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Executives

Tony Takazawa - Vice President, IR

David I. Goulden - President and COO

Joseph M. Tucci - Chairman and CEO

Analysts

Maynard Um - Wells Fargo

Lou Miscioscia - CLSA

Alex Kurtz - Sterne Agee

Amit Daryanani - RBC Capital Markets

Ittai Kidron - Oppenheimer

Brian Marshall - ISI Group

Shebly Seyrafi - FBN Securities

Aaron Rakers - Stifel Nicolaus

Kulbinder Garcha - Credit Suisse

Andrew Nowinski - Piper Jaffray

EMC Corporation (EMC) Q2 2013 Results Earnings Call July 24, 2013 8:30 AM ET

Operator

Good morning and welcome to the EMC Second Quarter 2013 Earnings Conference Call. All parties are in a listen only mode till the question-and-answer portion of the call. As a reminder, this conference is being recorded. If you have any objection, you may disconnect at this time. I would now like to introduce your host, Mr. Tony Takazawa, Vice President, Global Investor Relations at EMC.

Tony Takazawa

Thank you. Good morning. Welcome to EMC's call to discuss our financial results for the second quarter of 2013. Today, we are joined by EMC's Chairman and CEO, Joe Tucci and David Goulden, EMC President and COO.

David will begin with a few comments on our results and provide a bit more detail and color around the factors contributing to those results. He will also discuss our outlook for the year 2013. Joe will then spend some time discussing his view of what is happening in the economy and IT and the progress EMC is making with its vision and strategy.

After the prepared remarks, we will then open up the lines to take your questions. Today, we are providing you with important new schedules that will help you understand the operations and results of the EMC Information Infrastructure business, VMware and Pivotal individually and in the context of the consolidated results. Within these schedules, you will find six quarters of results for each of these three businesses including revenues, gross margin and operating margin. This information is key to better understanding the dynamics of our business and reflects how we will be discussing our results this quarter and moving forward. The full schedules are available for download on the EMC IR website and the summary data is included within our slides today.

We are providing you with our updated projected financial model for 2013. This model lays out all the key assumptions and discrete financial expectations that are the foundation of our outlook this year. We hope that you find this model helpful in understanding our assumptions in context and in ensuring that these expectations are correctly incorporated into your model. This model is available as background in today’s slides available for download in the IR sections of emc.com.

Please note 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 in today’s press release, supplemental schedules, and the slides that accompany our presentation. 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 U.S. Securities and Exchange Commission.

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

David I. Goulden

Thanks Tony. Good morning everyone and thank you for joining us today. We’re making some improvements to the format of our conference call. We’re reordering our prepared remarks to include our overall results and financial position first. We’ll then discuss the progress of the three businesses that comprise the EMC Federation and end up with an update of our go-to-market model and our outlook. As you know, we have comprehensive disclosures with extensive detail on the many aspects of our business available with our release in the slide presented and on the web.

We already cover all these in our prepared remarks, we’ll spend more time on the primary results of our business and various puts and takes within the results, while still leaving ample time for your question. We think this approach will give you a better understanding of the major drivers of our business today, as well as those expect will be big drivers overtime.

Overall, our solid top and bottom line performance in Q2 continue to demonstrate the soundness of our strategy, importance of our federated business model, and the focus and dedication of an EMC team globally.

In addition to delivering a solid quarter, during the last three months, we formed Pivotal, including investors from GE, we announced a new capital allocation strategy which includes dividend and we completed a $5.5 billion debt offering, so very busy quarter. I want to extent my thanks to the entire EMC, VMware and Pivotal teams.

We achieved year-on-year revenue growth in the quarter of 6% to $5.6 billion, results of continued steady growth from our Information Infrastructure business, double-digit growth from Pivotal and accelerating growth from VMware.

All four of our major geographies grew as well, with North America up 4%, EMEA up 6%, APJ up 12% and Latin America up 12% from last years second quarter. Our BRIC+13 markets grew 18%, the result of our focus and investments within these faster growing markets.

With the increase volume from Q1, consolidated gross margins improved nicely by 120 basis points sequentially to 64.3% and were down 10 basis points year-on-year. If we exclude the one-time positive $9 million impact from the RSA charge reversal in Q2 last year, consolidated gross margins were up slightly year-on-year.

I think you’ll find the informative to look at the year-on-year gross margin performance of different parts of the business. Within EMC II storage products gross margin came back to last year’s levels, helped by ongoing mix shift but pressured by another backend loaded quarter. Storage gross margin were down 30 basis points year-on-year due to higher service costs.

EMC II gross margin were also impacted by the RSA charge reversal in Q2 2012 I just mentioned. Consolidated gross margin benefited from improved margins and increase mix from VMware.

Going forward we continue to expect consolidated gross margins to improve quarter-on-quarter for the rest of the year, so better in the second half than in the first half, and we continue to expect consolidated operating leverage for the full year will come from both gross margin and operating efficiency improvements.

Good cost controls and spending discipline held operating expenses in check and non-GAAP operating margin improved by 20 basis points from Q2 ’12. The increase investment supporting the build out of VMware’s capabilities around software defined data center, DCHS and end-user computing were balanced by major spending in the Information Infrastructure business.

We invested resource in several growth initiatives in the EMC II business such as XtremIO and ViPR, and also in Pivotal as lay the foundation for rapid expansion over the next few years. These investments notwithstanding we were able to expand operating margins in the second quarter last year and grow non-GAAP earnings per share 8% to $0.42.

First half free cash flow was $2.3 billion, approximately $500 million higher than non-GAAP net income. We remain on track to deliver $5.5 billion of free cash flow for the year.

