EMC Reports Strong 4Q

Zacks

EMC Corp. (EMC) reported better-than-expected fourth quarter 2012 results, with earnings of 46 cents per share beating the Zacks Consensus Estimate by 3 cents.

Quarter Details

Revenues increased 8.2% year over year and 14.2% sequentially to $6.03 billion in the reported quarter, well above the Zacks Consensus Estimate of $5.98 billion. The revenue upside was primarily attributed to strong services and product sales.

Product sales increased 5.3% year over year and 20.9% sequentially to $3.73 billion. Services surged 13.2% from the year-ago quarter and 4.9% from the previous quarter to $2.30 billion.

EMC’s majority owned VMware Inc. (VMW) continued to impress with revenue growth of 22.0% on a year-over-year basis to reach $1.29 billion in the reported quarter.

On a geographical basis, domestic revenues climbed 5.0% year over year to $3.1 billion and contributed 52.0% to the quarter revenues. Revenues from international operations increased 12.0% year over year to $2.9 billion and accounted for the remaining 48.0% of revenues.

Gross profit (including stock-based compensation but excluding one-time items) increased 11.1% year over year and 18.1% sequentially to $3.96 billion. Gross margin expanded 180 basis points (bps) from the year-ago quarter and 220 bps sequentially to 65.7%, primarily on the back of strong revenue growth.

Research & development expenses were up 18.2% year over year and 1.5% sequentially to $663.0 million in the fourth quarter. Selling, general & administrative expense increased 7.5% year over year and 12.9% sequentially to $1.93 billion in the reported quarter.

Operating profit (including stock-based compensation but excluding one-time items) increased 12.4% year over year and 36.6% sequentially to $1.41 billion. Operating margin expanded 90 bps year over year and 340 bps from the previous quarter to 23.4% due to higher gross margin base.

Net income (including stock-based compensation but excluding one-time items) increased 13.2% year over year and 44.1% sequentially to $1.03 billion in the fourth quarter. Earnings per share (EPS) increased 10.0% year over year and 42.0% sequentially to 46 cents.

As of Dec 31, 2012, cash and cash equivalents including short-term investments were $6.17 billion compared with $5.45 billion at the end of Sep 30, 2012. EMC generated $1.90 billion in cash flow from operations in the fourth quarter compared with $1.44 billion in the prior quarter. Free cash flow jumped to $1.50 billion in the reported quarter from $1.14 billion in the prior-year quarter.

2013 Guidance

EMC forecasts revenues of $23.5 billion for 2013. Non-GAAP operating margin is expected to grow to 25.5% for 2013. Non-GAAP net income is expected to be approximately $4.1 billion for the full year. EMC expects EPS of $1.85 for 2013.

EMC also expects to repurchase shares worth $1.0 billion in 2013.

Our Recommendation

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 going forward.

Further, EMC’s leading position in the emerging economies of the Asia-Pacific and Africa will boost its profitability as higher revenues from these markets will offset sluggish growth in the Americas and Western Europe going forward.

However, increasing competition from the likes of International Business Machines Corp. (IBM) and Hewlett Packard Co. (HPQ) and a sluggish IT spending outlook for the next two years will keep the stock range bound, in our view.

Currently, EMC has a Zacks Rank #4 (Sell).

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