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EMC Corporation (NYSE:EMC)

Q2 2010 Earnings Call

July 21, 2010 8:30 a.m. ET

Executives

Tony Takazawa - VP, IR

David Goulden - EVP & CFO

Joe Tucci - President & CEO

Analysts

Alex Kurtz - Merriman & Co.

Aaron Rakers - Stifel Nicolaus

Brian Marshall - Gleacher & Company

Ben Reitzes - Barclays

Mark Kelleher - Brigantine Advisors

Ittai Kidron - Oppenheimer

Richard Gardner - Citi

Kaushik Roy - Wedbush

Wamsi Mohan - Bank of America

Louis Miscioscia - Collins Stewart

Katy Huberty - Morgan Stanley

Toni Sacconaghi - Sanford Bernstein

Operator

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. (Operator Instructions). Today's conference is being recorded. If you have ay objections, you may disconnect at this time. Now I will turn the meeting over to Mr. Tony Takazawa. You may begin.

Tony Takazawa

Thank you. Good morning. Welcome to EMC's call to discuss our financial results for the Second Quarter of 2010. Today we are joined by Joe Tucci, EMC's Chairman and CEO and David Goulden, EMC's Executive Vice President and CFO. David will provide a few comments about the results we have released this morning. He will highlight some of EMC's activities this quarter and discuss our updated outlook for 2010. Joe will then spend some time to discuss in his view what is happening in the market, EMC's execution of the strategy and how EMC is positioned to help customers on the journey to the Private Cloud. After the prepared remarks, we will then open up the line to take your questions.

I would like to point out that we will be referring to non-GAAP numbers in today's presentation unless otherwise indicated. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure today in our press release, supplemental schedules and the slides that accompany our presentation. All 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. These include a lot of financial details but we do encourage you to take a look at them. 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. And lastly I will note that an archive of today's presentation will be available following the call. With that it's now my pleasure to introduce David Goulden. David?

David Goulden

Thanks Tony. Good morning everyone and thank you for joining us today. I'm very pleased to report that EMC had another good quarter due to strong demand for our market leading solutions, our solid business model and great execution by the team. There are many highlights this quarter including record Q2 revenues of over $4 billion, up 24% and record Q2 non-GAAP net income of $596 million, up 66%, non-GAAP EPS of $0.28, up a robust 56%. Our storage business was up 21%.

VMware grew revenue 48% over last year. Free cash flow was $1.6 billion for the first half, up 47% and non-GAAP operating margin of 20.7% improved a 120 bits sequentially. Once again we achieved our triple play. We gained market share, invested for the future, and improved profitability. Within our consolidated revenue which is up 24% we saw excellent growth storage as I mentioned, up 21% year-on-year. Security revenue grew 18%. Our information intelligence group revenue was roughly flat and VMware revenue grew an impressive 48%.

Now let's take a closer look at some of the details within these business units. Within storage in the high end, Symmetrix product revenues were up 32% year-on-year as customers are embracing the capabilities of our high end solution. As the most powerful scalable storage solution on the market today V-Max clearly addresses customers needs as they build out their private cloud infrastructures. Our fully automated storage tiering software known as FAST is driving higher rate of SSD and ATA based storage in these systems, resulting in huge performance and cost improvements for our customers.

As anticipated, following the introduction of FAST, we have seen penetration rates continue to rise in terms of SSD capacity per system, percentage of systems shift with SSD and the proportion of systems being shipped with FAST. The combination of SSD and ATA drives with FAST software yields a solution with performance, scalability and cost effectiveness that's unmatched by our competitors.

Our VPLEX platform, which we announced in May, is a net new opportunity and it's proving to be a unique differentiator that is resonating with customers. Its technology is very complementary to tiered storage as the combination of tiering with the mobility from VPLEX creates entirely new usage models that's an ideal virtual storage infrastructure for the private cloud.

As we said with virtualization we're apt to consolidate it onto one server and then could be mobilized over many servers. Virtual storage creates an elastic tool of storage within which you can tier data and with VPLEX move data across arrays within and between data centers.

