E M C Corporation Q3 2009 Earnings Call Transcript

| About: Dell Technologies (DVMT)

E M C Corporation (EMC) Q3 2009 Earnings Call October 22, 2009 8:30 AM ET


Tony Takazawa – VP, Global Investor Relations

David Goulden – Executive Vice President, Chief Financial Officer

Joseph Tucci – Chief Executive Officer


Aaron Rakers – Stifel Nicolaus

Benjamin Reitzes – Barclays Capital

Alex Kurtz – Merriman Curhan Ford & Co.

Mark Moskowitz –J. P. Morgan

William Fearnley – FNT Equity Capital

Ghai Rajesh – Thinkequity

Paul Mansky – Cannacord Adams

Douglas Ireland – J. P. Morgan

Troy Jensen – Piper Jaffray

Jayson Noland – Robert W. Baird

Robert Cihra – Caris & Company

Kaushik Roy – Wedbush Securities


Welcome and thank you for standing by. (Operator Instructions) I’d now like to turn the conference over to your host for today’s call, Mr. Tony Takazawa.

Tony Takazawa

Good morning. Welcome to EMC’s to discuss our financial results for the third quarter of 2009. Today we are joined by Joe Tucci, EMC’s Chairman 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 the rest of 2009. Joe will then spent some time 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 lines 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. A reconciliation of our non-GAAP to our GAAP results can be found in the disclosure today in our press release, supplemental schedules and slides that accompany our presentation. All 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 the results, I refer you to our financial release from our site.

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.

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 Goulden

Good morning and thank you for joining us today. I’m pleased to announce that EMC achieved solid Q3 results with revenues of $3.5 billion, up 8% from Q2. Non-GAAP EPS is $0.23, up 28% from Q2 and free cash flow of $745 million, up 86% from Q2.

It’s encouraging to see our focused efforts resulted in good sequential revenue growth, improving profitability and strong free cash flow in what continues to be a challenging economic and IT spending environments.

Within these results our EMC information infrastructure business achieved $3 billion of revenues and about $0.20 non-GAAP EPS. EM also had a solid third quarter contributing $489 million of revenue or almost $0.04 of non-GAAP EPS for EMC.

Results that I would like to particularly highlight include solid overall performance on both a consolidated basis and for EMC information infrastructure, evidence of our model and good execution.

Improving both in North America, especially in storage are encouraging signs. Profitability has improved sequentially, a sign of great cost control efforts by EMC and VMware employees. Excellent free cash flow generation demonstrating the strength of our financial model and what looks to be an increasing stability in IT spending, this is important for obvious reasons. Overall, there’s a lot to be positive about in this quarter.

This morning, I’m going to make some comments about the Q3 spending environment, our business outlook for the rest of the year and some more specific details from our Q3 results.

As you may recall during our Q2 report, we noted that IT spending was becoming more stable and predictable heading into the second half of 2009. While we did not expect a big pick up in the economy or IT spending plans, we believe that customers are becoming increasingly confident about spending their budgets.

What we experienced in Q3 was in line with our expectations in this regard. There has not been a noticeable improvement in IT spending plans for 2009, but we did see customers continue to move forward and spend more of their budgets. There was steady customer activity with a more normal ramp during the quarter similar to what we saw in Q2. This is good to see.

Based on what we’ve seen through three quarters this year, things are playing out pretty much as we expected so our view of the environment remains unchanged. While second half IT spending is showing more of a normal seasonal progression in Q3 and Q4, it’s coming off a very weak first half.

As a result, when all is said and done we still expect overall IT spending to be down very high single to very low double digits for the full year 2009.

More specific to EMC, this second half improvement is a positive sign that customers are getting more comfortable spending their budgets. Our Q3 results are evidence we have the right business model and the right portfolio to do well in these challenging times and give us increased confidence in the remainder of 2009.

As a result, we now expect to achieve Q4 consolidated revenue of approximately $4 billion and non-GAAP EPS of $0.30 which will result in 2009 consolidated revenues of approximately $13.9 billion and non-GAAP EPS of $0.87 for the year. Note that these non-GAAP EPS expectations reflect $0.01 of additional dilution due to a slightly higher Q4 share count of about 2.12 billion.

