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EMC Corporation (NYSE:EMC)

Q4 2008 Earnings Call

January 27, 2009 8:30 a.m. ET

Executives

Tony Takazawa – Vice President, Global Investor Relations

David Goulden – Executive Vice President and CFO

Joe Tucci – Chairman, President and CEO

Analysts

Toni Sacconaghi – Sanford Bernstein

David Bailey – Goldman Sachs

Shebly Seyrafi – Calyon Securities

Amit Daryanani – RBC Capital Markets

Katie Huberty – Morgan Stanley

Keith Bachman – Bank of Montreal

Brian Freed – Morgan Keegan

Bill Choi – Jefferies

Mark Moskowitz – JPMorgan

Kaushik Roy – Pacific Growth Equities

Benjamin Reitzes – Barclays Capital

Brian Marshall – Broadpoint AmTech

Chris Whitmore – Deutsche Bank

Bill Shope – Credit Suisse

Operator

Welcome and thank you for standing by. (Operator Instructions) Today’s conference call is being recorded. If you have any objections you may disconnect at this time. Now I will turn the meeting over to Mr. Tony Takazawa, Vice President Investor Relations. You may begin.

Tony Takazawa

Thank you, Vicky. Good morning, welcome to EMC’s call to discuss our financial results for the fourth quarter and full year 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, he will highlight some of EMC's activities this quarter, and discuss some modeling assumptions for 2009. Joe will then spend some time discussing his view of what is happening in the market, EMC’s execution of the strategy and how EMC is positioned going forward. 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?

David Goulden

Thanks, Tony. Good morning. Thank you for joining us today. Against the backdrop of a tough economic environment, EMC achieved Q4 revenue growth of 5%, non-GAAP EPS growth of 7%, and free cash flow growth of 9%. For the full year, EMC achieved revenue growth of 12%, non-GAAP EPS growth of 14%, and free cash flow growth of 17%.

We are pleased that our execution in performance in 2008, and we achieved many of the goals we set for the company last January. We generated all-time record revenue for the breadth and depth of our solution portfolio, which is aligned with key IT priorities, and to the strength of our go-to-market model. By expanding our geographic reach and investing in new markets, we generated more revenue outside the US than ever before.

As a result of our R&D investments each of our business units (inaudible) strengthening the competitiveness of our solutions and extending our market leadership across the board. We effectively reinvested in our business for future growth while managing our spending carefully and delivering non-GAAP EPS leverage.

We used our cash wisely to make acquisitions for our technology portfolio and to new markets and to repurchase stock, while end of the year with the most cash in the company’s history.

Our 2008 results reflect the continued hard work to our organization and the strengthening of our business model. In 2009, we are very focused on managing our business to successfully navigate this tough economic environment. And towards this, we have already taken proactive measures to reduce our overall cost structure and improve the future efficiencies of our global operations.

Over the last several years we have been expanding EMC’s total addressable market, significantly diversifying our customer base, and strengthening and expanding our business partnerships. We have built a strong foundation for EMC not only to weather, but to take share during this downturn, and will be well positioned for even more success when the economy turns around.

For today’s call, I will cover Q4 year-end results and provide some comments about the demanding environments and the financial strength of our operations. As always, we have provided detailed financial tables in our news release and our corporate websites, and with regards to VMWare’s results, I refer you to the financial results from last night.

Before getting into details of our information infrastructure results, I wanted to mention that we did see the reduced level of budget flush we expected heading into the quarter, and order linearity (ph) was fairly normal for Q4. Given the tough environment we are pleased to be closed a lot of business and achieve the revenue expectations we had for the quarter.

Now let's turn to the financial results. EMC information infrastructure Q4 revenues were $3.5 billion up 2% year-on-year with approximately 260 basis points of headwind from currency. Looking at our geographic results for the information infrastructure results for Q4, North America held it well and grew 4%; EMEA was flat year-on-year with a slowdown in this growth rate pretty widespread including Eastern Europe. Asia Pacific was up 4%, and Latin America was down 2%. Our brick plus 13 markets were up 9% year-over-year in constant currency. We experienced strong demands in China, the Middle East, and Mexico. For 2008, our brick plus 13 revenues were up 24% in constant currency. And even though the growth here is slow, we believe these will be important regions for EMC to continue to invest in over the long term.

Looking at our results from our information infrastructure business units, in Q4 product revenues were flat, and service revenues were up 9% for the year. For the full year product revenues were up 5% and service revenues were up 21%.

Within this, Q4 information storage revenues were up 4% year-over-year, and up 10% for the full year. These results demonstrate good demand for our storage product portfolio across a very diverse customer base, and we believe these results reflect solid market share gains against our major competitors.

Our Symmetrix business was down 9% in Q4 year-over-year. These results were affected by a spending climate and a tough compare versus last year, which was the first full quarter of VMX4 availability and up 12%. For 2008, our Symmetrix business grew 2% reflecting our continued leadership in the high end market.

U4 CLARiiON revenues were up 6% year-over-year and 11% for 2008. Our CX4 platform is enjoying great success for customers, providing more advanced technologies than any other mid-range system at the lowest cost of ownership. CLARiiON sales through channels other than Dell were up 17% in Q4 and 19% for the year. These channel partners now represent close to 50% of CLARiiON revenues.

We had another excellent quarter in NAS with our seventh quarter of double digit revenue growth. This business is up over 40% for the year and we have clearly taken share.

