Shares of EMC Corporation EMC are down 2.9% in the pre-market session after the company announced its third quarter 2015 results. EMC’s adjusted earnings (including stock-based compensation expense but excluding other items) of 33 cents per share came in line with the Zacks Consensus Estimate but declined 8.3% on a year-over-year basis.
Quarter in Details
Quarterly revenues of $6,079 million came slightly above the Zacks Consensus Estimate of $6,063 million and improved 0.8% year over year. Product sales decreased 3.8% year over year, while services increased 6.7% from the year-ago quarter.
EMC Information Infrastructure segment revenues fell 2.6% year over year to $4,348 million. RSA dropped 6.9% while Information Storage revenues fell 2.2% year over year. The Enterprise Content Division decreased 6.5% year over year.
VMware Virtual Infrastructure continued to impress with revenue growth of 10.3% year over year to $1.7 billion. Pivotal reported revenues of $67 million, up 15.5% year over year.
On a geographical basis, revenues from North America increased 4% year over year. Revenues from Europe, Middle East and Africa region dropped 3% year over year. Revenues from the Latin America region were up1% year over year. Revenues from Asia Pacific and Japan declined 4% on a year-over-year basis.
Non GAAP gross margin decreased 110 basis points (bps) to 62.6%. Non GAAP operating margin was down 370 bps to 19.4%.
As of Sep 30, 2015, cash and cash equivalents including short-term investments were $7.6 billion compared with $8.3 billion at the end of Dec 31, 2014. In the third quarter, EMC generated $1.4 billion in cash flow from operations as against $1.7 billion in the prior year quarter. Free cash flow was $1.03 billion compared with $1.34 billion in the year-ago comparable period.
Our Take
The last few days have been pretty interesting for EMC. The company is being taken over by Dell and private equity firm Silver Lake in a record $67 million deal. The combined company will have revenues of over $80 billion.
Moreover, yesterday, EMC and VMware announced their plans to form a new cloud company by spinning out Virtustream. While the news in itself is no big deal, the timing of this announcement is perplexing as it means that Dell will also have ownership of Virtustream.
Also, its noteworthy that post spin-out, Virtustream's financial results will be consolidated with that of VMware (from the first quarter of 2016). This move, it seems, is an attempt by Dell to reinforce the fact that VMware’s business model will not be affected following its acquisition of EMC.
We believe the acquisition, once it closes, is likely to be a positive for the company as it will give a new lease of life to EMC. The transaction is expected to close in 2016. EMC’s board has approved the transaction. However, approval from regulatory authorities as well as EMC stockholders remains pending. The board has highly recommended the deal to shareholders.
However, Dell’s ability to raise the capital required for funding this buyout remains a concern. In addition, we believe significant competition in storage, cloud computing and Big Data markets, sluggish IT spending and pricing pressure, are also likely to be headwinds for the company in the near term.
Currently, EMC has a Zacks Rank #4 (Sell).
Stocks to Consider
Better-ranked stocks in the same sector include Imation Corp. IMN, Qumu Corporation QUMU and Violin Memory, Inc. VMEM. Imation sports a Zacks Rank #1 (Strong Buy) while Qumu and Violin Memory carry a Zacks Rank #2 (Buy).
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