EMC Corporation (NYSE:EMC) has reported record financial results for the third quarter of 2011. Continued strong worldwide customer demand for EMC's information storage, security and virtualisation products and services, balanced revenue growth and continued outstanding execution contributed to EMC achieving all-time record quarterly consolidated revenue and record third-quarter profit.
The results were also highlighted by all-time record quarterly gross margins on a GAAP and non-GAAP basis, and strong year-over-year increases in GAAP and non-GAAP operating margins.
Third-quarter consolidated revenue was $4.98 billion, an increase of 18% compared with the year-ago quarter. Third-quarter GAAP net income attributable to EMC increased 28% year-over-year to $606 million. Third-quarter GAAP earnings per weighted average diluted share increased 23% year-over-year to $0.27. Non-GAAP1 net income attributable to EMC for the third quarter was $822 million, an increase of 27% compared with the year-ago quarter. Third-quarter non-GAAP [1] earnings per weighted average diluted share were $0.37, an increase of 23% year-over-year.
EMC's cash flow generation continues to be strong, with trailing 12-month operating cash flow of $5.0 billion and free cash flow [2] of $3.8 billion. The company ended the third quarter with $9.3 billion in cash and investments.
Joe Tucci, EMC Chairman and Chief Executive Officer, said: “I am very pleased with EMC's execution and solid third-quarter financial performance. Global customer demand for our industry-leading products and services, which led to record quarterly financial results, is clear evidence that EMC is at the centre of the most transformative, disruptive and opportunity-rich trends in IT history - namely hybrid cloud computing and the explosion of big data.
“With the strategy, products and momentum in our favour, EMC remains extremely well positioned to help customers accelerate their journey to the cloud, discover the value of big data, and transform IT into a source of greater efficiency, agility and control.”
David Goulden, EMC Executive Vice-President and Chief Financial Officer, said: “The priorities we have outlined in our financial 'triple play'- to gain market share, invest aggressively to take full advantage of the massive opportunities at the intersection of cloud computing and big data, and improve profitability - continue to guide us through 2011. We remain on track to exceed our full-year goal of $19.8 billion in revenue, GAAP EPS of $1.07 and non-GAAP EPS of $1.48.
“We are confident that our company strategy, disciplined investment approach, and continued focus on execution, which have driven our success over the past several years, will continue to serve us well in the future.”
Third-quarter highlights
Third-quarter highlights included double-digit revenue growth for EMC Information Storage business, which increased 16% year-over-year. EMC's high-end Symmetrix storage product portfolio increased revenue 7% compared with the year-ago quarter. EMC's portfolio of mid-tier storage products [3] grew revenue 28% year-over-year. Revenue from VMware (NYSE: VMW), which is majority-owned by EMC, increased 32% and revenue from EMC's RSA Information Security business grew 16% year-over-year.
Additional third-quarter highlights included strong revenue growth for the EMC VNX unified storage family and the company's Backup Recovery Systems. Revenue from EMC's portfolio of big data solutions, which includes EMC Isilon, EMC Atmos and EMC Greenplum, more than doubled year-over-year. During the quarter, customers also continued to increasingly turn to EMC's broad consulting and professional services portfolio to build out their cloud architectures and transform their IT.
Finally, VCE, the Virtual Computing Environment Company formed by Cisco and EMC with investments from VMware and Intel, continued to gain momentum as customer demand increased for best-of-breed converged infrastructure through the Vblock Infrastructure Platform.
EMC's consolidated third-quarter revenue from the United States reached an all-time record of $2.7 billion, an increase of 17% year-over-year, representing 54% of consolidated third-quarter revenue. Revenue from EMC's business operations outside of the United States reached $2.3 billion, an increase of 20% year-over-year, representing 46% of consolidated third-quarter revenue. Within this, revenue from EMC's Asia Pacific and Japan region reached an all-time quarterly record, growing 37% year-over-year. Revenue from EMC's Europe, Middle East and Africa and Latin America regions increased 15% and 8% year-over-year, respectively.