We finished Q2 with $17.6 billion in cash and investments. This balance reflects the $5.5 billion debt offering we completed in Q2. We purchased $700 million worth of EMC stock in Q2 bringing by our buyback to $1 billion for the first half of the year. This leaves $2.5 billion of buyback to go by June 30, 2014 to meet our 18-month goal.

The EMC [ex-VMware] U.S. cash balance at quarter end was a little over $9 billion, over the next 12 month we committed about $5 billion of this to debt repayment, dividends and buybacks.

This is part of the larger capital allocation strategy we announced quarter, which includes repurchase of $6 billion of EMC shares over the three years ending December 2015, as well as the initiation of $0.10 per share quarterly dividend. We’re pleased to have paid our very first dividend just yesterday. Over time we expect to direct about 25% to 30% of our free cash flow ex-VMware to buybacks and about 20% to 25% to dividends. This framework allows the expansion of our cash returns to shareholders in sync with the growth of our ex-VMware free cash flow.

In summary, the net effect of gross and operating margin changes on EPS was positive. Various non-operating items such as tax rate and minority interest in the quarter were where we expect them to be. Noted increase to non-operating expense, including incremental interest expense related to our debt offering was roughly offset by the reduced share counts primarily stemming from our expanded share buyback.

In Q3, the interest expense fees associated with our debt offering will be about $35 million pre-tax in non-operating expense. The net results of always moving parts in the quarter was an incremental $0.03 per share on a non-GAAP EPS. David will demonstrate our ability to make required investments for our success tomorrow while still delivering returns today.

Our ability to deliver on the triple play to gain market share, reinvest for the future and deliver leverage has been strengthened by our federated structure. By dividing the strategy and executional focus between EMC II, VMware and Pivotal, we’re better able to focus each entity on their respective missions and set them up to succeed. Very importantly, this approach offers our customers horizontal solutions and more choice than they get from others.

It’s a unique business model that leaves each of the businesses free to build the products, go-to-market capabilities and ecosystems necessary to win and because the three share the same ultimate goal for customers, leveraging cloud, big data and trusted IT to maximize control efficiency and choice, their missions are clearly aligned. This is a powerful combination for customers. The federation also represents a portfolio of growth businesses that is well equipped for the industry transition to IT as a service. This approach captures the solid opportunities and growth of EMC’s Information Infrastructure business, the faster growing revenues of VMware as it executes on its focused strategy and the opportunity for hyper growth through Pivotal and its play in big and faster data.

Looking at each of these in turn, starting with our Information Infrastructure business, we continue to delight our customers and win new ones with our market leading storage portfolio. Storage revenue growth accelerates to 4% in Q2 driven by faster product revenue growth. Our high-end storage continued to show good growth and share gains. VMAX features are clearly relevance to a broader set of customers than we have traditionally served. Over three quarter of VMAX systems revenue in the quarter came from the 10K and the 40K and VMAX continues to add net new customers at EMC.

Growth in our Unified and Backup and Recovery portfolio improved from Q1. As expected, performance of our unified storage business was similar to last quarter. Our unified business was affected by the broad customer anticipation of the next generation VNX which is on track for major launch this quarter. We are confident customers and partners will be very pleased with capabilities, so stay tuned here. The improvement in growth was driven by our Backup and Recovery Systems business which grew considerably faster in Q2 than Q1.

As the largest data protection company in the world, EMC is creating new standards in this space and transforming backup so customers can better respond to the demand of their rapidly growing application and data environments. We laid the foundation for this with our protection storage architecture announcement two weeks ago and our brand new line of Data Domain products and new capabilities for our data protection suites, including better integration with applications, primary storage and optimization for VMware environments, means even greater scale for performance and integration than ever and represents a significant step toward delivering a full protection storage architecture.

Our emerging storage business grew a very healthy 39% in Q2 due to strong customer demand for our differentiated solutions, including Isilon, VPLEX, [IOPS] and our Xtrem flash products. These new technologies meet customers’ emerging needs as we build out their cloud embedded environments. VPLEX for instance is winning us new customers with capability that it alone is able to deliver, continuous operations for mission critical workloads over distance, in other words, full infrastructure utilization with zero downtime.

Isilon scale-out NAS architecture delivers an unmatched combination of performance and efficiency that make increasingly thoughtful for web-scale applications. In fact, iPhone has delivered almost 85 petabyte of capacity for single web-scale customer this year demonstrating the value its scale architecture can deliver.

iPhones stability verticals outside its traditional customer base is also gaining recognition. Revenue from FAST servers is doubling year-on-year in Q2. iPhones growth over the past year has been truly remarkable. In the first six months of this year, iPhones ships over half an exabyte.

Growth of Atmos also contributed meaningfully to emerging storage groups, strong growth in the quarter. More customers are seeking the globally distributed object based file storage that Atmos delivers and we’re seeing good adoption.

With the need for high performance in phase of massive data sets, more customers are implementing XtremSF Flash technology in the server environments. Improving the availability of server based storage, it is important to optimize this underlying infrastructure which is why we acquired ScaleIO early this month.

ScaleIO software which pool server storage across virtualize in physical environments will enable customers to build protected shared storage pools from whatever form factor exist in the server with SSDs, PCIe flash or hard disk drives. ScaleIO will become a key part of our Xtrem software suites.

The direct availability program of our all-Flash array XtremIO is exceeding our expectations and dozens of customers are now participating. Several customers have moved beyond the testing phase and have deployed XtremIO for their production environments.

We’re encouraged by this positive customer reaction. Our rigorous test in QA program is progressing and XtremIO is on track to GA before the end of the year. The growth in Q2 of each of our major storage portfolios underscores our conviction, the different storage technology required to meet the need of different workloads. Some like transaction processing require high levels of performance under advanced data management services.

