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EMC Corporation (NYSE:EMC)

Q3 2008 Earnings Call

October 22, 2008 8:30 am ET

Executives

Tony Takazawa – Vice President, Global Investor Relations

David Goulden – Executive Vice President and CFO

Joe Tucci – Chairman, President and CEO

Analysts

Aaron Rakers – Wachovia

David Bailey - Goldman Sachs

Mark Moskowitz - JP Morgan

Keith Bachman - Bank of Montreal

Ben Reitzes – Barclays Capital

Louis Miscioscia - Cowen and Company

Kaushik Roy - Pacific Growth Equities

Tom Curlin - RBC Capital Markets

Toni Sacconaghi – Sanford Bernstein

Katie Huberty - Morgan Stanley

Shebly Seyrafi - Calyon

Clay Sumner - FBR

Bill Shope – Credit Suisse

Bill Fearnley - FTN Midwest

Brian Freed - Morgan Keegan

Operator

(Operator Instructions) Now I’ll turn the meeting over to Mr. Tony Takazawa.

Tony Takazawa

Welcome to EMC's call to discuss our financial results for the third quarter of 2008. Today we will be joined by Joe Tucci, EMC Chairman, President and CEO, and David Goulden, EMC Executive Vice President and CFO.

David will provide a few comments about the results that we released this morning, and he will highlight some of EMC's activities this quarter. Joe will then spend some time discussing his market outlook, EMC's execution of its strategy, and how EMC is positioned in the marketplace. After the prepared remarks we will then open up the lines to take your questions.

I would like to point out that we will be highlighting various non-GAAP numbers in today's presentation. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure today, in our press release, supplemental schedules, and the slides that accompany our presentation. All of these are available for download within the Investor Relations section of EMC.com.

As always, the call this morning will contain forward looking statements, and information concerning factors that could cause actual results to differ can be found in EMC's filings with the US Securities and Exchange Commission. Lastly, I will note that an archive of today's presentation will be available following the call.

With that, it's now my pleasure to introduce David Goulden.

David Goulden

Against the backdrop of a challenging economic environment EMC had solid third quarter results with revenue growth of 13%, non-GAAP EPS growth of 14% and free cash flow growth of 49%. We want to remind you that our business today is very different from EMC during the tech down turn in 2001 across many dimensions including our business lines, the breadth of our products and services, the span of our customer base and the strength of our geographic reach. We believe that the solid results this quarter reflect improvements we’ve made in EMC’s business model.

Overall we believe that EMC is addressing a great market opportunity. We have a balanced business model, our products and services are the most competitive ever, we’re correctly focused on customer’s highest IT priorities, we’re managing our costs well, and we’re financially strong. As a result, we believe we are much better positioned for tough times like we’re seeing today and for better times that will come in the future.

On today’s call I’ll cover the Q3 results and provide some color into the demand environments, the financial strength of our operations and our business outlook. To make the best use of our time my focus in my prepared remarks on the areas we think will be most helpful to understand these developments in the quarter. As always we provided detailed financial tables in our news release and on our corporate website. With regard to VMware’s business results I’ll refer you to the earnings release from last night.

Before getting into the specifics of our information infrastructure results I do want to mention the business flow was pretty normal during the quarter in terms of ordinarity and backlog levels however we saw some revenue impact from the financial crisis. We did see some business push out across our customer base because of uncertainties and constraints in the global financial markets. Having said that we were pleased we were still able to close a lot of business and come in just slightly under the revenue expectations we had for the beginning of the quarter.

Now let’s turn to the financial results, EMC Information Infrastructure revenues were $3.2 billion up 10% year over year with approximately 130 basis points coming from currency. Within these results we experienced 5% growth in North America, 17% growth in EMEA, 15% growth in Asia/Pacific and 24% growth in Latin America. Growth in our brick plus 13 faster growing markets was approximately 20% year over year.

We experienced strong demand in the Middle East, Eastern Europe and Latin America. This is partially offset by lower growth in China due to the earthquake and the Olympics and a tough compare for India. Year to date our brick plus 13 revenues are up 34% over last year.