Our technology lead also extends to our mid-tier storage offerings. As you will recall, last quarter we expanded our disclosure to give you better insight into our progress in the mid-tier overall taking into account the mix shift occurring among our mid-tier products.

The many used cases mobile technology that’s available in the mid-tier have driven customers to demand ease of use and simplicity as well as the right technology for the right job. The strength and breadth of our technology portfolio helps to satisfy these customer requirements better than anyone else. Our approach is to continue to invest in our market leading log file and object storage products while converging technologies and products where it makes sense for simplicity and efficiency.

This ongoing strategy resulted in mid-tier product growth in Q2 increasing to 33% year-on-year. Sequential growth was 12%. This is very good growth especially given the fact that the majority of our mid-tier revenue currently comes from the high end of the mid-tier markets.

In addition to being the overall leader in mid-tier storage, EMC continues to be the leader in the more mature private channel only mid-tier markets. While fiber, while the fiber channel market is very important, we are also seeing higher growth opportunities in other areas of the mid-tier.

Some of this growth is in the form of a mix shift from traditional fiber only products to next generation products like our very successful D-Dupe products and the fast growing unified multiprotocol NS Celerra offerings we introduced a few years ago.

For example what might have traditionally been a CLARiiON Disk Library sale might now be a date of demand D-Dupe deal. As the mid-tier market continues to evolve we're in lockstep with customers making the transition to next generation solutions.

What really sets our mid-tier solutions apart is our technology edge coupled with simplicity and efficiency and this is driving our growth across the mid tier. EMC is considerably more efficient from a capacity standpoint versus competitive solutions and we guarantee it.

EMC enables better scalability to customers wanting to add capacity while retaining high-performance and high storage utilization levels. EMC is optimized for virtual environments in ways that make a notable difference to the customer resulting EMC being the clear storage vendor choice in virtualized environments.

Much of this preference is due to the efforts we've made to have the best integration with VMware virtual environments. For example, EMC is the only storage vendor to full support the four VMware storage APIs, for vCenter Site Recovery Manager, Data Protection, Multipathing and the just introduced Array Integration API. EMC puts more effort and resources into tight-integration and customers can tell the difference.

Today, EMC has far and away the largest installed base in VMware environments and according to a spending intention survey recently conducted by major independent analyst firm, VMware customers are more than twice as likely to choose EMC for storage than any other vendor.

As you know, software functionality is increasingly the key to competitive differentiation in the mid-tier and this quarter we'll be shipping exiting new next-gen software technologies that further extend the capabilities of our market leading CLARiiON and Celerra platforms. Since announcing these technologies that EMC rolled in May, customer anticipation has been very high as it offers a set of functionalities that no other vendor can match.

We're releasing a major step forward in management with Unisphere with an advanced and easy to interface to manage both Celerra and CLARiiON. We're building on our unique FAST technology in the mid-tier with FAST V2, which delivers sub-LUN performance analysis and data relocation.

We're providing customers with a new capability called FAST Cache, enabling customers to utilize solid state storage to increase cache size for burst requirements and we're introducing block compression for primary storage which yields an average of 50% improvement in storage consumption.

So to summarize our position in the mid-tier, first of all EMC is already the acknowledged leader in the traditional mid-tier SAN and NAS environments. Secondly, EMC is also leading in some of the most important new technologies such a D-Dupe, unified storage and virtualization affinity. And third, EMC continues to add major next-generation software functions that further extend our technological lead.

When you put it all together, EMC is the only company at this position to cross the mid-tier. Our competitive edge continues to grow and as a result it's pretty clear that EMC should be able continue to gain share in the mid-tier.

Before moving on, I know there has been a lot of interest in our strategy around our unified product family. So let me clarify this a bit for you. For a number of viewers, we've offered multi-protocol storage on one hardware platform, namely SAN, both fiber channel and iCSCI0: and NAS in the box, and this multi-protocol Celerra, this multi-protocol NS Celerra, has been one of our fastest growing products ever since.

