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EMC Corporation (NYSE:EMC)

Q2 2009 Earnings Call Transcript

July 23, 2009 8:30 am ET

Executives

Tony Takazawa – VP, Global IR

David Goulden – EVP and CFO

Joe Tucci – Chairman, President and CEO

Analysts

Keith Bachman – Bank of Montreal

Benjamin Reitzes – Barclays Capital

Mark Kelleher – Brigantine Advisors

Aaron Rakers – Stifel Nicolaus

Wamsi Mohan – Bank of America/Merrill Lynch

Brian Marshall – Broadpoint AmTech

Amit Daryanani – RBC Capital Markets

Toni Sacconaghi – Sanford Bernstein

Chris Whitmore – Deutsche Bank

Bill Choi – Jefferies

Mark Moskowitz – JPMorgan

Bill Shope – Credit Suisse

Troy Jensen – Piper Jaffray

David Bailey – Goldman Sachs and Co.

Alex Kurtz – Merriman Curhan Ford & Co.

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator instructions). I would like to introduce your host for today’s call Mr. Tony Takazawa. Sir, you may begin.

Tony Takazawa

Thank you, Diane. Good morning. Welcome to EMC’s call to discuss our financial results for the second quarter of 2009. Today, we are 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 sometime discussing his view of what is happening in the market, EMC’s execution of the strategy, and how EMC is positioned.

After the prepared remarks, we will then open up the line to take your questions. I would like to point out that we will be referring to non-GAAP numbers in today’s presentation unless otherwise indicated. 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, we have provided detailed financial tables in our news release and on our corporate website. And with regard to details of VMare’s results, we refer you their financial release from last night. 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 & Exchange Commission.

And lastly, I will note that an archive of today’s presentation will be available following the call. With that, it is now my pleasure to introduce David Goulden. David?

David Goulden

Thanks, Tony. Good morning and thank you for joining us today. I am pleased to announce that EMC achieved solid future results. Our focused execution this quarter resulted in EMC achieving revenues of $3.26 billion, non-GAAP EPS of $0.18 and free cash flow of $400 million. The sequential revenue growth, improving profitability, and strong cash flow is encouraging given the continued economic environment.

Within these results, our EMC information infrastructure business achieved $2.8 billion in revenue, a little over $0.14 of non-GAAP EPS. And as you saw last night, VMware also had a solid quarter coming in at the high end of that expected change. VMware’s results contributed $455 million of revenue and $3.03 of non-GAAP EPS for EMC.

This morning, I am going to make some comments about the future spending environments, our business outlook for the second half of the year and some specific details from our Q2 results.

Turning now to the financial results for EMC’s information infrastructure business, we believe that overall IT spending levels in Q2 were relatively flat with Q1, however, Q2 spending seemed more stable and a little more predictable during the quarter. We attribute the stabilization to customers having more confidence in their IT budgets that they had at the beginning of the year. Although the economic environment remains very tough and customers continue to scrutinize their spending very carefully, the stabilization is a positive sign.

Within this IT spending environments, I am pleased that we achieved sequentially better revenue profitability in Q2. During the quarter, we experienced more normal linearity compared with Q1 and the business delivered sequential revenue growth across all our major geographies and in all of our business units.

The area of our business that most exceeded our expectations was our information storage business in North America, where revenues were up 5% sequentially. Positive increase was due to a more favorable budget environments and part was due to storage capacity upgrades that customers deferred in Q1. We also firmly believe the strength of our product portfolio was an advantage.

While pressure on global IT spending is expected to continue, our results from the first half of the year give us more confidence and we have the right business model and the right product portfolio to do well under challenging conditions.

So with that as a backdrop, I will make some comments about our business outlook for the remainder of the year. I view that overall IT spending in 2009 will be down very high single to very low double digits have not changed. Based on the more stable spending environment we saw in Q2, our first-half performance and what we are seeing here in the marketplace, we now have better visibility and more confidence in the second half of 2009.

We are now planning for EMC to achieve revenues of approximately $13.8 billion and non-GAAP EPS of approximately $0.82 for the year. These expectations include the acquisition of Data Domain. In the near term, we believe the seasonality of our revenues from Q2 to Q3 will be more normal, i.e. up 2% to 3% with the remainder of the business coming in Q4. However, EMC reported revenues will probably be up 4% to 5% quarter-over-quarter due to the inclusion of Data Domain in Q3.

Now let's take a closer look at some of the financial highlights from the quarter. EMC information infrastructure revenues were $2.8 billion, up 5% sequentially and down approximately 13% year-over-year. On a constant currency basis, revenues were down about 9% year-over-year.

Non-GAAP earnings per share were $0.14. Free cash flow was $213 million. Excluding a series of inter company tax payments between EMC and VMware, EMC information infrastructure free cash flow was $298 million which was higher than non-GAAP net income of about the same as Q2 2008. In the quarter, information infrastructure product revenues were $1.8 billion and information infrastructure services revenues were $1 billion.

