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EMC Beats on Earnings, Outlook Weak

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EMC Corp. reported fourth-quarter earnings of 52 cents per share that beat the Zacks Consensus Estimate by a couple of cents. Earnings (including stock-based compensation but excluding other non-recurring items) increased 10.7% from the year-ago quarter and were significantly higher than 32 cents reported in the previous quarter.


Revenues increased 10.8% year over year and 20.6% sequentially to $6.68 billion, slightly better than the Zacks Consensus Estimate. Product sales climbed 11.5% year over year and 31.3% sequentially to $4.16 billion. Services increased 9.8% from the year-ago quarter and 6.4% from the previous quarter to $2.53 billion.

Information Infrastructure segment revenues (76.8% of total revenue) increased 9.7% year over year and 23.0% sequentially to $5.13 billion. The year-over-year growth was primarily driven by strong performance from RSA (up 17.5% year over year), Information Storage (up 9.5% year over year) and modest growth from Information Intelligence (up 2.7% year over year).

On a sequential basis, RSA increased 9.1%, Information Storage jumped 23.7% and Information Intelligence surged 26.8% in the reported quarter.

EMC's emerging storage business revenues surged 73.0% year over year, driven by the launch of XtremIO and continued strong growth of Isilon, Atmos and VPLEX products. The company's Unified and Backup Recovery revenues increased 11.0% on a year-over-year basis, benefitting from the recent product launches of the next-generation VNX and Data Domain product lines.

Revenues from high-end storage business rebounded in the fourth quarter as customers continued to adopt the company's popular VMAX family.

EMC’s majority owned VMware Inc. (VMW - Free Report) continued to impress with revenue growth of 16.5% on a year-over-year basis to reach $1.46 billion. Sequentially, VMware revenues increased 13.5% in the reported quarter.

Pivotal reported revenues of $91.0 million declining 6.2% from the year-ago quarter but increasing 13.8% from the previous quarter.

On a geographical basis, domestic revenues increased 11.0% year over year to $3.5 billion and contributed 52.0% to total revenue. Revenues from international operations increased 11.0% year over year to $3.2 billion and accounted for the remaining 48.0%.

Revenues from Europe, Middle East and Africa region grew 15% year over year in the quarter. Revenues from Asia Pacific and Japan region increased 1%, and that from Latin America region grew 12%.  Revenues from EMC's BRIC+13 markets increased 17% year over year in the last quarter.


Gross margin contracted 160 basis points (bps) from the year-ago quarter but increased 80 bps from the previous quarter. The year-over-year decline was due to unfavorable product mix. Sequentially growth was primarily due to higher revenue base.

Research & development expenses as percentage of revenues declined 40 bps on a year-over-year basis and 180 bps on a quarter-over-quarter basis. Selling, general & administrative expense as a percentage of revenues decreased 160 bps from the year-ago quarter and 230 bps on a sequential basis.

Operating margin expanded 40 bps on a year-over-year basis and 480 bps from the previous quarter to 23.8% due to higher revenue growth and gross margin base. Net income as a percentage of revenues was 16.5% compared with 17.2% in the year-ago quarter and 12.6% in the previous quarter.

Earnings (excluding stock-based compensation and other non-recurring items) increased 11.1% from the year-ago quarter and were significantly higher than 32 cents reported in the previous quarter.

Balance Sheet & Cash Flow

As of Dec 31, 2014, cash and cash equivalents including short-term investments were $10.66 billion compared with $10.60 billion at the end of Sep 30, 2013. EMC generated $2.19 billion in cash flow from operations in the fourth quarter compared with $1.79 billion in the prior quarter.

Restructuring Action

EMC also announced a restructuring plan that consists of a workforce reduction program. The restructuring is expected to be substantially completed by the end of the first quarter and fully by the end of 2014. The total charge will be around $100.0 million to $120.0 million for the program.


EMC forecasts revenues of $24.5 billion for 2014, which reflects year-over-year growth of approximately 5.5% and is slightly lower than the Zacks Consensus Estimate of $24.9 million. First-quarter 2014 revenues are expected to be 22% ($5.39 billion) of full-year revenues, which is also lower than the Zacks Consensus Estimate of $5.81 billion.

Non-GAAP operating margin is expected to grow to 25.0% for 2014. EMC expects earnings of $1.95 per share for 2014. Currently, the Zacks Consensus Estimate is pegged at $1.67 per share.

Earnings are expected to be 35 cents per share for the first quarter of 2014. Currently, the Zacks Consensus Estimate is pegged at 34 cents per share. EMC also expects to repurchase shares worth $2.0 billion in 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 - Free Report) and Hewlett-Packard (HPQ - Free Report) and a sluggish IT spending outlook for the next couple of years will continue to keep margins under pressure in the near term.

Moreover, the company’s first-quarter and 2014 outlook are unimpressive, which will remain an overhang on the stock, going forward.

Currently, EMC has a Zacks Rank #4 (Sell).

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