EMC's CEO Presents at Sanford C. Bernstein's 29th Annual Strategic Decisions Conference (Transcript)

Seeking Alpha

EMC Corporation (EMC)

Sanford C. Bernstein's 29th Annual Strategic Decisions Conference Call

May 31, 2013 8:00 am ET

Executives

Joseph M. Tucci – Chairman and Chief Executive Officer

Analysts

Toni M. Sacconaghi – Sanford Bernstein

Presentation

Toni M. Sacconaghi

Good morning, everyone, and welcome. I’m Toni Sacconaghi, Bernstein’s US IT hardware analyst. We are delighted to have Mr. Joe Tucci, Chairman, President and CEO of EMC join us today.

Joe joined EMC in 2000 as President and COO, was named CEO in January 2001, and Chairman in 2006. Since his arrival at EMC, Joe has transformed the Company from a largely high-end storage array provider into a broad-based solutions company and through the acquisition of VMware, the leading provider of virtualization software.

Under his leadership, the Company has typically identified key technology trends early and positioned itself to capitalize on them. Additionally, during his tenure, EMC has successfully integrated several major acquisitions and delivered 15% annual revenue growth since 2002.

I am thrilled to have Joe join us today. He is the consummate professional, as straight a shooter as they come and a pleasure to be with and work with. He is going to provide some short prepared remarks and then we will do Q&A. With much gratitude, I am pleased to introduce Joe Tucci.

Joseph M. Tucci

Thank you, Toni. Just want to thank Toni probably for inviting me and it’s great to be here with all of you and thanks for you interest in EMC. We very much appreciate it. I’ll make a few quick remarks. I really want to get to the questions and issues that are on your mind, but let me say a few things around my mind. But first, as always, we very possibly will make forward-looking statements and we very much encourage you to check our filings with the SEC.

If you think of any business, there is two major drivers. Yeah, you want increased revenues and you want lower costs. And of course it is not on this chart, but if you think of today’s world, you got to do that at a ever increasing speed. Velocity is incredibly important. So that presents some fundamental challenges for IT. They have to align with these business needs and more than anything else they got this great asset called information and how they leverage this asset in real-time, in massive quantities, go through massive quantities of information quickly to make better business decisions, create more intimacy with customers, create more knowledge about customers, create a more slick supply chain, work better with the people inside our company, work better with our partners et cetera.

So this is a tremendous opportunity, again, this velocity – how faster. And then to do that you need – IT has to become much more agile and deliver IT as a service. So, that’s kind of the challenges and I am not in a macro sense. So these are the trends that are going to enable IT professionals, CIO’s to do that. It’s a world of mobility. It’s a world of cloud computing, it’s a world of big data, predictive analytics, real-time and it’s a world of social media. And I personally believe these trends will drive the IT landscape for the next 10 years at least.

Now obviously there is pillars, pillars of trust, that will kind of gate how fast and how big these trends come in. These trends are going to be big anyhow, but again if we can establish – the more trust we establish, the more security, privacy we establish the faster these trends will impact the IT.

So we at EMC, the family of EMC companies our focus is on cloud big data and trust. And as you can see by this lens, we dipped into social media little bit and we were also dipped into mobility a little bit, but in the core of our – of what we try to do it’s all about cloud computing, it’s all about big data and it’s all about trust.

Now, when you think about the cloud, I want to start there. When you think about the cloud, most people go all the way to your left and they think about the public cloud, mostly Amazon Web Services. Now this is – you can see the number of sources here and surveys that have been done. This takes you out to 2016 and in 2016 78% of workloads, applications will run in a private-cloud, here in the conventional infrastructure in a companies data center or enterprises data center, 12% we will be running through public and then they have this hybrid model which is more a running in the cloud, but it’s more of a dedicated infrastructure, mostly a dedicated virtual infrastructure for you.

And across our company, we now are playing in all of these areas. With VMware and EMC Storage we are the largest player in virtualization and storage in the – which are now being termed private clouds. The VMware just launched a vCHS, virtual cloud hybrid service which will cover both the virtual private cloud and the public cloud is VM branded service. And then of course our storage, we have storage across this whole stack. And where does a customer put an application; well it depends on the service levels needed and it depends on the performance needed. So again it’s a spectrum, but that’s the lens a CIO thinks through.