Looking at the results for the business units with information infrastructure, Q2 information storage revenues were $2.5 billion, up 5% sequentially. In the high end, Symmetrix revenues were down 3% sequentially reflecting the continued pressure on large ticket items within the enterprise. I am pleased to announce the introduction of our new Symmetrix V-Max System is going very well and reception for customers has been phenomenal.

Customers appoint to V-Max directly into production environments and these systems are achieving six-nines of availability. I hope you understand what six-nines availability means, this equates to an average of approximately 30 seconds of unavailability per system per year, truly unprecedented performance.

We are very confident in the Symmetrix’s V-Max is a highly differentiated information storage platform that’s going to strengthen and extend our leadership in the high end of the storage markets. In the mid-tier, EMC CLARiiON revenues bounced back nicely, and were up 12% sequentially. North America and Asia Pacific have strong performance here.

While the fastest growing opportunities in our storage business is flash technology and we continue to see a high level demand for this capability across our platforms, year to date, we have shipped over 1 terabyte of solid state drives and we expect to see even more utilization of flash on our systems going forward, particularly when our fully automated storage tiering (ph) software comes out for Symmetrix V-Max later this year.

EMC’s Celerra NAS business continues to do very well and we achieved our ninth consecutive quarter of double digit revenue growth in Q2. The reliability and scalability of the unified storage systems are very important competitive differentiators within both commercial and large customers, and we continue to gain market share. Importantly, we are encouraged to see more customers planning to add EMC as a new dual source in their previously net up only environments.

EMC’s backup and recovery software solutions had good double digit sequential growth and I am very pleased that EMC’s Avamar deduplication solutions grew at over 40% year-on-year. Next generation backup and recovery is a major focus for EMC and we are delighted to welcome Data Domain to our information storage business. Including Data Domain, EMC is clearly the leading provider of deduplication technology with multiple ways for customers to utilize deduplication to manage data growth and reduce costs.

Although not included in EMC’s results reported today, Data Domain achieved Q2 revenues of almost $86 million, up 8% sequentially and up 40% year-on-year. Dell represents about 10% of EMC’s total revenues in Q2. Within this, Dell was approximately 29% of CLARiiON revenues, representing a higher percentage than in Q1.

While the near-term economy is challenging, we are confident that over the long term we will gain share as EMC continues to have the best and also the broadest and the most integrated storage product portfolio. EMC’s storage platform span across the consumer, mid-tier and high end markets, and we continue to lead the market with cost effective, energy efficient solutions with the latest feature functionality.

Information storage is a core strength of EMC’s business and our growth and profitability has been strong over the last few years. Our gross margins in this business have consistently been around 50% over the last two years. In Q2, our storage margin bounced back a little and were up 70 basis point sequentially to 48.5%. This is a nice improvement and looking ahead, we expect storage margin to be back around 51% for the second half of 2009.

Information storage is a great business and we committed to investing in R&D programs that will extend EMC’s technology lead to deliver the best portfolio of information storage across the solutions, specifically designed and optimized for virtual data centers and cloud computing environments.

Our RSA security revenues in Q2 were up 3% sequentially and up 2% year-over-year. The demand for RSA’s identity protection and verification products continues to be strong as customers look for ways to prevent fraud and reduce potential liabilities. We believe that our RSA IPV suite is becoming the factor of choice for all line and credit card banking authentication.

Within RSA security information and event management offerings, the RSA InVision 40 platform had another quarter of strong double digit growth. In June, we announced a partnership to embed data classification technology and policies from the RSA data loss prevention suite and start as part of Cisco’s IronPort E-mail Security Solutions.

And just yesterday, we announced RSA software tokens for iPhones providing a very convenient and cost-effective way to use two-factor authentication. Even in a tough environment, information security remains the top priority with customers.

Revenues for our Content Management and Archiving division in Q2 were up 3% sequentially and down 12% year-on-year. Managing unstructured data and compliance is a key challenge for companies of all sizes, and we continue to focus on providing customers with content management solutions that deliver more immediate ROI. Towards this end, we are encouraged that our SourceOne information government solution, the next generation email archiving, saw good demand in Q2 and was a key offering in several large solution deals this quarter.

In Q2, EMC’s global service’s organization performed well and grew 6% sequentially. We are confident that EMC servicing capabilities will continue to help customers meet their near term cost containment requirements while supporting their longer term objectives for rearchitecting the data center for the future. We believe our services organization will continue to be an important competitive differentiator in helping customers virtualized the data centers and plan for cloud computing environments.

Turning to some highlights from the income statements, Q2 non-GAAP gross margins were 50.4%, up 80 basis point sequentially mostly due to higher volumes. We also have nice improvements in our Q2 non-GAAP operating margin, which was up 220 basis points from Q1 to 13.5%. We have done very well executing our cost reduction plans having seen the benefits in our results.