Our (inaudible) duplication solutions continue to be in high demand as customers look to meet their data protection requirements, reduce costs, and mitigate risk Q4 was another great growth quarter making EMC the market leader with annualized run rates of $360 million. All of EMC, its folks are providing multiple ways for customers to utilize duplication, demand growth, and reduce costs. Dell represented 10.9% of EMC’s total revenues in Q4. Within this, Dell was approximately 25% of CLARiiON revenues.

EMC continues to have the best storage product offerings in the company’s history, and also the broadest and most integrated portfolio. Our storage platform spans across the consumer, mid-tier, and high-end markets, and we continue to lead the market with cost effective solutions.

Customers are extremely focused on reducing their costs and they look at EMC as a trusted partner. Our reputation for quality, reliability, ease of use, and low total cost of ownership are key competitive advantages. We believe we will continue to take share in 2009 and lead to market with new information storage product solutions that differentiate EMC from both traditional competitors and small starters.

Revenues from our Content Management and Archiving business in Q4 were down 12% year-over-year and up 2% for the full year. This is an area of our business that is being affected by the weakness in the enterprise software market this year. Going forward, we are focusing on content management and archiving solutions that deliver the most immediate ROI for our customer and where we believe we will see good opportunities in 2009, particularly for our compliance and E-discovery solutions.

Q4 RSA security revenues were up 5% year-on-year and up 11% for the full year. We had a good quarter in data loss prevention, and in December we announced a licensing agreement with Microsoft to build our DLP classification technology into their information protection products. And we saw good demand in the quarter for our security information and event management offerings.

Our security solutions portfolio is unmatched at helping customers and partners to address the overall process of securing data, managing risk, while meeting local compliance demands in a cost effective manner. We believe the security will continue to be a high priority for customers in 2009.

In Q4 our global services organization, which spans across our information storage, content management, and RSA security business, demonstrated continued success with revenues up 9%. For the year, (inaudible) revenues were up 21%. Most companies today are taking a very hard look at improving their offering models and reducing costs. We are confident that EMC’s services capabilities will continue to help customers to quickly meet their near-term cost containment requirements while supporting their longer-term information infrastructure objectives.

Turning now to margins, in Q4 our information infrastructure non-GAAP operating margin was 18%, approximately flat year-on-year, which is a good result, particularly in this environment. Throughout 2008 we managed our costs and investments carefully, conservatively, by carefully managing headcount growth, driving productivity, and optimizing our non-people spend across the business.

In addition to these efforts, three weeks ago we announced a restructuring program designed to further streamline the costs related to our information infrastructure business and improve the competitiveness and efficiency of our operations. We expect the program to reduce our information infrastructure costs from our 2008 spend rate by approximately $352 million in 2009, increasing our savings to approximately $500 million in 2010. The programs expected savings will come from both cost reductions and the transformation of several areas of EMC’s operational cost structure. As a result of this program, we booked a pre-tax restructuring charge of $248 million in Q4. After taxes, this charge is $200 million, or $0.10 per share. In 2009, we expect to accrue approximately $75 million of the $100 to $125 million in additionally pre-tax restructuring charges.

We designed this program to strike the right balance between achieving high levels of efficiency and for sustaining strong business agility and performance without in any way compromising our ability to serve the needs of our customers. We remain very confident in our products, services, and solutions, and believe these changes to our cost structure will help us to ride out this period of economic uncertainty and also be in a position of strength when things get better.

Looking at Q4 profitability, non-GAAP earnings per share were $0.25. Free cash flow was $660 million, which is about the same as Q4 ’07. For 2008, operating cash flow was up 13% and pre-tax flow was up 15% to $2.1 billion. For the year, the free cash flow was more than $300 million higher than non-GAAP net income. We are very pleased with these cash flow results for the year.

Now turning to our consolidated results. Total Q4 consolidated revenues were approximately $4 billion, or 5% why ear-on-year. Non-US revenue was 46% of EMC’s overall revenues. Q4 non-GAAP earnings per share were $0.32. VMware had a solid quarter and computed about six and a half cents (ph) to our consolidated non-GAAP earnings. Our non-GAAP tax rate for the quarter was 18.1% and for the year it was 21%. In Q4 our consolidated operating cash flow was $1.1 billion of 9%.

A few balance sheets that impacted Q4 operating cash flow include deferred revenues, which were $3.2 billion and up 15% over Q4 last year; inventory turns, which were up to 8.4 from 7.7 in Q4 of last year; and DSO’s, which were 52 days down from 55 days Q4 last year. Consolidated Q4 free cash flow was $775 million, up 9% over Q4 last year. For 2008, consolidated operating cash flow was $3.6 billion, or 14%, and free cash flow was $2.6 billion, or 17%. 2008 consolidated free cash flow exceeded non-GAAP net income by over $400 million.

We ended Q4 with a record $8.8 billion in cash and investments with $5.1 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 is 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 invest in research and development to retain and grow our front-line sales and service forces even during challenging economic cycles.

Turning now to cash use, in Q4 we spent approximately $370 million to purchase around 36 million shares. In 2008, we returned $1.5 billion to shareholders and bought back 112 million shares. In Q4 we spent approximately $50 million on acquisitions for our technology portfolio, mostly for VMware. Going forward, we will continue to use cash for reinvesting in our business, for strategic advancements and acquisitions, and for share repurchase. This strategy provides a benefit of turning back to shareholders and the longer term benefit of strengthening the competitiveness of our business.