Some like social media apps require minimum service levels that may need high performance levels while others on my archiving for instance may require capacity more than they do service or performance. At EMC, we have laid the folks while having the best-in-class solution across the spectrum and we are marketing technology across the board, we continue to gain share.

Our software defined storage platform, ViPR, which we announced in May adds further value to customer’s existing storage investments from EMC and from others. The ViPR controller allowed our diverse set of storage arrays to be managed in a standard and automated way. And the automation device controls provides, drives down IT cost and improves reliability.

We also recognized that the way next generation applications will be developed is different from the way the most traditional apps have been architected. And ViPR provides a set of data services including object and HDFS to allow for developments of the next generation, Big and FAST data applications including applications build using pivotal technologies.

The beauty of the ViPR architecture is that the control and data services will work with existing EMC arrays, third-party arrays and commodity storage, providing investment protection, flexibility and choice for our customers. The Early Adopter program that is underway for ViPR is in its final round and we’re on track to GA later this year.

Customers in the Early Adopter program are very happy that ViPR is delivering points to simplify managements. They are telling us they like how easy it is to deploy and how easy it is to use. They like that it works in heterogeneous environment. In fact, the advantage is all investments they’ve made in storage infrastructure and they like the vision.

ViPR solved the problems they have today and provide them a path to the future. Just as ViPR is an enabling technology for next generation in Cloud-based architectures so to is security. The agile intelligence security technology offered by RSA helps give organization the confidence from growing strengths towards mobile, social and cloud.

Overall, RSA revenue grew 3% in Q2 year-on-year. Our security analytic suites and compliance offerings show good growth. But the overall growth was impacted by two factors in identity and data protection. The first was our focus on customer migration, more than custom acquisition for our new highly claimed authentication manager 8.0 release. The second was due to timing of some large deals.

We expect stronger performance from our identity and data protection offerings in the second half. The growth of web-based applications, cloud architectures and mobile computing driving a transformation of authentication and identity management. RSA has recognized this trend and is investing in next generation authentication and identity access managements. The acquisition of Aveksa, a leader in identity and access governance, is a major step in that direction. And with the addition of Aveksa technology to our existing strong authentication portfolio, RSA can develop access governance for risk and activity based authentication and authorization. The result for customers is a more effective way to manage access to the business as the line of business owning the data rather than IT is given the power to make access decisions within the controls, processes and policies defined by information security.

Our Information Intelligence business continues to make progress and it’s transitioned to more cloud friendly offerings and vertical based solutions. While total future revenue was in line with comparable period last year, we saw a good growth for our new initiatives. Syncplicity was once again ahead of plan and earlier this month was positioned as the leader in the most recent Forrester report on file sink and share platforms.

The strong results VMware achieved this quarter speak the strategic position it holds in customers and partners data centers. The broad success we’re achieving across the three strategic pillars of software defined data center, hybrid cloud and end user computing is due in part to customer designs to undertake these initiatives with an existing trusted virtualization partner. VMWare consistently garnered the highest marks in customer satisfaction and net promoter scores and with over 500,000 customers using VMWare to run almost 40 million virtual machines this ability to delight customers is meaningful.

With an ever growing portion of license bookings coming from (inaudible) on standalone vSphere such as vCloud Suite, vSphere with operations management, the management and automation and end user computing is clear that VMWare’s expansion beyond several virtualization has gaining traction. VMWare’s recent launch of vCloud Hybrid Services furthers the opportunity for growth. The ability to see seamlessly extent private cloud to public cloud with vSphere as a foundation is very encouraging to customers and as a result we’ve seen strong interest in the early access program. While early and still maturing, OpenStack is the framework for customers to construct their own clouds, VMWare is expanding its market opportunity and so a good growth from these customers with its best in class components integrating into this framework. In particular, VMWare’s network virtualization platform is the leading software solution for OpenStack networking. All this has of for fantastic opportunity has for VMWare and its customers and with a line share of early renewal opportunity in the second half and with an exciting set of announcement planned for VMWorld, VMWare is highly energized and well positioned for the acceleration revenue growth we expect to achieve in the second half.

Pivotal made very good progress since its formal launch with a new company within the EMC family and with a significant investment from GE. The Pivotal team is building a new platform comprising next generation data fabrics, application fabrics and a cloud independent path layer. Pivotal announced during the quarter to the version of this platform for next generation big and fast data applications called Pivotal 1 will be launched before year end. Customer interest in Pivotal remains intense and we’re also actively engaging ours in the industry, in fact this morning Pivotal IBM for our press release on the work that they’ve been doing with Cloud family and the intention to work together to expand the ecosystem. Pivotal’s existing prox such as the Greenplum Database and the GemFire in memory data grid continues to score significant design wins particularly in the telecommunications, rental services, eCommerce and healthcare spaces. These factors all board well for Pivotal’s future growth. As we explained in our strategic forum 2013 will be a year of transition for Pivotal and we continue to expect revenues of about $300 million this year as we position Pivotal for rapid growth in 2014 and beyond.

As we’ve been building the federation and adding assets to strengthen the offerings across our businesses, we’ve also been developing our go-to-market model to enable customers to get the full value from these offerings in their preferred way. The work we’ve done with would converge infrastructures and recons architecture is clearly paying off. As IT headcount is growing at a fraction of the pace of data and as we demand from the data center, customers are looking for simple and scalable ways to build our IT-as-a-service and both Vblock and VSPEX meet these needs. Customers wanting a complete plug-and-play Cloud in a box leveraging best of breed technology from VMware, Cisco and EMC favor a Vblock from VCE. VCE has an excellent quarter as demand for Vblocks grew more than 50% year-on-year with roughly half the orders coming from repeat customers and the balance from brand new accounts just getting started with Vblocks.

