EMC Corp. (EMC) reported sluggish third quarter 2012 results, with earnings (including stock-based compensation expense of 7 cents but excluding net one-time items of 4 cents), of 32 cents per share, which missed the Zacks Consensus Estimate by a couple of cents.
Quarter Details
Revenue increased 6.0% year over year to $5.28 billion in the reported quarter, but missed the Zacks Consensus Estimate of $5.47 billion. The year-over-year upside was primarily attributed to strong services revenue (up 15.1% year over year to $2.19 billion). Product sales were flat on a year-over-year basis in the quarter.
Segment wise, EMC’s Information Storage business revenues increased 2.7% year over year to $3.76 billion, thanks to strong demand for networked storage platforms portfolio, which grew 2.0% year over year in the quarter. High-end Symmetrix storage product portfolio was up 5.0% annually.
The company’s mid-tier storage product portfolio witnessed flattish year-over-year growth in the quarter. Strong customer demand for Isilon scale-out NAS, VNX unified storage family, Backup Recovery Systems portfolio (BRS) and Greenplum products drove significant revenue growth in the quarter.
RSA information security business climbed 5.6% year over year to $227.0 million in the reported quarter. EMC information infrastructure revenue increased 2.7% year over year to $4.15 billion in the quarter. The significant growth from these segments fully compensated for a 2.2% year-over-year decline in Information Intelligence segment, which reported revenues of $158.0 million in the quarter.
EMC’s majority owned VMware Inc. (VMW) continued to impress with revenue growth of 20.2% on a year-over-year basis to reach $1.13 billion in the reported quarter.
On a geographical basis, domestic revenues climbed 8.0% year over year to $2.9 billion and contributed 55.0% to the quarter’s revenue. Revenue from international operations increased 4.0% year over year to $2.4 billion and accounted for the remaining 45.0% of revenues.
Gross profit (including stock-based compensation but excluding one time items) increased 7.9% year over year to $3.35 billion. Gross margin expanded 110 basis points (bps) to 63.5%, primarily on the back of strong revenue growth.
Research & development expense were up 19.1% year over year to $653.0 million in the third quarter. Selling, general & administrative expense increased 5.9% year over year to $1.71 billion in the reported quarter.
Operating profit (including stock-based compensation but excluding one-time items) increased 3.7% year over year to $1.03 billion. Operating margin contracted 40 bps year over year to 19.6% due to higher operating expenses.
Net income (including stock-based compensation but excluding one time items) increased 5.4% year over year to $717.3 million in the third quarter.
As of September 30, 2012, cash and cash equivalents including short-term investments were $5.45 billion compared with $5.65 billion at the end of June 30, 2012. EMC generated $1.44 billion in cash flow from operations in the third quarter compared with $1.24 billion in the prior quarter. Free cash flow jumped to $1.14 billion in the reported quarter from $957.6 million in the prior-year quarter.
2012 Guidance
EMC reiterated its full year revenue guidance. The company forecasts revenues to be in the range of $21.60 billion to $21.75 billion for fiscal 2012. Non-GAAP operating income is expected to grow to 24.5% for fiscal 2012. Non-GAAP net income is expected to be approximately $3.70–$3.75 billion for the full year. EMC expects earnings to be in the range of $1.68 to $1.70 per share for fiscal 2012.
Cash flow from operating activities is expected to be $6.1 billion for fiscal 2012. Free cash flow is expected to be $4.9 billion for the full year. EMC also expects to repurchase shares worth $700.0 million in fiscal 2012.
Our Recommendation
We believe that EMC is well positioned to benefit from incremental data center hardware spending going forward. Higher spending on high-end products (average selling price $250,000 and above) will also boost EMC’s market share 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.
We also believe that the increasing adoption of cloud computing technology will significantly drive the demand for EMC’s virtual infrastructure products, which in turn will drive top-line growth 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 a sluggish growth in the Americas and Western Europe going forward.
However, increasing competition from the likes of International Business Machines Corp. (IBM), Hewlett Packard Co. (HPQ), NetApp Inc. (NTAP), Hitachi Data Systems, Dell Inc. (DELL) and a sluggish IT spending outlook for the next two years will keep the stock range bound, in our view.
Thus, we remain Neutral on the stock over the long term (6-12 months). Currently, EMC has a Zacks #2 Rank, which implies a Buy rating in the near term.
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