EMC Corporation (EMC
Q2 2009 Earnings Call Transcript
July 23, 2009 8:30 a.m. ET
Tony Takazawa – VP, Global Investor Relations
David Goulden – Executive VP and Chief Financial Officer
Joe Tucci – Chairman, President and Chief Executive Officer
Keith Bachman – Bank of Montreal
Benjamin Reitzes – Barclays Capital
Mark Kelleher – Brigantine Advisors
Aaron Rakers – Stifel Nicolaus
Wamsi Mohan – Bank of America/Merrill Lynch
Brian Marshall – Broadpoint AmTech
Amit Daryanani – RBC Capital Markets
Toni Sacconaghi – Sanford Bernstein
Chris Whitmore – Deutsche Bank
Bill Choi – Jefferies & Co
Mark Moskowitz – JP Morgan
Bill Shope – Credit Suisse
Troy Jensen – Piper Jaffray
David Bailey – Goldman Sachs
Alex Kurtz – Merriman Curhan Ford & Co
Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator instructions) During the question-and-answer session please press “*1” on your touchtone phone. Today’s conference is being recorded. If anyone has any objections you may disconnect at this time. I would like to introduce your host for today’s call Mr. Tony Takazawa. Sir, you may begin.
Tony Takazawa – Vice President Global Investor Relations
Thank you, Diane. Good morning. Welcome to EMC’s call to discuss our financial results for the second quarter of 2009. Today, we are joined by Joe Tucci, EMC Chairman, President, and CEO; and David Goulden, EMC Executive Vice President and CFO. David will provide a few comments about the results that we released this morning. He will highlight some of EMC’s activities this quarter and discuss some modeling assumptions for 2009. Joe will then spend some time discussing his view of what is happening in the market, EMC’s execution of the strategy, and how EMC is positioned.
After the prepared remarks, we will then open up the line to take your questions. I would like to point out that we will be referring to non-GAAP numbers in today’s presentation unless otherwise indicated. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure today in our press release, supplemental schedules and the slides that accompany our presentation. All of these are available for download within the investor relations section of emc.com. As always, we have provided detailed financial tables in our news release and on our corporate website. And with regard to details of VMware’s results, we refer you their financial release from last night. The call this morning will contain forward-looking statements and information concerning factors that could cause actual results to differ can be found in EMC’s filings with the US Securities & Exchange Commission. And lastly, I will note that an archive of today’s presentation will be available following the call. With that, it is now my pleasure to introduce David Goulden. David?
David Goulden – Chief Financial Officer
Thanks Tony. Good morning and thank you for joining us today. I am pleased to announce that EMC achieved solid quarter results. Our focused execution this quarter resulted in EMC achieving revenues of $3.26 billion, non-GAAP EPS of $0.18 and free cash flow of $400 million. The sequential revenue growth, improving profitability, and strong cash flow is encouraging, given the continued economic environment. Within these results, our EMC Information Infrastructure business achieved $2.8 billion of revenue, a little over $0.14 of non-GAAP EPS. And as you saw last night, VMware also had a solid quarter coming in at the high end of that expected change. VMware’s results contributed $455 million of revenue and $3.03 of non-GAAP EPS to EMC.
This morning, I am going to make some comments about the future spending environments, our business outlook for the second half of the year and some specific details from our Q2 results. Turning now to the financial results for EMC’s Information Infrastructure business, we believe that overall IT spending levels in Q2 were relatively flat with Q1. However, Q2 spending seemed more stable and a little more predictable during the quarter. We attribute the stabilization to customers having more confidence in their IT budgets than they had at the beginning of the year. And while the economic environment remains very tough and customers continue to scrutinize their spending very carefully, the stabilization is a positive sign. Within this IT spending environments, I am pleased that we achieved sequentially better revenue profitability in Q2. During the quarter, we experienced more normal linearity compared with Q1 and the business delivered sequential revenue growth across all our major geographies and in all of our business units.
The area of our business that most exceeded our expectations was our information storage business in North America, where revenues were up 5% sequentially. Positive increase was due to a more favorable budget environments and part was due to storage capacity upgrades that customers deferred in Q1. We also firmly believe the strength of our product portfolio was an advantage. While pressure on global IT spending is expected to continue, our results from the first half of the year give us more confidence and we have the right business model and the right product portfolio to do well under challenging conditions.
