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EMC CEO Joe Tucci tries to win hearts and minds from VC backers

VMware spin-off? Let the shareholders decide

Enter Elliott Management

This is the background as Tucci sees it to the Elliott Management activist investor activity aimed at countering EMC's under-performing share price by pushing for a spin-off of VMware.

A questioner said recent EMC acquisitions had been of youngish companies “where the revenues have the opportunity to grow into something bigger. The downside to that I think is that [with] the investment that we are making upfront … you sort of have to wait until the revenues start to ramp up to get to the profitability.”

Tucci admitted that and said it was worthwhile to save money: “If we waited, the price of these acquisitions was going to nosebleed levels.“

XtremIO cost $400 million. Today it would cost $3 billion: “So, obviously, we felt it was better to take some pain upfront.” This has been done with the other acquisitions, paying up front for longer term gains, and they have come in a similar timeframe. The reason is “we do this on behalf of our shareholders. And I think they were good bets.”

If EMC put Pivotal up for sale, starting bids would be at $1.5bn and it would have “mezzanine DCs lined up out the door to buy that company.”

THe headwinds (costs) of the acquisitions and developments will become tailwinds (profits) over time: “I think what we need to be more clear on and I said that we would do this in Q1 [the first calendar quarter of 2015] is when do these headwinds become tailwinds, what’s this investment will be a little bit more forthcoming, not that we are hiding it, when these investments are going to pay off and then of course those headwinds become tailwinds.”

A roadmap is coming.

Will the headwinds become tailwinds in 2015? “I will give you a little look ahead, absolutely not. Will some of them happen? Absolutely, yes.”

He was asked: ”What … is taking the time to ramp these businesses up?” Tucci said EMC had higher product quality standards than the acquired startups and hence development took longer.

EMC has to be better at explaining to investors what it’s doing: ”I think that we have got to be a little clearer on that roadmap so that you as investors and people that follow us can understand how long are these tailwinds going to be there … when the headwinds are going to be there … and then give you a little bit of model because that’s what’s going to produce the leverage again.”

It has been growing its top line revenues but not its bottom line profits so much: ”So we are not producing the leverage which we once had, which of course is not ideal. We should be growing the bottom line faster.”

This is Tucci acknowledging aspects of Elliott’s case about EMC’s share price and EPS under-performing.

He also admits there is too much competition in the federation. EMC has had good mileage out of its [federation] model: “It produced a lot of value [in] the last 11 quarters. So, it’s not that it’s bad, but you have got to continue to morph a model. And basically … you need to have a similar vision to where the market is going.”

He added: "We listen to every shareholder with tremendous respect and as good ideas will come out of everything... This is a fierce industry and we are going up against the likes of IBM and … it’s competition with Cisco. … You have competition from Oracle. You have competition from Microsoft. You have competition from Amazon Web Services. These are big, big companies, right?”

To survive, a business has to get big or get niche, have a niche marketing strategy. It doesn’t want to create less scale or be less relevant. Tucci thinks that the seven bets EMC has made will pay off and EMC will have both the scale and relevance needed for success as a third IT platform player.

The timetable is for the fourth 2014 quarter earnings to be announced on 27 January next year, the roadmap to come before the end of that month, and then the shareholders can decide: Elliott’s way or Tucci’s way? Millionaire vs billionaire.

If they vote for Tucci then he can retire in February and rest easy having seen off Elliott, a feat which few of its investment targets manage to do.

And EMC’s share price will increase, Elliott can sell its shares at a profit, making multiple millions of dollar bits - 12½ cents – while the rest of us in the storage world focus on how to get multiple millions of data bits on and off disk, tape and flash as fast and as cost-effectively as possible - and so the world spins around and moves on.

If not, we may be looking at a VMWare sale... ®

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