What performance do I need for this application? What service levels do I need and then they make a decision. So again, great opportunity in growth in all three areas and we play in all three areas. Same thing as we do our storage, we believe that one size fits all is absolutely a wrong strategy. What we do is we basically have purpose built storage across this whole spectrum and again it’s all about high service levels needed for applications, lower service levels needed for application, high performance needed and then raw capacity needed for applications.

They then just not use very much, you are archiving it, it’s a backup copy, obviously you want to store that at a much less cost, and it doesn’t require the same performance. So that’s how we think about the cloud, that’s how we think about the storage, and they go hand in hand.

One of the kind of the pieces of information I’d like to impart here, and I am sure Toni will talk about this and in your questions also, is that the major players today are building technology stacks. I honestly believe if you ask me and got deep into my head that if you were upsized, even a EMC sized for sure or above you can’t play one dimension. I am not saying there is not going to be niche players, but when you get upsize, I don’t believe there is going to be niche players. I believe that these companies that are going to be successful in the future are going to offer broader technology stacks.

And of course you can see that’s what Oracle is doing, that’s what IBM is here, that’s what IBM is doing, Microsoft is doing it, very software dominated these stacks but of course since some of them, say for Oracle they are basically trying to doing the hardware and software together. And they’re building these stack and a lot of company is building these stacks vertically.

Now we at EMC and our family at EMC², our family of companies, our federation of companies, a Pivotal VMware and EMC, we will also build a really nice stack of technology. I think it’s a tremendously great advantage for us. So on Pivotal, they are building a platform, sort of the new generation of cloud applications, new way of building them, built for mobility, built for a new data model, built for running the cloud.

VMware is building a software defined data center, applying the Hypervisor and virtualization they did to the server market to both storage and network and whole set of appliances like Firewall, Load Balances, Security Appliances. And then we at EMC of course are doing that at a whole range of stores that I talked to you about and then of course cutting across this whole thing, we are largely doing security.

So unlike other companies, we are actually keeping four brands very much alive and well EMC, VMware, RSA and now Pivotal. So we can glue this together and have a really, really important stack and that is raising our credibility and are kind of future in the eyes of CIOs.

Now we’ve done our stack differently. We are building our stacks horizontally, not vertically as we think fundamentally vertical at the end of day will not look like a cloud. I mean if you look at what Amazon is doing, which – what I would regard as the best articulated cloud right now or the most successful articulated cloud right now I should say. They now build a different cloud for different applications. They built one horizontal infrastructure and run all the applications on it and that’s the approach we are taking.

The second thing we are doing different is we are not gluing our components together so tightly that you have to use every components. So this slide is kind of I parsed them up a little bit and I will give you a better example coming up. So you can use everything in Pivotal and use none of VMware and none of EMC. You can use all the technology in VMware and use none of Pivotal and none of EMC. You can see the technology in EMC and use n none of VMware or Pivotal, same thing what I would say.

So we are giving customers choice and customers do not want locking. It is a massive and I am absolutely positively convinced that horizontal model is going to win. So again this is a little bit complicated slide, but what I tried to say is, if we take Pivotal and you develop an application using Pivotal technology, a new cloud applications or big data or fast data application, you can run VMware’s cloud, that on the left is our stack, but you can run on Hyper-V from Microsoft, you can run on all the clouds listed here Amazon Web Services for instance, customers love that.

Well you can VMware and you can run all of those applications rather than build vertical stacks, you can run Oracle apps, you can run at SAP apps, you can run Microsoft apps, so much more flexibility and much more choice.

If you take VMware, it’s also participating in open stack. So you can use VMware Hypervisor or VMware Nicira and software defined networking inside of OpenStack. So it’s a very different approach, but it’s very important to build a stack of technology. And of course the same thing with EMC, we not only support VMware and Pivotal, we will support other big and fast data platforms, we’ll support other virtualization like Hyper-V, like OpenStack et cetera. So that’s our strategy, but I want to get important – how important it is at least in my mind believing this company, how critical it is for us to build a stack of technology.

Again we are now called EMC squared, a federation, and then that federation has four brands, three companies because EMC II controls both the storage as well as the as I say, VMware, software defined data center and then they’re helping solve the problems and end-user computing in this new world and of course the hybrid cloud offering I just talked about and then again Pivotal is doing a platform for new cloud apps, big data apps, fast data apps.

So again that’s what federation of companies and I have three tremendous leaders, and counting all I’d say four tremendous leader and I am just privileged to work with these gentlemen. So a differentiation is we believe we give the best efficiency. We use our infrastructure and you measure from top to bottom, total cost of ownership we have, we will have a core stage, and then create great efficiency, we give customers a whole new way of controlling their actions as we talk to the application and say, hi Mr. App?