So with that as a backdrop, I will make some comments about our business outlook for the remainder of the year. Our view that overall IT spending in 2009 will be down very high single to very low double digits has not changed. Based on the more stable spending environment we saw in Q2, our first-half performance and what we are seeing here in the marketplace, we now have better visibility and more confidence in the second half of 2009. We are now planning for EMC to achieve revenues of approximately $13.8 billion and non-GAAP EPS of approximately $0.82 for the year. These expectations include the acquisition of Data Domain. In the near-term, we believe the seasonality of our revenues from Q2 to Q3 will be more normal, i.e. up 2% to 3% with the remainder of the business coming in Q4. However, EMC reported revenues will probably be up 4% to 5% quarter-over-quarter due to the inclusion of Data Domain in Q3.
Now let''s take a closer look at some of the financial highlights from the quarter. EMC information infrastructure revenues were $2.8 billion, up 5% sequentially and down approximately 13% year-over-year. On a constant currency basis, revenues were down about 9% year-over-year. Non-GAAP earnings per share were $0.14. Free cash flow was $213 million. Excluding a series of inter-company tax payments between EMC and VMware, EMC information infrastructure free cash flow was $298 million which was higher than non-GAAP net income and about the same as Q2 2008. In the quarter, information infrastructure product revenues were $1.8 billion and information infrastructure services revenues were $1 billion.
Looking at the results for the business units with information infrastructure, Q2 information storage revenues were $2.5 billion, up 5% sequentially. In the high end, Symmetrix revenues were down 3% sequentially reflecting the continued pressure on large ticket items within the enterprise. I am pleased to announce, the introduction of our new Symmetrix V-Max System is going very well and reception for customers has been phenomenal. Customers appoint V-Max directly into production environments and these systems are achieving six-nines of availability. I hope you understand what six-nines availability means, this equates to an average of approximately 30 seconds of unavailability per system per year, truly unprecedented performance. We are very confident that the Symmetrix’s V-Max is a highly differentiated information storage platform that’s going to strengthen and extend our leadership in the high end of the storage markets. In the mid-tier, EMC CLARiiON revenues bounced back nicely, and were up 12% sequentially. North America and Asia Pacific have strong performance here.
One of the fastest growing opportunities in our storage business is flash technology and we continue to see a high level demand for this capability across our platforms. Year-to-date, we have shipped over 1 terabyte of solid state drives and we expect to see even more utilization of flash on our systems going forward, particularly when our Fully Automated Storage Tiering software comes out for Symmetrix V-Max later this year. EMC’s Celerra NAS business continues to do very well and we achieved our ninth consecutive quarter of double digit revenue growth in Q2. The reliability and scalability of the unified storage systems are very important competitive differentiators within both commercial and large customers, and we continue to gain market share. Importantly, we are encouraged to see more customers planning to add EMC as a new dual source in their previously net up only environments. EMC’s backup and recovery software solutions had good double digit sequential growth and I am very pleased that EMC’s Avamar deduplication solutions grew at over 40% year-on-year. Next generation backup and recovery is a major focus for EMC and we are delighted to welcome Data Domain to our information storage business. Including Data Domain, EMC is clearly the leading provider of deduplication technology with multiple ways for customers to utilize deduplication to manage data growth and reduce costs.
Although not included in EMC’s results reported today, Data Domain achieved Q2 revenues of almost $86 million, up 8% sequentially and up 40% year-on-year. Dell represents about 10% of EMC’s total revenues in Q2. Within this, Dell was approximately 29% of CLARiiON revenues, representing a higher percentage than in Q1. While the near-term economy is challenging, we are confident that over the long-term we will gain share as EMC continues to have the best and also the broadest and the most integrated storage product portfolio. EMC’s storage platform span across the consumer, mid-tier and high end markets, and we continue to lead the market with cost effective, energy efficient solutions with the latest feature functionality. Information storage is a core strength of EMC’s business and our growth and profitability has been strong over the last few years. Our gross margins in this business have consistently been around 50% over the last two years. In Q2, our storage margins bounced back a little and were up 70 basis points sequentially to 48.5%. This is a nice improvement and looking ahead, we expect storage margin to be back around 51% for the second half of 2009.