We have also maintained very disciplined expense control and had some extra benefit from currency and some one time improvements. Make it out, this puts us ahead of our planned cost reductions for 2009 and we factor this into our outlook. For 2010, we still expect cost savings of $500 million including the reversal of some of the cost savings such as the 2009 rate reduction.

At this time, we are also utilizing our financial strength to improve our operating structure and invest in future high growth market opportunities. We spent $20 million so far this year transitioning to a more cost effective operating structure and we have already executed a number of initiatives under this program.

For example, we are making good progress on our planned global real estate consolidation. Over next two years, we will increase the utilization of our company owned space and improve the efficiencies of our manufacturing facilities, data centers and R&D labs.

As part of our restructuring announcement in January, we are incurring planned additional restructuring charges in 2009 and 2010 for ongoing cost containment initiatives. To date in 2009, we have booked about $50 million in charges. And in terms of new market opportunities, we have invested about $40 million in our cloud infrastructure business this year.

By effectively reducing costs, improving operating efficiencies and continue to invest in new market opportunities, we are reinforcing the resiliency of our business model for the long term. We believe that net effect of these operational improvements will position us well for the next really big opportunities in IT. Joe will expand on these in his remarks.

Now turning to a few highlights from our consolidated results, total Q2 consolidated revenues were approximately $3.26 billion, up 3.4% sequentially and down 11.3% for the year. On a constant currency basis, revenues were down about 8% year-on-year. Non-GAAP earnings per share were $0.18 and free cash flow was $400 million, over $40 million better than Q2 non-GAAP net income.

So far this year, we generated almost $1.1 billion in free cash flow. This is $400 million more than first half non-GAAP net income and almost the same free cash flow as in the first half of 2008. The non-GAAP tax rate for the quarter was approximately 20%. Q2 consolidated operating cash flow was $574 million.

A few balance sheet items that impacted Q2 operating cash flow include deferred revenues, which were $3.3 billion, inventory churns which were $7.8 and DSOs which were 52 days, all very good given the current economic climate. We ended Q2 with a record $10 billion in cash and investments with $3.7 billion held overseas and $2.3 billion at VMware.

This quarter, we spent approximately $260 million on acquisitions and strategic investments. 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 our business even during challenging economic cycles.

In closing, we are clearly pleased with our Q2 results. The breath and depth of our technology portfolio allows us to assist customers in achieving strong ROI for the current IT projects while helping them to effectively and efficiently move towards rearchitecting the data centers to the future.

Although the spending environment will remain tough, we are encouraged the environment showed signs of stabilization. Our strategy and portfolio positions us exceptionally well in the market and we are pleased that we now have sufficient visibility to forecast our financial results for this year.

Our execution this year has been very good, and we are making a lot of headway on cost efficiencies and important investments for the future. We remain focused on meeting our near time objectives while positioning ourselves competitively for longer term success.

With that, I will turn the call over to Joe.

Joe Tucci

Thanks, David. I would like to begin by welcoming everyone to today’s conference call. As always, we thank you for your interest in EMC. Overall, given the tough economic and tight capital spending environment in which we operate in, I am pleased with our Q2 results.

The EMC and VMware teams around the globe met and exceeded both the top and bottom line goals, which our Boards of Directors set for us this quarter. Now, I would like to take this opportunity to publicly thank each and every member of our team for their hard work and dedication.

I would like to give you our view on IT spending, what we experienced in Q2 and what we expect to experience going forward for the second half of 2009. In Q2, we saw IT budgets firm up quite a bit, albeit at lower levels than in 2008. Customer approval processes and the timing of their spending appear to be more normal. In fact, the calendarization of our order flows in Q2 was very close to what we experienced a year ago in Q2 of 2008.

Simply put, our business felt more predictable and customers seem to be more comfortable with their spending processes. We are also seeing a definite trend with our customers where they are significantly cutting back on a number of suppliers they want to deal with. They want their supplier relationships going forward to be more strategic, deeper, broader. In short, more partner like ensuring them a greater value proposition.

We believe this trend will benefit EMC.

Looking forward to the rest of 2009, we continue to believe that Q3 will show slight improvement over Q2 and that Q4 will be the strongest of the four quarters. These beliefs were included in the outlook that David just provided you for 2009. Additionally, we continue to believe that our results will benefit from our strong product cycle and a really robust product portfolio. For 2009 in total, we still believe that overall IT spending is likely to decline year-over-year in a high single digits to very low double digit range, and we firmly believe and expect EMC to gain market share this year.

What gives us confidence in the second half of 2009 and well beyond, is the fact that consolidated EMC is a major player in four of the hottest and fastest growing market opportunities in IT namely next generation fully virtualized data centers; cloud computing; virtualized desktops and virtualized clients; and the next-generation of backup, recovery and archive solutions.

