AM ET
David Goulden, EMC Executive Vice President and CFO.
Full EMC Transcript can be found here.
Revenue from our Information Intelligence Group was down 4% year-on-year. In Q1, IIG released documents and mobile app for the iPhone, expanding users ability to access, share and collaborate on their preferred device and enable them to act upon information faster than ever before. IIG continues to win new customers as it did with the largest public banking organization in Turkey. With an aggressive strategy to grow its service network of more than 22,000 employees and 1,400 branch offices, Ziraat Bank chose EMC Documentum. As a result, the bank can now manage internal correspondence and regulation processes to ensure global compliance and operational efficiency, automate application processing to accelerate transactions and increase productivity across various internal departments. We are pleased with the operational and strategic progress our new leadership team is making at IIG.
Hearing that revenue was down 4% was not all the surprising from talking with our client base. Several factors tie into thoughts that IIG revenue would be trending downward. Quick thoughts include:
- Commodity Pricing of ECM – With a push from SharePoint, Alfresco, and others (see thoughts on aggressive Oracle push ), pricing for ECM, or at least customers tolerance to high, enterprise level pricing like Documentum’s, have eroded.
- Delayed Purchasing – Overall, many customers are delaying purchases given economic or industry concerns.
- IIG Client Relationships – the relationship with Documentum is somewhat strained from many clients perspectives. Whether the result of an aggressive software audit, or the feeling that previous sales efforts sold a considerable amount of shelfware, many clients are not anxious to purchase new licenses and are making do with what they have already purchased.
EMC Perspective – IIG Revenue not as important IIG Profit
Regarding declining revenue, does EMC really care? IIG is such a small component of overall EMC revenue (2-3%), that the decline isn’t really noticeable to the company as a whole. We would propose that, in EMC’s view, IIG is correctly focused on profits rather than just revenue. It is one thing for EMC to hold on to a poorly performing division from a revenue perspective, but quite another to hold onto a division that is losing money. Given the amount of revenue from IIG, it is much easier to focus on maintaining or improving profit (just reduce expenses), rather than finding new revenue sources. For Documentum users, the focus on profits should be a concern if it results in reduced R&D spending. As an example, take the recent D2 purchase versus the Universal Web Interface that was proposed last year at EMC World.
- Universal Web Interface (UWI) Summer 2011 – Documentum announced the “uncommitted” product that would be their replacement for Webtop and CenterStage built on a new, non-DFS based REST infrastructure.
- D2 Fall 2011 Purchase – Documentum licensed an already existing product that was developed by a French partner company. From what we can tell, D2 is being proposed as the alternative to Webtop and has interfered/delayed/cancelled the development of UWI.
It could be argued that going with D2 has some significant advantages in regards to profitability over an updated Webtop/UWI offering including:
- R&D Expense – Significant R&D expense on a new offering could be saved by having a “we pay you only on seats sold” licensing agreement with the creators of D2.
- Additional Revenue – UWI, as a Webtop replacement, would not get new licenses from clients who had already purchased Webtop. D2 would be a new license, although we have heard that Documentum is negotiating with clients in regards to D2 and Webtop licenses.
Would EMC ever sell and how would it impact users?
One relevant component of any discussion is EMC’s history of selling divisions. To my knowledge, EMC has never sold any of their previous purchases. Since Joe Tucci was CEO and approved of the Documentum purchase, the desire to sell off the division, given the minimal impact to profitability or revenue, would seem to be a distraction and require admiting a mistake, making it somewhat unlikely unless cash was really required for a bigger purchase for the performing and important divisions (example – flash media storage company XtremIO).
A bigger concern is whether EMC will invest in a declining revenue division. As pointed out in the D2 discussion above, if the division is focused on profits and continues declining in revenue, we would not expect innovation in regards to updated products or adding new products/services to their current suite.
If they did sell, who would or wouldn’t buy?
Even though it probably would not happen in the short-term, it’s always interesting to surmise who would be the purchaser. Feel free to comment below on your thoughts, but quick hits as to unlikely candidates and possible candidates fall into a couple of major categories:
- Oracle – Given how aggressively they are selling against Documentum, this appears to be off the table.
- Microsoft – All about SharePoint . Microsoft would not be interested in an expensive California company with software running on a Java platform.
- IBM – Already has too many content management platforms. Purchasing another would further confuse clients.
- SAP – I stick to my thinking two years ago that SAP would be a likely candidate, given their enterprise pricing model, a weak content management capability, the ability to leverage the same sales force and desire for SAP to grow.
- HP – For all of the same reasons as SAP. Leverages Sales force and enterprise pricing model. Might not make sense given HP and EMC storage relationship.
- CSC/CapGemini – Pulling in a wild card here but, consulting firms looking to grow have considered (and then reconsidered later) becoming software companies as well. CapGemini and CSC come to mind as the closest firms to Documentum.
- Box.net, Dropbox – very much a wildcard here (and it would not be a cash deal) but with iCloud(Apple) and gDrive(Google), the startups in collaboration might be looking to play on the corporate side. It’s a stretch but with Whitney Tidmarsh at Box.net, it might be an interesting decision.
- Computer Associates – where all software goes to die. CA would just buying for the revenue stream.
Those are my thoughts, let me know yours below.