Zacks_Analysts' Blog : EMC Beats Marginally - Analyst Blog

EMC Corporation’s (EMC) second quarter 2010 earnings of 23 cents per share exceeded the Zacks Consensus Estimate of 22 cents per share by a penny. Earnings per share increased 76.9% from 13 cents reported in the year-ago period, boosted by strong growth in storage spending and an increased demand for data storage equipment.

 

EMC is well positioned to benefit from the strong demand for data storage systems, particularly as cloud computing and digital data storage requirements accelerate. Moreover, Storage remains a top IT spending priority and EMC is well positioned to benefit from the growing corporate IT spending.

 

The rapid growth in cloud computing and business analytics is inducing companies to diversify into this area. We believe EMC’s strong foothold in the storage market positions it to become one of the chief beneficiaries of this growth.

 

Although EMC’s results are well ahead of expectations, competition from International Business Machines Corp. (IBM), NetApp Inc. (NTAP) and Hewlett-Packard Company (HPQ) is intensifying. We therefore maintain our long-term Neutral recommendation on EMC. Our short-term recommendation on EMC is ‘Buy’ supported by Zacks Rank #2.

 

Earnings

 

Earnings per share exclude restructuring and acquisition-related charges and intangible amortization expenses, but include stock-based compensation expense. VMware Inc. (VMW), which is majority-owned by EMC made a contribution of 5 cents per share in earnings.

 

Net income attributable to EMC (including stock-based compensation expense, but excluding intangible amortization charges) for the second quarter increased 78.6% year over year to $484.4 million. The improvement in results is mainly attributable to the continued focus on technology, increased execution efforts and operational efficiencies.

 

Revenues

 

Revenues for the second quarter of 2010 were $4.02 billion, up 23.5% from $3.26 billion reported in the year-ago quarter. The growth in revenue may be attributed to a recovery in corporate IT spending, improving storage demand across all geographical regions, increase in investments to improve customer service and enhance the product and service portfolio. This is the third consecutive quarter of record revenue growth, according to management. Moreover, VMware Inc. contributed $672.8 million to total second quarter revenue, up 47.8% compared with the year-ago quarter.

 

While Product sales (63.5% of total revenue) escalated 27.3% year over year, Services revenues (36.5% of total revenue) were up 17.4% year over year.

 

Revenues by segment

 

The company's Information Infrastructure business (comprising product and service revenues from the Information Storage, RSA Security, and Content Management and Archiving business segments) revenues increased 19.6% year over year to $3.35 billion, driven by a strong customer demand and double-digit revenue growth for EMC’s high-end Symmetrix storage product portfolio, which grew 32% compared with the year-ago quarter. EMC’s mid-tier storage product portfolio revenues grew 33% year over year.

 

Within the Information Infrastructure business, Storage revenues climbed 21.2% year over year to $3.00 billion, backed by a continued growth in the information business. Information Intelligence Group (Content Management and Archiving) revenues fell 1% to $178.4 million, while Security revenues grew 17.8% to $173.3 million.

 

This apart, revenues from the company’s Backup and Recovery Systems Division (BRS), EMC Data Domain and Avamar next-generation backup and recovery products registered growth that exceeded the 100% revenue run rate reported by the company in the first quarter of 2010.

 

Additionally, EMC benefited from the booming customer demand for its RSA information security solutions revenues, which grew 18% year over year, and the company’s broad portfolio of consulting and professional services.

 

Revenues by Geography

 

From a geographic perspective, revenues from the U.S. were up 28% year over year and represented 53% of total revenue. International revenues were up 19% year over year and represented 47% of total revenue. Within the International business, revenues rose 18%, 20% and 22% year over year, respectively, in Europe, Middle East and Africa (EMEA), Asia Pacific, Japan (APJ) and Latin America regions.

 

Margins

 

During the second quarter, EMC expanded gross and operating margins substantially on a year-over-year basis, primarily due to stringent cost controls. EMC has cut about 2,400 jobs under its restructuring initiatives and plans to reduce costs by about $500 million in 2010. The company’s consolidated (including VMware) operating income for the quarter was $831.2 million (20.7% of revenue), up 74.6% from $476.0 million (14.6% of revenue) reported in the year-ago quarter. The year-over-year increase in profitability is attributable to a lower cost to sales ratio (39.9% in the second quarter of 2010 versus 44.8% in the year-ago quarter).

 

Balance Sheet & Cash Flow

 

For the second quarter, EMC generated operating cash flow of $754 million, down from $1.32 billion reported in the previous quarter. Free cash flow was $487 million in the quarter versus $1.11 billion in the previous quarter. Cash, cash equivalents and short-term investments of $6.80 billion were down from $6.90 billion reported in the previous quarter. Long-term convertible debt was $3.16 billion in the quarter.

 

Guidance for 2010 Raised

 

EMC did not provide any quarterly guidance, but raised its guidance for the full year 2010, the second time this year. However, it did not provide any specific 2010 guidance. The company expects to exceed its previous expectation of $16.5 billion in consolidated revenues for 2010. Non-GAAP operating income is expected to be 20% to 21% of revenues for 2010, same as previously projected.

 

Non-GAAP diluted earnings per share, excluding the impact of restructuring and acquisition-related charges, stock-based compensation expense and intangible asset amortization, are expected to exceed previous expectation of $1.18. Consolidated restructuring and acquisition-related charges, stock-based compensation expense and intangible asset amortization are expected to be 2 cents, 23 cents and 9, cents per share, respectively, for 2010.

 

Management estimates 2010 non-GAAP, R&D expense to range between 18% and 19% over 2009 levels, below the previous guidance of 20%. Cost of transition to a more efficient cost structure is projected to be $50 million. Total non-operating expense is expected to be $90 million in 2010. The consolidated non-GAAP income tax rate is expected to be 21% for 2010. EMC expects to repurchase up to $1.0 billion of the company’s common stock.