Looking at the results from our Information Infrastructure business units Q3 Information Storage revenues were up 11% year over year and up 12% year to date. These results demonstrate good demand for our storage portfolio across a very wide customer base. Within this our Q3 Symmetrix business was flat year over year and up 6% year to date. VMX4 continues to be the market leading high end storage platform because it’s cost effective, easy to use and delivers the unparalleled performance, tiering, security, scalability and energy efficiency that our customers need.

U3 CLARiiON revenues were up 12% year over year and up 13% year to date. This business bounced back nicely from last quarter and in August we had a very successful launch of our new CX4 platform. In fact our channel partner sales other than Dell were up 20% year over year reflecting how excited the market is about this product. These channels now represent close to 50% of CLARiiON revenues.

We had another excellent quarter to NAS with revenues up over 40% year over year. This was our fourth quarter in a row of strong double digit growth and we’re clearly gaining share. Our NS20 and NS40 products are doing very well and in August we announced a new entry level NS4 system which has already enjoyed a nice up tick.

Other highlights in the quarter, our background and recovery business saw good demand and our Avamar duplication solutions had another great quarter. Our recurring point heterogeneous data protection solutions had strong growth. In Q3 Dell represented 10.4% of EMC’s total revenues. Within this Dell was just under 30% of CLARiiON revenues and the balance came from a mix of EMC’s information storage, content management, security and VM Web products. EMC continues to have the best storage product offerings in the company’s history and also the broadest and most integrated portfolio.

Revenues from our Content Management and Archiving business in Q3 were approximately flat year over year and up 8% year to date. While our technology platform continues to lead the market orders were impacted by customer caution particularly at the end of the quarter. Going forward we believe this business may continue to be affected by weakness in the enterprise software markets.

Q3 RSA Security revenues were up 11% year over year and up 13% year to date. We saw particularly strong demand for our consumer protection and our SIEM offerings. Our security solutions portfolio makes us uniquely suited to help customers address the overall process of securing data, managing risk and meeting multiple compliance demands in a cost efficient manner.

An important competitive differentiator for EMC is our global services organization which spans across our information storage, content managements and RSA security businesses. In Q3 our professional services revenues grew 23% year over year and are up 32% year to date. Even in these uncertain times EMC is getting sharing services because of our unique services offering and focus. Customers continue to look for our help to identify ways to implement broader EMC technology solutions, manage IT consolidation and virtualization initiatives and improve the overall efficiency of their IT environments.

Turning now to margins, in Q3 our Information Infrastructure non-GAAP operating margin was 16%. Margins were impacted by the slight shortfall in our revenues that I mentioned and by the addition of the Iomega business. Throughout 2008 we’ve been managing our expenses conservatively. We’ve improved EMC’s operating efficiencies by carefully managing headcount growth, driving productivity and finding new ways to optimize on non-people spend across the business.

In this unpredictable environment we will continue with this prudent approach and we’re now planning for further spending reductions. We’re looking closely at our back office and infrastructure expenses and parts of the business with low productivity or high costs. Our focus is to be as operationally lean and agile as possible. This will help us ride out this period of economic uncertainty and also be in a position of strength when things get better.

Looking at our Q3 profitability non-GAAP earnings per share were $0.21 up 17%. We had very strong cash flow results this quarter. Operating cash flow was up 41% and free cash flow was up 58%. Year to date operating cash flow was up 18% and free cash flow was up 20% to almost $1.5 billion. Year to date, free cash flow was approximately $200 million higher than non-GAAP net income.

Now turning to our consolidated results, total Q3 consolidated revenues were $3.7 billion up 13% year over year. Revenue outside the US was up 19% and non-US revenue was 46% of EMC’s overall revenue. On non-GAAP earnings per share were $0.25 up 14%. VMware had a solid quarter and contributed around $0.047 to our consolidated non-GAAP earnings. Our non-GAAP tax rate for the quarter was 21%.