Looking into 2009, it is evident that the global economy will be much weaker this year. Given this economic backdrop, it’s also clear that global IT spending will be under pressure as well. Based on the IT spending surveys we’ve seen and our conversations with customers, there is a wide range of potential outcomes for 2009. Our best guess today is that global IT spending will be down in the mid to high single digits percent compared with 2008. Within this environment, high priority technology and quick ROI solutions will certainly do relatively better. So, as a result, we think that the total market that we serve will probably do slightly better than overall IT.

As we think about the flow of IT spending this year, it looks like much more of the spending will take place in the second half than usual. Customer certainty around 2009 will result in a slightly weaker than normal first half. In fact, Q1 spending will likely look quite low compared to last year, and a much higher than normal seasonal decline from Q4 2008.

However, things may start to settle out in the second half as everyone adjusts to the new economic reality, and visibility throughout 2009 improves. In addition, activities like government stimulus packages and companies being further along in completing their restructurings, may also begin to have a positive impact. As a result spending in the second half should be considerably stronger than the first half.

These are not precise forecasts for 2008. However, we think they represent a pretty reasonable view of the world at this point, and we wanted to share with you how we currently see things. As visibility improves during the year, (inaudible). And while the economy will be challenging, business will be under pressure, we also wanted to make sure you know we are not standing still. About three weeks ago we announced a far-reaching restructuring program designed not only to reduce our costs, but also to strengthen our operating model in the future. We announced our plan to reduce our 2008 cost base by $350 million in 2009. About a third of this reduction will come from our [inaudible 00:08:43] line with the remainder representing lower operating expenses. The savings will be weighted toward the latter half of the year. Additionally, we will be managing expenses very tightly, and I expect minimal increases in discretionary spending throughout the year. Importantly, if the economy in IT spending plays out in the second half as we expect, then we should show improved profitability in the second half as well.

There are also four other items that you will find helpful for your modeling purposes. These items include accounting changes and other factors you should keep in mind as you reconcile our 2008 results to your new 2009 model. We are not excluding any of these in the presentation of our non-GAAP financials.

First of all, we will incur about $60 million in transition expense associated with our previously announced restructuring plan, but most of this will be reflected operating expense. Secondly, the impact of capitalizing amortizing R&D under 586 will result in about $100 million more expense than PNL mostly due to VMware.

Next the FSB14-1 change in accounting for convertible debt will increase our interest expense in 2009 by $108 million. Note this is a non-cash expense, but does hit our interest expense line. This is a retroactive accounting change and will be updating our 2007/2008 numbers to reflect this non-cash interest expense starting in Q1 2009. I’d like to point out the cash flow is not impacted by this accounting change.

And, finally, interest income will likely be reduced by about $70 million than 2008 due to lower interest rates on our cash balances. In some, these items were reduced using pretax income by approximately $340 million in 2009 versus 2008. It is important to note that about 60% of this change is non-cash, and the other 40% is primarily non-operational in nature. While each of these items have a different tax rate, to net it out for you, these incremental costs in 2009 will reduce EPS by about $0.12.

Overall, we expect the 2009 non-GAAP consolidated tax rate will be 21%, approximately the same as 2009. I realize this is a lot of information, but hopefully these additional data points will help you develop a more accurate non-GAAP income models for 2009.

As a reminder, we believe our non-GAAP results, which consistently exclude stock based compensation and intangibles allow for the most transparent and clean view of our operating performance. The non-GAAP financials better reflect how we run the business and are consistent with the way we discuss our results with you. As a result, we strongly encourage you to model EMC reflecting this non-GAAP view.

Finally, in an effort to help reconcile your non-GAAP models for reporting GAAP results, we suspect 2009 stock based compensation expense to be around $580 million, using half of this expense in almost all of the year-on-year increases due to VMware, and we expect intangible amortization to be approximately $240 million.

While 2009 looks to be a challenging year, we like opposition of both defense and offense for this year and beyond. First of all, as customers evaluate the operating models and IT infrastructure for cost and efficiency improvements, we are very confident we have the right portfolio to help them meet their needs. Secondly, the breadth and depth of our offerings are the most competitive they have ever been and will continue to increase our market leadership with new products and solutions this year. Third, we have a solid financial foundation and a strong cash position and we have not only a comprehensive program underway to reduce our cost base, but we also expect minimal increases in discretionary spending this year. As a result, we expect to have a much more efficient business with significant potential for offering leverage as the environment improves.

So if the economy and IT spending play out in the second half as we expect, we should show incremental programs and offering possibility to improvements as we move through 2009. We believe that showing continuing improvement coming out of this downturn will be the most meaningful measure of success. With that, I will turn the call over to Joe.

Joe Tucci

Thanks, David. I would like to also extend my welcome to everyone on today’s call. Thanks for joining us. Overall, given the tough economic climate the downturn in capital spending and the high degree of uncertainty that has permeated the market, I believe EMC had a very respectable Q4. My thanks to our teams across the world who delivered in these volatile times.

Commenting briefly on the full year, I am disappointed that we missed our $15 billion revenue target by a little over $100 million. We were well on track through Q3 to meet this important goal, but after 21 consecutive quarters of double digit revenue growth, in Q4 our revenue tapered off to 5% as we felt the impact of the economic storm. I am, however, quite pleased at despite the shortfall in the pipeline we achieved our annual non-GAAP EPS goal of $1.04 and exceeded our cash flow for shared goal of $1.15, which came in at $1.24.