We are seeing initial Vblock purchases by new customers growing in size and in a number of systems as converged infrastructure becomes a more accepted paradigm because of this. There is a good mix of service providers and Enterprise Data Center implementations as a value proposition of the Vblock converged architecture is strong for both.

Customers seeking more flexibility with referenced architecture look to VSPEX and more and more are doing just that. VSPEX is a resounding success with over 3,600 VSPEX systems sold since just last April. In other words, in less than half the time we have more systems been sold than another less flexible referenced architectures been on the market for several years. The programs makes it easy for partners to sell EMC and with over a further of total VSPEX systems sold coming in Q2 alone which is clearly gaining momentum.

The EMC Cloud Search provides a partner program continue to expand in Q2 with more partners added in the period and dozens more approved in being onboard. Revenue growth once again exceeded 40% over Q2 of last year with strength across all our major GAs. Our service provider partner program is a great example of the value EMC brings to table when it comes to IT as a service and service providers continues to be our fastest growing vertical market segments.

With these different choices to customers, the backing of world class services, tight integration with VMware and link to brand new possibilities through pivotal, EMC helps organizations transform confidently towards IT as a service. When you look across our company, the technologies that we offer is powerful when connected together.

It’s also powerful because it is horizontal and it is build to provide the choice that is one of our fundamental value propositions. We are confident that as customers continue to modernize their IT by leveraging their application infrastructures they have in place today and building out new platforms for future, EMC will be a key partner.

Looking towards the second half with the recent launch of our new Data Domain line, major launch is ahead of us for VNX, ViPR and XtremIO, an increasing momentum from VMware, we are reaffirming our expectations for 2013, namely that we expect EMC revenues to grow 8% to $23.5 billion. Non-GAAP EPS to grow 9% to $1.85 per share and free cash flow to grow by 10% to $5.5 billion.

Our robust product roadmaps, the success we are seeing across our go-to-market initiatives and the positive response from customers for our market leading technology have us very energized and highly focused on seeing the opportunities that lie ahead.

With that I will turn it over to Joe. Joe?

Joseph Tucci

Thank you, David. I would like to welcome everyone to today's conference call. Thank you for joining us. Overall, I am very pleased with our Q3 results and our execution. Especially so, given the uncertainties that still exist in the global economy and the resultant continued tightness that exists in macro IT spending. This IT spending time has exhibited itself once again in a very back-end loaded quarter.

As in the past several quarters, customers are being very cautious with their IT spend and are subjecting potential IT purchase orders to more scrutiny, tougher ROI hurdles and in many cases requiring a higher level of executive examination resulting in elongated approval processes. The good news for EMC is that we expect this phenomena and as such, we have been in higher inventory levels put additional resources in our factories and in our order support and we had the feel preconfigured hardware. Thus we’re able to manage through a quite late Q2.

The bad news is that these processes are less sufficient, more costly and thus hurt our gross and operating margins. That said, and again I repeat, I believe we performed very well especially when one compares our organic growth profiles to that of our peers. I am very proud that approximately 60,000 talented people for EMC VMware and Pivotal. I would like to probably thank them for their hard work and dedication they exhibit everyday.

I would now like to give you a little more color on the quarter. On a geographic basis, we experienced 4% growth in North America, 6% growth in EMEA, 12% growth in both Latin American and APJ with growth in Asia Pacific excluding Japan at 18%. Japan grew at 6% on a constant currency basis and they exhibited 18% growth in your BRIC+13 countries.

Looking at our year-on-year Q2 results from a vertical market perspective, we saw a straight and high growth with our service providers and in healthcare. We had good growth in a public sector markets including our U.S. Federal business. Our business with financial service in Pivotal was flattish within that banking was weaker.

As we look into the balance of 2013 and we still believe IT spending growth for the full year to be in a 3% range. Against this 3% we continue to expect our topline to grow 8% this year, while producing some leverage target on non-GAAP EPS to grow by 9% and grow free cash flow by 10%.

Our confidence of 2013 stems from our belief in our ability to accelerate growth in the second half of this year. Our confidence/ability is underpin by our winning cloud, Big Data and trusted IT strategy, by our unique innovative federation model under which we assure our cloud Big Data and trusted IT strategies are fully aligned among EMCII, VMware and Pivotal, but that each entity is laser focused on a set of clear defined missions given each of them the charter to build the products, go-to-market capabilities, and ecosystem necessary to win.

To refresh your memory, Pivotal is focused on building a platform for new cloud, Big Data and fast data applications. VMware is focused on building a software defined data center that will cover private, public and hybrid clouds and on solving the demands for end-user device management, automation and security in the PC era.

And EMCII is focused on providing information storage of protection, information security and information intelligence for existing and new cloud and Big Data infrastructures. EMCII’s new and existing initiatives are out Flash, scale-out NAS, Atmos, WIPER, and HDFS position as well to capture these new opportunities.

And the best news is that come from interest in and receptivity off these strategies on our federation model is very high. Additionally, and very importantly, it will give us confidence on our ability to accelerate our growth in the second half of 2013 and achieve our goals as a strong product portfolio of exiting products which we will launch over the next few months.

Again, thank you very much for being with us today. And I would now like to turn it back to Tony, to moderate the Q&A portion of today’s call. Tony?

Tony Takazawa

Thanks, Joe. Before we open the lines for your questions, as usual, we ask you to try and limit yourself to one question including clarification. Thank you all for your cooperation in this matter. Kevin, can we open up the line for the first question please.

Question-and-Answer Session

Operator

(Operator Instructions) Yes, sir. Our first question today comes from Andrew Nowinski with Piper Jaffray. Your line is open.