As I already said, in a few weeks we're releasing a single management interface, Unisphere for our block and file functionalities. What we're maintaining is our market leading SAN and NAS technologies that have been optimized for different data requirements customers have because one size does not fit all when it comes to these requirements.

In essence NS Celerra now has best of breed file-and-block functionality via advanced next generation software including a single management interface, fast cache, D-Dupe and compression on one common high performance hardware platform. This combination presents a most cost effective, most reliable and easy to use unified solution whilst retaining the native functionalities that customers value.

I might also add that we have recently integrated Atmos with Celerra adding object capabilities to our flagship unified storage platform. And as I mentioned earlier, our success in the mid-tier has come principally from the higher end of the market.

We plan to extend our success in the mid-tier to the faster growing lower end of the market with a new product family featuring EMC's market leading technologies, a price that will be very competitive in this space. As such we are also investing in the right people, the right partners to aggressively market this new family which we expect formally introduce very early, next year.

Our backup recovery systems business had another stellar quarter and continue overachieve against plans in Q2. When we acquired Data Domain a year ago, we had a pretty good idea of the power that could be unleashed by combining their data de-duplication technology with Avamar and our sensitive customer reach and in Q2 revenue from Avamar and Data Domain continue to grow from the $1 billion revenue run-rate we reported last quarter. There is great demand for this simple and efficient next generation backup technology because it addresses one of the biggest paying points in the data center.

We acquired over 350 new Data Domain customers in Q2 alone and more than 200 Avamar customers. Our BRS division continues to make strides against competitors with a release earlier this week of several new capabilities, including a new mid-range system that leverages Nehalem technology to drive high levels of performance and capacity, a de-duplication expansion option for EMC disk library for mainframe and increased scalability of the EMC disk library series. In short, this division is performing very well and the acquisition of the Data Domain completed a year ago this Friday has a ratio in [Cell-3] one of our best ever.

Clearly we are gaining share in storage and the reasons for that are straightforward. Customers are not only seeking out larger trusted vendors with established track records but they want a partner with a clear road map, innovative products and a breadth of capabilities for taking full advantage of cloud efficiencies going forward. EMC fits the bill in both areas.

Our RSA security revenue growth accelerates in Q2 to 18% year-on-year, coming in at $173 million. We saw strength across the board in security. Archer is driving and we're benefiting from the combination of its audit capabilities with our security information and event management and data loss prevention technologies. More than ever deal discussions are taking place at the CIO and CISO level together as customers seek security that is built and round bolted on.

Our data centric approach is especially resent with customers and security will enable us for broader adoption of cloud infrastructures. Accordingly we continue to invest to leverage our unique position and take advantage of the immense opportunity to secure these next-gen infrastructures.

Our information intelligence group formerly known as content management archiving reporting revenues of $178 million, relatively flat from the last years Q2. Our xCP composition platform and our e-discovery solutions are resonating well with customers. VMware revenue within EMC grew 48% year-on-year to $673 million. This Q2 record revenue was driven by strength across geographies, products and customer segments from SMB up through the enterprise.

Virtualization of the server infrastructure is the first step towards cloud computing and it's clear that customers are laying the foundation for their cloud architectures with VMware. This is not surprising, given the gains and flexibility efficiency in cost savings that cloud architectures offer and the fact that VMware technology is several generations ahead of competitors.

Our four business units together represent the combined power of information and virtual infrastructures. The same fundamental shift in IT is driving the success of each and together we continue to move forward under a shared vision and strategic direction to fully capture the opportunities that bounds over the next several years as customers embark on a journey to private cloud.

Our VCE coalition is addressing its mission to accelerate the proliferation of cloud infrastructures. Customers are eager to start realizing the benefits of reduced cost and improved business agility. They are looking to VCE as a means to get there because it provides a way to significantly reduce risks, costs and time to value with ready to deploy cloud infrastructures.

A recent survey by Data Monitor and UBS indicated that the VCE coalition is far and way the preferred solution for data sensor modernization. Our consulting business also continues to thrive by guiding customers transitions to virtual data center architectures as EMC is a trusted advisor within the enterprise that enables customers to move forward with confidence.

