EMC: Fiscal 2Q12 Financial Results

Second-Quarter Highlights:

• Consolidated revenue up 10% year over year
• GAAP net income up 19% year over year; GAAP EPS up 21%
• Non-GAAP EPS up 11%
• Operating cash flow up 16% year over year; free cash flow up 36%
• Strong percentage increases in gross and operating margins

EMC Corporation reported financial results for the second quarter of 2012, marking the company’s 10th consecutive quarter of double-digit year-over-year growth for consolidated revenue, GAAP net income, and GAAP and non-GAAP EPS.

It expects to achieve its full-year 2012 goals for consolidated revenue, non-GAAP EPS and free cash flow.

Second-quarter consolidated revenue was $5.31 billion, an increase of 10% compared with the year-ago quarter.

Second-quarter GAAP net income attributable to EMC increased 19% year over year to $650 million.

Second-quarter GAAP earnings per weighted average diluted share increased 21% year over year to $0.29.

Second-quarter non-GAAP earnings per weighted average diluted share were $0.39, an increase of 11% year over year.

During the second quarter, EMC generated operating cash flow of $1.24 billion and free cash flow of $958 million, a year-over-year increase of 16% and 36%, respectively.

Additionally, the company expanded GAAP and non-GAAP gross margin and operating margin percentages on a year-over-year basis, and ended the quarter with $10.9 billion in cash and investments.

Joe Tucci, EMC chairman and CEO, said: "I am very pleased with EMC’s execution and record second-quarter financial performance. We are seeing a transformation in the IT industry unlike anything we have seen before. Organizations are moving quickly to adopt cloud computing and take advantage of both the efficiency and agility that comes with running IT-as-a-Service. Customers are also looking to deploy a new generation of big data applications to gain competitive advantage and differentiate their businesses. And they demand that all this be done in a secure and trusted way. EMC is widely recognized as a leader and driver of this transformation."

David Goulden, EMC president and COO, said: "The business we have built is at the intersection of three of the most transformative waves in the history of IT – cloud computing, big data and trust. We have grown EMC profitably, expanded our portfolio of products and services into new markets, and established our reputation for quality and providing customers with the very best total experience in the industry. Looking ahead, we remain on track to deliver our ‘triple play’ – simultaneously taking market share, reinvesting for growth and delivering improved earnings – and are well positioned for our next major phase of growth."

Second-Quarter Highlights
In the second quarter, revenue from EMC’s Information Storage business increased 7% year over year. Within this, revenue from networked storage platforms portfolio, which includes EMC’s high-end and mid-tier storage platform products, grew 7% year over year. Revenue from EMC’s high-end Symmetrix storage product portfolio increased 3% compared with the year-ago quarter, and revenue from the company’s portfolio of mid-tier storage products increased 10% year over year, the result of year-over-year growth across EMC’s major mid-tier product lines.

Second-quarter highlights included continued customer demand for EMC’s Isilon scale-out NAS portfolio, VNX unified storage family, Backup Recovery Systems (BRS) portfolio, and VMAX systems family.

Customers also continued to increasingly turn to EMC’s Greenplum portfolio to gain greater insight and value from their data. Second-quarter revenue from EMC’s RSA Information Security business increased 13% year over year and revenue from VMware grew 22% year over year. Additionally, EMC continued to experience strong customer demand for its portfolio of services to help customers transform their IT and business.

Finally, Vblock Converged Infrastructure Platforms from VCE – the Virtual Computing Environment Company formed by Cisco and EMC with investments from VMware and Intel – also gained traction in enterprise data centers and with cloud service providers as demand continued to show very strong growth in the second quarter.

Consolidated second-quarter revenue from the United States increased 14% year over year to $2.9 billion, representing 54% of consolidated second-quarter revenue. Revenue from business operations outside of the United States increased 5% year over year to $2.5 billion and represented 46% of consolidated second-quarter revenue.

Business Outlook

• Consolidated revenues are expected to be $22.0 billion for 2012.
• Consolidated GAAP operating income is expected to be 17.5% of revenues for 2012 and consolidated non-GAAP operating income is expected to be 24% of revenues for 2012. Excluded from consolidated non-GAAP operating income are stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware’s capitalized software from prior periods and a release of excess RSA special charge reserve, which account for 4%, 1.6%, 0.5%, 0.5% 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 $211 million in 2012 and total consolidated non-GAAP non-operating expense is expected to be $200 million in 2012. Excluded from non-GAAP non-operating expense is stock-based compensation expense of $3 million, a gain on strategic investment of ($32 million) and a loss on interest rate swaps of $40 million.
• Consolidated GAAP net income attributable to EMC is expected to be $2.75 billion in 2012 and consolidated non-GAAP net income attributable to EMC is expected to be $3.75 billion in 2012. Excluded from consolidated non-GAAP net income attributable to EMC are stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware’s capitalized software from prior periods, a release of excess RSA special charge reserve, a gain on strategic investment and a loss on interest rate swaps which account for $665 million, $245 million, $90 million, $30 million, ($18 million), ($32 million), and $24 million, respectively.
• Consolidated GAAP earnings per weighted average diluted share are expected to be $1.25 for 2012 and consolidated non-GAAP earnings per weighted average diluted share are expected to be $1.70 for 2012. Excluded from consolidated non-GAAP earnings per weighted average diluted share are stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware’s capitalized software from prior periods, a release of excess RSA special charge reserve, a gain on strategic investment and a loss on interest rate swaps, which account for $0.30, $0.11, $0.04, $0.01, ($0.01), ($0.01) and $0.01 per weighted average diluted share, respectively.
• The consolidated GAAP income tax rate is expected to be 21% for 2012. Excluding the tax impact of stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges, the amortization of VMware’s capitalized software from prior periods, a release of excess RSA special charge reserve, a gain on strategic investment and a loss on interest rate swaps, which collectively impact the tax rate by 1%, the consolidated non-GAAP income tax rate is expected to be 22% for 2012. This assumes that the U.S. research and development tax credit for 2012 is extended in the fourth quarter of 2012.
• GAAP net income attributable to the non-controlling interest in VMware is expected to be $148 million and non-GAAP net income attributable to the non-controlling interest in VMware is expected to be $250 million for 2012. Excluded from non-GAAP net income attributable to the non-controlling interest in VMware are stock-based compensation expense, intangible asset amortization, restructuring and acquisition-related charges and the amortization of VMware’s capitalized software from prior periods, which account for $77 million, $16 million, $1 million and $8 million, respectively. The incremental dilution attributable to the shares of VMware held by EMC is expected to be $15 million for 2012.
• Consolidated net cash provided by operating activities is expected to be $6.2 billion for 2012 and free cash flow is expected to be $4.9 billion for 2012. Excluded from free cash flow are $900 million of additions to property, plant and equipment and $400 million of capitalized software development costs.

• The weighted average outstanding diluted shares are expected to be 2.2 billion for 2012.
• EMC expects to repurchase $700 million of the company’s common stock in 2012.