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EMC Reports Mixed 1Q

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EMC Corp. reported first quarter 2012 earnings of 31 cents (including stock based compensation), up 29.2% year over year and ahead of the Zacks Consensus Estimate by a couple of cents. The better-than-expected results were driven by robust top-line growth during the quarter, arising from the strong demand for EMC products globally.


Revenue increased 10.6% year over year to $5.09 billion in the reported quarter. This growth was primarily attributed to continued strong demand for EMC’s storage, data protection, virtualization and security products and services during the quarter. However, revenue fell slightly short of the Zacks Consensus Estimate of $5.11 billion.

Segment wise, product sales jumped 4.7% year over year to $3.07 billion. Services benefited from strong demand and surged 20.8% year over year to $2.03 billion in the reported quarter.

EMC Information Storage business revenues jumped 7.3% year over year to $3.69 billion. The company’s mid-tier storage product portfolio witnessed solid revenue growth of 26.0% in the quarter. Isilon scale-out NAS, VNX unified storage family, Backup Recovery Systems portfolio (BRS) and Greenplum portfolio achieved strong year-over-year revenue growth in the quarter.

Revenue from Information Intelligence segment dipped 3.7% year over year to $145.6 million. RSA information security business shot up 18.5% year over year in the reported quarter. EMC information infrastructure revenue increased 7.3% year over year in the quarter. VMware Inc. (VMW - Free Report) , in which EMC holds a majority stake, posted an impressive revenue growth of 25.0% on a year-over-year basis to reach $1.05 billion in the reported quarter.

On a geographical basis, domestic revenues climbed 11.0% year over year to $2.6 billion and contributed 52.0% to the quarter’s revenue. Revenue from the company’s international operations escalated 10.0% year over year to $2.5 billion and accounted for the remaining 48.0% of revenues.

Revenues increased 6.0% year over year in the Europe, Middle East and Africa (EMEA) region. Revenue in both Asia Pacific & Japan, and Latin America increased 20.0% on a year-over-year basis.

Operational Performance

Gross profit (including stock-based compensation but excluding restructuring and acquisition related charges, and intangible asset amortization) stood at $3.18 billion, up 16.1% year over year. Gross margin expanded 290 basis points (bps) to 62.3%, primarily driven by strong revenue growth.

Operating profit (including stock-based compensation but excluding restructuring charges and intangible asset amortization) was $979.4 million, up 25.3% year over year. Operating margin increased 220 bps to 19.2%, based on robust gross margin expansion.

Net income (including stock-based compensation but excluding restructuring charges and intangible asset amortization) in the first quarter was $673.3 million, up 22.6% year over year.

Balance Sheet

As of December 31, 2011, cash and cash equivalents including short-term investments were $6.34 billion compared with $6.32 billion at the end of December 31, 2011. EMC generated $1.69 billion in cash flow from operations in the first quarter compared with $2.18 billion in the prior quarter.

2012 Guidance

EMC expects revenues of approximately $22.0 billion for fiscal 2012 (in line with the Zacks Consensus Estimate). Non-GAAP operating income is expected to grow 24.0% (prior guidance 17.0%) for fiscal 2012. Non-GAAP net income is expected to be approximately $3.8 billion (prior guidance $3.7 billion) for the full year. EMC expects earnings to exceed $1.70 for fiscal 2012, excluding 29 cents related to stock-based compensation.

The current Zacks Consensus earnings estimate is pegged at $1.43 per share for fiscal 2012 (includes stock based compensation), which is slightly higher than management’s current outlook (including 29 cents in stock-based compensation; the company’s guidance translates to an earnings of $1.41 for fiscal 2012). EMC also expects to repurchase shares worth $700.0 million in fiscal 2012, which will boost earnings growth going forward.

Our Recommendation

According to market research firm Gartner, IT spending over the 2010-2015 period will be highest on computing hardware, of which data storage forms a major part. As enterprises continue to adopt cloud computing technologies, data center hardware spending is also expected to increase going forward.

Data center hardware spending includes servers, storage and enterprise data center networking equipment. Data center hardware spending is further forecasted to surpass $126.2 billion by 2015.

We believe that EMC is well positioned to benefit from this incremental spending going forward. Higher spending on high-end products (average selling price $250,000 and above) will also boost EMC’s market share going forward. We believe that EMC’s vast product portfolio, which has products suitable for any kind of budget, will boost its market share going forward.

We also believe that the increasing adoption of cloud computing technology will significantly drive the demand for EMC’s virtual infrastructure products, which in turn is expected to drive top-line growth going forward. Further, EMC’s leading position in the emerging economies of the Asia-Pacific and Africa will boost its profitability, as higher revenues from these markets will offset a sluggish growth in the Americas and Western Europe going forward.

However, we believe that supply chain problems, particularly the unavailability of hard disks due to the devastating floods in Thailand, will remain a concern for EMC in the near term. Moreover, increasing competition from companies such as International Business Machines Corp. (IBM - Free Report) , Hewlett Packard Co. (HPQ - Free Report) , NetApp Inc. (NTAP - Free Report) , Hitachi Data Systems, Dell Inc. and a sluggish IT spending outlook for the next two years will keep the stock range bound in our view.

Thus, we remain Neutral over the long term (6-12 months). Currently, EMC has a Zacks #2 Rank, which implies a Buy rating in the near term.

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