Now turning to 2009, as far as the economy is concerned I don't have too much to add. But, for sure, you are all witnessing a severe economic crisis being played out across the globe. Where I would like to add some color based on literally hundreds of meetings and conversations I have had with our customers is on a 2009 IT spending front. We have already indicated that we expect overall IT spending to be down this year.

On a macro level, customers are focused on driving their own restructuring, reducing costs, driving complexity out of their environment, implementing their really strategic initiatives, and while doing therapy is they want to assure they are positioning themselves to take advantage of the many upcoming technology trends, such as the virtualized beta center of the future.

As part and parcel of these initiatives, customers are demanding quicker ROI’s and are putting more emphasis on adhering to standard operating environments. In other words, customers are dramatically reducing the number of IT suppliers that they will deal with. There is a real like to quality taking place.

In addition, customers are giving every purchase order more scrutiny and they are subjecting them to higher levels of approval.

Now let's look at EMC in 2009. We are positioned in the markets that will do better than the average. Storage, virtualization, security, compliant archiving, new discovery, and governance risk and compliance are all markets that will top IT spending priorities. EMC is fortunate to have the most active and robust product cycle in our history going for us in 2009. In storage, 2009 will bring a new version of Symmetrix, new unified storage products, new entry level products, new data duplication products, including the ability to duplicate primary storage, new dynamic data mobility products, enhanced and provisioning (ph), numerous green IT initiatives, including expanded disc spin down capabilities, and the continued innovation in SSB flash technology that will significantly change the storage market landscape.

In 2009, new product intros from VMware include a new version of their core virtual infrastructure platform, VI4; new enhancements to the virtual desktop product, now formally called V client; new V cloud offerings; and new availability and security solutions.

In our RSA security division, we will introduce a new entitlements policy manager, a new release of envision, our security information event management product, enhancements to our data low prevention product sweep, including tighter integration with partners like Microsoft. We will introduce authentication manager, which will include more authentication methods merging elements of our protection and verification suite.

In our content management business, we will introduce a new product for the compliant archiving space, expanded capability around collaboration and social networking for the enterprise, and a new case management framework making our core documented platform easier for our customers and partners to build business processes on top of it.

I think you will agree 2009 will be a year of robust product introductions at EMC. Helping tie all of these products together is EMC’s global services organization, where we have approximately 14,000 talents professionals providing our customers with consulting services and limitation services and managed services and maintenance and support.

All this said, EMC will not be totally immune from this economic storm and its effect on IT spending, so it is imperative that we have a well defined game plan, and we do. First and foremost, this game plan dictates a solid execution of our highly complimentary virtual infrastructure and information infrastructure strategies. By the way, while I am on this subject, it has been too long since we presented our compelling vision and strategy to you. You have my commitment that we will do so later this quarter. I invite you to join Paul Moritz and other selected members of our executive team and myself for upcoming investors/analyst day meeting.

Also, I would like to add a few comments about VMware. I absolutely believe that the VMware platform squarely helps CIO’s meet their 2009 needs. So there is good opportunity for VM even in this tough environment. Paul Moritz is doing a marvelous job leading VMware and he is helping set a compelling vision and strategy to guide their future success. The VMware team is intact and motivated, retention has been very good, and Paul is doing a great job developing their internal talent, while bringing in additional management strength, such as Todd Neilson as COO, and (inaudible) to run their India operations and there is more to come.

Now let's get back to our overall game plan for 2009. While I have 38 years of experience in this industry, I have witnessed some pretty tough times. This has led to the formation of seven principles that EMC will embrace to help guide us through this economic downturn. In 2009, we will maintain our external focus, staying closer than ever to our key customers. In 2009 we will strive to gain significant market share. In 2009, we will sharpen our discipline on costs and cash flow. In 2009 we will sustain and deepen our product technology edge. In 2009 we will retain, attract, and upgrade our talent. In 2009, we will be optimists and we will be opportunistic. We will use strategic MA to strengthen our competitive position in the industry and we will be opportunistic and buy back our shares. And we will communicate, communicate, communicate both internally and externally.

Hopefully you can see how our current restructuring activities are supporting these seven principles. We took out cost to save $350 million in ’09 and $500 million in 2010 helping focus our discipline on cost and cash flow.

We took our costs to save $350 million in '09 and $500 million in 2010, helping focus our discipline on cost and cash flow.

We maximized number of people in our service organizations and sales operations to make sure we maintained focus on our customers and prospects and assure they receive the best, customer experience in the business.

We maintained and in some cases enhanced our R&D funding to help us deepen our product technology edge.

In closing, let me leave you, one thought, in trying times like this there are always winners and losers, disruption that is status quo is inevitable. I am convinced that adhering to the seven guiding principles coupled with the brilliant execution of our information infrastructure and virtual infrastructure strategies will results in EMC being a winner and we will emerge from this storm a stronger company.

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

Tony Takazawa

Thank you, Joe, before we open up the lines for your questions. Let me ask you to try and limit yourself to one question including clarification. We thank you all for your cooperation in this matter.

Vicky, can we open up the lines for question, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Toni Sacconaghi, Sanford Bernstein. You may ask your question.

Toni Sacconaghi – Sanford Bernstein

Yes, thank you and good morning. It sounds like you have a relatively pessimistic forecast for IT spending and one that cost that cost for further deceleration in 2009 to help us understand, sort of how you see things on a dynamic level. Can you give us a sense of what you thought IT spending was in Q4 of '08 given that it sounds like you calling for it to be down about minus 10% in the first half of '09? And can you help us to understand where your backlog going into Q1 compares versus usual year, typical years, I think typically you have about $100 million or little more entering Q1, can you comment on that as well?