As the only player offering virtual server and virtual storage infrastructures, coupled with advanced IT security and compliance in information intelligence, EMC is squarely focused on helping customers make this transaction to next generation private and public clouds.

Let me now give you a bit more color about what else happened in the quarter looking at our geos. All our geographies contributed to year-over-year revenue growth in the quarter with revenue up 28% in North America, 18% in EMEA, 20% in APJ and 22% in Latin America. In North America we did see some weakness in federal governments that was more than offset by growth in financial services, CME and the commercial markets.

Our International mix stood at 47% in Q2 with the largest portion of foreign revenue coming from Europe. Within Europe there was some weakness in Spain, Portugal and Greece and this was more than offset by strength in the U.K., France, Northern Europe, Eastern Europe and Russia.

Our growth in APJ was led by strength in India and China. Our force in the brick for 13 emerging markets is yielding good growth again with future revenue growth of over 30%. And as you can see EMC is a global company with operation in dozens of countries. Internationally we do some business in dollars and come in local currieries. Some local currency businesses is hedged and some is not and in some markets we have local pricing plans and not in others.

Given these and other factors, non-dollar currency effects are obviously a complex internal equation and pretty much impossible to calculate from an external perspective. So given your interest in this topic, I will try to net out the impact for your modeling purposes. While currency was neutral to our results in Q2, based on where rates were at June 30, we expect the currency will now be a 1 point head win for the full year 2010.

Now let's take a look at some the income statement balance sheet items, I'm Q2, EMC reported non-GAAP gross margin of 60.1%, non-GAAP operating margin of 20.7%, and non-GAAP earnings per share of $0.28. Free cash flow for the last 12 months was $3.1 billion, up over 20% in the comparable period, and about $800 million higher than trailing 12 months non-GAAP net income.

The excellent growth across this metrics demonstrate improvements we've made to our business model over the last couple of years are yielding a resulting the results we expected. The Q2 non-GAAP tax rate was 24%. We now expect a full-year non-GAAP tax rate to be close to 21%. This increase is due to high expected contribution of profits from the U.S. due to currency a well as some other factors.

We do still expect the U.S. R&D tax credit to take effect later this year. DSOs came in 45 days, compared to 52 for the second quarter of 2009. Inventory turns were 8.2, compared to 7.8 a year ago, and deferred revenue is up nearly $100 million from last quarter. We ended the quarter with $10.8 billion of cash; of this a total $6.2 billion was held in the U.S. with the remainder overseas.

We spent $341 million in the quarter buying back 18.6 million shares of EMC stock almost twice our Q1 level bringing it up to over $500 million on EMC share repurchases so far this year. We still expect to spend a $1 billion on EMC stock for the end of the year. In addition, EMC spent $99 million buying VMware shares, and VMware spent $130 million buying back VMware shares.

Our VMware business is a key enabler to making our cloud vision a reality. While customer transition to the cloud is underway, the majority of the journey lies ahead of us, which is why we see the purchases of EMC and VMware's excellent investments. As we look to the second half of 2010, our expectations to economic growth and IT spending for the full-year really haven’t changed that much.

IT spending still looks to be up around 3 to 5% with addressable market stronger, up around 6 to 8%. As the beginning of the year, we said we expected a economic recovery would be moderate with some bumps in the road, and this is what we've seen. There are a few factors we didn't specifically anticipate, so it's the relative weakness of the euro and pound, a high projected tax rate and more cautious government spending in the U.S. and Europe, and we obviously monitoring the impact of this very closely.

However, in spite these challenges, based on the level of customer interest in our strategy and solutions combined with the strength of our businesses including storage in VMware we now expect what we would like to see our previous outlook of $16.5 billion of revenue and $1.18 in non-GAAP EPS in 2010.

