EMC Beats, Ups Guidance

EMC Corp.’s (EMC - Analyst Report) third quarter results exceeded the Zacks Consensus Estimates as well as the company’s own expectations. Although results were down from the year-ago period, there was sequential improvement due to cost-cutting efforts and a recovery in corporate IT spending.
 
Revenues of $3.52 billion for the quarter were above the Zacks Consensus Estimate of $3.48 billion. Although revenues declined 5.3% year over year, it increased 8% from last quarter. The revenue increase was above management’s expectation of a growth of 4% to 5% or between $3.32 billion to $3.36 billion.
 
The sequential revenue growth is mainly attributable to the continued focus on technology, increased execution efforts and operational efficiencies. Moreover, VMware (VMW - Snapshot Report), which is majority-owned by EMC, contributed third-quarter revenues of $489 million.
 
The year-over-year revenue decline was due to lower Product sales (62.6% of total revenue), which was down 11.7% from last year but up 9.7% sequentially. Services revenues (37.4% of total revenues) were up 7.7% year over year and 5.2% sequentially.
 
While storage revenues fell 7.2% year over year as spending on data storage declined, it increased 9.1% sequentially. We see improving demand for servers and storage and expect the momentum to continue in 2010.
 
Excluding stock-based compensation expenses, amortization of intangibles, restructuring and acquisition related charges and other special charges, pro forma earnings was 23 cents, down 8% from 25 cents last year but up 27.8% from 18 cents last quarter. The company’s earnings came in well above the Zacks Consensus Estimate of 16 cents per share.
 
The sequential increase in profitability is attributable to lower cost of sales (44.8% in third quarter of 2009 versus 46.5% in the previous quarter). As a result, gross margin for the quarter improved to 55.2% versus 53.5% in the previous quarter. The sequential increase is attributable to increase in sales and cost cutting initiatives. Earnings also benefited from the lower tax rate.
 
Quarterly Highlights
 
EMC's Information Infrastructure business revenues increased 8% sequentially driven by strong sequential growth of EMC Symmetrix high-end storage systems, Symmetrix V-Max line, next-generation backup and recovery solutions and EMC Celerra unified storage systems.
 
From a geographic perspective, revenues from the U.S. were up 13% sequentially and represented 54% of total revenues. International revenues were up 3% sequentially and represented 46% of total revenues.

The company continues to boast a very strong balance sheet, with net cash per share of $1.51 at the end of September 2009. Year-to-date, EMC has generated strong free cash flow of $1.8 billion and $2.3 billion in operating cash flow.
 
Full-year Guidance Raised
 
The company raised its outlook for the full year. Management expects consolidated revenues to be $13.90 billion in 2009 versus its previous expectation of $13.80 billion. Earnings per share on a non-GAAP basis are expected to be 87 cents compared to its previous outlook of 82 cents per share. Excluding one-time charges, which will impact the tax rate by 6%, the consolidated non-GAAP income tax rate is expected to be 21% for 2009.
 
As a result, consolidated revenue is expected to be $4.00 billion for the fourth quarter, while earnings per share on a non-GAAP basis are expected to be 30 cents. Savings from cost reduction actions are expected to reduce the company's 2008 cost base by $500 million in 2010.
 
The company is benefiting from strong customer demand, new product launches, technology integrations and product enhancements across its Information Infrastructure portfolio. We expect the company to report strong results in 2010 as corporate IT spending and demand are showing signs of stabilization.
 
The company’s product line is pitted against offerings from NetApp Inc. (NTAP - Snapshot Report), Hewlett-Packard (HPQ - Analyst Report), CommVault Systems Inc. (CVLT - Snapshot Report) and Symantec Corp. (SYMC).
 
We have a Neutral rating on EMC.