What do you need? What’s the service levels you need to maintain? What are the policies we need to hear to? What are some of your cost constrains and then we take out, we create pools, this pools of different kinds of storage, pools of course – pools of memory, pools of networking capability and apply them just when it’s needed and when it’s not needed, we put it back in a pool, tremendous control. I talked to you about choice yielding, untold agility which helps customers with what I talked about that speed vector that’s coming with every business.

And finally, I’ll just give you a little highlight. I am sure most of you have got this yesterday. We’ve expanded our capital allocation framework and how we’re thinking about the future, and we expose a lot about and I am sure there will be some questions. But obviously we wouldn’t have done it if we weren’t really pleased with our strategy and the way customers are receiving our strategy and our products. We wouldn’t do this. We didn’t have confidence in the future, but we did institute a $0.10 per quarter dividend starting in July. We basically upped our share repurchases to 6 billion between now and the end of 2015. We said between now – in the next 13 months doesn’t make it simple and the next 13 months we spend an additional $3 billion to buyback shares. So we’re returning more cash to shareholders as promised. And again, we announced our – we said we had plans to access the debt markets.

So with that again thank you for your interest in EMC. It’s great to see all of you. A lot you, I’ve known for years and make some new friends while I am here. And so thank you and Toni, I will take the hot seat.

Toni M. Sacconaghi

Terrific. Well thank you for those remarks Joe. May be we can just because it’s tropical and news worthy, why don’t we maybe talk briefly about capital allocation.

Joseph M. Tucci

Sure.

Toni M. Sacconaghi

A follow up on the slide that you just put up. May be it’s context you have said publically before dividend was not a question of, if it was, when? So this was not a huge surprise, but maybe you can help us on the timing, why yesterday and how you thought about broader capital allocation between the dividend and the buyback?

Joseph M. Tucci

We really wanted to give you the whole story at once. So if you think about it, at the end of this year payable in early January we have $1.7 billion of convertible debt that’s coming due. And we basically want that at some point in time replace that and I’m saying that’s the number we’re going to take, I’m not saying that at all. We want to replace that with a more permanent debt and then apply some leverage on our balance sheet, but I think we can get better results for you.

At the same time, I told you was if not when so we didn’t want to basically wait until the earnings, which is kind of customary to say here is the dividend because we wanted to give you the whole story at once. So we said here is the buyback plans, here is the dividend plans, and yes, we will access the debt markets and we will update you on that and we said that wouldn’t be in the too, too distant future.

So we wanted to get out the whole story and it is an open period and you don’t want to get too, too close to the January date when the money is due to access those debt markets. So the timing was good. We’re confident in our business and we went.

Toni Sacconaghi – Sanford C. Bernstein & Co.

One of the questions that I received yesterday is from investors was specifically around some of the comments that you had made around cash flow. See you had said, we’re going to return 50% of our cash flow which we expect to be $4 billion for EMC this year. The total Company have previously got is $5.5 billion in cash flow. And some folks read into that and said well that sounds like VMware’s cash flow is $1.5 billion that feels low given they only did $600 million in the first quarter. Can you – are you being conservative or is there a message in those numbers that investors need to heed?

Joseph M. Tucci

You’ll see how I’m going to answer this one. The real answer, I mean the real answer I have to say is yes we’re being conservative. What we really wanted to get out to you yesterday was EMC II, EMC Information Infrastructure has $4 billion of free cash flow. And we did that, and we did not want to change guidance. Toni thinks I am conservative and I would rather be conservative than not. So we don’t want to change guidance of [$5.5 billion]. So VMware was kind of the right number. We certainly didn’t mean and I apologize, we certainly didn’t mean to change any VMware guidance and I refer you back to the guidance they’ve given and the statements they’ve made, and I’m sure they’ll help you and point you to where that guidance is. So I guess I have to say we are a little conservative.

Toni Sacconaghi – Sanford C. Bernstein & Co.

Okay. You’ve talked about a 50% return of free cash on an ongoing basis. The dividend as it is now is about 20% to 25% of your free cash flows, that would imply about half in dividends and half in share repurchases. Is that a sort of a mix that you think is an appropriate mix or do you see that evolving significantly differently over time once this significant upfront buyback is complete?