Each of these higher growth markets represents a multi-billion dollar market opportunity for EMC and they all require X86 software to help customers and service providers manage large pools of compute, network and storage, automatically applying the proper policy and service levels to govern workloads. In that sense, a data center operating system. These four growth opportunities require storage that massively scales, has multi-site active capability, has built in business continuity as policy driven and provides customers with the ability to automatically tier, de-dup and compress their information.

These four growth markets require security aspects like identity protection and verification, data loss prevention, and assurance that governance risking appliance metrics are being adhered to. And these four growth markets require an ecosystem of partners that can co-operate and execute seamlessly. In other words, to capitalize on these vast market opportunities require us innovative technology, the go-to-market, the service capabilities, and the partnerships that consolidated EMC has in place.

I am quite sure as I talked about these market opportunities and delineate the aspects of technology that are necessary for success, it is now clear to you just how strategic our recent acquisition of Data Domain is across all four of these markets. You heard from David how Data Domain grew a remarkable 40% year-on-year despite a tough economic and IT spending environment. And you heard how we plan to continue this type of growth and exceed $1 billion in revenue next year in 2010 with just the Data Domain and Avamar product lines.

I would once again like to publicly welcome Frank Slootman and all the people of Data Domain across the globe into the EMC family. Congratulations on the stellar Q2 and thank you for all you do to delight our customers. Additionally and in conclusion of my formal remarks, I would like to assure you that we are balancing the needs for today like reducing costs while focusing on and investing in high growth market opportunities for tomorrow.

We believe we have the vision and strategy in place for us to win and prosper, as the IT markets resume a more normalized growth, our focus on the four robust growth opportunities I mentioned coupled with excellence in execution will allow us to obtain double digit growth rates.

I would now like to turn it back to Tony to moderate the Q&A portion of today’s call.

Tony Takazawa

Thanks, Joe. Before we open up the lines for your questions, as usual we ask you to try to limit yourselves to one question, including clarifications. This will enable us to take as many questions as possible. Thank you all for your cooperation in this matter.

Diane, can we open up the lines for questions please.

Question-and-Answer Session

Operator

Yes sir. (Operator instructions) Keith Bachman of Bank of Montreal, you may ask your question.

Keith Bachman – Bank of Montreal

Thank you very much. I wanted to ask a question on Data Domain if I could please. I know you mentioned Avamar and Data Domain would add about incremental billion dollars. I was wondering if you could parse that out a little bit and it’s been sometime since you had your conference call if you could tell us how you are thinking about -- or relate it how you are thinking about the accretion potentials related to Data Domain as you look out into calendar year ’10. Thanks.

Joe Tucci

Well, David gave you Data Domain’s growth rate and revenue for Q2. We didn’t give you Avamar. We did tell you that Avamar, I will say Avamar is slightly smaller than Data Domain and had a growth rate a little bit higher in the mid 40s, so we get the deduplication which Avamar excels at which is at the source where information is created and of course you have to target as where Data Domain excels, and we feel that this market together we will continue to grow at over 40% next year and those two products alone is not an incremental billion, just remarkable growth to over $1 billion next year on those two products, Keith.

Keith Bachman – Bank of Montreal

Okay, Joe. And then in the past you have talked about the accretion potential, is there any color that you can give on the incremental opportunities with just data demand on how you are thinking about the accretion potentials?

David Goulden

Keith this Dave. Let me jump in and just kind of recap what we have said. So, we gave you some information in the news release about, 2009 we said that there'll be no impacts on a non-GAAP basis and a little less than $0.02 on the GAAP basis this year. 2010 still will be accretive to us on a non-GAAP basis, but we are not going to qualify that yet, we will give you more information and that was to get closer to year-end.

Keith Bachman – Bank of Montreal

Okay thank you guys.

Tony Takazawa

Thanks Keith. Next question plus.

Operator

Benjamin Reitzes of Barclays Capital, you may ask your question.

Benjamin Reitzes – Barclays Capital

Yes thanks a lot. My question is on Symmetrix. I believe you said the product was down 3% sequentially, but correct me if I'm wrong, what is the pent-up demand in that upgrade cycle heading into the back half? Is that part of the reason you have a better tone and a visibility and just what you kind of envision for the velocity of this product? Can a cycle last well into 2010, and what are customers telling you, because it clearly seems like it hasn't gotten going yet, and just talking about the velocity of that product price, you know going out, as far as you'd like would be helpful.

Joe Tucci

I will start and I will ask David to add some color. This is Joe. First of all, the V-Max we are very pleased with, we set a plant for Versus-Max and we slightly beat it, and it's being well received by customers. This is the biggest change we've had in Symmetrix since its inception, and so obviously the customers are being careful. What we're going to add only, I think killer applications like colors you have been asking for, which is what we call fast technology, which is fully automated storage tearing, and that comes in the end of the year and of course as that kicks in we do expect that this cycle will carry us also into 2010 very robustly. Want to add to that David?

