EMC reports third-quarter 2013 financial results

By Phumeza Tontsi for EMC Southern Africa
Johannesburg, 24 Oct 2013

Joe Tucci, EMC Chairman and Chief Executive Officer.

EMC Corporation (NYSE:EMC) has reported quarterly financial results that were highlighted by year-over-year revenue growth for EMC's Information Infrastructure business, and accelerated year-over-year revenue growth for VMware and Pivotal.

Third-quarter consolidated revenue was $5.5 billion, an increase of 5% compared with the year-ago quarter. Third-quarter GAAP net income attributable to EMC was $586 million and GAAP earnings per weighted average diluted share were $0.27. Non-GAAP1 net income attributable to EMC was $860 million and non-GAAP1 earnings per weighted average diluted share were $0.40.

During the quarter, operating cash flow grew 25% year-over-year, generating $4.7 billion year to date. Free cash flow2 grew 26% year-over-year in the third quarter, generating $3.7 billion year to date. The company ended the third quarter with $17.5 billion in cash and investments.

Joe Tucci, EMC Chairman and Chief Executive Officer, said: "The EMC federation across EMC Information Infrastructure, VMware and Pivotal continues to be well positioned in our target markets and very well received by customers and partners. We leveraged the unique power of our business model in the quarter to expand our technology portfolio, strengthen our partner ecosystem and extend our leadership in cloud computing, big data and trusted IT. Despite our disappointment with our quarterly results, our confidence in the success of our strategy over the long-term has never been stronger."

David Goulden, EMC President and Chief Operating Officer, said: "While our financial results for the third quarter were impacted by a decline in US federal spending and a back end-loaded quarter, we achieved almost all of our strategic and operational goals. We were pleased to see storage demand accelerate in the third quarter, excluding US federal, and we think this is an encouraging sign for the storage market overall. Going forward, we remain confident EMC will continue to grow and gain market share."

Third-quarter highlights

In the third quarter, EMC's Information Infrastructure business once again grew revenue year-over-year. Within this, EMC's Emerging Storage business3 increased revenue 66% year-over-year. Highlights within Emerging Storage included: continued strong year-over-year growth and a record number of new customers for the EMC Isilon scale-out NAS portfolio, solid demand for EMC Atmos object-based storage, and greater than 50% year-over-year revenue growth for EMC VPLEX virtual storage.

Other achievements in the storage business in the quarter included the refresh of the mid-tier Data Domain product line in July, and the successful launches of the next-generation VNX and ViPR in September. EMC's RSA Information Security business increased revenue 11% year-over-year, the result of year-on-year revenue growth for both the Identity and Data Protection and Security Management and Compliance businesses.

VCE had an excellent third quarter as demand for Vblock systems showed accelerated year-over-year growth, outpacing the fast-growing market for converged infrastructure. EMC VSPEX reference architecture solutions saw continued strong growth with rapid adoption and growing popularity with customers and among partners. Additionally, third-quarter revenue from EMC's Cloud Service Provider Partner programme, the company's fastest-growing vertical market segment, increased well over 50% year-over-year.

In the third quarter, VMware (NYSE: VMW) achieved accelerated 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 to bridge this new world, it is enabling them to capture new levels of efficiency, control and agility.

Pivotal - the new company that unites strategic technology, people and programs from EMC and VMware - continued to execute well in the third quarter as it builds a next-generation platform comprising new data fabrics, application fabrics and a cloud-independent platform as a service. Pivotal's recent acquisition of Xtreme Labs adds an important dimension to this effort, as Xtreme Labs' advances in mobile application development are highly complementary to the expertise of Pivotal Labs, the agile development services unit within Pivotal.

EMC's consolidated third-quarter revenue from the United States increased 2% year-over-year to $3 billion, representing 53% of consolidated third-quarter revenue. Revenue from EMC's business operations outside of the United States increased 8% year-over-year to $2.6 billion, and represented 47% of consolidated third-quarter revenue. Within this, on a year-over-year basis, revenue from EMC's Europe, Middle East and Africa region grew 8%, revenue from EMC's Asia Pacific and Japan region increased 8%, and revenue from EMC's Latin American region grew 13%. Revenue from EMC's BRIC+13 markets increased 19% 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 $23.25 billion for 2013.

* Consolidated GAAP operating income is expected to be 18% of revenues for 2013, and consolidated non-GAAP operating income is expected to be 25% 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 4.2%, 1.7%, 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 $319 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 ($31 million).

* Consolidated GAAP net income attributable to EMC is expected to be $2.9 billion in 2013, and consolidated non-GAAP net income attributable to EMC is expected to be $3.9 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, special tax charges and a net gain on disposition of certain lines of business and other, which account for $630 million, $260 million, $170 million, $15 million, ($60 million), $23 million and ($22 million), respectively.

* Consolidated GAAP earnings per weighted average diluted share are expected to be $1.33 for 2013 and consolidated non-GAAP earnings per weighted average diluted share are expected to be $1.80 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, special tax charges and a net gain on disposition of certain lines of business and other, which account for $0.29, $0.12, $0.08, $0.01, ($0.03), $0.01 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, special tax charges and 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 $195 million for 2013 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 $70 million, $15 million, $13 million, $4 million, ($6 million) and ($6 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 2.16 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 third-quarter earnings conference call today at 8:30am 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 8:30am ET at http://www.emc.com/ir.
* Visit http://ir.vmware.com for more information about VMware's third-quarter financial results.
* Visit EMC Pulse, EMC's product and technology news blog, and EMC Reflections. 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 third quarters of 2013 and 2012 are 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, special tax charges and a net gain on the disposition of certain lines of business and other. 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 three and nine months ended 30 September 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 Xtrem families.

EMC, Atmos, Data Domain, EMC RecoverPoint, Isilon, RSA, ViPR, VPLEX, VNX, VSPEX and Vblock are either registered trademarks or trademarks of EMC Corporation in the United States and/or other countries. Pivotal, Pivotal Labs and Xtreme Labs 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, 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 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 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 amortisation, restructuring and acquisition-related charges, the amortisation of VMware's capitalised software from prior periods, special tax charges and a net gain on disposition of certain lines of business and other) 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, pay dividends, 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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