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.
See our initial thoughts on D2 here and specifically thoughts on why here.
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.
What about Open Text as a Documentum suitor? They don’t fear product overlap. They embrace it.
Alan Lee says
For filenet, OpenText and EMC thoughts of potential sale is a permanent topic from bloggers.
EMC IIG have increased his customer Net Promoter score and if your read the transcript: EMC: “We are pleased with the operational and strategic progress our new leadership team is making at IIG”.
First quarter have always been like that for Documentum, Opentext and FileNET (all down to 3/4%) but FY they are the choice of more than 50% of the market.
Forrester, Ovum and Gartner have also ranked EMC IIG as dominant is ability and vision
EMC will never sell IIG (building block of information governance and big data strategy)
TSG Dave says
Alan – thanks for the note – a couple of counter points:
– I didn’t see the IIG net promoter score published – can you share with the group? I am not sure that “pleased with operational and strategic progress” necessarily tie to net promoter score. (For readers, net promoter score is the score of customer satisfaction survey’s – How likely is it that you would recommend this company to a friend or colleague? typically rated 1-10 – where 9 and 10 is a net promoter, 7/8 passive, 0-6 detractors).
– Also – the transcript says “year on year” – I interpret that to be 4% down from 1st quarter 2011. Agree with your take that 4th quarter compared to 1st quarter is typically lower but I didn’t read the transcript that way.
– Can you share what you are using for ECM/market that Documentum, Opentext and Filenet is the choice for 50%. Most of our clients have multiple ECMish products so hard to say here.
– Lastly, I agreed with you on the post that EMC will not sell of IIG but not for the same reasons. I mentioned that they haven’t sold anything and, if IIG is not losing money, why bother. Not sure I buy the building block of information governance and big data strategy. Bigger questions is will they invest in R&D if there revenues are declining? What are your thoughts?
Do you work in Marketing Alan? We have been hearing this same Marketing spin from EMC IIG for 3 years now. They even brought in some former FileNet folks who were supposed to be the ‘savors’ for IIG and they have made it worse. The bottom line is that the ECM market is now mature and IIG is suffering big time. They have steadily losing money according to Joe T. year over year.
TSG Dave says
I am not sure that IIG is losing money – just that revenue is down. Big difference between revenue decreasing and actually losing money. Agree with your point the ECM is mature. I think that commodity pricing and competition (SharePoint, Alfresco….) will put pricing pressure on “entrprise” software and user based pricing – therefore affecting revenue.
Alan Lee says
I’m also in the consulting business for 8 years and pointing just the fact that major analysts have ranked IIG as leader/visionary in this business
Pointing also the fact that, not meeting sales goals doesn’t mean loosing money. EMC sales target is always big and they can miss their forecast, but still be strong performers in the ECM marketplace over years.
Agree with you, ECM is now a commodity moving to the cloud.
Hi Dave, I agree with you on the Revenue vs. ‘losing money’ ponit. That being said, I have been in the ECM space for a long time and EMC IIG has been telling the industry folks for about 3.5 years that they “were turning it around”. The fact is that they are a large player in the ECM space per market share (as seems to be Alan’s important point). However, from the folks I know in the industry they are seen as a 2nd rate ECM vendor. Please understand that these same ‘Industry Analyts’ that Alan is raving about, has stated that they don’t see a ‘game changer’ for EMC IIG. My view is that EMC Core needs to sell off this poor performing company (compared to other ECM vendors and to their own internal divisions) and/or clean house with Rick D. and his FileNet buddies.
btw: I don’t believe any of the companies you mentioned above would acquire EMC IIG. SAP has a 20 year integrated product folio with Open Text and is a strong brand in the industry. They wouldn’t just replace it with EMC IIG. MSFT, forget about it …. Oracle and IBM, no way.
Finally, any somewhat smart business person would know that losing revenue year over year is not a Sustainable business model. It just is not and it hardly takes a business degree to appreciate that situation. IIG will continue to die on the vine so to speak.
TSG Dave says
By the leader/visionary ranking, are you talking about Gartner? I wrote on that here
in regards to Alfresco. I am not sure many of us in the ECM world put that much significance on the “Magic” Quadrant anymore. Ability to Execute seems to be based on size – something that I think hampers innovation and ability to react to the market.
TSG Dave, ‘spot on’ with your statement to Alan regarding the Gartner MQ for ECM. Gartner has many of these ECM vendors as PAID CONSULTANTS and I frankly don’t believe much of what they report from it any more … the ‘big guys’ wine and dine them to influence their MQ reports.
fyi: I meant to write that many of the ECM vendors’ pay Gartner consultants to assist with their ECM strategy …. sort of a ‘conflict of interest’ wouldn’t you think ???
Alan Lee says
If ovum, forrester and Gartner have ranked emc IIG #1 vision/execute, they cannot all be wrong. Now emc, FileNet and opentext can more or less deliver same capabilities to customers.
Let be franck, we all use analyst reports to advice customers and they are Usefull
Back to emc, I honestly think that they will continue to invest in Documentum and i will attend next emc world to give here feedbacks on their strategy.