David Goulden

Joseph very good. Ben you are right, Symmetrix are down 3% sequentially. Obviously as Joe said this is a huge transition. You know some customers or many customers are going straight into production others are still going through their tech labs and a typical transition is three of four quarters to go through the transition to fully transition across and then of course you've still got the bow wave of it being a brand-new technology. So, Joe said, you expect fall through benefits through 2010.

Benjamin Reitzes – Barclays Capital

Great. Dave, just remind us of the margin profile of Sym versus other products?

David Goulden

Which particular product spend did you have in mind?

Benjamin Reitzes – Barclays Capital

Well, just, you know is it a positive mix shift in general and vis-à-vis the CLARiiON and other areas of hardware?

David Goulden

Yes. I think as we said before, at the system level there is not a lot of difference between Sym and CLARiiON per se, but of course typically, you know Symmetrix have all things wrapped around in terms of more management software and more services, so the total margin, the solution margin tends to be a little richer on the Symmetrix sales.

Benjamin Reitzes – Barclays Capital

Thanks guys.

Tony Takazawa

Thanks Ben. Next question please

Operator

Mark Kelleher of Brigantine Advisors, you may ask your question.

Mark Kelleher – Brigantine Advisors

Great, thanks for taking the question. It looks like total product gross margins were down about 100 basis points sequentially, you mention storage gross margins were up 17 basis points sequentially, so my question is, what products where under a little bit of pressure to move that overall gross margin number down and could you comment on the overall pricing environment as a factor to those gross margins? Thanks.

David Goulden

Mark let me start and Joe may comment on the pricing environments, but I think we said that overall EMC improvisation, infrastructure margins were up 80 basis points sequentially. If you kind of look at that product versus services, product margins were actually relative flat quarter-on-quarter, so not quite sure whether you're getting your down probably handle that offline later. Basically a couple of factors in that, we did get volume growth, we did get volume benefit in margins, and mainly on the services side, this quarter sequentially, product margins, we actually did get some help from volumes sequentially, but then it was kind of offset by some of the product condition cost associated with kind of running both the DMX-4 and the Versus-Max lines in parallel. So, we are trying to question things we're pretty stable from a front margin point of view. Our pricing environment continues to be tough out there, but if you kind of look at how are margins have basically have faired, let's say you take last Q4 as the baseline, basically all the change can be tied back to volumes that differently, obviously there has been pricing pressure from customers, we mail to offset that through efficiencies and are cost based in manufacturing benefits in the product line.

Tony Takazawa

Thanks Mark.

Mark Kelleher – Brigantine Advisors

Thanks.

Tony Takazawa

Next question please.

Operator

Aaron Rakers of Stifel Nicolaus, you may ask a question.

Aaron Rakers – Stifel Nicolaus

Yes thanks and congrats on a great quarter. I guess my question I want to dive back into the Data Domain assumptions that you're making, if we just take the expectations that are out there for Data Domain right now from Street estimates, it seems to be given that you're recognizing maybe two months of revenue from that, you're implying a decent amount of relative upside to the Street expectations looking into Q4 for Data Domain, so I would like to understand, you know what you're seeing from a revenue synergy perspective, already in the Q4 timeframe. And then if you can also help us understand how you look to position Data Domain i.e. driving synergies out of the expense structure of Data Domain going forward? Thank you.

Joe Tucci

This is Joe. I just kind of break the mystery here. Late into our second half plan, we have about $200 million to pay to domain revenue, okay, to cost Q3 and Q4 okay. The Data Domain story is not about obviously there are some cost and synergies that we can get, but that's not what this is about and that this is not really where we're going, we intend to increase investment in R&D and obviously the big win here is to leverage the EMC go to market force through 85 countries and thousands and thousands of people and really kind of pop this product line to make sure that we actually increased our investment in R&D. So that is going to be the winning story here and then we do believe that by working in better harmony, what we call Avamar source based duplication with target based duplication, we can really create a tremendous win. So, this is all about revenue synergies not cost synergies, not to say that there is not a few cost synergies.

Tony Takazawa

Thanks Aaron. Next question please.

Operator

Wamsi Mohan of Bank of America/Merrill Lynch, you may ask your question.

Wamsi Mohan – Bank of America/Merrill Lynch

Thanks guys. I see, another gross margin question I mean, when you look at the information infrastructure gross margins, why shouldn't that get better in 2H from 51%? In Q1, you had noted that there had been four from volumes to smaller extent from pricing, but as you go through product refreshes and volumes improve as your revenue guidance would imply and you get benefits from cost savings that are flowing into cods and you notice some product transition cost that you incurred in this quarter why should we not expect the second half gross margins to trend significantly higher?

David Goulden

Yes, Wamsi I think you may have -- perhaps that wasn’t cleared up in exactly which margin I was talking about, I was talking from an information storage gross margins, obviously an important substance of inflation infrastructures, so just to clarify our storage margins were 48.5% in Q2. They were up 70 basis points in Q1 and that margin rate is the number I was talking about going back up to 51%. Okay got it thanks.

