EMC Misses on Q2 Earnings, Revenues Up Y/Y, Boosts Buyback

EMC Corp. (EMC) reported second-quarter earnings (including stock-based compensation but excluding other non-recurring items) of 34 cents per share that missed the Zacks Consensus Estimate by a penny.

Quarter Details

Revenues climbed 4.7% year over year to $5.88 billion. Product sales increased 1.9% year over year, while services increased 8.7% from the year-ago quarter.

Information Infrastructure segment revenues (74.4% of revenues) inched up 1.0% year over year to $4.38 billion. RSA, Information Storage and Information Intelligence revenues increased 6.6%, 0.6% and 3.9% from the year-ago quarter.

EMC's emerging storage business revenues surged 52.0% year over year driven by strong growth of XtremIO all-flash storage, Isilon and ViPR products. Both Security Analytics and Archer product revenues increased more than 20.0%, respectively.

EMC’s majority owned VMware Inc. (VMW) continued to impress with revenue growth of 17.0% on a year-over-year basis to reach $1.45 billion. Pivotal reported revenues of $54.0 million compared with $42.0 million in the year-ago quarter.

On a geographical basis, domestic revenues increased 3.0% year over year at $3.1 billion and contributed 52.0% of revenues. Revenues from international operations increased 7.0% year over year to $2.8 billion and accounted for the remaining 48.0%.

Revenues from Europe, Middle East and Africa region grew 12.0% year over year in the quarter. Revenues from Latin America region grew 14% year over year, while the BRIC+13 markets grew 5% year over year.

Gross margin contracted 70 basis points (bps) from the year-ago quarter due to unfavorable product mix. Research & development expenses as percentage of revenues increased 20 bps on a year-over-year basis. Selling, general & administrative expense as a percentage of revenues jumped 240 bps from the year-ago quarter.

Operating margin contracted 220 bps on a year-over-year basis due to lower revenue base and contraction in gross margin base. Net income (including stock-based compensation) was $702.0 million or 34 cents per share compared with $767.0 million or 35 cents in the year-ago quarter.

As of Jun 31, 2014, cash and cash equivalents including short-term investments were $8.26 billion compared with $8.26 billion at the end of Mar 31, 2014. EMC generated $1.34 billion in cash flow from operations compared with $2.19 billion in the prior quarter.

Guidance

EMC forecasts revenues of $24.6 billion for 2014, which reflects year-over-year growth of approximately 5.5%.

Non-GAAP operating margin is expected to grow in the range of 24.0% to 24.5% for 2014. EMC expects earnings of $1.91 per share for 2014. Currently, the Zacks Consensus Estimate is pegged at $1.56.

Currently, the Zacks Consensus Estimate for third-quarter earnings is pegged at 38 cents.

EMC also expects to repurchase shares worth $3.0 billion (up from $2.0 billion) in 2014. Net cash provided by operating activities is expected to be $7.2 billion and free cash flow is expected to be $5.8 billion for 2014.

Our Take

We believe that EMC is well positioned to benefit from incremental data center hardware spending in the long run. EMC’s vast product portfolio, which has products suitable for any kind of budget, will boost its market share. Additionally, aggressive share repurchase will drive earnings.

Sluggish IT spending outlook for the next couple of years will continue to keep margins under pressure. Moreover, EMC’s high-end storage systems are facing increasing competition from flash-driven storage technology provider like SanDisk (SNDK) and Western Digital (WDC). This will continue to hurt top-line growth in the near term.

Moreover, increasing activism from Elliott Management regarding separation of VMware will weigh on the stock in the near term.

Currently, EMC has a Zacks Rank #3 (Hold).