Our Q2 results indicates that we are on the right track strategically and executing well on our triple play. We see no reason why we cannot continue to maintain this triple play over the long-term. When thinking about this, it is worth noting that since we start expanding, EMC's addressable markets in 2004, EMC's growth is impressive with annual average revenue growth of 12% and annual average non-GAAP EPS growth of 19%. This is excellent performance over the six year period which included the '08, and '09 recession.

So today, our strategy is clear. The business model and operating model are in place. Our investments continue to pay off, and the private cloud opportunity is very big. EMC has never been better positioned for success than it is right now and as a result we believe we can continue to deliver double-digit revenue and double-digit earning growth for the next several years. I'll now turn the call over to Joe who will provide some color on what we're seeing in 2010, and explain why we are confident about double-digit growth going forward. Joe?

Joe Tucci

Well, thanks David. I would like to begin by adding my welcome to all of you who are attending today's conference call, thanks for joining us.

Overall, I was very pleased with our performance in Q2. We posted solid year-over-year and sequential growth numbers while establishing EMC and VMware as thought leader in the next major wave of computing, mainly the transformation of IT to IT as a service, commonly called cloud computing.

This success would not have been possible without the hard work and dedication of the more than 45,000 people of EMC and VMware around the world. I want to thank them for their leadership and congratulate them on their accomplishments.

I believe the top question on your mind has to be around the pockets of uncertainty that seem to pop up around the world and their affect on the global economy, and more specifically, how does will manifest itself in IT spending going forward. As we have said before, we at EMC expected and planned for our recovery in 2010, but we always believe it would be choppy. So, perhaps the best way to look at IT spending trends is by geography.

The U.S. market continues to be good with good prospects. Our customers here are investing in information technologies to increase their levels of productivity while managing risk with a maniacal focus on maintaining solid compliance with their policies, best practices and laws of the land while ensuring proper governance and oversight.

Turning to the international markets; in Europe, we are seeing moderate growth in IT spend, except in Southern Europe, we're definitely seen slowdown in IT purchases. In Latin America, the Middle-East, Africa, China, Southeast Asia and selected Eastern European countries, IT spending is robust and is exhibiting very solid double-digit growth. And lastly in Japan, we've seen that spending is now improving a bit.

And as David has already said, we were not affected by currency rates in Q2, but we most likely will be in the second half of this year. I want to make it clear however, that with only 47% of our revenues coming from the international markets, I truly believe we have ample opportunity for solid international growth despite likely currency fluctuations.

We at EMC believe that international revenues should make up well over 50% of our total revenues and we are squarely focused on investing in this growth opportunity for EMC. Of importance to global markets to virtualization storage, data protection and data security markets were consolidating EMC as the leader. We'll continue to grow faster in the IT market as a whole.

And again what adds confidence to this growth statement is the thought leadership, innovations and strong product mode of roadmap we have in the next new way of IT, cloud computing. It is our firm belief that cloud computing will happen in both enterprise IT shops as customers transform the IT datacenters into private clouds as well as in the service provider community, we build out an extensive number of very large public clouds.

These transformations will give CIOs the capabilities to offer their customers whether they are internal customers or external customers, the mass of benefits of IT as a service, namely the ability to run applications, more flexibly at a lower cost, while assuring that the attendant policies and service levels are here too.

To assure, we capitalize on this master cloud opportunity, consolidated EMC is focused in our technology and go to-market resources on providing our customers with a path, a measured journey to the private cloud. First and foremost, VMware is advancing its leading virtualization technologies into a full fledge, next generation data center cloud operating system with innovative and integrated, management, automation and orchestration software.

Last week’s introduction of VSphere 4.1 is a major deliverable towards that goal. VM also uniquely automates both existing applications as well as reaching out to the new wave development communities that tend to develop applications in a framework context. A powerful benefit to customers as a journey to the private cloud.

VMware also has a significant technology play in bringing their virtualization technology to client devices allowing for the provisioning of an individual user rather than provisioning the constantly changing C of new devices that seem to come out as almost daily.

On the information side, EMC is focused on storing, managing, protecting and securing the incredible amount of new digital information that this world continues to create with price performance levels that the future cloud world will demand.

