EMC Corp. (
reported sluggish third quarter 2012 results, with earnings
(including stock-based compensation expense of 7 cents but
excluding net one-time items of 4 cents), of 32 cents per share,
which missed the Zacks Consensus Estimate by a couple of
Revenue increased 6.0% year over year to $5.28 billion in the
reported quarter, but missed the Zacks Consensus Estimate of
$5.47 billion. The year-over-year upside was primarily attributed
to strong services revenue (up 15.1% year over year to $2.19
billion). Product sales were flat on a year-over-year basis in
Segment wise, EMC's Information Storage business revenues
increased 2.7% year over year to $3.76 billion, thanks to strong
demand for networked storage platforms portfolio, which grew 2.0%
year over year in the quarter. High-end Symmetrix storage product
portfolio was up 5.0% annually.
The company's mid-tier storage product portfolio witnessed
flattish year-over-year growth in the quarter. Strong customer
demand for Isilon scale-out NAS, VNX unified storage family,
Backup Recovery Systems portfolio (BRS) and Greenplum products
drove significant revenue growth in the quarter.
RSA information security business climbed 5.6% year over year
to $227.0 million in the reported quarter. EMC information
infrastructure revenue increased 2.7% year over year to $4.15
billion in the quarter. The significant growth from these
segments fully compensated for a 2.2% year-over-year decline in
Information Intelligence segment, which reported revenues of
$158.0 million in the quarter.
EMC's majority owned
VMware Inc. (
continued to impress with revenue growth of 20.2% on a
year-over-year basis to reach $1.13 billion in the reported
On a geographical basis, domestic revenues climbed 8.0% year
over year to $2.9 billion and contributed 55.0% to the quarter's
revenue. Revenue from international operations increased 4.0%
year over year to $2.4 billion and accounted for the remaining
45.0% of revenues.
Gross profit (including stock-based compensation but excluding
one time items) increased 7.9% year over year to $3.35 billion.
Gross margin expanded 110 basis points (bps) to 63.5%, primarily
on the back of strong revenue growth.
Research & development expense were up 19.1% year over
year to $653.0 million in the third quarter. Selling, general
& administrative expense increased 5.9% year over year to
$1.71 billion in the reported quarter.
Operating profit (including stock-based compensation but
excluding one-time items) increased 3.7% year over year to $1.03
billion. Operating margin contracted 40 bps year over year to
19.6% due to higher operating expenses.
Net income (including stock-based compensation but excluding
one time items) increased 5.4% year over year to $717.3 million
in the third quarter.
As of September 30, 2012, cash and cash equivalents including
short-term investments were $5.45 billion compared with $5.65
billion at the end of June 30, 2012. EMC generated $1.44 billion
in cash flow from operations in the third quarter compared with
$1.24 billion in the prior quarter. Free cash flow jumped to
$1.14 billion in the reported quarter from $957.6 million in the
EMC reiterated its full year revenue guidance. The company
forecasts revenues to be in the range of $21.60 billion to $21.75
billion for fiscal 2012. Non-GAAP operating income is expected to
grow to 24.5% for fiscal 2012. Non-GAAP net income is expected to
be approximately $3.70-$3.75 billion for the full year. EMC
expects earnings to be in the range of $1.68 to $1.70 per share
for fiscal 2012.
Cash flow from operating activities is expected to be $6.1
billion for fiscal 2012. Free cash flow is expected to be $4.9
billion for the full year. EMC also expects to repurchase shares
worth $700.0 million in fiscal 2012.
We believe that EMC is well positioned to benefit from
incremental data center hardware 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
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 will 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
However, increasing competition from the likes of
International Business Machines Corp. (
Hewlett Packard Co. (
NetApp Inc. (
, 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 on the stock 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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