EMC Corp. (
reported first quarter earnings of 32 cents per share that beat
the Zacks Consensus Estimate by a penny. Earnings (including
stock-based compensation but excluding other non-recurring items)
increased 3.3% year over year but decreased 31.5% sequentially in
Revenues increased 5.8% year over year but decreased 10.7%
sequentially to $5.39 billion, well short of the Zacks Consensus
Estimate of $5.45 billion. Product sales climbed 1.4% year over
year but plunged 16.5% sequentially to $3.11 billion. Services
surged 12.3% from the year-ago quarter but decreased 1.1% from
the previous quarter to $2.28 billion.
Information Infrastructure segment (80% of revenues) revenues
increased 3.9% year over year but declined 11.4% sequentially to
$4.20 billion. The year-over-year growth was primarily driven by
strong performance from RSA (up 12.5% year over year),
Information Intelligence (up 7.1% year over year) and Information
Storage (up 3.3% year over year). All three segments posted
significant sequential decline in the quarter.
EMC's majority owned
VMware Inc. (
continued to impress with revenue growth of 12.8% on a
year-over-year basis to reach $1.19 billion. Sequentially, VMware
revenues decreased 8.0% in the reported quarter.
On a geographical basis, domestic revenues climbed 8.0% year over
year to $2.8 billion and contributed 53.0% to revenues. Revenues
from international operations increased 4.0% year over year to
$2.6 billion and accounted for the remaining 47.0% of revenues.
Gross margin expanded 20 basis points ("bps") from the year-ago
quarter due to higher services margin. However, on a sequential
basis, gross margin contracted 320 bps due to unfavorable product
Research & development expenses were up 14.9% year over year
and 1.9% sequentially to $675.6 million in the first quarter.
Selling, general & administrative expense increased 3.9% year
over year but decreased 11.1% sequentially to $1.71 billion in
the reported quarter.
Operating margin contracted 30 bps on a year-over-year basis and
450 bps from the previous quarter to 18.9% due to modest revenue
growth and lower gross margin base. Net income as a percentage of
revenues was 12.8% compared with 13.2% in the year-ago quarter
and 17.1% in the previous quarter.
Earnings (excluding stock-based compensation and other
non-recurring items) increased 4.6% year over year but decreased
28.3% sequentially to 39 cents in the quarter.
Balance Sheet & Cash Flow
As of Mar 31, 2013, cash and cash equivalents including
short-term investments were $6.53 billion compared with $6.17
billion at the end of Dec 31, 2012. EMC generated $1.71 billion
in cash flow from operations in the first quarter compared with
$1.90 billion in the prior quarter. Free cash flow slightly
declined to $1.44 billion in the reported quarter from $1.50
billion in the prior-year quarter.
EMC and VMware recently formed a new company called GoPivotal Inc
(Apr 1, 2013), which combines Greenplum, Cloud Foundry, Spring,
Cetas, Pivotal Labs, GemFire and other products from the VMware
vFabrix Suite. Reportedly,
General Electric (
plans to make a strategic investment of approximately $105.0
million in Pivotal, representing a 10% equity stake.
EMC forecasts revenues of $23.5 billion for 2013. Non-GAAP
operating margin is expected to grow to 25.5% for 2013. Non-GAAP
operating expense is expected to be $280.0 million for 2013.
Non-GAAP net income is expected to be approximately $4.1 billion
for the full year. EMC expects earnings of $1.85 per share for
Cash flow from operating activities is expected to be $6.8
billion, while free cash flow is expected to be $5.5 billion for
2013. EMC also expects to repurchase shares worth $1.0 billion in
We believe that EMC is well positioned to benefit from
incremental data center hardware spending going forward. We
believe that EMC's vast product portfolio, which has products
suitable for any kind of budget, will boost its market share
However, increasing competition from the likes of
International Business Machines Corp. (
and Hewlett Packard Co. and a sluggish IT spending outlook for
the next two years will continue to keep margins under pressure
in the near term.
Currently, EMC has a Zacks Rank #4 (Sell).
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