In Q3 our consolidated operating cash flow was $961 million up 34%. A few balance sheet metrics that impacted Q3 operating cash flow include deferred revenues which were $3.1 billion and up 23% over Q3 last year, inventory turns which were 6.7% essentially flat from Q2 and DSOs which were 51 days. Consolidated Q3 free cash flow was $707 million up nearly 50% over Q3 last year. On a year to date basis consolidated operating cash flow was $2.5 billion up 16% and free cash flow was $1.8 billion up 21%. Year to date consolidated free cash flow exceeded non-GAAP net income by over $280 million.

We ended Q3 with a record $8.4 billion in cash and investments with $4.9 billion held overseas and in VMware. We have a very strong cash position and we continue to manage our investment portfolio conservatively and we believe it’s in very good shape. Financial flexibility is a critical strength and competitive advantage for EMC particularly in this unpredictable economy. Our financial strength allows us to continue to invest in research and development, maintain and grow our frontline sales and service forces even during challenging economic cycles.

Turning to use of cash, we continue to focus on increasing shareholder value. In Q3 we spent approximately $433 million to purchase around 31 million shares. Year to date including what we’ve done so far in Q4 we’ve bought back around $1.2 billion worth of stock. We spent approximately $70 million on acquisitions for our technology portfolio.

Going forward we’ll continue to use cash for reinvesting in the business, for strategic investments and acquisitions and for share repurchase. This strategy provides the near term benefit of returning value to shareholders and the long term benefit of strengthening the competitiveness of our business.

Now turning to our outlook and closing comments, you’ll probably recall we started out this year with a conservative outlook for the IT spending environments. We expected the customers focused on technology investments were near term ROI that improved efficiencies and helps save money. With this in mind we knew that EMC will be very well positioned to help customers with their priorities. We expected the markets we serve to fair better than overall IT spending we continue to expect this to be the case.

Obviously the current environment is unpredictable which make it difficult to forecast what will happen in Q4. However, in discussion with customers and from what we currently seeing in the marketplace the focus remains on efficiencies, ROI and cost savings. It looks like customers spending priorities will not change going forward.

Based upon this we believe there’s enough opportunity out there for approximately $4 billion of revenues in Q4. Given this outlook we are planning to spend accordingly and we expect to earn approximately $0.30 to $0.31 of consolidated non-GAAP earnings per share and $0.23 to $0.24 of consolidated GAAP earnings per share. This does not reflect any potential costs from the expense reduction initiatives I mentioned earlier.

EMC believes that the explosive growth of information will continue to be a challenge for customers around the world which brings a great market opportunity for us. As customers try to manage its growth, reduce costs and improve efficiencies in their IT infrastructures we’re very confident we have the right portfolio to help them meet their needs.

We believe the breadth and depth of our offerings are the most competitive they’ve ever been. We have a solid financial foundation, we’re focused on managing our costs and we have very strong cash positions. When you put all this together we believe EMC is a very good and trusted partner for customers in these times.

With that I’ll turn the call over to Joe.

Joe Tucci

I am quite pleased with our overall Q3 results and I am extremely proud to be able to announce that Q3 2008 marked our 21st consecutive quarter of double digit revenue growth. What makes this accomplishment more special that these results were achieved in a tough global economic environment. As always my thanks goes out to the dedicated and hard working EMC and VMware teams around the world.

I would like to give you a bit of color on IT spending in Q3 and what we saw and what we experienced. In the last three weeks of September we did see some slowdown in the SMB and commercial markets which was mostly caused by an air of caution on the part of our customers. This was also coupled with a tightening of the credit markets. We saw a few large IT products get postponed by our large enterprise customers and we did feel the impact as several large financial institutions paused some of their IT spending as they are going through a wave of consolidation.

Thus looking forward I am quite sure the number one issue on all of your minds is around our take on this uncertain economic climate and its effect on IT spending in the months and quarters ahead. As David has indicated by our Q4 forecast we are seeing some signs of a slowdown in IT spending in many parts of the world. I believe the slowdown will continue into 2009.

As is always the case there will be industries and countries that are being more effected than others. For instance I noted some pull back in the financial service industry on the other hand we are still seeing very good growth in the Brick Plus Plus Plus countries. Against this backdrop we believe IT spending will be slower going forward in 2009 than it was in 2008. At this juncture looking at the global markets we still expect there will be modest growth.