IDC in a recent White Paper estimated that the amount of digital information that is created will grow remarkable, a remarkable 44 times during 2009 and 2020. EMC is heavily investing in innovative information technologies like V-Max, a new category storage that scales both up and out, or bring unmatched cost performance functionality and reliability. Technologies like unified storage or converged fiber channel, SAN, NAS and iSCSI environments again featuring leading functionality for mid-tier storage platforms.

We are investing in game changing cloud technologies like VPLEX our Virtual Storage product. VPLEX provides new capabilities like active/active data over distance and information federation across cloud data centers.

Since most of the new information has been created as object base, EMC is investing heavily on special like cloud storage for this important category of information storage software called Atmos.

We are investing in technologies like FAST or fully automated storage tiering that moves data automatically and constantly with the policy and service levels our customer choose between flash drives, fiber channel drives, SATA drives and SSD drives were the data is de-duplicated and compressed fastest and short innovative technology that assures ultra-high performance when called for will also optimize the total system for lowest cost.

We are investing in technologies for data protection, changing the backup paradigm from slow unpredictable backup the tape to the backup the disk with best in class data de-duplication and compression technologies to offer customers speed of recovery, reliability recovery and low cost.

We are investing in technologies that secure data itself and access to the data while assuring stellar, GRC metrics. A quick preview of things to come is later this year. We released the capability to encrypt data at rest on array itself. That’s fully integrated with RSA's key management software that is most cost effective and has very high performance, and lastly we are investing heavily in our customers to gain value from their information, to help our customers gain value from their information. Greenplum our most recent acquisition provides organization with real time insight from vast amounts of data.

Greenplum’s unique naturally parallel scale out architecture provides the ability to handle big data and delivers information intelligence in real time. We also continue to extend our Documentum's to offer portfolios to help our customers to better leverage information that is vital to their business.

With our new document xCP platform we are enabling companies to move from traditional and complex enterprise concept management applications to far more flexible case management applications.

In short, xCP dramatically reduces the amount of custom code that is typically required, thus saving customer’s time and money.

Another important piece of our cloud strategy is the deep partnership and alliances that we have built with other leading IT companies. Partners like Cisco via our VCE coalition. And I'm happy to report that under the leadership of Michael Capellas, VCE reception by our customers has been nothing short of remarkable and Vblocks sales are well ahead of plan.

I'm also pleased to report that our partnership with Dell is back on track, and is very strategic to both companies. Our Q2 mid-tier storage revenues were roughly flat year-on-year with Dell, and we fully expect to have year-on-year mid-tier growth with them in the second half.

Our partnerships with system integrators such as Accenture, CSC, Capgemini, Wipro, TCS and Deloitte and others continue to grow strategically and tactically. And lastly, on the service provider front we are building a number of very deep alliances and we will be talking to you soon about our initiatives and plans here.

In summary, EMC is executing very well in today’s IT market. We have a strong product and technology portfolio and the go-to-market prowess to create the opportunities that the next wave of IT cloud computing will offer. Thus I reaffirm our belief that we can achieve double-digit growth rates over the long-term.

Let me now turn it back to Tony to moderate the Q&A portion of today’s call.

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 clarifications. We thank you all for your cooperation in this matter. We open up the lines for questions, please.

Question-and-Answer Session

Operator

Thank you. We will now begin the formal question-and-answer session. (Operator Instructions) Alex Kurtz, Merriman & Co., you make ask your question.

Alex Kurtz - Merriman & Co.

Yeah. Thanks for taking the question. David, given the launch of all these new products in the mid-range, especially, around Unisphere, could you take us through the puts and takes on the gross margin impact given that the profile of the mid-range business is very different probably going in the next couple of years than it was when it was just CLARiiON and Celerra standalone products?

David Goulden

Well, I think Alex, what we talked about is the fact that the software stock becomes more and more important in the mid-range and as the software content in the mid-range platform increases, then that’s a good thing for gross margins going forward.

Alex Kurtz - Merriman & Co.