Joe Tucci

Yes, I'll start and may be David could try many your, Toni, this is Joe. I haven't really given any real thought to what spending was in 2008 believe or not we spend a lot of time looking forward. As I said, read a lot of surveys that the industry has done and as I said, I talked to hundreds and hundreds of customers in groups and individually and most customers are telling us at least for the first half of this year, they are going to be very cautious and are expecting declines and it’s not, and that's what we are hearing.

I do not really think even though we gave our best guess, I do not really think what we are seeing for the year has a tremendous amount of merit because it's just not that kind of visibility. But I do think what we are saying has a lot of merit for the next four to six months.

And I am convinced Toni, that we're going to see, in that mid to high digit decline in overall IT spending and I said, I do believe that where the products that we have to kind of like to like so where IT spending real happen and we'll fair better than most. Based on yearly results for Q4 it looks like that’s exactly what happened if the reports that I have seen we did fair better than most. And like hope we expect that to continue. But there's definitely going to see a deterioration of what we saw -- we started to see this kind of storm really taking some foothold in Q4. And I think it will be a harder storm in Q1 and Q2. I just believe that, that’s why I said.

So as far as our comments even though they were for the year, I'd apply them more to the first half of the year because it's just that uncertain. David, you want to backlog or little color on it.

David Goulden

Yes, I just, one more comment on the first half of course, Toni, we did mention, we saw a little bit of budget which we say, we need to coming in to Q4 kind of get to $4 billion, which was a much bigger sequential growth from Q3 to Q4 most people felt that we could achieve, we saw that, I think number of people saw that as well, across the industry it adds a bit more pressure on the first half as well.

With people kind of looking at their budgets going forward Q4 into Q1, and to Q2. Then on the backlog side, we have a little bit less in total backlog then you'd normally have coming out of a Q4 but not whole lot less, it’s actually little stronger on the software side, little less on the storage side, but not materially different.

Toni Sacconaghi – Sanford Bernstein

Thank you.

Tony Takazawa

Thanks, Tony. Next question please.

Operator

David Bailey, Goldman Sachs. You may ask your question.

David Bailey – Goldman Sachs

Great, good morning, thank you very much. Can you give us some idea about how much of the $350 million in savings you expect from the restructuring, will drop to the bottom-line? And how much will be absorbed in either pricing or investments in other areas?

Joe Tucci

David, let me take that. We've taken these cost reductions really to a -- approve to business for the overall efficiency when things return but also to have protect our operating margins in 2009. So, we expect our operating margins to kind of hold up well.

In 2009, you had given the combination of this cost coming out and also what will inevitably be more pricing pressures kind of more cautious during the year. So, I think we are looking at on an overall operating margin, trying to stay as closest as we can to 2008, but given the pricing pressure and the slowdown in the marketplace. I should not look for a whole lot of leverage in 2009 concurrent these cost reductions.

However, they do set off age much lower when things improve. And I'll just say during the course of the year you will see a nice sequential improvement from Q1 going forward assuming that revenues continue to increase sequentially because the cost reductions kick in wall-to-wall in the second half of the year while keeping the rest of our costs flat. So, you should see some nice leverage during the course of the year. Which sets ourselves well during 2010.

David Bailey – Goldman Sachs

And when you talk about flat operating margin or roughly flat operating margin, is that on a GAAP or a non-GAAP basis?

Joe Tucci

That would be, everything I am talking about on a non-GAAP basis. That would be excluding those $0.12 and things I talk to you about with impact our all full year on year compared.

David Bailey – Goldman Sachs

Okay, thank you very much.

Tony Takazawa

Thanks, David. Next question please.

Operator

Shebly Seyrafi of Calyon. You may ask your question.

Shebly Seyrafi – Calyon Securities

Yes, thank you very much. Lot of a moving parts from the OpEx line, if you compare on, I am sorry, add R&D and SG&A for 2008 you get around $6.3 billion. How do you see that shaking out for full year 2009 considering that its leverage the back half?

David Goulden

Yes, Shebly, as we said that the $350 million reduction is from our 2008 cost base. So, you should see some real year-on-year reductions in OpEx. Bear in mind I said about a third of those reductions will hit the cost in line with two-thirds hitting the OpEx line. So, look for that when you look at the full year results must actually have less absolute dollars which of course you all mean to offering things down because as you know during 2008 OpEx grew during the year.

Shebly Seyrafi – Calyon Securities

So, to be clear rough around say $200 million less from the 6.3, is that fair?

David Goulden

That’s a fair. That’s a fair, assumption.

Shebly Seyrafi – Calyon Securities

Thank you.

Tony Takazawa

Thanks, Shebly. Next question please.

Operator

Amit Daryanani of RBC Markets. You may ask your question.

Amit Daryanani – RBC Capital Markets

Thanks. Good morning, guys. Given your comments regarding in sort of '09 budgets just being a little bit more backend loaded. If you look at historical seasonality in the March clearances and sales are going to be down high single digits or so, but I think in the old note to time from low to mid teens. Is that the way you should be thinking about in the first half of '09?

David Goulden

Well, I think that we said that, we're going to expect to see a large than normal seasonal declines in revenue from Q4 to Q1 that we saw before example, you just so came see as a benchmark excluding the VMware we sure about and a 11% sequential decline in revenues last year Q4 to Q1. So, obviously looking for something larger than this year based upon what we spoke about in terms of market trends.