Here too some IT companies and IT product categories perform and grow better than others. On the IT company side as is always the case in a down time there will be a flight to quality. On this front EMC is very well positioned with our leadership and several important technologies. With our solid market reputation, with our strong commitment to research and development, with our respected sales and service organizations, with our reputation with customers who trust us for their most mission critical work loads, and with our very strong balance sheet which gives customers confidence that we will be there for them over the long haul.

On the IT product and solutions front EMC is the leader in key areas of technology to our customer survey after customer survey points to areas where customers will spend and invest even in these tough economic times. Customers will continue to spend on virtualization to consolidate servers and other infrastructure elements. Customers will continue to spend on storage to consolidate their arrays, to tier their storage and to move to back to disk technologies with duplication for faster recovery.

Customers will continue to spend to assure governance risk and compliance and customers will continue to spend to leverage the power and flexibility of the web. These are all areas which product a solid return on investment and they are technology areas which EMC has leading products and solution sets.

Let me now turn my comments to VMware, I am very pleased with the continuing progress of VMware. Paul Maritz has laid out a compelling strategy and direction and Paul is the right person at the right time to lead VMware. We need to and we will give Paul the time and resources to execute. Paul will strengthen the management team as VMware grows and takes advantage of ever larger opportunities.

As was demonstrated yesterday VMware’s results continue to show the power of its uniquely rapid and powerful ROI proposition for customers. We take very seriously our dual responsibilities. First as the custodian of open and equal access to VMware’s technologies for all interested players in the IT industry and second, as the fiduciary for EMC and VMware shareholders.

We want to make sure that EMC itself fully utilizes VMware’s capabilities to strengthen our own strategic plans and storage, file computing and virtualized data centers. Again, as we do this all other IT players are openly welcome and in fact encouraged to do the same with equal access to VMware’s game changing technologies. As we have said before we have preserved all options relative to VMware and as I’ve also said before we have no plans to spin off VMware.

With the continuing pressures created by this unpredictable global economy we are now targeting to hold our analyst meeting early in the new year. We’ll be working to streamline our costs and improve operating financial efficiencies in the coming months and we look forward to giving you our strategic direction. Once again I could not be more pleased with the positioning of our products and solutions in today’s competitive IT marketplace and we’ll be proud to share this with you when we meet.

With that let me turn it back to Tony to moderate the Q&A portion of today’s call.

Tony Takazawa

Before we open up the lines for your questions we ask that you try and limit yourself to one question including clarification. This will enable us to take as many questions as possible. I thank you all for your cooperation in this matter.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Aaron Rakers – Wachovia.

Aaron Rakers – Wachovia

Maybe if you could expand on some of the business push outs that you saw at the end of September and maybe what the trends have looked like thus far in October. Specifically I guess I’m a little bit confused in the commentary that some of the weakness that you saw was more predicated towards the SMB and commercial markets. However, it looks like your Symmetrix business was a little bit weaker than what I had anticipated. If you could help me understand that commentary as it relates to the Symmetrix results as well.

Joe Tucci

What I tried to cover in my remarks, maybe I didn’t do it well enough is that I said yes for sure we saw weakness in the SMB and the commercial markets and I gave you two reasons why I think mostly everybody is kind of being very cautious now with their spending and keeping their money close. Second, there were customers we had that are having trouble in the financing.

I did point out two examples on the enterprise side and our bigger account side both in financial institutions which are obviously going through some pretty traumatic times and there’s been a tremendous wave of consolidation there. Of course that affects Symmetrix.

I also pointed out that there were several large deals around other areas other than finance where customers took a more conservative view and gave us either a smaller order or priority order as they also try to keep some of their powder dry and be flexible in these uncertain times. We did see it in both markets. We did experience it most of the quarter.

Operator

Your next question comes from David Bailey - Goldman Sachs.

David Bailey - Goldman Sachs

I was wondering if you could give us some idea of the timing on the cost reduction initiatives and maybe some idea of what the magnitude there could be.

