EMC’s Results Above Expectations

EMC Corp.’s (EMC - Analyst Report) second quarter results were better than analysts’ expectations. Although results were down from the year-ago period, it increased sequentially due to a greater stability in corporate IT spending.
 
Revenues came in above the Street estimate of $3.20 billion and totaled $3.26 billion, down 11.5% year over year but up 3.4% from last quarter. The sequential revenue growth is mainly attributed to the continued focus on technology, increased execution efforts and operational efficiencies.

Year-over-year revenues fell due to lower Product sales (61.6% of total revenue), which was down 18.6% from last year but up 1.8% sequentially, while Services revenue (38.4% of total revenue) was up 3.3% year over year and 5.9% sequentially. Quarterly revenues were negatively impacted by 3.7% due to changes in exchange rates from the prior-year period.
 
Pro forma EPS was 18 cents, down 25.2% from 24 cents last year but up 12.5% from 16 cents last quarter. EPS was above the Street estimate of 16 cents due to the company’s cost-cutting initiatives. EPS also benefited from the lower tax rate, which was 22.6% in the quarter versus 25.7% in the year-ago period and 23.3% in the previous quarter.
 
Despite a year-over-year decrease in operating expenses, operating margin decreased to 14.5% in the quarter from 17.4% in the year ago quarter but increased marginally from 14.1% last quarter. Gross margin increased sequentially due to increase in sales and cost cutting initiatives, partially offset by a negative impact of difficult pricing environment.
 
During the quarter, Dell represented approximately 10% of EMC’s total revenues, out of which CLARiiON revenue contributed 29%, while the rest came from a mix of EMC’s Information storage, Content management, Security and VMware products. NAS witnessed the ninth consecutive quarter of double-digit revenue growth.
 
Guidance
 
EMC expects third quarter to show sequential improvement, while the fourth quarter is expected to be the strongest quarter of the year. For the third quarter, EMC expects consolidated revenues to increase 2% to 3% sequentially, excluding revenues from the acquisition of Data Domain. Including the acquisition of Data Domain, consolidated revenues are expected to increase by 4% to 5% sequentially. For 2009, management expects revenues to be $13.80 billion in 2009, including $200 million of revenues from Data Domain. Pro forma EPS is expected to be 82 cents for 2009. The acquisition of Data Domain is expected to have a neutral impact on non-GAAP diluted EPS for the full year.

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