EMC reports second quarter 2013 financial results

Issued by Redline a division of DRAFTFCB for EMC Southern Africa
Johannesburg, 01 Aug 2013

Highlights:

* Record second-quarter consolidated revenue, net income and EPS.
* Year-over-year revenue growth across EMC's three federated businesses - EMC Information Infrastructure, VMware and Pivotal.
* Year-over-year revenue growth across US and major global geographies, with strong revenue growth from BRIC+13 markets.
* EMC reaffirms full-year 2013 business outlook for consolidated revenue, non-GAAP EPS and free cash flow.

EMC Corporation (NYSE: EMC) has reported quarterly financial results that were highlighted by record second-quarter consolidated revenue, net income and EPS. The company achieved year-over-year revenue growth across all three of its federated businesses, with continued steady growth from EMC Information Infrastructure, double-digit growth from Pivotal and accelerating double-digit growth from VMware.

Second-quarter consolidated revenue was $5.6 billion, an increase of 6% compared with the year-ago quarter. Second-quarter GAAP net income attributable to EMC was $701 million. Second-quarter GAAP earnings per weighted average diluted share increased 10% year-over-year to $0.32. Non-GAAP¹ net income attributable to EMC was $907 million. Non-GAAP¹ earnings per weighted average diluted share were $0.42, an increase of 8% year-over-year.

EMC generated year-to-date operating cash flow of $2.9 billion and free cash flow² of $2.3 billion, and ended the second quarter with $17.6 billion in cash and investments.

Joe Tucci, EMC Chairman and Chief Executive Officer, said: "The strength and demand we saw during the quarter, despite a cautious IT spending environment, speaks to the soundness of our strategy, the value customers see in our federated business model, and the massive opportunity ahead in cloud computing, big data and trusted IT. EMC Information Infrastructure, VMware and Pivotal are positioned on the leading-edge of these significant trends. Each business is focused on building its own unique technologies and independent partner ecosystems to offer customers greater choice. Collectively they add up to a very competitive technology stack that not only addresses our customers' top IT needs in 2013, but also their longer-term business transformation priorities."

David Goulden, EMC President and Chief Operating Officer, said: "Our second-quarter results are further evidence that our business strategy is on target and that we continue to deliver our 'triple play'- to gain market share, reinvest for the future and deliver leverage. With another solid quarter behind us, we are reaffirming our full-year revenue, non-GAAP EPS and free cash flow goals. EMC's robust product roadmap, combined with the success we are seeing across our cloud, big data and trusted IT initiatives, and the continued interest from customers in our market-leading technology, have us very energised and highly focused on seizing the opportunities that lie ahead."

Second-quarter highlights

In the second quarter, EMC's Information Infrastructure business increased revenue 4% compared with the year-ago quarter. Second-quarter revenue from EMC's Information Storage business accelerated to 4% year-over-year. Highlights within this include: 39% year-over-year revenue growth from EMC's Emerging Storage business,³ continued year-over-year revenue growth and market share gains from EMC's High-End Storage business,⁴ and improved year-over-year revenue growth from EMC's Unified and Backup Recovery business.⁵ EMC's RSA Information Security business increased revenue 3% year-over-year, and EMC's Information Intelligence business continued to make progress during the quarter on its transition to more cloud-friendly offerings and vertical-based solutions.

VCE had an excellent second quarter as demand for Vblock systems showed strong year-over-year growth. Additionally, EMC's VSPEX reference architecture solutions continued to gain momentum with rapid adoption and increasing popularity with customers and among partners who have sold over 3 600 VSPEX solutions since their launch in April 2012.

In the second quarter, VMware (NYSE: VMW) achieved solid double-digit year-over-year revenue growth. The company continues to excel because it is uniquely positioned to help customers move from the client-server era to the mobile-cloud era of computing. As VMware helps customers bridge to this new world, it is empowering them to capture new levels of efficiency, control and agility.

On 1 April 2013, EMC and VMware formed a new company - Pivotal - which unites strategic technology, people and programs from EMC and VMware, including: Greenplum, Cloud Foundry, Spring, Cetas, Pivotal Labs, GemFire and other products from the VMware vFabric Suite. Pivotal also announced a strategic investment by General Electric Company (GE) of approximately $105 million in the company, representing a 10% equity stake. Pivotal made very good progress in its first quarter within the EMC federation, and is building a new platform comprising next-generation data fabrics, application fabrics and a cloud-independent platform as a service. In the second quarter, the company announced the first version of this platform for next-generation big and fast data applications, called "Pivotal One", which will be launched before year end.

EMC's consolidated second-quarter revenue from the United States increased 4% year-over-year to $3 billion, representing 53% of consolidated second-quarter revenue. Revenue from EMC's business operations outside of the United States increased 8% year-over-year to $2.7 billion and represented 47% of consolidated second-quarter revenue. Within this, on a year-over-year basis, revenue from EMC's Europe, Middle East and Africa region grew 6%, revenue from EMC's Asia Pacific and Japan region increased 12%, and revenue from EMC's Latin American region grew 12%. Revenue from EMC's BRIC+13 markets increased 18% year-over-year.