Joe Tucci

Not yet, were in the middle of the work but obviously we’re realists. We gave you our best forecast for Q4. I also said that I felt I believed fully, I don’t duck out on things that this economic is going to continue in 2009. We’ve got to see what that all means for us but obviously it means that we got to make sure that we have a core structure that’s commensurate with what is going forward and we will do that.

As we do that we’re going to make sure that we guard the heck out of continuing to invest in R&D because that’s what financial strength allows you to do so we can gain share and protect the areas of our organization that’s around customers, sales, service, etc. Everything else we’re going to take incredibly hard look at, it’s not that we won’t look for more efficiencies in even those areas that I mentioned, better ways to surround the customers.

I don’t want to cut back there the number of people we have selling. I think there’s great opportunity here using our strength and position to take share and that’s what we’re going to do.

Operator

Your next question comes from Mark Moskowitz - JP Morgan.

Mark Moskowitz - JP Morgan

Can you give a sense in terms of the complexion of your overall revenue base that is recurring right now in terms of both your software and your services? Just trying to get a sense in terms of as you really have built out your model over the last seven years and you have a lot more levers how should investors think about some of the stability within your model but from a top line perspective but also how that provides a back stop to your margins as you go through a more difficult macro environment in the next 12 months?

Joe Tucci

It’s a vastly different company now then we were in the last down turn in 2001-2002. I don’t really remember what deferred revenue was back then but it was deminimus, now you can see we’re well over $3 billion. That has changed, as you can see the hardware side and software side of our business are pretty close to being in balance.

That’s tremendously different; we were over 70% hardware back then. Obviously we didn’t have virtualization business, obviously we didn’t have security business, obviously we didn’t have the content management business, obviously a lot of other things have changed in the way we go to market, the way we’re financed, the way customers view us.

Still, I’m not going to, again I don’t buck anything, most of our revenues are book, ship and bill but again we’re in areas that have quicker ROIs and where these surveys are showing that even in tough times these are areas I’m going to need to spend. Think about it this way, you think any CIO out there is going have his organization say I need less servers, no, they’re going to need more servers and virtualization is the way to give them the effect of more virtual servers without having to go buy as many physical servers.

CIO’s and even in the 2001-2002 down turn information still grew in the low to mid 40% range. Obviously helping customers consolidate their storage, tier their storage is important. The risk, the opportunities as I said around government risk and compliance are going to be massive, even discovery capabilities are going to be massive. We’ve got areas we’re much better positioned this time then last time, I just gave you a few examples.

We are more than 50% of our revenues are book, ship and bill. I can’t buck that but again I want you to understand that our book, ship bill revenues are in places where customers I think as I said are going to cut back their spending a little bit but still make the priority list.

Operator

Your next question comes from Keith Bachman - Bank of Montreal.

Keith Bachman - Bank of Montreal

I wanted to ask a similar question on your take on what the challenges are in 2009 versus 2001-2002 so in 2001-2002 I agree that storage continued to grow at some rate, requirements grew but ASPs were hit pretty hard and revenues actually declined by more than 20% for two successive years in ’01 and ’02. In particular I wanted to get your take on capacity points utilization rates because my impression on ’01 and ’02 is utilization rates were far lower and therefore spending could be deferred. I want to try to get your take anecdotally on where you think you are now or where customers are now relative to what existed in 2001-2002 and then hopefully when you say modest in next year just any kind of color around what modest means in terms of your growth expectations for storage?

Joe Tucci

If you go back to 2001-2002 the biggest problem that EMC faced you mentioned it was ASPs. At that point in time we were at a premium market of at least 50%. If you took our next competitor we were charging 50% at least more than they were. Today we are very market pricing dependent so won’t have the ASP issue we had back then. A lot of EMC’s growth came in the dot com and the new wave Telco and other economies which vanished and obviously that’s not the case here. Back then you’re right utilization rates were extremely low below 25%.

