Zacks_Analysts' Blog : EMC Beats on Strong Revenues - Analyst Blog

EMC Corp. (EMC) reported fourth quarter 2011 earnings per share (EPS) of 42 cents, up 16.1% year over year and ahead of the Zacks Consensus Estimate by a couple of cents. EPS (excluding stock-based compensation, restructuring charges and intangible asset amortization) was 49 cents, up 16.7% year over year from 42 cents in the year-ago quarter.

The better-than-expected results were driven by robust growth in the top line during the quarter arising from the strong demand for EMC products globally.

Revenue

Revenue increased 14.0% year over year to $5.57 billion in the fourth quarter, surpassing the Zacks Consensus Estimate of $5.49 billion. This growth was primarily attributed to continued strong demand for EMC’s storage, data protection, virtualization and security products and services in the quarter.

Segment wise, product sales jumped 11.2% year over year to $3.54 billion. Services benefited from strong demand and increased 19.3% year over year to $2.03 billion in the reported quarter.

EMC Information Storage business revenues jumped 11.8% year over year to $4.07 billion. The company’s high-end Symmetrix storage product portfolio climbed 11.0% year over year while mid-tier storage product portfolio experienced a revenue growth of 24.0% in the quarter.

Revenue from Information Intelligence segment dipped 1.1% year over year to $201.2 million. RSA information security business jumped 16.3% year over year in the reported quarter. VMware Inc. (VMW), in which EMC holds a majority stake, posted an impressive revenue growth of 26.8% year over year to reach $1.06 billion in the reported quarter.

On a geographical basis, domestic revenues climbed 16.0% year over year to $3.0 billion and contributed 54.0% to the quarter’s revenue. Revenue from the company’s international operations escalated 12.0% year over year to $2.6 billion and accounted for 46.0% of revenues. Revenues increased 6.0%, 26.0% and 26.0% year over year, respectively, in the Europe, Middle East and Africa (EMEA), Asia Pacific & Japan, and Latin America.

Operational Performance

Gross profit (including stock-based compensation but excluding restructuring and acquisition related charges, and intangible asset amortization) stood at $3.56 billion, up 18.8% year over year. Gross margin expanded 250 basis points (bps) to 63.9%, primarily driven by strong revenue growth.

Operating profit (including stock-based compensation but excluding restructuring charges and intangible asset amortization) was $1.25 billion, up 18.6% year over year. Operating margin increased 90 bps to 22.5%, based on robust gross margin expansion.

Net income (including stock-based compensation but excluding restructuring charges and intangible asset amortization) in the fourth quarter was $913.4 million, up 28.7% year over year during the quarter.

Balance Sheet

As of December 31, 2011, cash and cash equivalents including short-term investments were $6.32 billion compared with $4.76 billion at the end of September 30, 2011. EMC generated $2.18 billion in cash flow from operations in the fourth quarter compared with $1.29 billion in the prior quarter.

2012 Guidance

EMC expects revenues of approximately $22.0 billion for fiscal 2012 (in line with the Zacks Consensus Estimate). Non-GAAP operating income is expected to grow 17.0% for fiscal 2012. Non-GAAP net income is expected to be approximately $3.7 billion for the full year. EMC projects EPS of $1.70 for fiscal 2012, excluding 30 cents related to stock-based compensation.

The current Zacks Consensus estimate is pegged at $1.42 per share for fiscal 2012 (includes stock based compensation), which is slightly higher than management’s outlook (including 30 cents in stock-based compensation; the company’s guidance translates to an EPS of $1.40 for fiscal 2012). EMC also expects to repurchase shares worth $700.0 million in fiscal 2012, which will boost EPS growth going forward.

Our Recommendation

According to market research firm Gartner, worldwide data center hardware spending is expected to reach $106.4 billion by the end of calendar year 2012. Data center hardware spending includes servers, storage and enterprise data center networking equipment. Data center hardware spending is forecasted to surpass $126.2 billion by 2015. We believe that EMC is well positioned to benefit from this incremental spending going forward.

We also believe that EMC will benefit from its dominant position in the storage market going forward. Moreover, increasing adoption of cloud computing technology will boost demand for EMC’s virtual infrastructure products, which in turn is expected to drive top-line growth going forward.

However, we believe that the current guidance is disappointing, which reflects lack of visibility and sluggish IT spending trend in the near term. Moreover, a sluggish North American and European market coupled with increasing competition from companies such as International Business Machines Corp. (IBM), Hewlett Packard Co. (HPQ), NetApp Inc. (NTAP), Hitachi Data Systems and Dell Inc. (DELL) will remain an overhang on the stock going forward.

We remain Neutral on a long-term basis (6 to 12 months). EMC has a Zacks #3 Rank, which implies a Hold rating in the near term (1-3 months).