About a decade ago, I enjoyed a Christmas party at the 10,000 square foot mansion of a son of the co-founder of data storage giant EMC. Sitting in a comfortable room of the house, one of the guests raved about its beauty. In response, the owner quipped, “It seemed like a good idea when the stock was $100.”
Looking at the stock chart of companies like EMC, Cisco Systems, and Microsoft reminds me of the 14 years that have passed since the end of that 1995 to 2000 boom during which their stock prices soared.
After peaking in 2000, EMC stock tumbled to about $5 a share in October 2002 and has since climbed to $27 — 73% below its peak. One of EMC’s best moves since then was to pay $625 million in cash in 2004 to acquire VMWare, a data virtualization software maker that makes 100 physical servers do the work of 500 virtual ones. EMC’s 43 million shares in the now-publicly traded VMWare are worth a tidy $4.6 billion.
Now a VMWare-like upstart is nipping at EMC’s heels. The CEO of Actifio, a Waltham, Mass.-based startup that saves companies money on data storage, said that 22% of its revenue is coming out of EMC’s hide.
EMC declined to comment.
In a classic David and Goliath tale, EMC is the giant that is dedicated to encouraging companies to buy its expensive gear to store their data. And as the volumes of corporate data keep growing so are the costs of storing and retrieving that data.
One reason for that growing cost is that companies make many copies of their data – used for many purposes like backup and recovery, testing new computer systems, or development of new applications — on separate devices.
Actifio gets rid of the need for all those copies — letting companies do all these things through a single “golden copy” that also slashes the time it takes to retrieve old files.
EMC could have developed a product that helps companies in these ways — but it would have cut into EMC’s revenue as customers bought the cheaper product that saved them money and time.
Actifio has taken advantage of the gap between the interests of customers — who want to operate more efficiently — and EMC management that wants to meet its revenue targets.
EMC has been responding to this threat in a way that has not been overwhelmingly effective. It acknowledges the importance of Actifio’s market – dubbed Copy Data Management – through public statements and white papers. However, EMC has not provided any actual products that deliver a similar benefit to customers.
I’d guess that EMC hopes to blunt Actifio’s growth by suggesting that it may eventually introduce such products.
Meanwhile, Actifio has suffered its own set of disadvantages. Many big companies are reluctant to bet on a startup that could go out of business. After all, startups generally are unprofitable and if a big company like EMC can scare away potential customers, an upstart could burn through its cash and disappear.
But Actifio has lobbed another stone at the head of EMC. On March 23, Actifio announced that it had raised $100 million in new financing – led by hedge fund, Tiger Global Management, along with venture capitalists Andreessen Horowitz and Greylock Partners — that valued the company at $1 billion.
Although revenues are in the $50 million to $100 million range and it is losing money, Actifio’s growth has been impressive. Revenues were up 182 percent in 2013 and it has over 300 business customers – such as Time Warner Cable, Netflix, IBM and Unilever — in 31 countries who pay an average of $349,000 for a three year contract to license its software, according to the New York Times.
Actifio has big ambitions. As founder and CEO Ash Ashutosh explained, “Our market is $46 billion according to IDC. Our product knocks out companies’ cost for copy data management by a factor of 18 to 20. By reducing the number of copies of data, we deliver a huge cost reduction – 18-fold for big companies and two to five-fold for mid-sized companies. We have a long way to go before we achieve 80% market share. Our goal is to get 100% of the market.”
Actifio’s success is coming out of the hides of big companies. “22% of our sales come from what would have gone to EMC. 15% of our sales came from Symantec. And in 50% of our sales, there was nobody else there. We have found a gaping hole in the market that is unaddressed by traditional storage guys.”
Actifio customers are happy. DSM, which operates “Florida’s largest DataCenter network” has been pleasantly surprised by Actifio. DSM CEO David Robinson said, “I was a doubting Thomas on Actifio. Their claims sounded too good to be true and they were a startup –but our technical people found that they delivered. Actifio let one of our customers cut the time to restore an old mailbox from three months to 30 seconds.”
EMC revenues have grown 9% in the last year — and EPS should be up 7% in 2014. That’s too slow to support a P/E of 21. And with Google cutting prices on its cloud services by 85%, Barclays anticipates revenue-reducing price cuts on EMC hardware.
To be fair, EMC beat its latest quarterly earnings per share estimate of $0.59 by a penny and exceeded by $60 million analysts’ $6.64 billion quarterly revenue estimate.
With threats to faster growth abounding, I doubt that mansion-owner will ever see EMC stock return to $100.