As you look at it today it’s a totally different story on storage. You asked about utilization rates, customers that are using SAN all these customers that are using SAN, we chat with and you talk about the capabilities we have in our systems and had them for a while of better ways to move data across tiers, better ways to manage your information, FIN provisioning, and other technologies that have been introduced. Customer utilization rates at do it right are well above 50 and really good customers do it above 70%. Utilization rate is not going to be a big issue this year.

Obviously there are always opportunities to help customers there. What do I mean by modest, modest is going to be very low single digits. I don’t know if it’s 1%, 2%, 3% but it’s certainly in that ballpark for the IT industry in general. Hopefully the markets that we’re participating in will have a little more lift than that.

Operator

Your next question comes from Ben Reitzes – Barclays Capital.

Ben Reitzes – Barclays Capital

With regard to gross margins could you talk about pricing and mix heading into the fourth quarter and beyond in particular just with regard to your guidance you have the R&D tax credit in there so I think it makes up $0.015 if you can just talk about the gross margin trend heading into the fourth quarter and next year with pricing and then also working in the R&D tax credit on how thing look sequentially. The big question is do you guys show us your handle on gross margins in this tough times as well as revenue.

David Goulden

You’re right; the R&D tax credit is about $0.015 of benefit in Q4. It’s about $34 million the way that we calculate it. Gross margins I’ll give you a couple feels on gross margins. If you for the third quarter pricing continued to be relatively flat in terms of constant declines nothing out of the ordinary on the pricing side. If you look at the gross margins and if you took out the impact of Iomega our product gross margins were up sequentially and year on year a little bit so we saw continued improvement in gross margins.

In the Q4 guidance we’ve basically given you gross margin assumptions pretty flat for those which we were seeing in Q3.

Operator

Your next question comes from Louis Miscioscia - Cowen and Company.

Louis Miscioscia - Cowen and Company

I was wondering if you could go in and maybe give us a little bit more color that the hardware line seemed to do pretty well but the software licensing lines didn’t grow as well. Does that have anything to do with the environment that’s out there and what would your thoughts be I guess going into fourth quarter and ’09 on those two lines.

David Goulden

We talked about those lines a fair amount of time. Obviously you need to look at the individual businesses. Obviously what’s happening in content we talked about separately in security we talked about separately. I think where you need to look is the correlation between hardware and software and storage. As we’ve explained on several times hardware line will continue to grow faster than the software line because of the fact that when we are selling to existing customers they could move their licenses across for their existing capacity on the software and only by the upgrades.

Also at the lower end the storage products and things like this there’s a lower software content. That’s not a trend that’s anything related to this particular economic environment that’s been there for quite some time which is why I focus on gross margins because you need to look at the margin for hardware and software together in storage the product gross margin and that’s what I mentioned was up sequentially year on year when you add those two together.

Operator

Your next question comes from Kaushik Roy - Pacific Growth Equities.

Kaushik Roy - Pacific Growth Equities

Seems like Dell was down 26% year over year and 12% sequentially can you comment what you may be doing to offset that decline?

Joe Tucci

We’re doing two things. Number one is you could, David pointed out, the strong growth in CLARiiON and of course that was on the back of a robust channel build out that we’ve been doing. Of course on the back of building out our commercial and SMB sales organizations, that’s worked extremely well for us. On the other hand, we are very quickly and very actively working with Dell and if you talk to Michael Dell I believe he’d say the same statement and believe that there’s a lot more we can and should be doing together. We’ve probably got a little bit off track and we’re working hard to improve the Dell channel on top of everything else we’re doing.

Operator

Your next question comes from Tom Curlin - RBC Capital Markets.

Tom Curlin - RBC Capital Markets

Can you just talk about in the commercial segment Celerra was strong year over year what’s happening with Celerra competitively or in terms of product cycle? Also with Dell it looks like it was down significantly sequentially and year over year, how would you describe what’s happening there, they do have some of their own stuff now or is that just macro?

Joe Tucci

You mentioned the Celerra product line which our NS and NX product line we just announced a new low end the NX4. This is a multi protocol product. With that same product you can run NAS, you can run ISCSI and you can run SAN and you can run them all extremely well none of those is really kind of subjugated and have one that works well and two that are kind of chuck the box.