Joe Tucci

Yes, we were pretty clear and we ended up being exactly right that we thought they would be what I called, I turned if you recall last call a mini budget flush. So, I expected there not to be a budget flush as usual, but I expected to be something and we did see and we did that's exactly what we saw in Q4. And obviously in Q1 we do not expect to see that mini budget flush so to speak. So, that would bode that was probably see a bigger than normal drop up within Q4 and Q1.

As many customers out there they still do not have their budgets and there is a lot just in time budgets being done. But like everything else in life you get custom to whatever environment you are in and I expect this as we progressed through the year, the companies will get their restructuring behind them, get them the grips and understand that IT is a way to improve productivity which every company is going to strive to do and that’s the trends I expect that this industry will follow this year and that’s kind of where we are guiding.

Tony Takazawa

Thanks, Amit. Next question please.

Amit Daryanani – RBC Capital Markets

Thank you.

Operator

Katie Huberty of Morgan Stanley. You may ask your question.

Katie Huberty – Morgan Stanley

Thanks. Good morning. How did that currency fluctuation in the quarter influence margins, and how do you expect that to play out in '09?

David Goulden

Yes, Katie, thank you for the question. If you look at our non-GAAP results for the EMC Information Infrastructure, you do see a slight reduction in gross margins from Q3 to Q4 sequentially.

And basically, all that is accounted for by a combination of currency and the slightly higher mix of Iomega revenues. So that definitely, if you normalize our gross margins for currency and Iomega revenues mix, they would be flat from Q3 to Q4.

2009, obviously, anybody's guess, because rates are going to move all over the place. If I look at that the spot rates today, last week, probably somewhere between two to three point headwinds on the revenue line.

Katie Huberty – Morgan Stanley

Great, thanks.

Joe Tucci

Thanks, Katie. Next question please?

Operator

Keith Bachman, Bank of Montreal. You may ask your question.

Keith Bachman – Bank of Montreal

Yes, thank you. Number one, Joe, Dell, I think you said, was about 25% of CLARiiON revenues. That seems to still be weak. How do you anticipate that that's going to unfold during the first half of onto your '09? Would you expect to see a deceleration of contribution from Dell, or is this going to be a steady state? And then I want to follow-up with an FX question if I could.

Joe Tucci

No, I don't expect to see a deceleration or a less percentage from Dell. We have worked hard with Dell. Mike and I have worked personally, and we believe we have our relationship back on track. While the year-on-year was down, you saw that sequentially from Q3 to Q4, we did have improvement. We have tremendous amount of activities and respect between the two companies, and we now believe we have come to a methodologies and processes in the field, which will help us continue to work together better together. And as you saw, Mike and I were in New York recently and we extended our partnership for five more years.

Keith Bachman – Bank of Montreal

Right.

Joe Tucci

And both talked about really working better together and capturing growth, so I would expect that to get better if anything not worse.

Keith Bachman – Bank of Montreal

Okay. If I could just follow-up from the past comment on FX then, Joe, you did mentioned that you saw IT budgets would be down high single-digits. And then, EMC, or your thought would be better.

Are you with incremental FX pressure be added to that? So, in other words, the 200, 300 basis points headwinds, obviously that's going to move around quite a bit, but is that an incremental add to how we should be thinking about revenues on a year-over-year basis for first half of '09?

Joe Tucci

Yes. Just to be clear to you, I said mid-to-high.

Keith Bachman – Bank of Montreal

Right.

Joe Tucci

Because there is just that degree of uncertainty, right? So that's a pretty wide span, I understand.

Keith Bachman – Bank of Montreal

Okay.

Joe Tucci

You know, because mid could mean 4 and mid could mean 9, I mean a hike could mean 9, so that's a pretty wide spread. And I am not saying at 4 and 9, I just expect it is going to be down. So, do not go to just a hike.

Secondly, you have the bad FX rebates, and some FX assumptions, but I wouldn't say we did any kind of massive betting on which way the dollar or the euro was going to go.

Keith Bachman – Bank of Montreal

Okay. FX is one of the factors that's driving a -- view of what IT spending might look like on year-on-year. So, we have got some FX assumption baked in that case.

Joe Tucci

Yes. We have put on some assumption, but not widely different than where it is today.

Keith Bachman – Bank of Montreal

Okay, thank you.

David Goulden

Okay, thanks. Next question please?

Operator

Brian Freed, Morgan Keegan. You may ask your question.

Brian Freed – Morgan Keegan

Yes. Good morning. Thanks for taking my call. If you look at your kind of thoughts around the IT budget, could you give us a little more color by segment in terms of your software services and hardware?

Yes, I know, it is a little tough, but the amalgamated view here of the mid-to-high, what are the relative areas of strength and weakness as you see it? And how do you think it's going to compare to statement of the 2000 to 2001 one timeframe?

Joe Tucci

I don't know. From a growth perspective, we will vary by our product. As I have said before and I will say again, everybody would be affected including VMware, including EMC. But that being said when you look at the sales priorities are, I don't think is product out that more relates in the VMware.

So, obviously I think that will be at the top of from a product perspective, security is strong, storage information are going to grow, so coming in that way. And I think, you are looking a little bit like growth hardware and software. So, I would say that probably in a short-term, because we have more backlog in services and software holds it better because software got the just the sport side of it.

We have to do more book, ship and billing which is on license side for software, and on a license side for storage and security et, cetera, and that will probably get impacted more so. So we get pretty balance, and that's kind of where I see it.