Business outlook

The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially. These statements do not give effect to the potential impact of mergers, acquisitions, divestitures or business combinations that may be announced or closed after the date hereof. These statements supersede all prior statements made by EMC regarding 2013 financial results.

All dollar amounts and percentages set forth below should be considered to be approximations.

* Consolidated revenues are expected to be $23.5 billion for 2013.
* Consolidated GAAP operating income is expected to be 18.5% of revenues for 2013 and consolidated non-GAAP operating income is expected to be 25.5% of revenues for 2013. Excluded from consolidated non-GAAP operating income are stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges and the amortisation of VMware's capitalised software from prior periods, which account for 4.3%, 1.6%, 1% and 0.1% of revenues, respectively.
* Total consolidated GAAP non-operating expense, which includes investment income, interest expense and other income and expense, is expected to be $331 million and consolidated non-GAAP non-operating expense is expected to be $350 million in 2013. Excluded from consolidated non-GAAP non-operating expense is a net gain on disposition of certain lines of business and other for ($19 million).
* Consolidated GAAP net income attributable to EMC is expected to be $3 billion in 2013 and consolidated non-GAAP net income attributable to EMC is expected to be $4 billion in 2013. Excluded from consolidated non-GAAP net income attributable to EMC are stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, the amortisation of VMware's capitalised software from prior periods, the benefit of the 2012 R&D tax credit and a net gain on disposition of certain lines of business and other, which account for $675 million, $260 million, $170 million, $15 million, ($60 million) and ($11 million), respectively.
* Consolidated GAAP earnings per weighted average diluted share are expected to be $1.37 for 2013 and consolidated non-GAAP earnings per weighted average diluted share are expected to be $1.85 for 2013. Excluded from consolidated non-GAAP earnings per weighted average diluted share are stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, the amortisation of VMware's capitalised software from prior periods, the benefit of the 2012 R&D tax credit and a net gain on disposition of certain lines of business and other, which account for $0.31, $0.12, $0.08, $0.01, ($0.03) and ($0.01) per weighted average diluted share, respectively.
* The consolidated GAAP income tax rate is expected to be 20.5% for 2013. Excluding the tax impact of stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, the amortisation of VMware's capitalised software from prior periods, the benefit of the 2012 R&D tax credit and a net gain on disposition of certain lines of business and other, which collectively impact the tax rate by 3%, the consolidated non-GAAP income tax rate is expected to be 23.5% for 2013.
* GAAP net income attributable to the non-controlling interest in VMware is expected to be $190 million and non-GAAP net income attributable to the non-controlling interest in VMware is expected to be $285 million for 2013. Excluded from non-GAAP net income attributable to the non-controlling interest in VMware are stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, the amortisation of VMware's capitalised software from prior periods, the benefit of the 2012 R&D tax credit and a net gain on disposition of certain lines of business and other, which account for $71 million, $15 million, $14 million, $4 million, ($6 million) and ($3 million), respectively. The incremental dilution attributable to the shares of VMware held by EMC is expected to be $10 million for 2013.
* Consolidated net cash provided by operating activities is expected to be $6.8 billion for 2013 and free cash flow is expected to be $5.5 billion for 2013. Excluded from free cash flow are $900 million of additions to property, plant and equipment and $400 million of capitalised software development costs.
* The weighted average outstanding diluted shares are expected to be 2.17 billion for 2013.
* EMC expects to repurchase an aggregate of $3.5 billion of the company's common stock in 2013 and the first half of 2014.

Supporting resources

*EMC will host its 2013 second-quarter earnings conference call today at 8:30 a.m. ET, which will be available via EMC's web site at http://www.emc.com/ir

* Additional information regarding EMC's financials, as well as a webcast of the conference call, will be available at 8:30 a.m. ET at http://www.emc.com/ir

* Visit http://ir.vmware.com for more information about VMware's second-quarter financial results

* Visit EMC Pulse, EMC's product and technology news blog. Connect with EMC via Twitter, Facebook, YouTube, and LinkedIn

EMC

EMC Corporation is a global leader in enabling businesses and service providers to transform their operations and deliver IT as a service. Fundamental to this transformation is cloud computing. Through innovative products and services, EMC accelerates the journey to cloud computing, helping IT departments to store, manage, protect and analyse their most valuable asset - information - in a more agile, trusted and cost-efficient way. Additional information about EMC can be found at www.EMC.com.

1 Items excluded from the non-GAAP results for the second quarters of 2013 and 2012 are amounts relating to stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware's capitalised software from prior periods, a net gain on the disposition of certain lines of business and other, an RSA special charge (release), loss on interest rate swaps and a gain on strategic investment. See attached schedules for GAAP to non-GAAP reconciliations.

2 Free cash flow is a non-GAAP financial measure which is defined as net cash provided by operating activities, less additions to property, plant and equipment and capitalised software development costs. See attached schedules for a reconciliation of net cash provided by operating activities to free cash flow for the six months ended 30 June 2013 and 2012.