Okay. And if you look, just this is follow up. V-Max seemed very strong in the quarter. Was that sort of a core driver for strength in gross margin within the core business group, or were there some other drivers that we should be thinking about?

David Goulden

No. Within the storage business, we saw a nice sequential growth in gross margin. On the product side, we had some good mix impact. If you look, obviously sequentially, actually, V-Max was relatively flat. But we did see good growth in the DD products, and a couple of other things that are driving higher margins. Obviously, volume helped us with the gross margins on the product side and on the services side; we actually saw a nice pickup in our professional services margin due to higher utilization. On the customer services side, revenue increase to be continued to keep our cost base relatively flat as we improve the efficiency of that business. So, good improvements across the board sequentially in the core business in margins.

Tony Takazawa

Thanks Alex. Next question please.

Operator

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

Aaron Rakers - Stifel Nicolaus

Yeah, congratulations on the quarter. My question is also on the margin, though more so on the operating margin side. If I look back historically guys, for the second half relative to the first half of the year, it looks like ex-2009 you were able to drive about 200 to maybe even 300 basis points of operating margin expansion. Yesterday, we saw VMware raised their operating margin target for the full-year.

You guys today talk about lowering or tempering your R&D growth for the full-year. So I'm curious of why 20 to 21% can't actually be moved higher here given those puts and takes.

David Goulden

Let me just, kind of a point you mentioned upon R&D, it’s a very minor change and certainly it's less than $15 million. So it doesn’t reboot the needle on margins. We still have internal plans to hire to up the 20s, to the 20% level, but we're just not quite on track against that right now.

Joe Tucci

Let me just add a little color. We have not cut back R&D budgets. Our R&D teams are still in coverage to find the best people, very high quality people and staff up. Obviously they're been vey picky in day-to-day, they hire and its -- they are hiring a little slower than actually I would like, but we are not cutting back R&D budgets. This is just kind of a reality. Go ahead, David.

David Goulden

Right so, on that base -- that’s a very small factor in variable margin performance. I think what you've got to recognize is that 2010 is not really a normal year. And trying to apply normality to 2010 I think is going to get us into a little bit of trouble. What I mean by that is clearly mentioned in Q1, and we saw the impacts of composite budget flush obviously we've done a little bit better than we expected in Q2.

But I talked to you about some factors in the second half that are going to impact those kind of normal year-on-year compared and we've got some significant currency head wins in the second half, which is going to obviously impact our top line and most of the things that drive the margin improvement historically from the first half to second half is kind of volume related. You got to tie it back to that. We still feel comfortable in the 20 to 21% range, and obviously we'd like to come in towards the higher end of that. We are not going to increase that this point in time.

Tony Takazawa

Okay, thanks Aaron. Next question please.

Operator

Brian Marshall, Gleacher & Company. You may ask your question.

Brian Marshall - Gleacher & Company

Hi, thanks for taking my question. With regards to the second half outlook, due to some of the potential product transitions that might be occurring down the road in the mid-range, do you think its likely that V-Max will actually outgrow the mid-range and in the unified products in the second half of the year?

Joe Tucci

V-Max, because it’s a new category, and I keep referring to that traditionally all high-end systems which is still true today with the exception of V-Max scale-up. V-Max, we can now add, we call engines which are servers to have it just scale out and when we do that, to add a server and put a whole tier of SATA drives or D-Dupe's or in the future, even D-Dupe SATA drives there. I think it makes it very effective to consolidate a lot of mid-tier platforms. So some of our growth is coming out of the higher end of mid-tier as we consolidate mid-tier platforms so while V-Max, you can think of it as a high-end platform and certainly it is, it is definitely, definitely have an impact on the mid-tier as we consolidate there.

Brian Marshall - Gleacher & Company

Thanks Joe. And as a quick follow-up, I would assume that would have a positive margin impact as well?

Joe Tucci

As we've said many times, ironically they're both good. If we grow mid-tier we get good margins. If we grow to high-end we get good margins. So its not -- they are not as substantially different as they were at one time years ago.

