Editor’s note: EMC’s profitability fell last quarter as the tech giant shifts investment to new storage models. So what’s next for the company, which has a major presence in the Triangle? Technology Business Research analyst Krista Macomber offers a detailed analysis.

HAMPTON, N.H. – EMC’s 1Q15 financial performance WAS challenged by declines in the traditional storage market

In 1Q15 EMC continued to reposition its portfolio and business structure to solidify its leadership in the declining traditional storage market. The vendor’s financial performance was weakened by internal go-to-market execution challenges and external pressures such as declines in the high-end disk market and geopolitical factors in Russia and China. To augment its traditional storage revenue, EMC is aggressively targeting newer storage technology segments, including flash, scale-out file and object storage, SDS and converged infrastructure, which are all growing at a faster rate than traditional storage.

EMC reported that its market share in several of these product segments exceeds its share in the traditional external storage market. TBR believes this demonstrates the company’s success in leveraging its leadership and install base in the traditional storage market to help customers bridge the gap between legacy and newer storage technologies.

In 1Q15 EMC’s consolidated revenue increased 2.4% year-to-year to $5.6 billion. Revenue growth was driven by its VMware, Pivotal and RSA businesses, while declines in EMC Information Infrastructure weakened revenue growth. EMC reported that its 1Q15 operating income of 6.8% was down 500 basis points year-to-year, as the vendor’s portfolio initiatives increased operating expenses.

While reduced demand for high-end SAN systems will continue to have a negative impact on EMC’s corporate financials for the next three to five years, TBR believes EMC II’s Emerging Storage segment will support its financial growth in 2015. EMC II’s Emerging Storage revenue increased 14% year-to-year in 1Q15, and is on pace to become EMC’s second-largest storage hardware business segment in revenue by the end of 2015.

TBR believes the company is successfully building scale in targeted, high-growth markets such as network virtualization and flash storage. As EMC faces significant competitive pressure in these markets going forward, the vendor will solidify customer relationships within its core enterprise install base to help to ensure future revenue and profit growth.

EMC will improve long-term storage revenue and margins by continuing to refine its cross-federation go-to-market strategy

EMC II is entering a new phase in its business, whereby its revenue and profits are becoming less dependent on legacy high-end disk-based SAN solutions and more dependent on converged, software-defined and flash storage, as well as more open systems. As opportunities for high-end disk storage deployments declined in favor of commoditized platforms, EMC II revenue declined slightly in 1Q15, falling 0.7% year-to-year. Looking ahead at EMC’s three-year trajectory, TBR expects EMC will face rising difficulty improving its revenue and profit performance as flash storage becomes commoditized, traditional portfolio lines between servers and storage continue to blur and competition intensifies around delivering full software-defined data center capabilities.

EMC and its peers face the challenge of navigating significant change and disruption as customers’ traditional business and IT models become upended and their workload requirements grow increasingly unpredictable. Portfolio bets such as EMC’s acquisitions of DSSD and TwinStrata in 2014 are smart and strategic; they will help to keep EMC at the heart of data-centric, mission-critical workloads such as SAP HANA. The promise of truly abstracted, simple-to-use and heterogeneous software-defined IT has yet to be realized. EMC has an opportunity to emerge as a leader in addressing customer pain points such as IT complexity through continued evolution of its ViPR software-defined storage controller and innovations such as its VSPEX Blue Manager.

In today’s marketplace, adopting a nimble and agile portfolio strategy alongside clear, consistent messaging is key. EMC’s federated business model is an asset provided it continues to mature in its ability to walk the delicate line between driving an open alliance strategy and close integration with VMware and Pivotal. As HP, Symantec and IBM drive toward more focused business strategies and Dell works to better unify its corporate structure, the go-to-market approach becomes even more critical to setting EMC apart.

EMC’s close integration with VMware vSphere is a double-edged sword

Integrating more closely with VMware than peers has been an important portfolio focus for EMC since its acquisition of VMware in 2006. Today, close ties to VMware are more strategic than ever to EMC as VMware drives product initiatives outside of its core server virtualization market. VMware is increasingly bringing to the market critical, differentiating functionality by investing in areas such as hyperconvergence and hybrid cloud management — making the company an increasingly important partner across the data center ecosystem. However, EMC has particular interest in VMware’s success as more of EMC’s corporate revenue and profit performance becomes influenced by VMware’s success.

As a result, EMC is more closely intertwining its portfolio with VMware, expanding integration to include products such as EMC Avamar and EMC Data Domain to meet customer requirements for integration of backup and recovery with production, cloud-based workloads.

VMware is positioned well in the race for third-generation platform leadership, as a result of its incumbency as a leader in compute virtualization, investments in end-user computing, software-defined data center and hybrid cloud management technologies, and its focus on broadening its sales and marketing reach across the data center. However, this race is far from won as customers accept heterogeneous IT environments for choice and flexibility.

For the many benefits EMC gains from positioning as the best partner for VMware and demonstrating a clear commitment to its federated businesses, EMC also risks alienating itself from other potential strategic partners, such as Microsoft, and from customers in this unpredictable and rapidly changing market. Balancing partnership and portfolio openness with its own increasing reliance on VMware’s success for revenue and profit growth is challenging but necessary for EMC.

TBR believes that going to market with a message of superior integration and interoperability not only with VMware, but also with OpenStack and technologies from third-party ISVs such as Microsoft, will help EMC to maximize its storage growth opportunities and avoid customer and partner skepticism.