Andrew Nowinski - Piper Jaffray

Good morning. Congrats on nice quarter. You guys are seeing a broad strength across here in clear portfolio including the high end, the midrange, and backup. Like, I was just wondering, are there any wins or color that you can provide that you can provide to support the notion that EMC is displacing the competition that’s in the large enterprise and service provider customers leveraging the comprehensive nature of your portfolio? Thanks.

David I. Goulden

Andrew, let me start. This is Joe, I’ll had some color. First of all, we absolutely believe that we are taking share. So you look at us again in the industry we’re doing very well, you mentioned all those segments. I gave you a little bit of color in my commentary about, for example, Web Scale customer that has purchased 85 terabytes of Isilon so far, this year obviously a very major investment on their behalf and a key customer for us.

I’ll also cross on major customers and we’re in the middle of significant roll out via all those key technologies. Obviously, as all the customers preferred to not go public with those statements so I can guarantee you that the number of big wins that we are seeing is definitely increasing as you’ve mentioned across the portfolio, no just enterprises, but also SPs and also by geography we’re in a pretty strong position right now.

Unidentified Speaker

I think, you covered it well David, I mean, you got to look at applications, there are applications that need tremendous functionality, high functionality. There are applications which need storage to have great performance. There are applications which need storage to have just great capacity and low cost. So basically if you look at that, you kind of come out with four quadrants and we’re the only ones out that I know that are building significant products for all four quadrants and building the ecosystem and the set of technologies out of WIPER, out of Flash, to pull those four quadrants of technologies together. And that’s the winning formula.

Andrew Nowinski - Piper Jaffray

Great. Keep up the good work.

Operator

Our next question comes from Kulbinder Garcha with Credit Suisse, your line is open.

Kulbinder Garcha - Credit Suisse

Thanks. A question for David and one for Joe. David, on the gross margins, if I look at the Information Storage business, ex-Pivotal, it looks like year-on-year in the first half gross margins have been actually slightly down. I am just wondering that I just previously had the view that you could gain share and expand gross margins in that segment, given high-end, mid-end and mix higher software touch. How we perhaps can you tell at that point and maybe from (inaudible) much more ahead or can you speak about some of the dynamics around why that may continue?

And then for Joe, various kinds of last year you mentioned that people maybe under investing on the storage side given the level of data growth. And just the reacceleration in growth this quarter and maybe present any collection and we’re going to see some of that on the spending come through and revenues for you guys over the next 12 months. So how do you -- how confident do you feel about that? Many thanks.

David I. Goulden

All right. Kulbinder thanks. Let me start. Obviously, we’ve given you a fair amount of color on what’s happening in gross margins. I think it’s important to actually look, not just at infrastructure but with the detail we given you in the software management schedules. We’ve announced any directionality by quarter what’s happening in information storage, information intelligence and RSA security. So the biggest factor I think we’re focusing upon is what’s happening in Information Storage. And as we’ve mentioned in Q1, we saw some pressure on the product gross margins due to just revenue growth and also the timing of quarter end.

The good news is, as I mentioned in my prepared remarks, this quarter Information Storage product gross margins came back to what exactly where they were last year which is a good thing, because we have positive impact from mix but we still have the pressures that we have in Q1 related to a late quarter.

So I feel good about that trend and this quarter within Information Storage, we saw some build up in service cost that brought our overall Information Storage segment down a little bit. So the good news is the Information Storage product margins bounce back. We saw positive mix and we still see the opportunity for mix improvements going forward. We do expect to see margins improve sequentially throughout the year, both in total and in information infrastructure and in Information Storage.

The other thing that happened this quarter that I mentioned in a couple different places is if you look at the RSA segments, you’ll see that this quarter year-on-year, it looks that gross margins are down a fair amount and that’s due to the effect of last Q2 of the $9 million charge reversal as we closed out issues related to the breach. So we’ve given you a lot more information to dig into it. And so we’ll give you more color upon each segment as we go through the year.

Joseph Tucci

Yeah. I think Kulbinder you are asking me more of an industry general than EMC specific in storage and I’ll answer that way. If that’s wrong, come on back. (Inaudible) now is that what you are after?

Kulbinder Garcha - Credit Suisse

Yeah. Basically, I am trying to understand, Joe, that there is a perception out there and we have this as well but there is an under investment happening in storage just given the data growth. It has decelerated the entire industry and for you guys as well. And I am wondering that you guys have sense with the inflection growth you saw this quarter in your business and just the level of under investment that may have happened. Maybe people have to do an element, let’s saying casual spending as we saw in ‘09 and ‘10, we know that stage in the industry and budgets, that is going to remain tight for some time?

Joseph Tucci

Sure. I think there’s two ways to look at it. And I’ll give you both ways. First of all, I absolutely believe that the economy and the slow growth IT spend overall is the biggest impact and especially when you look at what’s happening in portions of India and Japan. For sure, we also see customers elongating their upgrades like they are keeping their hardware longer and trying to get more value out of it that way.

Also, the industry has produced a tremendous amount of technology for efficiency and optimization of storage, things like thin provisioning, the deduplication, compression of data, advanced technology, fully automated storage sharing. All these things are helping get tremendous more value.

The advent of flash helps a lot too because you can, again if we take flash and fast that that really helps customers a lot get both efficiency and optimization of storage. So there is a lot happening there and of course that will -- the basic information is going to grow over time.

If you look at the environment itself, I think it will be similar to what we saw but I do expect you’ll see a slight pickup in just aggregate storage. You also got easier year-on-year comparison for the industry as we’re going through second half. If you take IT growth in general in the first half, I’ll just take easy numbers, positive IT spending in ’12. In the first half of ‘12, it was over 3%. And I’m quite positive that IT spending overall in the second half of ‘12 was under 2%. I’m sure the people that gave you more precise number specific. So obviously we’re facing – the industry is facing easier comparison, so is EMC. And then, of course, when we look at ourselves, I think will help or propel some of our growth as our product cycle and exciting new announcements we have scheduled.

