EMC Corp. (EMC) reported third-quarter 2014 earnings (including stock-based compensation but excluding other non-recurring items) of 35 cents per share that missed the Zacks Consensus Estimate by a couple of cents.
Quarter Details
Revenues increased 9% year over year to $6.03 billion. Product sales increased 7.4% year over year, while services increased 10.9% from the year-ago quarter.
Information Infrastructure segment revenues (74.4% of revenues) increased 6.2% year over year to $4.45 billion in the reported quarter. RSA, Information Storage and Information Intelligence revenues grew 3.6%, 6.4% and 3.4%, respectively from the year-ago quarter.
EMC’s emerging Storage business revenues grew 47% year over year driven by strong growth of XtremIO, EMC ViPR and EMC ScaleIO. EMC Isilon revenue growth accelerated in the third quarter, benefiting from newer growth vectors where Hadoop capabilities allow efficient analysis of Big Data.
EMC’s majority owned VMware Inc. (VMW) continued to impress with revenue growth of 17.4% on a year-over-year basis to reach $1.51 billion. Pivotal reported revenues of $58 million compared with $47 million in the year-ago quarter.
On a geographical basis, revenues from Europe, Middle East and Africa region grew 15% year over year in the quarter. Revenues from the North America region grew 8% year over year, while the BRIC+13 markets grew 9% year over year. Asia-Pacific and Japan grew 4% on a year over year basis.
Gross margin contracted 70 basis points (bps) from the year-ago quarter. Research & development expenses as a percentage of revenues increased 30 bps on a year-over-year basis. Selling, general & administrative expense as a percentage of revenues jumped 30 bps from the year-ago quarter.
Operating margin contracted 10 bps on a year-over-year basis due to contraction in gross margin base.
Net income (including stock-based compensation) was $729.0 million or 35 cents per share compared with $697.0 million or 32 cents in the year-ago quarter.
At the end of the third quarter, cash and cash equivalents including short-term investments were $15.4 billion compared with $8.26 billion at the end of the prior quarter. The company generated $1.70 billion in cash flow from operations compared with $1.34 billion in the prior quarter.
Reportedly, EMC will be buying much of Cisco’s (CSCO) stake in their joint venture VCE. EMC is also rumored to be closing in on a deal to buy cloud start-up company Maginatics.
Guidance
EMC forecasts revenues of $24.5 billion for 2014, which reflects year-over-year growth of approximately 5.5%. Non-GAAP operating margin is expected to be 24.0% for 2014.
EMC expects earnings of $1.90 per share for 2014. Currently, the Zacks Consensus Estimate is pegged at $1.55.
EMC also expects to repurchase shares worth $3.0 billion in 2014 (up from $2.0 billion). Net cash provided by operating activities is expected to be $6.80 billion and free cash flow is expected to be $5.35 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 providers 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 demanding VMware’s spin-off will weigh on the stock in the near term.
Currently, EMC has a Zacks Rank #3 (Hold).
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