I’m more concern about alfresco and SharePoint (+others) future than documentum, filenet or opentext. These big guys are real ECM players and will be there for the next 4 years.
Let look at facts not rumors
Alan, your comments are rather non sequitur to say the least. I am addressing declining revenues for several years for EMC IIG and you are talking about ‘Vision/execute’. Uh ? Can you please stay on topic per the headline article that was written?
I fully understand now you seem to have this blind worship for the analysts; I got that. I on the other hand don’t trust many of these Industry groups (as you seem to be fawning over) because they as I wrote prior, tend to favor the big ‘guys’ who spend thousands of dollars paying consulting dollars for their strategic advise. And, as David already pointed out, Gartner’s ECM MQ has basically become irrelevant. I agree!
Btw: You wrote you are in Consulting, so I am confused that you would be using these ‘analyst reports” to advice a customer. Are you consulting sales ? Who do you work for ?
The fact is that EMC IIG has missed the revenue numbers for almost 3 years. That is a fact not a rumor. In the past, EMC Documentum and IBM-FIleNet were seen as the ‘go to’ ECM vendors and Open Text was behind them. Now the ECM vendors are all bunched together. The ECM market is matured (according to Gartner). EMC IIG’s so called strategy has been all over the map … do you really, really want me to go there with you?
Finally, I find it laughable that you write these “big guys are really the ECM ‘players’. Uh ? What ? What the heck do you mean by that ? So if that is your fatuous logic, then I guess your buddies ‘Ovum, Forrester, and Gartner’ are all wrong for covering these other ‘non big ECM guys’. Again, your logic is flawed and not cogent.
You can’t argue against the fact that IIG is failing in their financial performance. They have been missing their $$$ targets for many years now, and that is why EMC Core has been reporting on them missing their financial numbers during 2010, 2011, and now 2012. No amount of spin by you nor IIG Marketing can turn that fact fairy tale positives.
alan lee says
I’m in this business since a decade and advice customers a building block leveraging documentum, filenet, open text or opensources regarding their requirement matrix and roadmap. And yes, I do use analysts studies. And your accusation is not fair regarding gartner!
Now, back to your post (which is good research), you need to understand the difference between GAAP analysis and sales forecasts / bookings revenues analysis => that’s my point.
If you look at the global ECM Market spending and shares … you will understand.
You can’t say that Us gov, Indian gov, and Israeli gov who all decided in Q1 (the quarter you are mentionning) to rationalize their case management strategy around documentum, are fool enough to not analyze the risk around IIG continuity!
IBM, EMC and OpenText are the leaders, their revenues can decline, but they do re-structure their investment to get a good GAAP at the end of the day, and yes companies are spending less money in ECM (now a commodity).
Acquisitions are done based on coverage, penetration and GAAP analysis==> again no real sign that EMC will sell IIG.
The ECM Market is changing, the way it will go ? BCS (box.net, alfresco, sharepoint…) + vertical content intensive solutions (hot!) +
TSG Dave says
Thanks for all your posts.
While we agree on one item (that EMC won’t sell IIG) it is for different reasons. You seem to point think someone would pursue getting IIG from EMC. I am stating that, given it is the poorest performing division, that EMC might consider selling it. That said, I don’t think EMC would as it is just a small component (2-3%) of their overall revenue.
I have been proposing a win-win sale to SAP for the last two years. SAP has a strong client base that could benefit from strong ECM play like Documentum (SAP internal or OpenText hasn’t been that successful with ECM) and IIG could leverage the strong client relationships and a true growing software company. EMC knows infrastructure and, while is phenomenally successful with storage and VMWare, they have not gotten the leverage to the software space of Documentum (as shown by the declining revenues and very separate sales organizations).
My two cents – thanks again for the posts,
Alan, I fully understand you have a vested interest in the outcome of IIG. I got that and your ‘interesting’ spins and comments speaks volumes of your (in my humble opinion), bias views for them. That being said, I am just sort of amazed you just continue to discount the poor financial numbers that EMC IIG has been producing for the past 3 years. Most folks know that IIG have been cutting expenses and downsizing also over the past 3 years and I and many others know the reason for IIG is primarily driving for profit vs. investments.
I sincerely am not trying to pick on you but I have to say, I am really tired of the ‘master’ spin by the IIG Marketing folks that “hey the strategic breakout for IIG will be TCM (about 14 months), no it’s Collaborative Case Management (about 6 months), no it’s xCP (2 years and counting), etc.” And, in my views/exp, Gartner plays along with the big boys due to $$$$. They have been accused of that for years so I don’t have a monopoly on that perception.
Finally, I believe the market (customers) is going towards more of a EIM infrastructure and the ECM layer is just one piece of it. Major pieces of ECM have become a commodity, period.
Dave, I don’t know where you have come to the conclusion that SAP has not been that succussful with Open Text ECM, but that is not correct. Far from it.
Hemant Prasad says
I can’t comment on whether SAP has been successful with OpenText ECM or not, but OpenText has been successful with SAP. I often see OpenText sales folks jumping for joy because SAP sales folks are selling their ‘sap archival’ licenses to their existing SAP customers to meet numbers.