Joseph M. Tucci

Well, it’s going to evolve. In my head what I think we can do the best for you – if we can find another VMware – I know that’s little reaching because maybe VMware is your once- in-a-lifetime events. But another Data Domain, another Isilon, another RSA. We’ve given you great returns on those investments. I would rate that as the best thing we can do for you, as investors. So top of my mind is that we can continue and find the right string of pearl, that would be top of my list. Obviously we’re committed to the dividend, we’re committed to increase it over time. We want to take dilution out with the – use it for the stock options and restricted shares, we want to take out that dilution. So kind of giving you pecking order.

And then you take – then the next thing on my list would be more buyback, all right. So that’s kind of the order I think of things, moving the Company strategically, making sure that in a reasonable period of time you get a great reward, dividends, increasing dividends over time, taking out dilution, excess buyback.

Toni Sacconaghi – Sanford C. Bernstein & Co.

Okay.

Joseph M. Tucci

I don’t know if that’s helpful, but that’s how I think about it.

Toni Sacconaghi – Sanford C. Bernstein & Co.

And then.

Joseph M. Tucci

And then of course the Board makes the final decision, not me. And if I try and operationalize that Joe, if I look back over the last five years of cash generation at EMC. Roughly 50% up and this is consolidated EMC with VMware, roughly 50% of the free cash flow has been used to make acquisitions then you got your highest priority from a cash utilization perspective. And about 40% has been used to repurchase shares which is largely been done to offset dilution.

Toni Sacconaghi – Sanford C. Bernstein & Co.

Right. And so today you – most of your cash flow has been spoken for those two things. So now you’re introducing a dividend that might be another 20% of your cash flow on an ongoing basis. Does that mean that the share repurchase might actually, because if 90% of the cash flow is already claimed and now you’re introducing another 20% for the dividend, does that mean that your buybacks actually could go down and you may not be able to offset dilution going forward or?

Joseph M. Tucci

We believe we could…

Toni Sacconaghi – Sanford C. Bernstein & Co.

Probably you wish your less stock and options to employees or what kind of gives in that equation?

Joseph M. Tucci

Well you want to get the best talent. So, but always you’re looking – you want to be frugal about everything, right, but you want to get the best talent. On the other side Toni, we’re committed to continue. We showed you with the $4 billion as we are generating a lot of cash. We showed – we expect to generate more over time. We picked up the buyback significantly over the next three years and we know we can fund all of that. And then of course three years from now some of the investments we’ve made will kick in and I believe produce significant, more cash flow for us, and increase cash flow and will be fine.

Toni Sacconaghi – Sanford C. Bernstein & Co.

Okay. On the debt side, you talked about up to 1.5 times EBITDA. So that’s currently now probably a $7 billion or $8 billion number if you just multiply the 1.5 by your current EBITDA. I would expect that that’s not something that you would do immediately, on the other hand you wouldn’t be taking on debt unless it was something that meant – was of some size. So should we be thinking about initial debt in that $1 billion to $7 billion range. I mean I couldn’t imagine it being lower and you’ve given the upper bound is that the right way to think about it?

Joseph M. Tucci

Right now in the state we’re in I really can’t give any guidance of that and we’ve kind of given you an upper boundary and where the EBITDA would allow us. You can also think about some of the uses of cash that we need, we talked to you about taking out the convert with more permanent tiers so I'm kind of bracketing it for you but I don’t want to give you any numbers right now.

Toni M. Sacconaghi – Sanford Bernstein

Okay understood. You mentioned acquisitions as being the highest priority for good acquisitions ultimately because you have a good track record of dealing being the highest priority. Over the last couple of years, EMC has not done the acquisitions, it’s actually the VMware that has more of the acquisitions. As we think about acquisitions going forward, is it more likely that they actually may come in through Pivotal or VMware on a go-forward basis or what we’ve seen in terms of more modest acquisition activity at core EMC just sort of a blip?

Joseph M. Tucci

I think what we did, which can look everybody in the eye, and I believe it is going to have tremendous success is where a change was Toni is, we had a string of them that we did. We did a smaller company called [Kasha] which became a recovery point, a great success. We did a smaller other company called Avamar, a great success. We did a bigger company called Data Domain, a great success. We did out Isilon, great success.

And then we switched a little bit of our kind of what we were doing and we bought a little bit further ahead. So we bought companies like Greenplum, which is now core piece of Pivotal. We bought companies like XtremIO and when we bought it we said this is at least a year pre revenue. On the VMware side, we bought companies like Nicira. Now if you add them up, that’s over $2 billion of acquisitions right. All of them today are losing money right? I believe all of them will be $1 billion businesses or $1 billion plus businesses absolutely believe it, absolutely believe it.