These are three that are tier ‘A’ storage solutions. That combination is working incredibly well for us and without a doubt we’ve been taking share because of that feature and that’s been a real winner for us. We’re going to continue to scale that market up and scale that product line up and down.

On the other side of the coin you mentioned Dell and basically I was quite open I think as you know Dell bought EqualLogic, we diverged more than we should have and we are now putting plans together in addition to the channel build out and direct sales force build out that we’ve done we’re also putting plans in place very cooperatively with Dell to make this relationship even better.

Operator

Your next question comes from Toni Sacconaghi – Sanford Bernstein.

Toni Sacconaghi – Sanford Bernstein

Can you comment on whether your financial services business grew year over year in the quarter worldwide and in the US? I think you mentioned that there was no incorporation in your Q4 guidance for any charges associated with expense reductions but have you included any expected benefit from expense reductions in your Q4 guidance?

David Goulden

Financial services globally we actually did see some overall modest growth but not surprisingly saw some declining revenue in the New York investment bank traditional financial services component within that. In terms of Q4 no, they do not anticipate any significant benefit from cost reductions its more something we’re looking in 2009.

Operator

Your next question comes from Katie Huberty - Morgan Stanley.

Katie Huberty - Morgan Stanley

As you balance the cash as king mentality with the attractive valuations in a lot of cases in the current market how would you characterize your appetite for larger or smaller share repurchases and acquisitions as you go into the next couple quarters?

Joe Tucci

In this environment you did half of it for me. I think cash is king and options are king. I think they’re first cousins. Obviously we have built up a lot of cash and of course with that there’s going to be a tremendous number of options. We’re a strong company and the options will be there and obviously the answer to the question is yes buying back shares is a very attractive option. We’ve got to make sure that we do the right option, pull the right set of options at the right time to maximize the value for shareholders and that’s what we’re going to do.

I don’t feel rushed to do that but I do feel compelled in this general time frame as this economy is soft to pull a reign on the right set of options or right option. That will maximize the shareholder value not only the short term but more importantly over the long term. We look at that every day, our Board is intimately involved and I just love the position we’re in from that point of view because it’s great to have options and cash gives you some of those options. It’s strength and cash which give you those options and we have both.

Operator

Your next question comes from Shebly Seyrafi - Calyon.

Shebly Seyrafi - Calyon

Consensus for the December quarter revenue is $4.14 billion you guided to $4 billion. I want to know how literal we should take that number. In July you guided for greater than $15 billion for the year which would imply about $4.14 billion for calendar Q4. Maybe you can also talk about the trends you’re seeing in the first few weeks of October and how that may weigh into it.

Joe Tucci

That’s a tough question to answer. Obviously I think life with us is all about credibility with all of our base and everyone that follows us and all of our customers. We always call what we see to the best extent we can do it and our track records have been pretty good. At this juncture when listening to other calls you hear unpredictable and uncertain cloudy… We used a lot of those same adjectives.

Using a lot of forecasting that we do well, looking at pipelines, looking at front logs, backlogs, opportunities, taking in normal, we certainly aren’t planning in for a normal budget flush but I do think if you’re asking me I think they’ll be some. When we put that all together we came out with $4 billion. Obviously we did the $4 billion that will be a tick shy of the $15 billion and a tick shy on the EPS line for the year but our plan is our plan and we’re going to continue to drive for that. We’re giving you the best forecast we can.

Operator

Your next question comes from Clay Sumner – FBR.

Clay Sumner - FBR

I wanted to talk about how you guys can leverage two or three VMware’s key initiatives one of which is to make VMware into virtual data center operating system. Another which is use this OS to enable customers to move their apps off of their own infrastructure and put it on the infrastructure operated by service providers. Can you update us on your plans do develop that infrastructure service providers and maybe an update on [Halkenmalley] if you could please.