Now let’s take a closer look at some of the financial highlights from the quarter. EMC information infrastructure revenues were $3 billion, up 8% sequentially. Within this number information infrastructure program used $1.96 billion and information infrastructure storage revenues were $1.07 billion.

Non-GAAP earnings per share were $0.20, up 40% quarter on quarter. Free cash flow was $576 million.

Looking at the geographic results for the information infrastructure business, our U.S. revenues represented about 55% of total and were up a strong 14% sequentially. Amir and Western America were up 3% and 15% respectively from Q2 while APJ was down 4%.

The [big plus] 13 countries were up 8% quarter to quarter and 4% year over year. The very positive data point is that these markets were up 8% year over year on a constant currency basis. While it’s too early to call a trend, it is encouraging to see.

In the quarter, we did see some unexpected results from our public sector especially in North America as the U.S. government closed out its fiscal year end. In addition, we saw some upside in the U.S. National Services vertical as their budgets stabilized and they started to make some investments.

Looking at results for the businesses within information infrastructure, Q3 information storage revenues were $2.7 billion, up 9% sequentially. In the high end symmetric revenues were up 10% sequentially. While there’s still some pressure on demand of big ticket IT items, the Vmax ramp is ahead of target and proceeding extremely well.

The Vmax is popular because it’s a highly differentiated information storage platform with exceptional quality and features. It’s also in line with customer priorities which is consolidation, virtualization and improved efficiency. The Vmax is clearly strengthening our leadership in the high end of the storage markets.

In the mid tier, EMC client revenues were up 1% sequentially, a very normal seasonal change. Within this, Dell CLARiiON revenues were down 15% quarter to quarter, with directing channels more than offset this and were off a solid 6%.

I think it would be well to spend a few moments and clarify the nature of our sales and our revenues. Dell CLARiiON was 25% of total EMC client revenues this quarter, and there are two types of revenues within it. One type is the OEM revenues for Dell EMC co-branding CLARiiON that makes up about 15% of total CLARiiON. This business is at the core of our partnership with Dell.

The second side is a more opportunistic reseller type business that EMC branding plans where EMC is also generally involved in the transaction. These revenues make about 10% of the total CLARiiON We and Dell are strongly committed to the core OEM focus partnership but have chosen to de-emphasize its reseller side business.

As a result, the resale revenues were down 24% sequentially and will probably continue to decline over time. While these changes will have an effect on our channel mix in CLARiiON over the next few quarters, we expect a strong progress in our channels business will continue to drive CLARiiON on a successful trajectory.

The CLARiiON remains a key element to our broad offering and we are confident that EMC will continue to extend its lead in the mid tier space.

EMC’s Celerra NAS business continues to do very well and we achieved our 10th consecutive quarter of double digit year over year revenue growth in Q3 as growth returned to over 40%. In this space, EMC’s unified storage continues to gain a lot of customer traction with the best of combination Celerra NAS.

We have a differentiated offering that addresses the needs of both commercial and large customers. This is enabling us to continue grow at a significant rate despite the competition and gain share in a tough spending environment.

While the fastest growing opportunities in our storage business is Flash technology, we continue to see a high level of demand for this capability across our platforms. We expect to see even more utilization of Flash in our systems where our fully automatic storage tiering, also known as FAST comes out across all our major platforms later this year.

Data Domain is now an integral part of a newly formed division within EMC. While Joe will comment more on this business, I will point out that for the full quarter the Data Domain business was up about 40% year on year. This is a great result in a transition quarter and is ahead of our acquisition plan. Data Doman growth has remained strong throughout 2009 and year to date growth is over 40%.

Another positive data point is the fact that the Avamar business continued to experience significant double digit growth in Q3 and is also up over 50% on a year to date basis. Together, this continued growth demonstrations focus and executions by the teams, however the strategic value of this acquisition is indicative of the strength and leadership we have in these markets.