Kulbinder Garcha - Credit Suisse

Thank you.

David I. Goulden

Next question please.

Operator

Our next question comes from Aaron Rakers with Stifel Nicolaus. Your line is open.

Aaron Rakers - Stifel Nicolaus

Yeah, thank you for taking the question. I guess, Joe, building on that last comment about product cycles and in particularly focusing on the upcoming VNX refresh, as you look at the second half set up in terms of the absolute increase in revenue, how would you characterize this refresh and the ability to reaccelerate that mid-ranged growth range relative to what historically had been talked about as being kind of a double digit growth rate. How meaningful architecturally is this refresh to you guys in the back half of the year?

Joseph M. Tucci

I think it’s definitely meaningful. Let me – because David runs that business. Let me let him comment and I’ll add a little color at the end.

David I. Goulden

Yeah, Joe thank you. So we had a couple of upbeats going on this year, both of which are helpful. So in the first half, you’ve seen that we’ve had a strong product cycle coming from 2012 into 2013 in the high end and that’s given as strong growth rates in the high end relative to our long term trends, which has helps us in the first half. Obviously, in the second half, that’s now we are well beyond the year after that major launch. So that will start to tilt a little bit. And then, to your point in replacement of that, we’ve got the product cycles coming in mid-tier category obviously from a revenue point of view, the Data Domain platforms that we have just launched would be available for the entire second half and the to-be-launched VNX that will be available for a less in the entire second half a little bit over four months. So those are going to kind of ramp up as the high end and ramps down. The other thing I’ll point out to you relative to acceleration is, you’ve also got another thing going on, which is the year-on-year compare that, Joe, mentioned earlier.

We expect it and we still expect this year to progress normally sequentially in terms of the contribution for the first half and the second half. So if you look back over time, we typically do 47% of our revenue in the first half of 53 and in the second half. And if you look at actually what we achieved in the first half, it’s exactly 47% of our goal of $23.5 billion. So you’ve got these product cycles happening and they do offset each other a little bit and clearly very important for the second half as to make sure they mid-tier product cycles kick in. Then on top of that we’ve got things like Viper and XtremIO. But totally, if you look at the year, it’s actually quite balance in terms of the sequential progression. So I hope that gives you a little bit of color about those different factors.

Aaron Rakers - Stifel Nicolaus

Thanks.

David I. Goulden

Next question please.

Operator

Our next question comes from Shebly Seyrafi with FBN Securities. Your line is open.

Shebly Seyrafi - FBN Securities

Yeah, so thank you very much. So for you Pivotal segment, it had a deceleration to 11% from 57% at Q1. Can you talk about your growth expectations in that segment going forward? And separately, can you talk about the riskier areas to a lot of industries; China, Europe and Federal, you did well in all three last quarter. But what’s your expectation going forward in the second half? Thanks.

Joseph M. Tucci

I’ll take the Pivotal and I’ll give it to David on the China, Europe and Federal.

First of all, I want to say that Pivotal is performing so close to their plan. It’s unbelievable. If you’re internally, it almost look like we – the plan and the actual, it’s almost the same. So we’re very pleased with the way Pivotal is progressing. This is a positioning here for Pivotal. This is a big investment year for Pivotal. The big thing from the product point of view is to get this Pivotal One platform out and we’re focused on that, a big, big milestone for Pivotal as we’re watching. And I can tell you, I’m incredibly pleased with this one, is are we getting the light house wins and the big accounts across the set of industries which we think are important and I could tell you we are in space.

PS margins are very low, dragging it down. The reason there is we’re building up like crazy, right. So PS margins – you can always put a technologist in, but then it takes you a while to get revenue out off the other end. But we’re over staffing and building the talent because that’s how we’re going to win. And again, while the future will be a cloud based platform, we still sell a lot of appliances today. We’re exceeding the markets whereas appliances are low. So really, the Pivotal growth last quarter was exceedingly good – this slowdown. I think you’re going to look at it the whole year and we told you we expect that to be a little bit over $300 million for the year, that’s I believe that’s where it’s going to come in. But the more important things, are we going to get out Pivotal I, are we going to get those lighthouse win, are we going to build the team to win and the answer is yes, yes and yes.

And I think as David mentioned, IBM joining CloudFoundry. I think is really, really positive for the industry and that will expand the CloudFoundry ecosystem contributing to -- contribute technology and plan to use the CloudFoundry in their own application development there.

So, Pivotal is, I couldn’t be more pleased with Pivotal, I really couldn’t. So it’s the way we set the plan, not from maximum revenue growth there but to get those things I just talked about [Dan]. Do you want to talk about China and Europe and federal, David?

David I. Goulden

Yeah. Sure. As always, we are not going to give you guidance for specific regions but I would tell you that, obviously the third quarter, basically a strong quarter for federal, I think the first year end despite the pressure there, we do expect to see decent success in federal this quarter.

China is relative underweight for us compared to perhaps some of the bigger players in the industry, so we are more impacted by our ability to gain share, obviously the macro impact of was a little bit but it still a region is growing, one of the fastest amongst, they will.

And Europe, we saw some bright spots this quarter. We saw a growth in Europe. We saw it was accelerated from Q1. We saw improvements relative to Q1 in U.K, Germany and Eastern Europe. So those are all markets that bode well for us for the balance of the year. So I don’t want to get tide down to specific guidance numbers like data. But I do think we are going to continue to be fairly balance as we go throughout the rest of the year.

Shebly Seyrafi - FBN Securities

Thanks.

Tony Takazawa

Thanks. Can we hold it to one question, please moving forward?

Joseph Tucci

You are setting Tony.

Tony Takazawa

Don’t make me make you pick one. So, next question.