Brian Freed – Morgan Keegan

Great, and if you wouldn't mind one quick clarification. As we look all the moving parts in your model, do you view non-GAAP as really the best measure of your performance going forward given the changes in accounting standard and charges on GAAP?

David Goulden

Yes, absolutely do. I think there is lot of reaction off of that. Obviously, we give you all the data, you can come to your own conclusions, but we feel very strongly, that's a case.

Joe Tucci

Thanks, Brian. Next question please?

Operator

Bill Choi of Jefferies. You may ask you question.

Bill Choi – Jefferies

Okay, thanks. I just want to get little more color about Symmetrix. Obviously, this is your high-end system. Could you confirm that this product was indeed actually down sequentially? And when you think about customers' unwillingness to do major projects, how do you look at seasonality for Symmetrix going into Q1? And what would you expect the new SIM upgrade to do, and is that can be around September? Thanks.

David Goulden

We talked about the seasonality, SIM was up sequentially from Q3 to Q4, just not quite strongly as it normally is. The year-on-year decline as I said before, it was really compared to a very tough Q4 year ago, which is our first full quarter on VMX4 access.

If I kind of look at the Symmetrix performance for the quarter, a little bit more weakness in international than in the US, eventually in Europe we saw things slowdown rapidly during the quarter. You see our growth rates changing in total by substantially, and that's where the biggest impact was upon SIM.

Joe Tucci

I just want to comment on when the new SIM is coming, but I'll just say it is coming.

David Goulden

Thanks Bill.

Bill Choi – Jefferies

Okay.

David Goulden

Next question please?

Operator

Mark Moskowitz of JP. Morgan. You may ask your question.

Mark Moskowitz – JPMorgan

Yes, good morning. Thank you. I want to learn a little more if you could, Joe about the SAN versus NAS acceleration here in terms of your EMC business. How much of the NAS acceleration is being driven by share gains versus may be a market shift by your customers? And if so, what reasons of verticals are shifting more towards NAS versus SAN that is recurring?

Joe Tucci

The thing that we are doing here, which is driving our businesses, we are shipping more and more of our products that have, what we call, unified storage. So, you buy the product and you can basically have fiber channel SAN, you could have ISCSI 10, or you could have network attached.

So, if you think of a customer, especially in the midsize market, you say well. You have the database and that looks great on SAN, and don't you have some file and print work for NAS, rather than two systems we are selling.

We are selling like combined to it and that is just really hotter than hot. You could see that for the year or that product line at over 40% growth and that's kind of -- you will see a lot more that in the future. I mentioned that is one of the areas that we are going to expand that you could expect new product announcements, so I do not think there is a NAS or SAN versus NAS shift going on at all, but I think it's basically there is a big shift to what we are calling is unified storage.

David Goulden

Thanks, Mark. Next question, please?

Operator

Kaushik Roy of Pacific Growth Equities. You may ask your question.

Kaushik Roy – Pacific Growth Equities

Thank you. Can you comment on the current pricing environment and the impact on the gross margin maybe in 2009? I asked this because you remember at 2001, 2002 pricing and gross margins took a hard hit, so how you do see gross margin is playing out in 2009? Can you quantify the impact in any way?

Joe Tucci

Let me make a statement first. I remembered back in 2001, 2002 coming into that time, our policy and our practice was the price 50% to 100% more than our competitors. So yes, we had a lot margin impact, right? But we think we are very competitively priced, very value priced, so we don't expect near the compression this time we had last time. I'll let David comment specifically but obviously in tougher times, we always do have more pricing pressure but on the other side we make it sure that we do a lot on the cost side to help bolster as much of that as we can Dave would you want to?

David Goulden

Let me give you a little bit more color upon how margins go through in the quarter. I gave you one metric so let me drill down a little bit upon that. So margins held it very well during the quarter as I mentioned if you back-out effects if you normalize for Iomega which had a slightly bigger quarter in Q3 and Q4.

Not only were storage volumes flat but storage product margin were also very flat as well quarter-on-quarter. So given that Q4 was a bit of a storm and that was budget flush but clearly people were looking for pricing pressure and we were able to respond to that we are getting cost out of props and we'd have one quarter now when margins have held it pretty well during this storm and hopefully we'll continue to do well as we get more cost savings through the programs to help us get maintain our competitive stance.

Kaushik Roy – Pacific Growth Equities

Okay great thanks.

Tony Takazawa

Thanks, Kaushik Next question please.

Operator

Ben Reitzes of Barclays Capital. You may ask your question.

Benjamin Reitzes – Barclays Capital

Yes, good morning, thanks. I just wanted to talk about your guidance coming, sorry lack of guidance but some of the comments you said, given IT spend and where storage could go and then your ability to gain shares it sounds like you are kind of saying given currency, revenue declined in '09 for EMC its best amount of down low single digits and then given the cost cutting is offset a lots by accounting and pricing may be have EPS down a little.

I want to know if you agree with that and then also can you just talk about how the '09 shifts by quarters made differ versus prior years, usually you have like 22% and whatever it is in the 1Q, I mean should we look for a big difference in skew as well. So if you can comment on the first kind of conjecture I made on the guidance and then the quarterly skew that be great.