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 regarding 2011 financial results.
All dollar amounts and percentages set forth below should be considered to be approximations.
* Consolidated revenues are expected to exceed $19.8 billion for 2011.
* Consolidated GAAP operating income is expected to be 16% to 17% of revenues for 2011, and consolidated non-GAAP operating income is expected to be 23% to 24% of revenues for 2011. Excluded from consolidated non-GAAP operating income are stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, and an RSA special charge, which account for 4%, 2%, 0.5% and 0.5% of revenues, respectively.
* Total consolidated GAAP non-operating expense, which includes investment income, interest expense and other income and expense, is expected to be $161 million in 2011, and total consolidated non-GAAP non-operating expense is expected to be $210 million in 2011. Excluded from non-GAAP non-operating expense are stock-based compensation expense of $7 million and a non-recurring gain on strategic investments of $56 million.
* Consolidated GAAP net income is expected to exceed $2.4 billion in 2011, and consolidated non-GAAP net income is expected to exceed $3.3 billion in 2011. Excluded from consolidated non-GAAP net income are stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, an RSA special charge, and a non-recurring gain on strategic investments, which account for $590 million, $225 million, $75 million, $56 million and ($29 million), respectively.
* Consolidated GAAP diluted earnings per share are expected to exceed $1.07 for 2011, and consolidated non-GAAP diluted earnings per share are expected to exceed $1.48 for 2011. Excluded from consolidated non-GAAP diluted earnings per share are stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, an RSA special charge, and a non-recurring gain on strategic investments, which account for $0.26, $0.10, $0.03, $0.03 and ($0.01) per diluted share, respectively.
* The consolidated GAAP income tax rate is expected to be 21% for 2011. Excluding the impact of stock-based compensation expense, intangible asset amortisation, restructuring and acquisition-related charges, an RSA special charge, and a non-recurring gain on strategic investments, which collectively impact the tax rate by 1%, the consolidated non-GAAP income tax rate is expected to be 22% for 2011.
* GAAP net income attributable to the non-controlling interest in VMware is expected to be $143 million, and non-GAAP net income attributable to the non-controlling interest in VMware is expected to be $205 million for 2011. Excluded from non-GAAP net income attributable to the non-controlling interest in VMware are stock-based compensation expense, intangible asset amortisation, acquisition-related charges, and a non-recurring gain on strategic investments, which account for $58 million, $10 million, $1 million and ($7 million), respectively. The incremental dilution attributable to the shares of VMware held by EMC is expected to be $15 million for 2011.
* The weighted-average outstanding diluted shares are expected to be 2.235 billion for 2011.
* Consolidated net cash provided by operating activities is expected to be $5.4 billion for 2011, and free cash flow is expected to be $4.0 billion in 2011. Excluded from free cash flow are $950 million of additions to property, plant and equipment and $450 million of capitalised software development costs.
* EMC expects to repurchase $2 billion of the company's common stock in 2011.
Supporting resources:
* EMC will host its third-quarter 2011 earnings conference call today at 8:30am ET, which will be available via Webcast on EMC's Investor Relations Web site at http://www.emc.com/ir.
* Visit http://ir.vmware.com for more information about VMware's third-quarter financial results.
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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 third quarters of 2011 and 2010 are amounts relating to stock-based compensation expense, intangible asset amortisation and restructuring and acquisition-related charges. 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 trailing 12 months ending 30 September 2011.
3 EMC's mid-tier storage products include EMC VNX, EMC CLARiiON, EMC Celerra, EMC Centera, EMC Data Domain, EMC Isilon, EMC Avamar and EMC Atmos hardware and software products.
EMC, Atmos, Avamar, Celerra, Centera, CLARiiON, Data Domain, Greenplum, Isilon, RSA, Symmetrix, VNX and Vblock are either registered trademarks or trademarks of EMC Corporation in the United States and/or other countries. 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, Inc.'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 centers 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 U.S. 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 website 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 amortization and restructuring and acquisition-related charges) 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 capitalized 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 capitalized 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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