EMC Misses Q3 Earnings and Rev Estimates

EMC Corp. (EMC) reported third quarter earnings of 32 cents per share that missed the Zacks Consensus Estimate by a nickel. Earnings (including stock-based compensation but excluding other non-recurring items) remained almost flat on a year over year basis but decreased 8.7% sequentially in the quarter.

Revenues

Revenues increased 4.9% year over year but decreased 1.3% sequentially to $5.53 billion, well short of the Zacks Consensus Estimate of $5.79 billion. Product sales climbed 2.6% year over year but declined 2.9% sequentially to $3.17 billion. Services increased 8.2% from the year-ago quarter and 0.8% from the previous quarter to $2.37 billion.

Information Infrastructure segment revenues (75.4% of revenues) increased 0.3% year over year but decreased 3.1% sequentially to $4.17 billion. The year-over-year growth was primarily driven by strong performance from RSA (up 11.0% year over year) and Information Storage (up 1.3% year over year), which fully offset a weak result from Information Intelligence (down 5.7% year over year).

On a sequential basis, RSA increased 10.5%, while Information Storage and Information Intelligence declined 3.9% and 2.0%, respectively.

EMC’s majority owned VMware Inc. (VMW) continued to impress with revenue growth of 16.7% on a year-over-year basis to reach $1.29 billion. Sequentially, VMware revenues increased 3.8% in the reported quarter.

Pivotal formed in the second quarter reported revenues of $80.0 million that surged 21.2% from the year-ago quarter and 14.3% from the previous quarter.

On a geographical basis, domestic revenues climbed 2.0% year over year to $3.0 billion and contributed 53.0% to revenues. Revenues from international operations increased 8.0% year over year to $2.6 billion and accounted for the remaining 47.0% of revenues.

Margins

Gross margin contracted 20 basis points (bps) from the year-ago quarter and 50 bps from the previous quarter due to unfavorable product mix.

Research & development expenses as percentage of revenues remained flat both on a year-over-year and sequential basis. Selling, general & administrative expense as a percentage of revenues increased 30 bps from the year-ago quarter and 90 bps on a sequential basis.

Operating margin contracted 60 bps on a year-over-year basis and 130 bps from the previous quarter to 19.0% due to lower revenue growth and gross margin base. Net income as a percentage of revenues was 12.6% compared with 13.6% in the year-ago quarter and 13.7% in the previous quarter.

Earnings (excluding stock-based compensation and other non-recurring items) decreased 3.6% from the year-ago quarter and 35.7% from the previous quarter to 27 cents.

Balance Sheet & Cash Flow

As of Sep 30, 2013, cash and cash equivalents including short-term investments were $10.60 billion compared with $11.15 billion at the end of Jun 30, 2013. EMC generated $1.79 billion in cash flow from operations in the third quarter compared with $1.23 billion in the prior quarter.

Guidance

EMC forecasts revenues of $23.25 billion (down from earlier outlook of $23.5 billion) for 2013. Non-GAAP operating margin is expected to grow to 25.0% (down from earlier outlook of 25.5%) in 2013. Non-GAAP operating expense is expected to be $350.0 million for 2013.

Non-GAAP net income is expected to be approximately $3.9 billion (down from earlier projection of $4.0 billion) for the full year. EMC expects earnings of $1.80 (down from the earlier outlook of $1.85 per share) for 2013.

Cash flow from operating activities is expected to be $6.8 billion, while free cash flow is expected to be $5.5 billion for 2013. EMC also expects to repurchase shares worth $3.5 billion in 2013 and in the first half of 2014.

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. Additionally, aggressive share repurchase will drive earnings going forward.

However, increasing competition from the likes of International Business Machines Corp. (IBM) and Hewlett Packard (HPQ) and a sluggish IT spending outlook for the next two years will continue to keep margins under pressure in the near term.

Currently, EMC has a Zacks Rank #2 (Buy).

Read the Full Research Report on HPQ
Read the Full Research Report on VMW
Read the Full Research Report on IBM
Read the Full Research Report on EMC


Zacks Investment Research