So what we did is, we struck with the string of pearls but rather than take something that was kind of revenue now. We bought a little bit further ahead but I think these are areas that are going to just going to rock. I mean the future storage is very much going to be based on Disk and Flash, but Flash is going to be our margin opportunity, Flash is going to drive lot of the revenue but Flash is eight on average, eight times more expensive. Remember that chart I said, so when you want performance, you want Flash. Then customers will pay for performance because certain apps needed. Certain apps don’t needed they don’t way to pay for performance, that’s why we need to arrange. So these things that we’ve done XtremeIO, Greenplum, Nicira are going to be tremendous successes but we changed our MO, right and we bought a little bit earlier. But I think the reward is going to be equal or better hence then some of those companies that you love like that was just they went through.

Toni M. Sacconaghi – Sanford Bernstein

Is that a permanent change in mindset, Joe?

Joseph M. Tucci

No, it is not a permanent change in mindset. You got to have balance. If I’ve seen here today and again I am – I don’t want to give we don’t or we do have one of these inside, we always are looking at a lot of things. I would much rather do a data demand on a Avamar right now than I would rather do another Greenplum or another Nicira or another XtremeIO or something. The product was fairly mature and then of course you take our distribution and kind of pretty good housekeeping Seal of Approval in the eyes of CIOs and drive those products to revenue quickly.

So that’s the big change we’ve made and I think its going to take a little more patience and I’ll remind everybody that I’ll be 66 in August, so why would I be doing something like that if I was thinking short-term, but I’m thinking longer term and I do believe this is not a short-term. If you think only short-term, you are going to misguide your company and these were good – I really believe in these best and I really believe all three of those will be $1 billion plus.

Toni M. Sacconaghi – Sanford Bernstein

Okay great. And we can talk a little bit more broadly about the storage market. Third-party data such as Gartner and others are pointing to storage capacity growth that is much lower than what we’ve seen historically, I think 20% last year, which was about half the rate that we saw during the financial crisis. And so what’s your perspective on why these rates are lower and are we seeing any kind of change either from a buyer’s perspective or from a secular perspective that maybe changing storage demand’s profile?

Joseph M. Tucci

Just two reasons, the first and far bigger reason is that, we have applied a tremendous amount of technology in a relatively short time. So in other words, you can now tier your storage and do it automatically rather than have human beings do it. So basically, if you need these high performance, we’ll put it on Flash, if you need just capacity, we’ll move it down. So before customers were buying more high performance storage than needed. So now automatically we distribute form, gives them a lot better – as you could buy 4 terabyte by drive now for a lot less cost than a fraction of that in Flash, so depending on where I put the information.

So basically – and then you have got thin provisioning and I could go on and on with all the technologies, the de-duplication compression so, all of these have giving customers a tremendous benefit, a benefit of technology, in which given us the ability to do that is to speed up the multi-core processes, right. So, now, they’re so many course coming, its, we can basically use those cores to do all that software technology, right, to get customer benefit and that is by far the biggest reason, because if we look at terabytes per say, growing in terms of how much information being created in the world that has a slowdown.

So, basically we’re storing a lot more for less, but there is no sector of this industry, which is been more then the storage in terms of giving value more or less right. The second thing is as we move through this kind of not normal recovery, right. Customers for sure are keeping their assets longer and of course with software, we’re letting them get more out of their older assets so those two things play together. So, those are the two reasons, we just a tremendous amount of technology, we’re throwing out what the customers are using and benefiting, and then we’re keeping their for sure and we have statistics they are keeping their assets longer. And of course, when you do that, it looks good on the service line, but it doesn’t look us good on the sales line. On the later, you know that hopefully is clearly as cyclical factor.

Toni M. Sacconaghi – Sanford Bernstein

On the former is that more structural and should we be thinking about lower growth rates for storage overall from a revenue perspective on a go forward basis?

Joseph M. Tucci

I think the answer to that is going to be how well do you play the Flash game, because again if you want that performance, and customers who want to pay for performance, because what I said in my speech its not only about if you’re running your company, you’re not only want lower cost and higher revenue. We got to do things with a tremendous philosophy now. Speed is the whole game, speed and agility if you pick up two words, not only it get lower cost more revenue with speed and agility, right. And Flash is going to give you a lot of that, because when you core assets is your information, how do I mind that information better business decisions faster, so to more we can get there, the more we can keep our revenues growing and that’s where we’re making such massive investments in Flash.