3 EMC's Emerging Storage business primarily includes product and maintenance revenues from EMC Isilon, EMC Atmos, EMC VPLEX, EMC RecoverPoint, ASD Suites and EMC vFlash and EMC XtremIO families.

4 EMC's High-end Storage business primarily includes product and maintenance revenues from EMC Symmetrix.

5 EMC's Unified and Backup Recovery business primarily includes product and maintenance revenues from EMC VNX, EMC CLARiiON, EMC Celerra, EMC Avamar, EMC Data Domain, EMC NetWorker, EMC Disk Library, EMC Data Protection Advisor and EMC Mozy.

EMC, Atmos, Avamar, Celerra, CLARiiON, Data Domain, EMC RecoverPoint, Isilon, Mozy, Networker, RSA, Symmetrix, VPLEX, VNX, VSPEX, Vblock and XtremIO are either registered trademarks or trademarks of EMC Corporation in the United States and/or other countries. Cetas, Cloud Foundry, Gemfire, Greenplum, Pivotal, Pivotal Labs and Spring are registered trademarks or trademarks of GoPivotal, Inc. and VMware is a registered trademark or trademark of VMware, Inc. in the United States and/or other countries. All other trademarks used are the property of their respective owners.

Forward-looking statements

This release contains forward-looking statements as defined under the Federal Securities Laws. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors, including but not limited to: (i) adverse changes in general economic or market conditions; (ii) delays or reductions in information technology spending; (iii) the relative and varying rates of product price and component cost declines and the volume and mixture of product and services revenues; (iv) competitive factors, including but not limited to pricing pressures and new product introductions; (v) component and product quality and availability; (vi) fluctuations in VMware's operating results and risks associated with trading of VMware stock; (vii) the transition to new products, the uncertainty of customer acceptance of new product offerings and rapid technological and market change; (viii) risks associated with managing the growth of our business, including risks associated with acquisitions and investments and the challenges and costs of integration, restructuring and achieving anticipated synergies; (ix) the ability to attract and retain highly qualified employees; (x) insufficient, excess or obsolete inventory; (xi) fluctuating currency exchange rates; (xii) threats and other disruptions to our secure data centres or networks; (xiii) our ability to protect our proprietary technology; (xiv) war or acts of terrorism; and (xv) other one-time events and other important factors disclosed previously and from time to time in EMC's filings with the US Securities and Exchange Commission. EMC disclaims any obligation to update any such forward-looking statements after the date of this release.

Use of non-GAAP financial measures

This release, the accompanying schedules and the additional content that is available on EMC's Web site contain non-GAAP financial measures. These non-GAAP financial measures, which are used as measures of EMC's performance or liquidity, should be considered in addition to, not as a substitute for, measures of EMC's financial performance or liquidity prepared in accordance with GAAP. EMC's non-GAAP financial measures may be defined differently from time to time and may be defined differently than similar terms used by other companies, and accordingly, care should be exercised in understanding how EMC defines its non-GAAP financial measures in this release.

Where specified in the accompanying schedules for various periods entitled "Reconciliation of GAAP to Non-GAAP", certain items noted on each such specific schedule (including, where noted, amounts relating to stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, the amortisation of VMware's capitalised software from prior periods, a net gain on disposition of certain lines of business and other, an RSA special charge (release), loss on interest rate swaps and a gain on strategic investment) are excluded from the non-GAAP financial measures.

EMC's management uses the non-GAAP financial measures in the accompanying schedules to gain an understanding of EMC's comparative operating performance (when comparing such results with previous periods or forecasts) and future prospects and excludes the above-listed items from, its internal financial statements for purposes of its internal budgets and each reporting segment's financial goals. These non-GAAP financial measures are used by EMC's management in their financial and operating decision-making because management believes they reflect EMC's ongoing business in a manner that allows meaningful period-to-period comparisons. EMC's management believes that these non-GAAP financial measures provide useful information to investors and others (a) in understanding and evaluating EMC's current operating performance and future prospects in the same manner as management does, if they so choose, and (b) in comparing in a consistent manner the company's current financial results with the company's past financial results.

This release also includes disclosures regarding free cash flow which is a non-GAAP financial measure. Free cash flow is defined as net cash provided by operating activities less additions to property, plant and equipment and capitalised software development costs. EMC uses free cash flow, among other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalised software development costs. Management believes that information regarding free cash flow provides investors with an important perspective on the cash available to make strategic acquisitions and investments, repurchase shares, service debt and fund ongoing operations. As free cash flow is not a measure of liquidity calculated in accordance with GAAP, free cash flow should be considered in addition to, but not as a substitute for, the analysis provided in the statement of cash flows.

All of the foregoing non-GAAP financial measures have limitations. Specifically, the non-GAAP financial measures that exclude the items noted above do not include all items of income and expense that affect EMC's operations. Further, these non-GAAP financial measures are not prepared in accordance with GAAP, may not be comparable to non-GAAP financial measures used by other companies and do not reflect any benefit that such items may confer on EMC. Management compensates for these limitations by also considering EMC's financial results as determined in accordance with GAAP.

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