Joe Tucci

Obviously as Paul delineated his strategy you talked about the three key pillars of that strategy one is being the virtual data center future, one is VM Cloud initiative, one is VM Client initiative. Obviously these are kinds of things we’ll talk to you when we get together how we will use these technologies. Obviously VMware and as I mentioned 100 times now our staunch competitor is free to use these same technologies and in fact they do in their initiative. We’ll basically both say how VMware is progressing with those three initiatives and we’ll tell you what we’re going to do on our part on those three initiatives when we meet early in the new year.

Operator

Your next question comes from Bill Shope – Credit Suisse.

Bill Shope – Credit Suisse

It obviously sounds like you guys are fairing better than most feared in this environment. Certainly even with that context here reigning in costs. Can you give us the scenario where we do go into a deeper recession then you’re assuming? How do you think about the plan ‘B’ in terms of managing the business, restructuring opportunities? If you could just give us at least some qualitative sense on what your plan ‘B’ type of strategy would be in that environment.

Joe Tucci

It would be unfair to obviously any good management team has contingency plans; you plan for what you really expect will happen with a heavy dose of reality. Then of course you have contingency plans, what if things are slightly better, how do I accelerate. What if things get worse, how do I make sure I adjust my plan, my go to market plans and my cost structure. Obviously we have done a lot of that and we’ll be discussing with our Board. I think its way, way premature to discuss that at this time.

To give you a sense that I understand and better analog time and know how to do that and let’s all keep our fingers crossed that we go through tough patch but things are too, too terrible.

Operator

Your next question comes from Bill Fearnley - FTN Midwest.

Bill Fearnley - FTN Midwest

Could you give a little more detail here on the pipeline? When you talk to your direct sales force obviously when you talk to the channel as well what types of pipeline issues or opportunities are out there for SIM, CLARiiON and for the NAS products?

Joe Tucci

Obviously the hottest product we have right now is, you referred to NAS but we’re really selling it as a unified storage. As you buy this product yes you can use it in a NAS environment and yes you can use it in the SAN environment, Fiber Channel SAN environment, yes you can use it in an ISCSI environment.

Of course that’s very attractive especially as you go down market because let’s say you have a lot of your block data, you want to do it in ISCSI SAN for instance but you’re also going to have a lot of file and print workload and therefore you don’t have to buy a separate system you can do both on it. That’s really compelling, obviously that’s incredibly hot.

I mentioned a huge trend whether its in financial services or Telco or anything else is going to be to be able to consolidate data centers, consolidate frames and that’s where the Symmetrix plays like no other. The importance, as these larger and larger companies through consolidations get built the importance on business continuity will rise. Of course that plays well again for SAN. CLARiiON has got a great value as you tier, of course Symmetrix tiers within the box and CLARiiON is a way to tier across frames and also within that frame.

I think our balance of that is a real big differentiator for us of having the unified storage line, having the Clarion line which both ISCSI and Block as well as Symmetrix. That breadth is our strength.

Operator

Your last question comes from Brian Freed - Morgan Keegan.

Brian Freed - Morgan Keegan

Turning back to CLARiiON you mentioned that channel was 50%, Dell was their tradition third can you talk a little bit about your commercial sales organization. It feels like they’re 15% to 20% of Clarion revenue this quarter versus the traditional third. Was there some dynamic within your focus shift to channel assist or something that would account for that?

Joe Tucci

That’s exactly right, that’s what it is, channel assist. We very rarely, very, very rarely allow our commercial and SNB sales force to take order. When they’re out there it’s to create need to help opportunities come to fruition faster, to help opportunities get larger. Again they always work with the channel partners. You’ve got to view those two things as one. It very much is an assist model.

Let me just wrap it up and thank you all for being here. I think three key messages we’re very pleased with our product and solution set is strong and well placed. We talked pretty well about the options we have in our financial strength and our market strength and we’ll make sure that we choose the right options, the right time to maximize your value.

We will look forward to getting together with you early next year for a formal review of our technology and strategy. Again, I think we are very realistic and understand how to manage through good times and even more importantly right now understand how to manage through tough times.

Thanks for your interest. We really appreciate it and see you soon.

Operator

This concludes today’s conference call thank you for attending.

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Source: EMC Corporation Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript
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