EMC Corp.
(
EMC
) 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
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
), 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
),
Hewlett Packard Co.
(
HPQ
),
NetApp Inc.
(
NTAP
), Hitachi Data Systems,
Dell Inc.
(
DELL
) 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.
DELL INC (
DELL
): Free Stock Analysis Report
EMC CORP -MASS (
EMC
): Free Stock Analysis Report
HEWLETT PACKARD (
HPQ
): Free Stock Analysis Report
INTL BUS MACH (
IBM
): Free Stock Analysis Report
NETAPP INC (NTAP): Free Stock Analysis Report
VMWARE INC-A (VMW): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research