Operator

Yes, sir. Our next question comes from Brian Marshall with ISI Group. Your line is open.

Brian Marshall - ISI Group

Great. Thanks. Here comes one question. Yeah. We’ve been monitoring the SPF (inaudible) fund storage space for quite sometime. I think the acquisition of [CLIO] is pretty interesting. But I think the only product that you guys currently offer from a decoupling standpoint of software, from hardware is Atmos?

Can you talk a little bit about what the customer traction is with this strategy of decoupling and what are you just Atmos software, and perhaps what are the issues from a qualification, the maintenance, the service perspective, if you can give any color there that would be great? Thanks.

David I. Goulden

Yeah, Brian. Sure. I mean, first of all, before I answer the question specifically, I just want to go back to the workload chart that we showed earlier on, because workload are very important, after all storage systems, in fact all IT infrastructure exist to support workloads.

We’ve got to understand where the software defines storage or the decoupling as you say is going through potential play, not going to play of transaction mission critical workload because of the time integration people need and support environment and data services, while we do see it playing is in some of the new applications are potentially server-base or scale out environments like Atmos.

So to answer your question about Atmos, its quite interesting for us, I think quite insightful. We do offer and have offered Atmos all either a software bases or basically buying, we called HAWQ hardware which is basically very dense commoditized package of hardware from EMC. And we give customers the choice and we’ll give not choice on scale, we’ll give not choice with ViPR data services and we also have things like VPLEX available as a software-only solution as well. So it’s not just an Atmos so the longest experience is with Atmos.

Basically thing is in the vast majority of cases, I’d say in the vast combination cases, customers choose to buy the both parts of the solution from us, because they want the support, they want the integration, they want the qualification that we do.

Now some customers do go and buy their own and choose rates upon hardware they put together and obviously we support them the best we can, we have well published ATI’s, et cetera to communicate between those two ways. But our experience is so far, that given the choice most customers would like to buy the two together.

Brian Marshall - ISI Group

Thank you.

Tony Takazawa

Thank you, Brian. Next question, please.

Operator

Next we have Ittai Kidron with Oppenheimer. Your line is open.

Ittai Kidron - Oppenheimer

Thanks and maybe its one question with two parts.

Joseph Tucci

Thanks.

Ittai Kidron - Oppenheimer

And both focus on the gross margin side. Can you talk about the gross margin in Pivotal longer term, where do you see that converging to because it seems like there is a lot of volatility there? I assume just by adding the pieces moved around but maybe if you can help us think about the longer term perspective?

And second David regarding your comments on the sequential improvement in gross margin in the storage business, just considering the headwinds that you had on gross margin this quarter with the extra cost that you had to incur during the backend loaded quarter. Should we interpret that commentary to mean that the VNX introduction is actually going to be very early in this quarter, meaning you know that you have that problem this quarter?

David I. Goulden

Okay, let me take the two parts. So Pivotal gross margin I think as you correctly say, they’re all over the place and they will be that way as we move through 2013. We’re repositioning a lot of the resource. We have 1250 people roughly came in Pivotal where a few more are hired in that. We’re building out a strong professional services and capability. Obviously we’re not fully utilizing all those people, so the gross margin’s there. I don’t know what they will be when the business ramps up to scale. From a product point of view there’s a lot of integration and positioning, so we are selling a number of things like Greenplum and GemFire. But a number of the other products that are coming in are being repositioned.

So you really shouldn’t read too much into any particular line item on Pivotal this year. We’re on track for 300 plus a little bit of revenue. And as we get Pivotal One to market which is more of a combined IP platform, we go into 2014, you’ll see a higher mix of the revenues coming from licensing and IP and also we’ll hopefully see ourselves getting better utilization on those services. So those are the things to look out from Pivotal. But I think you’ll drive yourself crazy if you try to understand in 2013 what’s going on, on a particular line item. As Joe said we’re on track. We have a business plan with Pivotal which requires about $400 million of P&L investment up through breakeven and we’re on track within very, very close measure on that.

On storage yes, we are pleased as I mentioned with a sequential increase in margin in storage; in particular, in storage product margins. I would say that obviously as you correctly pointed out, some of the buildup in inventory at quarter end was to do with just managing through a backend quarter. Others were related through due to getting ready the launch the new platforms and VNX will be available this quarter. It won't be available for the entire quarter, but will be available this quarter and I expect a major launch and some of you may have already picked up. We’ve already started some of the partner training and internal training around the new VNX launch.

Ittai Kidron - Oppenheimer

(inaudible)

David I. Goulden

Next question please.

Operator

Thank you. We have Amit Daryanani with RBC Capital, your line is open.

Amit Daryanani - RBC Capital Markets

Thanks a lot. Good morning guys. Could you maybe just talk about if you’re starting to public cloud options like AWS and Microsoft as you’re in the field from a competition perspective and then so maybe if you can just talk about what sort of workloads are they typically going to win and is that competition relegated more or less to the SMB (inaudible) are you seeing that enclosing the large enterprise? Thank you.

Joseph M. Tucci

I’ll start and David could give it color. You see it across version SMB in a larger -- primarily they’re doing things a lot. We call them shadow ID. They’re doing a lot in say, areas like development. We think – our approach that we’ve launched VMware called the VCHS, the Virtual Cloud Hybrid Services, it’s being well received by customers. Of course on the Pivotal layer, we’ve taken approach to be cloud agnostic. So it’s obviously a trend, the cloud is going to be a big trend. We believe that read both public and private and the winning is going to be choice and hybrid clouds and we think we’re well positioned and driving a lot of the change in this industry.

