EMC Corp. (EMC) is scheduled to release its third quarter 2011 results before the opening bells on October 18, 2011.
Prior Quarter Recap
EMC reported second quarter earnings (excluding stock-based compensation, restructuring charges and intangible asset amortization) of 35 cents per share, up 25.0% year over year.
Revenues increased 20.4% year over year to $4.85 billion in the second quarter, surpassing the Zacks Consensus Estimate of $4.73 billion. This growth was primarily attributable to continued strong demand for EMC’s storage, data protection, virtualization and security products and services during the quarter.
On a geographical basis, domestic revenue climbed 17.0% year over year to $2.5 billion and contributed 52.0% to the quarter’s revenues. Total revenue from the company’s international operations escalated 25.0% year over year to $2.3 billion and accounted for 48.0% of revenues. Revenues increased 20.0%, 34.0% and 43.0% year over year, respectively, in the Europe, Middle East and Africa (EMEA), Asia Pacific & Japan, and Latin America regions.
Fiscal 2011 Expectations
EMC expects revenues of more than $19.8 billion in fiscal 2011. The Zacks Consensus Estimate is pegged at $19.82 billion.
GAAP net income is expected to exceed $2.44 billion, while non-GAAP net income is expected to be around $3.35 billion. For 2011, GAAP and non-GAAP EPS are expected to be $1.07 and $1.48, respectively. Currently, the Zacks Consensus non-GAAP EPS estimate for fiscal 2011 is $1.22 per share, better than the mid-point of guidance.
EMC expects to repurchase shares worth $1.5 billion in fiscal 2011.
GAAP operating income is projected to range between 16.0% and 17.0% of revenues, while non-GAAP operating income is estimated in the range of 23.0% to 24.0% of revenues. Non-GAAP income tax rate is expected to be 21%.
Consolidated net cash provided by operating activities is expected to be $5.4 billion for 2011, and free cash flow is expected to be $4.0 billion in 2011. Capital expenditures are expected to reach $950.0 million in the quarter.
Estimate Revision Trend
For the current quarter, none of the 11 analysts covering the stock revised their estimates in the last thirty days, thereby leaving the Zacks Consensus Estimate at 30 cents per share.
For fiscal 2011, out of the 12 analysts covering the stock, no upward revisions were noticed while one analyst revised estimates downward in the last thirty days. Consequently, the Zacks Consensus Estimate for fiscal 2011 remained at $1.22 per share.
Analysts expect growth trends in the IT sector to benefit EMC in the long run. A strategic shift in focus toward cloud computing is also seen as a strong catalyst for EMC. EMC remains focused on key areas of IT spending: including virtualized data centers, cloud computing, virtualized desktops and clients, and next-generation backup, recovery and archive solutions. The company is addressing these growth opportunities through an expanding portfolio of products/services within its business groups, which include information storage, security and intelligence.
Recommendation
We maintain our Neutral rating on EMC Corp. over the long term (6-12 months). We believe EMC will benefit from its dominant position in the storage market going forward. Moreover, increasing adoption of cloud computing technology will boost demand for EMC’s virtual infrastructure product, which, in turn, is expected to drive top-line growth going forward.
We also believe that increasing spending from government and large enterprises on cyber security will bolster EMC’s top line over the long term. We also expect EMC to witness strong revenue growth from its broad portfolio of products.
We expect EMC to step up investment in research and development, which could negatively impact earnings growth in the near to medium term. However, this is a necessary investment in our opinion, given the momentum in cloud computing and constantly increasing scope for growth.
Additionally, competition from companies like IBM Corp. (IBM), Hewlett Packard Co. (HPQ), NetApp Inc. (NTAP), Hitachi Data Systems (HIT) and Dell Inc. (DELL) remains a headwind going forward.
EMC has a Zacks #4 Rank, which implies a Sell rating in the near term (1-3 months).
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