EMC: Fiscal 3Q13 Financial Results

EMC Corporation reported quarterly financial results that were highlighted by year-over-year revenue growth for its Information Infrastructure business, and accelerated year-over-year revenue growth for VMware and Pivotal.

Third-quarter consolidated revenue was $5.5 billion, an increase of 5% compared with the year-ago quarter. Third-quarter GAAP net income attributable to EMC was $586 million and GAAP earnings per weighted average diluted share were $0.27. Non-GAAP1 net income attributable to EMC was $860 million and non-GAAP1 earnings per weighted average diluted share were $0.40.

During the quarter, operating cash flow grew 25% year over year, generating $4.7 billion year to date. Free cash flow grew 26% year over year in the third quarter, generating $3.7 billion year to date. The company ended the third quarter with $17.5 billion in cash and investments.

Joe Tucci, EMC chairman and CEO, said: “The EMC federation across EMC Information Infrastructure, VMware and Pivotal continues to be well positioned in our target markets and very well received by customers and partners. We leveraged the unique power of our business model in the quarter to expand our technology portfolio, strengthen our partner ecosystem and extend our leadership in cloud computing, big data and trusted IT. Despite our disappointment with our quarterly results, our confidence in the success of our strategy over the long term has never been stronger.”

David Goulden, EMC president and COO, said: “While our financial results for the third quarter were impacted by a decline in US federal spending and a backend-loaded quarter, we achieved almost all of our strategic and operational goals. We were pleased to see storage demand accelerate in the third quarter excluding US federal, and we think this is an encouraging sign for the storage market overall. Going forward, we remain confident EMC will continue to grow and gain market share.”

Third-Quarter Highlights
In the third quarter, Information Infrastructure business once again grew revenue year over year. Within this, Emerging Storage business increased revenue 66% year over year . Highlights within Emerging Storage included: continued strong year-over-year growth and a record number of new customers for the EMC Isilon scale-out NAS portfolio, solid demand for Atmos object-based storage, and greater than 50% year-over-year revenue growth for VPLEX virtual storage. Other achievements in the storage business in the quarter included the refresh of the mid-tier Data Domain product line in July and the launches of the next-generation VNX and ViPR in September. RSA Information Security business increased revenue 11% year over year, the result of year-on-year revenue growth for both the Identity and Data Protection and Security Management and Compliance businesses.

VCE had an excellent third quarter as demand for Vblock systems showed accelerated year-over-year growth, outpacing the fast-growing market for converged infrastructure. VSPEX reference architecture solutions saw continued strong growth with rapid adoption and popularity with customers and among partners. Additionally, third-quarter revenue from cloud service provider partner program, the company’s fastest-growing vertical market segment, increased well over 50% year over year.

In the third quarter, VMware achieved accelerated double-digit year-over-year revenue growth. The company is positioned to help customers move from the client-server era to the mobile-cloud era of computing. As VMware helps customers bridge to this new world, it is enabling them to capture new levels of efficiency, control and agility.

Pivotal – the new company that unites strategic technology, people and programs from EMC and VMware – continued to execute well in the third quarter as it builds a next generation platform comprising new data fabrics, application fabrics and a cloud-independent platform-as-a-service. Pivotal’s recent acquisition of Xtreme Labs adds a dimension to this effort, as Xtreme Labs’ advances in mobile application development are highly complementary to the expertise of Pivotal Labs, the agile development services unit within Pivotal.

Consolidated third-quarter revenue from the United States increased 2% year over year to $3.0 billion, representing 53% of consolidated third-quarter revenue. Revenue from business operations outside of the United States increased 8% year over year to $2.6 billion and represented 47% of consolidated third-quarter revenue. Within this, on a year-over-year basis, revenue from Europe, Middle East and Africa region grew 8%, revenue from AsiaPac and Japan region increased 8%, and revenue from Latin American region grew 13%. Revenue from EMC’s BRIC+13 markets increased 19% year over year.

Business Outlook

• Consolidated revenues are expected to be $23.25 billion for 2013.
• Consolidated GAAP operating income is expected to be 18.0% of revenues for 2013 and consolidated non-GAAP operating income is expected to be 25.0% of revenues for 2013. Excluded from consolidated non-GAAP operating income are stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges and the amortization of VMware’s capitalized software from prior periods, which account for 4.2%, 1.7%, 1.0% and 0.1% of revenues, respectively.
• Total consolidated GAAP non-operating expense, which includes investment income, interest expense and other income and expense, is expected to be $319 million and consolidated non-GAAP non-operating expense is expected to be $350 million in 2013. Excluded from consolidated non-GAAP non-operating expense is a net gain on disposition of certain lines of business and other for ($31 million).
• Consolidated GAAP net income attributable to EMC is expected to be $2.9 billion in 2013 and consolidated non-GAAP net income attributable to EMC is expected to be $3.9 billion in 2013. Excluded from consolidated non-GAAP net income attributable to EMC are stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware’s capitalized software from prior periods, the benefit of the 2012 R&D tax credit, special tax charges and a net gain on disposition of certain lines of business and other, which account for $630 million, $260 million, $170 million, $15 million, ($60 million), $23 million and ($22 million), respectively.
• Consolidated GAAP earnings per weighted average diluted share are expected to be $1.33 for 2013 and consolidated non-GAAP earnings per weighted average diluted share are expected to be $1.80 for 2013. Excluded from consolidated non-GAAP earnings per weighted average diluted share are stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware’s capitalized software from prior periods, the benefit of the 2012 R&D tax credit, special tax charges and a net gain on disposition of certain lines of business and other, which account for $0.29, $0.12, $0.08, $0.01, ($0.03), $0.01 and ($0.01) per weighted average diluted share, respectively.
• The consolidated GAAP income tax rate is expected to be 20.5% for 2013. Excluding the tax impact of stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware’s capitalized software from prior periods, the benefit of the 2012 R&D tax credit, special tax charges and net gain on disposition of certain lines of business and other, which collectively impact the tax rate by 3%, the consolidated non-GAAP income tax rate is expected to be 23.5% for 2013.
• GAAP net income attributable to the non-controlling interest in VMware is expected to be $195 million for 2013 and non-GAAP net income attributable to the non-controlling interest in VMware is expected to be $285 million for 2013. Excluded from non-GAAP net income attributable to the non-controlling interest in VMware are stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware’s capitalized software from prior periods, the benefit of the 2012 R&D tax credit and a net gain on disposition of certain lines of business and other, which account for $70 million, $15 million, $13 million, $4 million, ($6 million) and ($6 million), respectively. The incremental dilution attributable to the shares of VMware held by EMC is expected to be $10 million for 2013.
• Consolidated net cash provided by operating activities is expected to be $6.8 billion for 2013 and free cash flow is expected to be $5.5 billion for 2013. Excluded from free cash flow are $900 million of additions to property, plant and equipment and $400 million of capitalized software development costs.
• The weighted average outstanding diluted shares are expected to be 2.16 billion for 2013.
• EMC expects to repurchase an aggregate of $3.5 billion of the company’s common stock in 2013 and the first half of 2014.