Yeah within the storage business specifically, the service provider segment, people who are putting up business class clouds, , obviously a different sort of bells and many cases, different price points when I was in and -- it’s our fastest growing segments. We believe that customers are going to want a range of cloud capabilities that will be with a small handful of cloud players who choose to roll their own, but a lot of the others, in fact the vast majority of players out overtime, they’re going to want to partner with technology companies with sum some of all their stacks.

So we’re very encouraged by how quickly that follow-up isn’t just growing right now.

Operator

Next we have Alex Kurtz with Sterne Agee. Your line is open.

Alex Kurtz - Sterne Agee

Yeah. Thanks, guys, for taking the question. Just a follow up on that last question about the service provider business; last night, BMR sort of talked about strong growth in bookings from the service provider program. Can you give us any more detail about contribution to the overall business, the core business around service provider and how do you think about, from a field perspective the shift between between an EMC rep selling a service provider often on service versus selling the product directly on premise and sort of how you weigh that in the field?

David I Goulden

Sure Alex. Relative to the second question for our partners who are part of our official service provider program, different class of silver, diamond and platinum. Performance in that program, we actually have our field in center to be essentially neutral whether the equipment is sold on-premises or via NSP. So we have a program in place obviously, we need to like no one SP is selling but if it’s in our partner program than the field is come to neutral which is very important because we don’t want to be competing against RSPs with the capital sales the way the customer wants to go.

In terms of the FT business, as I mentioned, our fast-growing vertical again is over 40% growth in the quarter. It was 44% growth in Q1 as well. And it is not in our top three verticals yet but it’s rising up the important stack rapidly.

Alex Kurtz - Sterne Agee

Thanks.

Tony Takazawa

Thank you. Next question, please.

Operator

Our next question comes from Lou Miscioscia with CLSA. Your line is open.

Lou Miscioscia - CLSA

Okay. Thank you. You said some very interesting products coming out in the Flash side. I though XtremIO is going to be available in the third quarter. But I thought your comment this morning was that by year-end and I know it’s out with direct availability. Maybe you could just talk about bad debt and also on the server side, PCIe Flash is also extremely interesting. Maybe you’ve also have some beta testing there. If you could give us some update on both sides. That would be very helpful? Thank you.

David I. Goulden

Lou, certainly. XtremeSF, the server side flash is actually shipping. And we are very pleased with how that has moved forward. What we’re seeing right now for used case point of view is much more customers are using in a caching environment and they are in a primary storage environments but with the addition of ScaleIO software provider with additional data services, we do see some additional opportunities are opening up for us in the server storage, the primary storage world.

But today most of the PCIe’s XtremSF is being sold without storage arrays and server charge, cache there which is adding a low value. XtremIO, I don’t think we’ve ever been specific. We’ve always said second half. I think people may have implied 3Q but never actually given a hard day for what we are doing now as you know. We have the direct availability program where customers can actually buy the product today and are buying but we’re basically not same to be used in all these cases.

That’s little bit of a used case aperture later on in the year and it will firmly be in this year when we ship the product to GA. So it is actually in the market today. People can buy it and they expect that GA to happen in Q4. So we’re excited about that opportunity. I think the Flash portfolio offers interesting additional market for us. I’m excited about that combination of XtremeIO, ScaleIO and the XtremSF Flash capability.

Tony Takazawa

Thank you, Lou. And we have time for one more question and then some concluding comments from Joe.

Operator

Our final question comes from Maynard Um with Wells Fargo. Your line is open.

Maynard Um - Wells Fargo

Hi. Thanks. I just have a question on workload trends. You obviously address the broad range of workloads with your portfolio but are there any particularly workload that have seen greater growth than others and are those shifts having any impact on your other products. And I’m curious because in an ideal world, customers are buying all the storage they need but in reality, IT dollars are limited. So I’m just wondering what areas are seeing strength and at the expense of what other areas. Thank you?

Joseph Tucci

It’s Joe. If you take a look at that major update that David laid out. The high functionality, the high performance, the lower functionality, the capacity, we’re selling products on all those. I think it’s more of a timing of announcements that has held all others back. The VNXe -- VNX2 launch that David alluded to this quarter is important for us and that fills the gap that we had on that chart. David you want to…

David I. Goulden

Yeah. I think just take it how the folks navigate that chart. All you see the high end, the Symmetrix very much folks have form the transaction-oriented market place. At the top right end corner, we’re seeing growth there as we talked about. As Joe mentioned VNXe will be -- VNX2 sorry will be a mid-tier transaction origin platform for (inaudible) and we’ve not been growing that in the first half. We do expect to grow that in the second half. We mentioned how well we’re doing moving down to more and more of the scale out in both Isilon and Atlas and we’re seeing a good growth in both those platforms. We also mentioned that how on this BRS portfolio – that showed good growth in the second quarter, despite not really having the new line that comes to market that’s actually shipping now.

And then you’ve got the performance is with Flash. Joe said in the first comment, one of the views of our portfolio and our strategy and it’s absolutely unique as we are the only storage vendor that can take that whole transaction workload chart and put the best of three platforms across the entire portfolio. When you tie that together, what we do is we VIPER and this is kind of really why I think customers are sitting up and taking note as EMC as very different.

Maynard Um - Wells Fargo

That’s great, thank you.

David I. Goulden

Well, thank you all for joining us today. In summary, we across EMC Federation strongly believe that our cloud, Big Data, trusted IT strategies are right on and they’re being very well received by our customers and partners. Customers love the fact that we’re giving them choice. Over the next several months, we will launch a significant number of very exciting and timely new products. We have a great team and we have that all important momentum going for us. And there’s a lot of excitement in the company about our prospects to grow and take share in the second half of 2013 and beyond.

So again, thank for joining us today. We’d really appreciate your interest in EMC and I wish you all the best.

Operator

This does conclude today’s conference. Thank for joining. You may disconnect at this time.

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