Tony Takazawa

Thanks Wamsi. Next question please.

Operator

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

Brian Marshall – Broadpoint AmTech

Hi great thanks guys. I actually had a question on the information stories gross margins, as well as, if you look at it, the forecast -- well you did about the 64% incremental gross margins in the June quarter, looks like that is going to strike up quite a bit in September and that increase, you know by my calculations in the 60% range in December. I was wondering if you could comment on, you know if we do expect calendar year 2010 to return to some sort of level of normalcy out there, you know would you expect that incremental gross margin on the information storage side of the business to kind of remain constant next year?

Joe Tucci

Brian let me take that. I think that we said and recapped what I said about the margin changes from the end of 2008 into this first half of 2009, obviously we do have some fixed cost rolling through that. Of all those fixed costs related to our warranty expenses in the business as well as some of the manufacturing overhead, so you do have a fixed versus variable equation and that is what we kind of giving you a hint as to what’s going to happen with some variable increase in volume in the second half and you see that margin bounce back again. So, I think I have given you the pieces of the equation as we talk about 2010, we will able to update you from what impact we might think volume could have could have at that point in time.

Brian Marshall – Broadpoint AmTech

Any help on the fixed versus variable structure at this point?

Joe Tucci

No not going to break it down, but you can always do a little bit of modeling just based upon what happened in Q4 to Q1 and get to a pretty good answer yourself.

Brian Marshall – Broadpoint AmTech

Understood thank you.

Tony Takazawa

Thanks Brian. Next question please.

Operator

Amit Daryanani of RBC Capital Markets, you may ask your question.

Amit Daryanani – RBC Capital Markets

Thanks. Yes just a quick question. The VMware amortization expense on the EMC results, I think it was supposed to be $0.02 a share, is that what the headwind was this quarter and do you expect that to be a similar issue for the next few quarters?

David Goulden

Well I think you're talking about intangible amortization?

Amit Daryanani – RBC Capital Markets

Yes.

David Goulden

If I had understood the question correctly. Yes, I think what we basically told you is that if you go to the press release where we put the non-GAAP to GAAP reconciliation information in there, we expect intangible asset amortization to be $0.08. So, your $0.02 a quarter is approximately correct.

Amit Daryanani – RBC Capital Markets

Thanks.

Tony Takazawa

Thanks Amit. Next question please.

Operator

Toni Sacconaghi of Sanford Bernstein, you may ask your question.

Toni Sacconaghi – Sanford Bernstein

Yes, thank you. I appreciate the commentary around the market and your belief that it has stabilized. I suppose if I would have looked at your results and your guidance, it actually wouldn't appear clear to me that things have stabilized your year-over-year growth rate at constant currency in Q1 was minus 5.7. It was minus 18 in Q2 and yes you had a tougher compare, but that was only one point tougher. So the year-over-year growth rate actually into that incremental deceleration and your sequential growth guidance up 2% to 3% is a bit lower than history and you're going to get a one or two point currency benefits, so it is more or like zero to one or zero to two, which is below normal seasonality. So, could you comment on the extensible discrepancies between the deceleration in Q1 and Q2 and your perception of stabilization and then you commentary around sequential guidance versus history and how that is also consistent with things firming, perhaps you can talk about your visibility, your pipeline, your backlog, or what else is contributing your view because the numbers in then of themselves don't jump out obviously has being high conviction stabilization.

Joe Tucci

Yes. First of all Toni, maybe it is the way we presented it. For a while, we have been saying and I still think we are going to be right. I said that Q2 is going to be the bottom and then as I said, you know, I don't expect any kind of V-shape recovery. So, as you know and as you right point out, we grew 5% in Q4, we declined 8% in Q1, we climbed 11% in Q2, right. That was year-on-year. So, you're right about your trend, but what we are trying to focusing on is the predictability, you know the forecast we had last quarter were tough and the business came in late and the visibility looking at the windshield was incredibly foggy.

This quarter, you know our forecast held up well, the calendarization, which is our term we use in an internally, it is not actually a real word, but we use internally as how the flow of orders everyday of the quarter and we compare that to the same time last year, same time year before that, same time last quarter, last month -- last month, last quarter, and we have all these kind of metrics that we use and from all those perspective it was a lot more predictable.

When you talk to customers, customers are saying, hey I do have a budget now. Yes it is less than last year by x- percent or whatever the case might be. But I can now have a more normal approval process. So that is kind of what we are saying Toni and maybe we said it wrong in the first time, but that kind of color I think -- and of course if you look at Q3 and our predictions, the year-on-year decline would reverse, right as it did get now get a little bit better.

So that is what we are saying in macro. And then we had enough predictability that we actually could give you a forecast for the second half of the year, we did in terms of the year, but since you have the first half, we gave you a second house forecast in essence, right. So, I think those are the things that we're trying to point out today Toni. Does that address that part of it?

