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EMC Corp. (EMC - Analyst Report) reported first-quarter earnings (including stock-based compensation but excluding other non-recurring items) of 27 cents per share that were in line with the Zacks Consensus Estimate.

Quarter Details

Revenues inched up 1.7% year over year to $5.48 billion, slightly better than the Zacks Consensus Estimate and management guidance. Product sales declined 3.3% year over year, while services increased 8.6% from the year-ago quarter.

Information Infrastructure segment revenues (74.4% of revenues) decreased 2.6% year over year to $4.08 billion. RSA revenues increased 4.7% from the year-ago quarter, which was fully offset by 3.1% decline in Information Storage and modest decline in Information Intelligence.

EMC's emerging storage business revenues surged 81.0% year over year, driven by strong growth of XtremIO all-flash storage, Isilon, Atmos and ViPER products. EMC Syncplicity revenues soared well over 100.0% from the year-ago quarter. Both Security Analytics and Archer product revenues surged more than 25.0%, respectively.

EMC’s majority-owned VMware Inc. (VMW - Snapshot Report) continued to impress with revenue growth of 16.0% on a year-over-year basis to reach $1.35 billion. Pivotal reported revenues of $49.0 million compared with $35.0 million in the year-ago quarter.

On a geographical basis, domestic revenues remained flat year over year at $2.8 billion and contributed 52.0% of revenues. Revenues from international operations increased 3.0% year over year to $2.6 billion and accounted for the remaining 48.0%. Revenues from Europe, Middle East and Africa region grew 8.0% year over year in the quarter.

Gross margin contracted 40 basis points (bps) from the year-ago quarter due to unfavorable product mix. Research & development expenses as percentage of revenues increased 80 bps on a year-over-year basis. Selling, general & administrative expense as a percentage of revenues jumped 200 bps from the year-ago quarter.

Operating margin contracted 290 bps on a year-over-year basis due to lower revenue base and contraction in gross margin base. Net income (including stock-based compensation) was $560.0 million or 27 cents per share compared with $694.0 million or 32 cents in the year-ago quarter.

As of Mar 31, 2014, cash and cash equivalents including short-term investments were $8.26 billion compared with $10.66 billion at the end of Dec 31, 2013. EMC generated $1.34 billion in cash flow from operations compared with $2.19 billion in the prior quarter.

Guidance

EMC forecasts revenues of $24.6 billion for 2014, which reflects year-over-year growth of approximately 5.5% and is slightly higher than the Zacks Consensus Estimate of $24.5 million. The Zacks Consensus Estimate for the second quarter of 2014 is pegged at $5.41 billion.

Non-GAAP operating margin is expected to grow in the range of 24.0% to 24.5% (down from 25.0%) for 2014. EMC expects earnings of $1.90 per share (down from $1.95 per share) for 2014. Currently, the Zacks Consensus Estimate is pegged at $1.61 per share.

Currently, the Zacks Consensus Estimate for second-quarter earnings is pegged at 36 cents per share.

EMC also expects to repurchase shares worth $2.0 billion in 2014. Net cash provided by operating activities is expected to be $7.2 billion and free cash flow is expected to be $5.8 billion for 2014.

Our Recommendation

We believe that EMC is well positioned to benefit from incremental data center hardware spending, going forward. EMC’s vast product portfolio, which has products suitable for any kind of budget, will boost its market share, going ahead. Additionally, aggressive share repurchase will drive earnings, going forward.

However, increasing competition from the likes of IBM Corp. (IBM - Analyst Report) and Hewlett-Packard (HPQ - Analyst Report) and a sluggish IT spending outlook for the next couple of years will continue to keep margins under pressure in the near term.

Currently, EMC has a Zacks Rank #3 (Hold).

Read the Full Research Report on EMC
Read the Full Research Report on HPQ
Read the Full Research Report on VMW
Read the Full Research Report on IBM


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