Additional storage highlights include the progress on our Mozy online PC back up business has made including a strategic announcement in September. In September we joined TelCom to offer file based services and a more recent agreement with Votaphone. In addition, Iomega, a consumer and small business focused operation is seeing increased customer demand for back up protection and expect next quarter up strong double digits year over year.

Information storage is a great business and we’re committed to making the investments necessary to expand EMC’s lead. As customers are beginning their journey to private clouds, we’re focused on helping them make the transition at their own pace.

With our broad portfolio, solutions and partnerships EMC is uniquely able to help solve their problems today while at the same time helping them position themselves to meet the needs of tomorrow. While the economy continues to be challenging, we’re confident we’ll continue to gain share because EMC has the best, the broadest and the most integration portfolio to meet the needs of customers both now and in the future.

Our RSA security revenues in Q3 were $152 million or 4% sequentially. This business has executed well this year. Even in a tough environment growth has been positive each quarter in 2009 as information sensitive security continues to be a top customer priority.

Our strategy here is playing out well as RSA is more than holding its own across its major businesses such as authentication, SIEM, DLC and encryption. The recent agreements we signed with First Data Corporation is great evidence of this success. This is a first of its kind solution to seamlessly embed RSA security encryption capabilities right into First Data’s infrastructure which can then be offered as a service to First Data’s 5.4 million retail customers.

This is further proof of how information centric security is an important focus of customers and highlights RSA’s strong position here.

Revenues from our content management and archive division in Q3 were $177 million, down 2% sequentially. As we went through the quarter, there were signs of customer engaging a bit more on these types of projects, especially in areas such as compliance and case automation.

We also expect that addition of Cashion to our e-discovery business will be positive going forward. As an example, early this week we just announced that Cashion base source one solution for managing share point repositories, a new opportunity for us.

In Q3 the EMC’s global services business performed well. Our revenues grew 4% sequentially. The organization continues to improve its customer value proposition and as a result we’ve seen more opportunities across our customer base. In addition it’s great to see the customer loyalty and satisfaction remain very high.

EMC’s associate capabilities are an important competitive [inaudible] that we’re confident will continue to help customers meet their near term and cost compare requirements while supporting the longer term objectives for protecting their data centers for the future.

Now turning to some highlights from the income statements; Q3 EMC information infrastructure non-GAAP gross margins were 53.1%. Operating margins were 16.7%. Both metrics are up year over year from the 52.8% and 16% we reported in Q3 2008.

Clearly we’ve done very well executing our cost reduction plans and maintaining disciplined expense controls in order to show improved profitability off a smaller revenue base. More telling perhaps is that Q3 non-GAAP gross margin was up 270 basis points and operating margin was up 320 basis points from last quarter.

This is an excellent result of our successful cost reduction efforts and a good example of leverage in our model. I’d like to thank everyone at EMC for the hard work and dedication in achieving this result.

This margin strength is impressive taking into account that we are also making necessary investments for the future. As you’ll recall we are investing in transition efforts to reduce our long term cost structure and we spent $35 million so far in 2009. We’ve also invested approximately $60 million in our Cloud infrastructure services business this year.

As we mentioned last quarter, we continue to be well ahead of our plan for cost savings of $450 million in 2009 versus 2008. We also continue to target $500 million in savings in 2010 versus 2008 from these initiatives.

We are committed to a healthy balance of growth, leverage and investment for the future. I think we’ve done a very good job in a challenging environment. Given our recent efforts, we believe we’re putting into place a business model that can support a fair amount of growth operating leverage while at the same time allowing us to strengthen EMC’s lead and invest in our strategic growth opportunities. Joe will discuss these opportunities and our efforts in more detail later.

Now turning to a few highlights from our consolidated results; total Q3 consolidated revenues were approximately $3.5 billion, up 8% sequentially and down 5% year on year. On a constant currency basis, revenues were down about 4% from last year.

Non-GAAP earnings per share were $0.23 and free cash flow was $745 million. Free cash flow this quarter is $265 million higher than non-GAAP net income, a great result. So far this year we’ve generated $1.8 billion in free cash flow. This is more than $660 million greater than cumulative non-GAAP net income through three quarters and slightly higher than the free cash flow in the same period in 2008. We are very pleased with the strong cash generation we’ve achieved so far this year.

The non-GAAP tax rate for Q3 was 17.4%. We now expect the rate for the full year to be around 19%. The rate we report in Q3 reflects the revised annual rate including the necessary adjustments for Q1 and Q2. The 2009 tax rate is expected to more than our previous estimates due to changing global income mix and higher R&D tax credits.

Consolidated operating cash flow was $808 million. A few balance sheet items impacting operating cash flow include deferred revenues which were $3.5 billion, inventory turns which was $7.7 billion and DSO’s which were 49 days all very good given the economic climate.

We ended Q3 with $8.4 billion in cash and investments of which $3.7 billion is held overseas and an additional $2.2 billion is at VMware. This quarter we spent approximately $2.5 billion on acquisitions and strategic investments. The bulk of this was due to the EMC and VMware acquisitions of Data Domain and Spring Source respectively.

Financial flexibility is a critical strength and a competitive edge for EMC particular in an unpredictable economy. Our financial strength allows us to continue to invest in our business, even during challenging economic times.

In closing, we’re clearly pleased with our Q3 results. The breadth and depth of our technology and solutions portfolio allows us to assist customers in achieving strong ROI for their current IT projects while helping them effectively and efficiently move towards re-architecting their data centers for the future.

Although the economy remains unsettling and spending environment is challenging we are encouraged with the signs of stabilization we’re seeing and we believe that our strategy of our portfolio position has done exceptionally well and successful in the marketplace. Our execution this year has been very good. We’re making a lot of headway on cost efficiencies and important investments for the future.

We remain focused on meeting our short term objectives and positioning ourselves competitively for long term success. With that, I’ll turn the call over to Joe.

Joseph Tucci

I would also like to welcome everyone to today’s call. Thank you for joining us. Overall, given the current IT spending environment I was quite pleased with our Q3 results. Our results demonstrated that the market demand for our storage virtualization, security, compliant back up recovery and archive solutions was and is solid.

EMC’s business model has proven resilient and strong in this turbulent economic climate. The people of EMC and VMware around the globe are executing our strategy and business plan very well and as always, I want to thank them for their hard work and dedication and congratulate them on their success.

I am sure the top issue on your minds are around what EMC is experiencing relative to this economic climate and even more so, what’s happening on the IT spending front now and into 2010.

I’ll start with Q3. Throughout Q3 the predictability of our business was very good. The timing of our order flows throughout the quarter were very close to our historical patterns. Market acceptance of our new product lines were strong and very importantly, the confidence and espre de core of our people is exceptionally high.

On the macro front, 2009 is progressing pretty much as we expected. We predicted back in our January call that the year on year revenue declines would bottom out in Q2 and that IT spending in the second half of 2009 would be stronger than the first half, and as you can see from our quarter results and our Q4 forecast, this is the way the year seems to be playing out.

I might also note we predicted the continued consolidation of the IT market with a particular belief that the larger players would be the most aggressive. For sure, this is happening, including EMC as a consolidator. And again, we predict this trend will continue.

As David indicated, our practice has always been to talk about next year in detail on the January conference call and we intend to continue this practice for 2010. However, I will give you a bit of feel for how we are thinking 2010 will shape up both from an IT spending point of view and from a consolidated EMC product and solution competitive point of view.

For 2010 on a macro economy economic recovery front, we expect a slow but steady recovery. In 2010 we expect IT spending to return to growth, albeit somewhat below the historical growth levels we saw in 2004 through 2007. We also expect the year on year growth in 2010 for storage, virtualization, security and compliant back up archiving and recovery will be above IT industry averages.

Most importantly, we believe we have a terrific set of technology assets in virtualization and Cloud as well as in information storage and security. With these assets, we are squarely focused on four opportunities that are or will become multi-billion dollar markets, markets we expect will exhibit solid double digit growth not only in 2010 but well beyond.

The first and largest of these opportunities is to provide key technology and support to help our customers move to the next generation of fully virtualized data centers. We call this our internal or private Cloud initiative. This move will provide our customers with a more flexible and dynamic IT environment; one that’s easier to operate, one that is extremely secure and very importantly, one that costs significantly less to build and operate.

The second growth opportunity is the external or public Cloud. We will work with our Telco and service provider partners to establish external Clouds that are fully compatible with the internal Clouds that enterprise customers will build out.

As part of these two initiatives we with our Echo System partners will enable our customers to establish their own federated Clouds. These Clouds will allow customers to distribute their IT workloads across their own unified and internal Cloud data centers and the external Cloud data centers of their chosen service provider partners will deploy, providing our customers with another level of flexibility and efficiency.

EMC will also offer a portfolio of SAS spaced solutions that will operate on top of these Cloud infrastructures. Our first is Mozy, that provides online PC back up.

The third opportunity for us to provide the benefits of virtualization and fully protected compliant information storage to the desktop and mobile market. This client initiative benefits customers by allowing them to more efficiently provision users once, not for each of their multiple continuously changing devices. This means not only a better, simpler management scheme, but better security and protection from viruses and provides a lower total cost of ownership.

The fourth opportunity is for EMC to lead the charge for the next generation of back up, recovery and archive solutions. We have sized this market at approximately $10 billion for 2009. It’s an extremely fragmented market with EMC being the leader. The opportunity here stems from the continuing sea of data that customers need to better manage and protect.

The attributes of automated tier storage coupled with the duplication technologies are the keys to success here. Clearly we are absolutely accelerating the move to back up and recovery from tape to disc.

And the best news of all according to a recent Gartner study, only 8% of back up recovery solutions currently deploy used data duplication technology, a great opportunity for EMC.

We have moved extremely aggressively since our acquisition of Data Domain. We have already formed a new $1 billion plus division we call BRS or back up and recovery systems. This division, led by former Data Domain’s CEO Frank Slootman combines Data Domain, Avamar, Networker and our disc areas. And again, in its first quarter of operation produced very impressive results.

It is very important to note that for EMC to capitalize on these four strategic growth opportunities, we will need a strong network of complimentary alliance partners. Obviously we will partner very closely with VMware, but I want to make it very clear that all other technology companies and I mean all, are welcome and in fact encouraged to also partner with VMware. And as always, they can be assured of open and equal access to the VMware’s leading technologies.

And, over the next several weeks and months we will continue to form deep alliances with leading IT players in the areas of infrastructure technology, application providers, system service providers and system integrators. EMC’s ecosystem will be second to none.

Also, I’m proud of the seasoned and talented executive team that EMC has in place. EMC II is anchored by Bill Turbert, David Goulden, Howard Alias and now Pat Gelsinger and of course we have on the VMware side, a really strong team.

In closing, we believe we have the vision, the strategy, the technology and the partner ecosystem and management team in place for EMC to win and prosper into the future.

Thanks again for joining us, and now I’d like to turn it over to Tony to moderate the Q&A portion of today’s call.

Tony Takazawa

Before we open up the lines for your questions, as usual we ask you try and limit yourself to one question including clarification. We thank you all for your cooperation in this matter.

Question-and-Answer Session


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

Aaron Rakers – Stifel Nicolaus

I want to try and understand a little bit the guidance and you’re implying on an organic basis. By my math it looks like maybe Data Domain was about $70 million of revenue contribution in this quarter, and I believe you had mentioned that you would do about $200 million with Data Domain for the full year. So if I look at your guidance on an organic basis, it looks like you’re guiding somewhere around 12% to 13% sequential growth versus historical more normal seasonal growth of about 16% to 17%. I’d like to understand what the puts and takes are there, what you’re assuming for Data Domain and why we should think kind of a sub seasonal growth for Q4.

David Goulden

Data Domain gave us about three points of growth on a quarter on quarter basis, on a year on year basis in Q3, so a little stronger than the number that you mentioned there. When I apply that and I look at the sequential from Q3 to our Q4, given that we had Data Domain for most of the Q3 and all of Q4, I can normalize that. I’m looking at about at 14% reported growth, about 13.5% organic growth.

If you look at that compared to prior years normalized acquisition that would compare to about 15% that we see in what I call a growth year with a full budget flush. So given that we’re in a tough economy with IT budgets still being under scrutiny, we think that 14% sequential growth that we guide to is actually a very impressive number.


Your next question comes from Benjamin Reitzes – Barclays Capital.

Benjamin Reitzes – Barclays Capital

Could you talk about what your plans are for your cash? You had good cash flow this year so far. You have your share count creeping up with the higher stock price and you have a convert. Maybe it’s time to buy back more stock or discuss what your acquisition strategy remains to be. Is it string of pearls or anything bigger on the horizon.

Joseph Tucci

Our stated preference and I’ll state it again is to continue with our string of pearls approach. I also always state that I don’t want to take any options off the table that we believe firmly will benefit our shareholders and the company for the long haul, but nothing has changed on that front and that will for sure be one of the focuses for usage of cash and obviously you’re right, it’s a couple of years away yet but we do have to think about taking out the convert for cash which is what we’re going to do.

David Goulden

On our cash situation, obviously $8.4 billion, as I mentioned $3.7 billion is sitting overseas and $2.2 is sitting at VMware, so you can take that into account. But given the four strategic growth opportunities that Joe has outlined and the huge potential for us to really expand our business in those areas, that’s kind of prime focus for how we’re looking for our cash to work right now.


Your next question comes from Alex Kurtz – Merriman Curhan Ford & Co.

Alex Kurtz – Merriman Curhan Ford & Co.

Could you give us a little bit more detail about the verticals that you saw that showed a lot of strength this quarter and how you see that progressing into Q4?

Joseph Tucci

We had a lot of strength in federal. We did better than you might expect in the financial services. That held it’s own as David pointed out. The oil and gas sectors continues to be strong. There was no really terrible areas. We had a pretty good spread.

Alex Kurtz – Merriman Curhan Ford & Co.

Would you expect the financial vertical showing sort of a strong recovery heading into ’10 after some really depressed spending levels earlier this year or is this sort of a one quarter blip?

Joseph Tucci

I think it’s going to be slow and steady. I don’t think it’s a one quarter blip nor do I think financial services are going to be bringing out their check books big time next year. I just think it’s going to be slow and steady.


Your next question comes from Wamsi Mohan – Bank of America/Merrill Lynch.

Wamsi Mohan – Bank of America/Merrill Lynch

You highlighted the operating leverage on the core EMC infrastructure business but when you look on a consolidated basis the revenues declined 5% and expenses declined 3% so on a consolidated basis the gap between the revenue decline and the expense decline year over year does not seem to be narrowing significantly. Should we expect that divergence to continue or should we view this more of a one time given the Spring Source acquisition?

David Goulden

I actually think, obviously you’re asking what happens on the VMware side and the reason our non-GAAP operating margin basis, you’re not seeing quite so much contribution from VMware this quarter compared to a year ago is really the impact of the software capitalization. I mentioned to you back in January that software capitalization, the net effect of software capitalization was going to be a significant headwind this year, and that is proving to be the case particularly in the second half of the year with VMware being where you’re seeing the biggest impact.

Obviously a lot of the development costs were capitalized. Those are now being amortized and there’s less new capitalization to offset that. So that’s the major factors impacting what’s happening to the VMware non-GAAP numbers as looked at from the EMC point of view.


Your next question comes from Mark Moskowitz –J. P. Morgan.

Mark Moskowitz –J. P. Morgan

The question revolves the unified storage platform. You’re doing quite well there in terms of the 40% growth. I’m just kind of curious if you can give us a little more context around how much of this growth is being driven primarily with legacy EMC customers versus new incremental customers to EMC?

Joseph Tucci

We don’t traditionally break out how much is to our base so to speak and how much is to new, but I will say that if we look at the what we call our unified product line which is what you’re asking about which is the NAS plus product line that had over 40% growth, we’re clearly capturing new names also at a pretty impressive rate.


Your next question comes from William Fearnley – FNT Equity Capital.

William Fearnley – FNT Equity Capital

For the Dell relationship, you mentioned quickly the de-emphasizing the reseller agreement. Do you think the EMC channel in the direct channel especially in the CLARiiON side make up for whatever revenue falls off here from the change in the Dell relationship?

Joseph Tucci

I certainly think we have that capability. But I just want to make it pretty clear that as David talked to you about, between Dell and us, we’re extremely committed to the OEM side of the relationship. What’s kind of winding down if you will is the reseller side of the relationship and of course as that winds down on that side, we’re trying to pick up that slack with our own direct sales and mostly through channel partners, and David talked to you about some pretty impressive growth there.

So obviously we had sequential growth within CLARiiON despite a significant down through the Dell channel so I would say we are certainly beyond the knee of the curve and we ought to continue to work with Dell and make sure this OEM opportunity becomes stellar and grows and at the other side also work with Dell about opportunities around our duplication technology, around opportunities with our NAS technology and at the same time, continue to build out other channels and beef up our direct selling organization to make sure that we can pick up the slack that we’re going to lose from the reseller side.


Your next question comes from Ghai Rajesh – Thinkequity.

Ghai Rajesh – Thinkequity

You mentioned high end storage was stronger during the quarter. I just wanted to understand how much of your high end storage revenue is being contributed by Vmax and also if you can quantify the effect of the transition into the architecture gross margin.

David Goulden

The good news is that this quarter over 50% of our symmetric system revenues came from Vmax which means that in the second full quarter up to a full half or a little over half of Vmax, that really is about one quarter faster than we would have expected typically especially from a major transition like this. It takes three quarters before we get to 50%. So we think that’s a very good sign.

Ghai Rajesh – Thinkequity

And the effect of the transition into architecture on gross margin metrics.

David Goulden

Obviously you’ve seen a lot of operating leverage and gross margin leverage coming through the quarter. As we said, as Vmax ramps to volume it has lowered production costs at Vmax 4, so that’s one of the main factors that did help us to drive our operating margin and gross margin increase quarter on quarter.

Ghai Rajesh – Thinkequity

Can you put a timeline for transition for other platforms into architecture?

David Goulden

All our platforms are now on into architecture. If you look at the latest generation, 100% of our platforms are at Intel architecture.


Your next question comes from Paul Mansky – Cannacord Adams.

Paul Mansky – Cannacord Adams

I wanted to follow up on the change in the nature of the Dell relationship, or at least the go to market as you’ve detailed a couple of times. How are you thinking about margin contribution from that revenue stream going forward both in terms of gross and operating.

Joseph Tucci

The OEM relationship is the most profitable to both of us because obviously they make better margins, but then they do virtually all of the selling. So when you net those two out, it actually ends up ironically being better for both of us so we can get this to grow. And that certainly is the intention.


Your next question comes from Douglas Ireland – J. P. Morgan.

Douglas Ireland – J. P. Morgan

My question was about the product cycle coming up in the next generation data center and some of the deferred maintenance on servers that we’ve seen. Can you talk a little bit about what you see coming in terms of a data center refresh?

Joseph Tucci

I’m not 100% sure of your question so let me take a stab at it and if I’m not on what you’re asking let me know. I think what we’re really saying is, if you look at the inherent power of these new class of four core going to eight core very quickly here, processors that Intel has out, and the amount of memory they can have and the amount of power they have and if you look at the road map, it is clear.

And the fact that these processors have a lot of what Intel calls VT technology which is virtualization aware technology, which brings down the overhead of a VMware for instance. It’s clear to us that data centers of the future will be pretty close to 100% virtualized and under a VM type environment, you’ll be able to run any and all applications.

Once you get to that particular opportunity, if you look at where VM has taken, you’ll be able to have a much different management model and be able to have a lower cost infrastructure to run your applications. That’s where we’re headed.

And of course from a storage point of view, we are two systems we’ve done from scratch if you will to make sure we’re there. On the block side we’ve done a lot of work with Vmax and then on the object side we’ve come out with a brand new system called Atoms and then of course by the very definition of our future now systems, will play very well there too.

And then of course it puts a real premium on security as you do more federation across more of your own data centers or your partner’s data centers and those cover areas of data leakage and protection and verification and the GRC side of making sure you have good security for data management and this is what we do in our RSA.

So we think we’re very well positioned for that cycle and that’s what that cycle will be made up of.


Your next question comes from Troy Jensen – Piper Jaffray.

Troy Jensen – Piper Jaffray

If you look at the mix of the margins here both services and products were up nicely. Do you think you can sustain the gross margins on the services side in the mid 60’s and do you think the product gross margins can get back to the mid to high 50’s level?

David Goulden

On the services margins, yes we’ve made a lot of improvement there. That’s been through a lot of our cost re-engineering, cost improvement and efficiency programs on the services side. As I’ve mentioned, we’ve done that while keeping customer loyalty pretty close to all time highs so we’re very pleased with that.

So we expect to be able to maintain margins at this level, but don’t expect to see a huge amount of improvement from here forth on the services side.

As I said on the product side, the biggest factor in our margin equation going in to this year, certainly back in Q1 was the volume effect and you can see as volumes have increased sequentially during the year that we see a nice improvement in product gross margins and we do believe that as volumes continue to increase and we continue to see the full effect of our new technologies, there’s certainly some upside potential on that side as well.


Your next question comes from Jayson Noland – Robert W. Baird.

Jayson Noland – Robert W. Baird

I know close rates are more important than pipelines sometimes, but if you could talk about pipeline and just trying to get a sense for pent up demand.

Joseph Tucci

Well so far as I said our productivity against our pipeline has been very good. Our pipelines have been proved accurate and obviously that’s what gave us the confidence to call a 14% growth from Q3 to Q4 and it’s a real growth because there’s really no acquisition effects because we had the acquisitions done in the case of Data Domain in Q3.

So it’s pretty close as David said. We wouldn’t have made a call like that if we didn’t have the pipelines and the visibility to make that call, and obviously the proof is in the pudding. Our sales force now has got to come through but they’ve got a pretty good track record, and that gave us the confidence to do what we did.


Your next question comes from Robert Cihra – Caris & Company.

Robert Cihra – Caris & Company

On Vmax, I don’t know if you can parse it out this way or not but can you get any feeling for how much of this is new buying, people excited over the architecture and what not for virtualization versus customers replacing old DX3’s from back in ’05 and ’06?

Joseph Tucci

There’s obviously some and some. We just don’t give out that level of detail. We think we’re pretty forthcoming and we for sure believe we give more than most, but it is definitely some and some. I know that’s not the answer you want.

Robert Cihra – Caris & Company

Is FAST starting? Is that still ramping in Q4 in terms of that feature.

Joseph Tucci

FAST is a late Q4 delivery so it will have some impact on Q4 and that is deliverable in Q4, but not a heck of a lot. It will be delivered and ready for customers before the end of the year and the of course that’s code for saying the very end of the year. So that means you’ll see the impact really next year.

David Goulden

FAST is not just a symmetrics issue. FAST will be coming across all our major storage platforms so expect that to help in some areas as well.


Your next question comes from Kaushik Roy – Wedbush Securities.

Kaushik Roy – Wedbush Securities

I understand you’re not talking about Q1, but can you comment on the typical seasonality for Q1? Are you expecting less than normal sequential decline as the macro situation gets better?

Joseph Tucci

I think we’ve done more than we usually do, so I’ll kind of take the fifth again. We always have a very detailed run down in our January call. We’ll do that again. I wanted to give you some of our thinking as we’re building our plans and what expect the market to do which I’ve done, but other than that I don’t want to go any further right now.

Thanks everybody for joining us, and as I said we are excited about our product portfolio. We’re excited about the opportunity that we have in these four great areas in addition to our kind of business as usual. I personally am excited about the management team and success that we’ve built here and I think it’s going to serve us and the shareholders very well. So again thank you for your interest in EMC as always and we’ll be talking to you soon.

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