Toni M. Sacconaghi – Sanford Bernstein

And that might be realistic for the market rather than you’re making a forecast around EMC. I mean in five years from a terabyte perspective and from a revenue perspective, how much could Flash ultimately be in the market place and then obviously is up to you about whether you are more or less than that, but I’m trying to gauge how significant you think that might be?

Joseph M. Tucci

If you look at, if you look what’s happening and you look at the Flash roadmap, you look at this roadmap, I mean they’re basically coming down about the same. So, companies that Seagate and Western Digital didn’t pay me to do this, but that not gone away, because they’re doing a really good job bringing down for us, I mean they get the four terabyte shipping now, and this drives twice that size and more on their roadmap, so they’ll continue to bring down, of course of storage. So its going to be a mixed game, so its not only Flash only, its really – the key is really going to be more and more in software and that’s why the biggest activity we got going on now is [wiper], which is what we’re doing any and see on the software-defined storage side. And again as we do things like that, because value the customers will pay for it.

So, we’re confident in our storage (inaudible), but its going to look differently, you’ll see a big change in a landscape and again of course, once you apply all those technology in the data growth, its going to be the growth storage unless we have another huge breakthrough, but again the breakthroughs in data deduplication the breakthroughs or compression are likely to be less. They’re going to continue, but it would be less than we’ve got over the last say five years, I mean five years of our nobody deduped anything, now, we’re deduping almost everything, so, if you look five years from now, you’re not going to get the same benefit, you just got looking back. So, it’s an area, which I am convinced we’ll grow faster in ideas and average.

Toni M. Sacconaghi – Sanford Bernstein

You talked briefly about cloud and you put up the slide, that’s look public cloud which is what people send a lot of talking about is a relatively small portion of where ultimate cloud deployments are and will be, but if we think about software to service which isn’t necessarily a public cloud phenomena, it’s a service offering. If its, I guess the question is how is that not a potentially negative trend for EMC and how do you see your share at SaaS providers relative to traditional liner product providers?

Joseph M. Tucci

The SaaS providers that are coming up today are using, VMware kind of infrastructures, and again we sell a tremendous – somewhere of this is growing markets are two service providers in the public cloud, our two SaaS providers. And again with our VMware branded cloud hybrid service, we’re going to play in all three markets, how customers build out the private clouds, how virtual private clouds and which is basically in a cloud but dedicated sort of virtual infrastructure for you and you only. And then of course, a pure public cloud where you just taken a piece of a huge infrastructure. So we’ll play across the board, and we will play hard there and we are using a franchise model and as we get a lot of companies that we’ll work with and I think it’s going to be a plus for us. I really do.

Toni M. Sacconaghi – Sanford Bernstein

So you see a shift in your company’s ability to capture those revenues as perhaps coming through the VMware side of the business rather than the EMC side of the business?

Joseph M. Tucci

It’s still need storage...

Toni M. Sacconaghi – Sanford Bernstein

But you think ultimately overtime that prevailing traditional architectures from branded OEM vendors will be sufficiently highly penetrated at SaaS providers?

Joseph M. Tucci

If you look at the range of storage, lot of our storage is going into SaaS providers because the interest from SaaS providers in what we are doing with Atmos, the interest in SaaS providers in what we are doing with some of our yet to be announced Flash capabilities. The interest in Isilon is incredibly high. So we have great opportunities both places.

So I’m not, it’s a huge market, I mean we just take a look at the slide around numbers, you look four years ago was a fairness in 2016, 25% and it was 23% to be a specific, but a quarter, of all applications are going to be running in some quarter, some cloud is not in the customer zone, the customer doesn’t know. That’s a huge shift. So I’m not going to adding that shift, but I’m saying we got plans with pivotal – that’s why the stack is important of technology, because it’s how we play it. But and again we do have our stack and lot of companies pick that and that’s a fantastic SaaS players, service providers, but we provide alternatives and there is a lot of different ways for us to make money now.

Toni M. Sacconaghi – Sanford Bernstein

Shifting to another technology change and you’ve alluded to it and you’re making significant investment, this area of software defined data centre and software defined storage, again conceptually at a high level the notion that value may be extracted from an integrated storage device placed on software centrally somewhere in the network. Could hallow out traditional hardware and I think that’s a fear among investors. So a) do you, is that a legitimate fear, and b) perhaps you can discuss your software defined storage and data centre efforts and distinguish what you are doing between VMware and EMC.