Tony Takazawa

Thanks Brian. Next question, please?

Operator

Ben Reitzes of Barclays, you may ask your question.

Ben Reitzes - Barclays

Hey, thanks a lot. Can you guys talk about velocity of business throughout the quarter, and into next, and what you think about second half seasonality given currency? I guess it's about 150 million of a currency hit you guys are talking about for the second half that you absorb. So what is that due to seasonality that you expect as we go into the third and fourth quarter, and how you exited the second quarter?

Joe Tucci

Yeah Ben, you got the math right on the currency impacts, from where we though we were back in April, obviously all the math was based year-over-year, the currency impacts bigger than that, but compared to where we thought we were back n April, the currency change is about a $150 million because we thought for the full year we would be roughly flat back then.

So, that is a factor, during the call in Q2 we were back to regularly normal seasonality, we mentioned that we saw some earlier seasonality in Q1 because of some kind of spillover, but I think what we saw in Q2 was a more normal demand environment, I think we really put our over achievements down to the fact that people just had a better appetite for our products and services because they are just satisfying customers paying points well.

So, I think those accounts the key factors, I think one of the biggest differences that you mentioned before from were we were in April was that currency head wins.

Ben Reitzes - Barclays

And then heading into the back half what do you think that you have enough momentum with the new products that’s coming and new software and the V-Max and what not, to have normal seasonality in the back half?

Joe Tucci

Well I think that, if you just look at kind at our guidance, we came out of the first half, obviously it was down, I don’t expect you, but when we look ahead we are very confident any what we were seeing in the second half in terms of customer acceptance for our products and services and in fact we have -- we've raised our guidance, we said that we’re going to beat what we talked about in April.

So, we are more confident now then we were in April, especially when you normalize some of the head wins.

Ben Reitzes - Barclays

Okay, thank you.

Tony Takazawa

Thank you Ben, next question please.

Operator

Mark Kelleher of Brigantine Advisors. You may ask your question.

Mark Kelleher - Brigantine Advisors

Great, thanks for taking the question. I wanted to focus on the federal government vertical. There is some big initiatives there to move IT out into the cloud that seems like it should be right near [wheelhouse]. Can you tell us what you're seeing there? You said there were some weakness, what's the dynamic and visibility in the federal government.

Joe Tucci

Yeah, I think it's -- unfortunately markets both. If you talk to the powers to be in the IT and federal government, they are very sold on the cloud and I truly believe that they release the capability that the collective weighing if CBM were to bring to the party and that’s goodness, on the other side you also saw that they kind of try to put a bit of a freeze on IT spending so we saw a little bit of weakness in Q2.

And as David said, governments around the world as they try to -- kind of reign in their spending a bit. So, we kind of have one good work from column A and one kind of negative trend from column B and I actually think they are both true. So, I do think that the government will make a massive play there is much more efficient way in and much more flexible way to do IT instead of cloud and we will benefit from that.

And on the other said as the government cuts back in its day-to-day spending, you get hurt by that side.

Mark Kelleher - Brigantine Advisors

Normal seasonality for the government in the Q3?

Joe Tucci

If I was guessing and it is a guess right now because we will see how Q3 unfolds, but obviously I probably believe Q3 will -- even though it's the government’s fiscal end and it's usually strong, I think it will be a little softer than normal. Although, you'll see some uptick obviously from Q2 but probably not as big as normal.

Mark Kelleher - Brigantine Advisors

Okay, great thanks.

Tony Takazawa

Thanks Mark, next question please.

Operator

Ittai Kidron from Oppenheimer, you may ask your question.

Ittai Kidron - Oppenheimer

Thank you, and congrats on good numbers, can you give me some more color on the mid-tier, you mentioned 33% year-over-year growth, but if you take out back up and recovery Avamar and Data Domain, what was the growth of the other businesses, CLARiiON specifically and Celerra.

Joe Tucci

I want to break it out into front line, so let me tell you that if you added a team revenues from Data Domain a year ago, the growth actually increased a little bit from Q1. