Editor’s note: Krista Macomber is an analyst with Technology Business Research. She goes inside EMC’s latest earnings report. EMC is a big tech employer in the Research Triangle Park, N.C. area.

HAMPTON, N.H. - As EMC’s federated businesses make strides in targeted growth initiatives, long-term success will depend on careful go-to-market execution

The EMC federation reported record second-quarter revenue of $5.9 billion during 2Q14, representing an increase of 4.7% over the year-ago quarter.

Each of EMC’s federated businesses — EMC Information Infrastructure (EMC II), VMware, Pivotal and RSA — achieved growth, indicating success in evolving their portfolios and executing around selling cross-federation solutions to maximize opportunities emerging in the transition to big-data-centric and cloud-enabling IT infrastructures. However, increases in cost of goods sold and SG&A and R&D expenses outpaced top-line gains, driving operating margin down 330 basis points year-to-year to 14.9%.

Particularly as EMC II endures a period of revenue transition away from legacy high-end hardware, TBR expects the EMC federation’s bottom line to remain pressured over the next 12 months. EMC II CEO David Goulden underscored that executing alongside partners around cross-federation, customer-centric solutions is critical to maximizing opportunities. For an organization with a historic focus on technology speeds and feeds and entrenched in the IT department, execution bears watching.

Within the core EMC II business, revenue climbed 1% year-to-year, or 7% excluding the high-end business. Following the refresh of EMC’s VMAX portfolio in June, which is focused on embracing hybrid cloud service delivery, TBR anticipates accelerated revenue growth for EMC II in 2H14.

However, the business will struggle to improve profitability as EMC embraces hardware commoditization and software-led functionality and builds scale in higher-growth areas of the data warehousing and management marketplace. Notably, EMC’s Emerging Storage business rose 52% year-to-year during 2Q14, buoyed by the XtremIO all-flash array family exceeding $300 million in an annualized demand run rate.

Pivotal, the newest member of the EMC federation, grew revenue 28.6% year-to-year to $54 million, benefiting from its shift toward a software- and services-led model focused on providing the data fabric required for customers’ mobile, socially-connected, cloud-enabled ways of doing business. Demonstrated by rising adoption of Pivotal’s Cloud Foundry PaaS, Pivotal will increasingly influence the EMC federation’s market presence and financial performance by providing inroads to next-generation application and data service requirements. Service revenues grew 44.4% to $39 million, as Pivotal addresses the industry skills gap in building out data analytics and next-generation application fabrics.

Pivotal software license revenues were flat at $15 million, but growth will accelerate in 2H14 and 1H15 as Pivotal shifts from a license- to a subscription-based software model and builds proof-of-concept around its analytics and application management capabilities. This approach coupled with simplified pricing will help Pivotal compete for industry mindshare and accelerate adoption despite broad-based efforts to build cloud platform leadership by vendors ranging from Red Hat to IBM.

  • EMC will accelerate its cloud market share growth by overhauling VMAX to embrace service delivery

As EMC II evolves its portfolio to help customers transition to the cloud, it has lacked a wholesale architecture update to its core VMAX platform. TBR believes that the lack of an architecture overhaul placed VMAX in an increasingly unfavorable light in the face of commoditization and the general customer desire for more openness and flexibility. As a result, EMC’s high-end storage revenue fell 14% year-to-year during 2Q14.

However, EMC announced in July a number of dramatic steps toward supporting customers’ cloud initiatives with the VMAX portfolio, which TBR believes will help EMC shed its reputation as a provider of inflexible and expensive proprietary hardware, and provide new fuel to accelerate its push toward next-generation IT architectures.

Core to EMC’s VMAX refresh is its new VMAX3 family of systems. TBR recognizes a concerted effort by EMC to protect the VMAX reputation for reliability and availability with the new architecture, but also to improve scalability and agility of the platform with innovations such as its HYPERMAX open converged operating system and storage hypervisor. As a result, EMC appears poised to protect its high-end storage market share, but also to attract new customers and ensure its future relevancy among next-generation workloads. We anticipate that lowering total cost of ownership for workloads such as Oracle and SAP analytics through platform consolidation and improved performance will emerge as an important draw to the VMAX platform.

EMC’s VMAX innovations are augmented by the vendor’s 2Q14 acquisition of TwinStrata, which enables EMC to tier workloads to third-party public cloud services as capacity requires. With competitors such as NetApp gaining an earlier advantage in integrating public cloud access into their portfolios, TBR believes that EMC will work to quickly integrate TwinStrata’s capabilities into VMAX and seek additional opportunities for integration (such as with the VNX line) to overcome this disadvantage.

  • EMC will focus on the business outcomes of its broad big data capabilities to accelerate adoption

To help customers harness increasingly unwieldy data stores, EMC is driving toward its vision of “data lakes” as a corporate strategic objective. EMC is integrating its refreshed Isilon portfolio with its broad, cross-federation capabilities, including analytics and converged infrastructure through Pivotal and VCE, respectively, to enable customers to more efficiently and effectively store, protect and manage their exponentially growing unstructured data pools. From this portfolio perspective, TBR believes that EMC is competitively positioned. However, EMC’s messaging is highly focused on various portfolio capabilities. We believe that simplified and centralized messaging will be necessary for EMC to maximize its opportunities as customers incrementally assess big data solutions from the perspective of improving their business outcomes.

TBR believes that centralized management across a number of protocols and access methods including NFS, HDFS, ViPR object and OpenStackSWIFT object is a key selling point of EMC’s data lake vision and capabilities, as managing these heterogeneous environments is a leading pain point and barrier to accelerated business outcomes for customers. Additionally, TBR believes that improved scalability and agility of the Isilon platform alongside tie-ins to EMC’s flash capabilities position EMC to gain scale-out network attached storage market share by better aligning with next-generation analytics, cloud and mobile workloads.

Nevertheless, if EMC is unable to message the benefits of these capabilities to customers’ bottom lines, we expect that Isilon, and EMC’s broader data lake initiatives, will do little to accelerate top-line growth over the next two years.