Joseph M. Tucci

Sure. If you think of what happened, this is tremendous amount of money is being made in service. The problem is where is the money being made? So obviously VMware gets a chunk of that now. But if you think about it, there’s Microsoft gets a chunk of it, Intel gets a chunk of it. So if you look in service a lot of them are in the stack. The OS is either owned by Microsoft or Linux now the popular, right? But if you think of storage, the OS is ours, the underlying hardware is ours, so we can still – you can still basically put a Hypervisor above the storage.

And if you look at all places you can make money at VMware level, at hypervisor level, as VMware I now get to where VMware is doing versus what EMC is doing in a second. And then of course it’s your operating system, your environment, you are not using Microsoft Windows, right? So if you have – Windows is still one of the large environments out there, so if you had a server Microsoft has taken a piece, Intel has taken a piece, VMware has taken a piece, and then of course whoever sold you the service is taking a piece, right? So, you still got more of a stack in networking or in storage than you do anything in server. So there is still pretty rich pool of dollars there.

If you got to think about VMware were sitting in the stack, VMware is one of the only things in the whole stack that sees every package. So they will see everything a network vendor sees because they see impact of the flow. They see everything that’s happening in the server, right. Anything that’s happening in the register, every memory reference and they see every I/O that we see.

So they are in the best place to basically fundamentally know what the app needs create intelligence and then passion. So, VMware is going to work more on that side and we will work more on the actually what the – more of so basically they’re working more in the control plan, we’re working some in the control plan, but more in the data plan.

Toni M. Sacconaghi – Sanford Bernstein

If you think about the evolution of software defined storage over what timeframe and I know this is evolutionary is not discrete in time, but is this a one-year event or five-year event?

Joseph M. Tucci

It’s not a one-year event. It will probably happen faster than five. So I think you’ll see little inflection this year my opinion, this would be like the very beginning, you’ll see some next year 2015, you will really start to see impact.

Toni M. Sacconaghi – Sanford Bernstein

Some investors have said look it feels like VMware is going through a transition that is core virtual infrastructure market is becoming more mature, you have a lot of workloads that have now been virtualized, server sales are slower and the opportunity is less. And the opportunity for the software defined data center is going to take two or three years for your comments to really start meaningful bend. Do you worry at all about this interim lull while at VMware where the core business is maturing and the significant investments you’re making in software defined data centers are going to take a while to take hold and I know you’ve given guidance that sort of reflects that where revenues actually start to re-accelerate in 2015.

But do you worry about the fact that that transition actually could be even steeper than you think perhaps more precipitous on the way down and more significant on the way up, because of this transition?

Joseph M. Tucci

Yeah, kind of what I said, when I said 2015 you’re going to see a big uptick, you asked me the question about software defined storage specifically. So in VMware, you are talking about software defined data center which is compute storage network and whole set of appliances Firewall, Load Balancers, Security Appliances, et cetera. So the opportunity that there is going on is immense. They’ve told you time and time again that the vCloud suite as opposed to a vSphere is three times the ASP, and they are picking up nicely. So I think the VMware is going through a transition but I think it could be a lot smoother and you shouldn’t think 2015 for – if you’ve got to wait for 2015 as far as seeing that benefit, I do think with the guidance they gave, I think it’s good guidance, and it’s not – nothing is to use a basketball term, nothing is layup, but they’ve got a tremendous opportunity, they’ve got tremendous – it’s great people, and trust I mean I get a very, very trusted operating environment, it’s very stable, our customers get tremendous value, so I’m just thrilled about what’s happening in VMware and the progress.

But again it’s a bit of a transition, but I would characterize it differently, but I think if you look at it the one that’s happening in the third, because it’s probably the hardest is software-defined storage, all right, we will start with compute network, now storage, so I said storage you’ll see big inflection point 15, I think software-defined data center with all those components will happen sooner.

Toni M. Sacconaghi – Sanford Bernstein

Joe I’d like to do the lightning round, we have about four minutes, five minutes before I get in as many questions as they can. Largest acquisition you might do historically $2.5 billion to $3 billion, could you do something that’s more than $5 billion?

Joseph M. Tucci

I much preferred the string of pearls approach, it stands smaller, I prefer now going back to the kind of the kind of the Isilon, Data Domain model if I can, and that type things we’re looking at, if we really believe that will be accretive, and tremendously value I would look at something bigger not they preferred.