David Goulden

Yes, Ben let me start and then Joe, could may be add a few comments. So I think when you look at the EPS let's keep the conversation at the non-GAAP levels kind of ease on the what's going also happens a year-on-year we told you to about $0.12 of kind of headwinds this is going to impact just through those core items and then of course on top of that you've got the impact of the operational performance offset by the cost savings. So you got at least a $0.12 negative swing on the non-GAAP EPS plus or minus whatever we get out of the business operation excluding those things. So directionally you are absolutely correct.

And then from a seasonality point of view, I think the answer to the question, the short answer is yes. I mean we've really said that we expect the higher revenue proportionately in the second half that we get in the first half normally. And then that’s going to be because of the keeping expenses flat and driving both the savings from the 350 into second half.

It's also going to produce more leverage on the non-GAAP EPS line then you normally get between the Q1 and Q4 as well. So you are going to see a lot of leverage in the model Q1 and the first half is clearly going, it is going to be toughest for us. And it’s going to have the kind of lowest revenue because of the seasonality. It's going to have total of cost savings in there, the second half should look a whole lot better from revenue and an EPS point of view again assuming that our focus is on recovering growth rates in the second half plays out.

Tony Takazawa

Thanks Ben. Next question please.

Operator

Brian Marshall, Broadpoint AmTech, you may ask your question.

Brian Marshall – Broadpoint AmTech

Good morning, guys. Thank you, question with regards to the deceleration that we saw in the Semetric's line, sort of relative to your mid-range offering and given the fact that we are seeing a re-price on the Semetric's coming up in the next three quarters. Is there a point where the mid-range actually becomes the largest product category from a mixed perspective of your storage products?

David Goulden

I do not know. It certainly could, they are pretty close rate this quarter. You saw, we think this re-price on Semetrics is something else and different than a lot of you might expect. So in difference to Semtrics there is quite a future there for sure but the mixture keeps growing especially as I said this move to unify storage is incredibly strong.

Brian Marshall – Broadpoint AmTech

And just as a follow-up, in terms of software attach rates and service attach rates, there, would you expect any material differences to those lines, going through '09?

David Goulden

The service attach rates, I think, continually going up and the software attach rates are good and we are just basically selling solutions now, as you could see, it’s kind of all when you buy it customers are buying the bundle which includes hardware and software, if you look at the company in total, right? And this is excluding VMware.

We have about 8,000 engineers doing software. We have about 400 engineers doing -- little less than 400 engineers doing hardware. So, what’s happening is we are selling the bundle and are margins on the stores are going up and I do not think that they are going up solely because of the hardware, I think they are going up because of the value that we are building in the software.

But, we are selling it together as a collective group and since we have got catalog for our sales force more neutral. So you can just sell list rather than selling hardware and software.

Our margins have gone up and customer satisfaction with us has gone up. So, it’s been a great move. I know it’s caused all of you angst but I really do not understand it because you think it’s because of the 400, less than 400 engineers we have, building hardware and that these revenues are going or you think it’s more because we have 8,000 engineers building software. And so it’s all in there and we watch gross margins like a hawk and on storage they have a very good trend.

Tony Takazawa

Okay thanks Brian. Next question, please.

Operator

Chris Whitmore of Deutsche Bank, you may ask your question.

Chris Whitmore – Deutsche Bank

Thanks, just a follow-up on the gross margin question. Product gross margins were down about two and a half points year-on-year and the quarter where revenue actually grew, if sales on the product side are down in that mid-single digit range, what is your expectation for gross margin. Can you expand them in 2009? Thanks.

Joe Tucci

I think Chris; gross margins are going to be under pressure in 2009. Not so much from volume but really from the customer pricing pressure. We see more pressure in the market right now from customers than we do from competition. That is a double-edged sword.

Customers are asking us to kind of give them pricing opportunities and then they are also offering us a bigger piece of that share of their spend in their response for that. So, I do not expect to see margins to increase in 2009. I do think that -- we are going to continue to bring cost out of the products.

All the products that we introduced have a lower cost base than the prior products. It's further opportunities for us. There is going to be a lot of opportunities towards continuing to drive prices down from our supply chain. So, we are going to work all those things. I would not look for expanded margins in 2009.

Tony Takazawa

Thanks, Chris. We have time for one more question and then Joe, will have a few concluding comments.

Operator

Our last question comes from Bill Shope of Credit Suisse.

Bill Shope – Credit Suisse

Okay thanks guys. So, looking at your outlook for IT spending maybe more backend loaded than usual in '09, would you say that storage spending should be more or less backend loaded than other segments despite spending? I understand you think storage spending will be a bit more stable than the rest of the IT environment but can you give us an idea for the backend loaded nature of storage spending?

Joe Tucci

Well, I think, couple of things. When you look at our product road map, we certainly have a stronger product portfolio in the second-half of the year as these re-prices come up. So that'll help, that kind of forum. But, I do think storage will be a little better but it will be subject to the same trends, to answer your question directly and honestly, Bill.

Bill Shope – Credit Suisse

Okay thank you.

Joe Tucci

Okay, well again thank you for joining us today and I want to leave you with a kind of closing. So, I think, in 2009 for sure as you all know we are operating in a very tough and uncertain environment but I also want you know we are operating from strength. We have innovative leading timely products backed by a winning strategy and of course we are going to share their strategies with you later this quarter.

We have the cash in the balance sheet to stay to course. We have terrific talent that has a positive attitude and a leadership team in place to drive success and we have a very large customer base that truly values EMC and we should be a beneficiary of this spike in quality. So, again thank you for joining us and we will see you later this quarter.

Operator

This concludes today’s conference call. Thank you for participating. You may disconnect at this time.

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