Toni Sacconaghi – Sanford Bernstein

Yes. Just on the – I hear you on the year-over-year growth getting better, but you're compare off gets a lot easier, so sequential is more valid and with the currency tailwind you should get, the sequential growth feels a little bit less than normal seasonality, is that just some, you know a little bit of conservatism in there or is there anything else you can comment on?

David Goulden

Tony this is Dave, let me jump in and try out a little bit of flavor there. So, as Joe said, we are talking about stabilization, but from a much lower level of spending, still have a very tight budget environment then we had seen, obviously in the last couple of years. So, yes there should be potentially a little bit of tailwind from currency sequentially, but remember my comments about what happened in Q2 and where we really had the most upside to our internal expectations was in the storage business in North America where some of that was stabilization effect and some of that was some kind of Q1 orders, it just didn't get going in Q1, it came into Q2. So you're going to understand the baseline has impacted a little bit by that. So, taking all things into account, we are also looking for a sequentially stronger Q3 than Q2 and obviously with Q4 being our strongest quarter, I think that pretty positive signs given the economic backdrop.

Toni Sacconaghi – Sanford Bernstein

Thank you.

Tony Takazawa

Thanks Tony. Next question please.

Operator

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

Chris Whitmore – Deutsche Bank

Thanks very much. It looks like on a consolidated basis services margins where a pretty significantly both quarter-on-quarter and year-on-year, wanted to understand the outlook for that line item and perhaps on a consolidated basis, what the outlook is for product margins and service margins as they move through the back half? Thanks a lot.

Joe Tucci

Yes, Chris you're right we had -- we saw some nice increase in services margins, couple of impacts that -- one of course we had some volume effects, particularly on our customer services business where fixed costs are relative – where the costs are relatively fixed and obviously volume has a nice benefit. Also, a number of the cost transformation programs that we have been driving have also gone through the services lines. So, you have to benefit on both of those. I have given you a very strong hint on kind of where the biggest piece of product margin is going to go for the second half of the year, and kind of given you the full lookout for the full-year outlook. So, you can kind of triangle at around that, but obviously we are expecting to see, you know margins continue to improve a little bit as you go through second half and you know that is backed into our overall guidance for the year.

Tony Takazawa

Thanks Chris. Next question please.

Operator

Bill Choi of Jefferies, you may ask your question.

Bill Choi – Jefferies

Okay thanks. I kind of want to follow up on an earlier question about this guidance. I guess one comment notably missing this time around from David’s prepared comment is, you know thoughts about second-half being a much stronger and that revenue will be more backend loaded this year then perhaps has been historically and if you look at your guidance you are suggesting about 53%, excluding data demand to be generated in the second half. You know that is pretty much right in line with historical trends of 53% to 54%. So, I'm just curious, given update as to why that that wouldn’t be more backend loaded especially if the budgets are getting stabilized? Thanks.

David Goulden

Yes Bill I think couple of factors here. One, when we were predicting Q2 to be roughly flat with Q1 and by definition the second half was getting that much stronger, you know we did see much better sequential growth in Q2 than we expected certainly back in April when we made the comments we made about what was happening to the market at that point in time and then I gave you some of the flavors of kind of what some of the drivers where around that Q2 of growth. So, what the year is now looking to be is to be a little bit more normal from a sequential point of view, clearly with the second half still being stronger than the first half, but the progressions throughout the quarter is being a little bit more normal.

Obviously, you want to think as a big driver in the second half of a normal year is a fair degree of budget flush in Q4. And whilst we obviously predict a little bit and off that and we are predicting some pretty good sequential growth in Q3 to Q4, a budget flush is not going to be at normal levels. So, you know that all adds into what we are telling you about the $13.8 billion or 13.6 with our Data Domain for the year.

Joe Tucci

And remember to, if you looked at Q3 of ‘08, and that quarter was a pretty quarter for us, we grew 13% over Q3 of ‘07. So this is not yet one of those kind of really done compares. Where we spell off a little bit, were as in Q4 of last year, we only grew 5%. So, I think when you look at all that I think that probably is well for our forecast.

Bill Choi – Jefferies

Yes.

Tony Takazawa

Thanks. Next question please.

Operator

Mark Moskowitz of JPMorgan, you may ask your question.

Mark Moskowitz – JPMorgan

Yes thank you good morning. David I was wondering if you could talk a little more about the software revenue stream in the quarter as it relates to license and maintenance and the insights that you could on the growth profile with two, particularly with respect to renewals, trying to a sense of your Sym, a greater level of focus of add-on software, I think your customers who are not really willing to deploy new system yet?