Toni M. Sacconaghi – Sanford Bernstein

Is mix the biggest driver of future margin expansion and is Cloud, as the Cloud infrastructure gross is that margin accretive event for EMC?

Joseph M. Tucci

The answer to that is yes. But again, tremendous opportunity what we are doing with RSA in Security, tremendous opportunity in Pivotal, I mean the next big set of acces going to be around big and fast data, for the opportunities are throughout the whole stack. But for sure, Pivotal, for sure, VMware, and again, security and storage are going to be good markets, better in ITs and average.

Toni M. Sacconaghi – Sanford Bernstein

Under what circumstances would you consider selling WMware entirely or reducing your 80% stake?

Joseph M. Tucci

Entirely I will be here and that happens just put it that way. And I’m not religious about the 80% stake. I thought it was a great investment and has been, and if you look at the investments you’ve made in buying back and having EMC is alone 80% of this asset has been a good investment and it’s got a great ROI, but I’m not religious about the 80% stake.

Toni M. Sacconaghi – Sanford Bernstein

Did you consider selling part of that stake is part of the capital rates rather than taking on this?

Joseph M. Tucci

No.

Toni M. Sacconaghi – Sanford Bernstein

In the changing landscape, who do you view to be EMC’s largest and most important competitor that’s the traditional ones versus the additional ones in the form of public cloud competitors?

Joseph M. Tucci

We have no shortage, obviously you look at the new competitors, Amazon and Google might or might not do, traditional competitors I have tremendous respect for IBM and Oracle and other players. So unfortunately the answer is both there are no shortage of competitors. We’ve attracted attention, I mean our stack is, everybody has figured it and just saying oh, that’s a pretty good stack and we have no shortage of competitors.

Toni M. Sacconaghi – Sanford Bernstein

Question from the audience along that, the power of the stack is in the ability to bundle underline how does Federation of brands capture counter the bundling advantage?

Joseph M. Tucci

I’m not sure understand it, I mean…

Toni M. Sacconaghi – Sanford Bernstein

Can we bundle across the Federation?

Joseph M. Tucci

Well, I think the assertion is that bundling is good and when you have different brands and our spread across perhaps your ability to bundle is more mitigated, which will running a very different model in terms of we’re trying to give choice, but don’t mistake, we can and do bundle across the Federation, it’s something we’re not as good as we need to be, but again I’m trying to guard the fact that if you’re going to get choice you’ve got a get choice, that’s the differentiated between us and a lot of other companies and something customers love. And the other side to use the power to stock we got to get better, we do it today and something we got to get better and how to be bundle and still keep the choice aspect and something we’re working on hard.

Toni M. Sacconaghi – Sanford Bernstein

And what of the two things you worried most about, Joe, EMC of course?

Joseph M. Tucci

Yeah, we got a straight focused on, there’s lot of – kind of went pick up EMC is kind of broken, but it was easy, the only (inaudible) metrics, right. Now we got a lot of things going on, so it’s the complexity, because we have to take that complexity and simplify it, because we got to consume it easier, so I spend a lot of time there, and I to worry about it, but on the other side it’s tremendous opportunity for us.

Toni M. Sacconaghi – Sanford Bernstein

And finally, I don’t turn the question back on me please, what do you think investors under appreciate about EMC?

Joseph M. Tucci

I would say that the best that we placed for you, which of course, readying today, right, it is what we’re doing in Pivotal tremendous opportunity, the reception of Pivotal has been beyond my wildest dreams positive reception, it’s the best we placed in software-defined data center what we are doing in storage security. Again there is tremendous value obviously we got to play it right. And then of course, I think the opportunity of, if you think of what’s the next trend is being coordinate the Internet of Things, GE calls it the Industrial Internet.

You’re going to see sensors building everything is right now is less than 5 billion devices connected to the Internet, by the end of the decade it talking 200 million with sensor is being built and everything you can imagine from clothing and how you water your lawn to medical devices to smart grids all that I generates tremendous amount of information, all that needs a cloud, all that needs for the biggest trend I think coming out is the Internet of things, and I think is tremendously beneficial to the EMC family to Pivotal, to WMware and of course that you have some massive amount of informations that is got be stored and then reasoned over, so.

Toni M. Sacconaghi – Sanford Bernstein

Joe as always thank you so much for your time and you interest.

Joseph M. Tucci

Thank you, Tony. Thank you everybody here. Really appreciated.

Question-and-Answer Session

[No Q&A session for this event]

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