David Goulden

Yes Mark sure. As you know we are now looking at the business on a kind of product versus services basis and we give you the kind of gross margin color for proxies of what's going on. Wasn't really a whole lot of mix shift, in fact almost no mix shift during the quarter within products. Certainly, for the storage business hardware and software performed pretty similarly, and you can see for a content security the profit is software, so you can see what is going on there. Maintenance renewal is doing very well and you saw good sequential growth in this customer services business and software maintenance was a big piece of that. So, we certainly see customers that are wanting to get full value from the maintenance contract from the upgrades that come with that. We view that has a very strong indicator.

Tony Takazawa

Thanks Mark. Next question please.

Operator

Bill Shope of Credit Suisse, you may ask your question.

Bill Shope – Credit Suisse

Okay great thanks. Wanted to extend on a question from earlier on the call and it is not on guidance. I want to ask about pent-up demand across both Symmetric and CLARiiON and assuming conditions continue to improve, is there any data that you guys have to suggest that utilization rates are perhaps reaching critical levels or that a normal portion of the installed base is up or passed leased renewed points, or any other data that would help us gauge the potential pace of hardware recovery not just in the second half, but also in the 2010?

Joe Tucci

Bill I could tell you apparently for sure that customers are driving utilization rates up and they are at our beliefs an all-time high. Whether that is critical – whether it is a critical level and they have to abide, I mean we are certainly there is only so far you can storage and you got to do it next by, so whether it is critical or not I don't know, but that certainly had an all-time high in terms of utilization rates that I can tell you.

Bill Shope – Credit Suisse

Okay very helpful. Thank you.

Tony Takazawa

Thanks Bill. Next question please.

Operator

Troy Jensen of Piper Jaffray, you may ask your question.

Troy Jensen – Piper Jaffray

Yes quick question for Joe here. Industry consolidation, obviously last quarter we saw a lot of it, just curious to know if you think it is going to continue and is there any holes in EMC’s product lines that need to be filled in the near term?

Joe Tucci

I do think it is going to continue Troy, as an industry trend for sure. As far as holes are concerned, there is nothing glaring, but there are -- we are always on the look for opportunities and there are a couple or little areas that we would like to expand and obviously it is my policy as always been not to comment on them because I just kind of work against myself when I do that or work against the Company when I do that. So, there is nothing major that we have to have, it would all be only in the case that they are really could drive a lot of shareholder value.

Troy Jensen – Piper Jaffray

Keep up the good work gentlemen.

Tony Takazawa

Thanks Troy. Next question please.

Operator

David Bailey of Goldman Sachs, you may ask your question.

David Bailey – Goldman Sachs and Co.

Great. I was wondering if you can give us an idea of what percentage of your cost cuts have been completed so far and when do you expect to wrap those up?

David Goulden

Yes, sure David. We have told you that we do plan to exceed our original $450 million reductions for 2009 and that’s factored into guidance. To give you a flavor, we have basically done two thirds of the headcount reductions now. Sorry, three quarters on headcount reductions are now complete. While some of the other programs like real estate, like some of the other infrastructure costs reductions will basically come out during the second half of the year and go into 2010. So, we are actually a little ahead of our original targets of the year, we will beat the original target for 2009, and we're still confident about the $500 million for 2010.

David Bailey – Goldman Sachs and Co.

Great, thank you.

Tony Takazawa

Thanks David. We have time for one more question, and then we will have some comments from Joe.

Operator

Our last question comes from Alex Kurtz of Merriman Curhan, you may ask your question.

Alex Kurtz – Merriman Curhan Ford & Co.

Yes. Thanks for sneaking mean here. So, Joe what kind of activity levels are you seeing between he enterprise and commercial groups in North America. So, how do you see that projecting to the rest of the year and then underneath that sort of is the competitive landscape shifting it all and any comments around IBM and XIV would be helpful. Thank you.

Joe Tucci

The competitive landscape hasn't really changed in all that much. Right now, we see a little more kind of action I would say in the commercial marketplace than we do in the enterprise. Activity levels are quite high in both, but the actual buying patterns of the commercial is a little ahead right now and basically, as far as the landscape is concerned I don't really see any change and I would include IBM and XIV. We have always had high competition with IBM and it continues at about the same level.

Alex Kurtz – Merriman Curhan Ford & Co.

Okay, thank you.

Joe Tucci

Okay. Well in closing, I just like to remind you that we really do believe that our business model is serving us quite well and is working as is evidenced that we are weathering this pretty tough economics doing fairly well. We have a strong product portfolio and cycle going for us right now. We are focused on, what we think is going to be four very large, very high growth markets in IT, which will help our future, and gives us confidence. We continue to focus as David has told you on our cost structure. And I think the most important thing, which is a little bit of an intangible if you could be inside of the EMC and feel. The people of EMC are excited and VMware are excited about the future and kind of pump and with that I would like to, as always thank you for being with us. It is great chatting with you and we look forward to seeing you soon.

Operator

Thank you for your participation. Your call has concluded, you may disconnect at this time.

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Source: EMC Corporation Q2 2009 Earnings Call Transcript
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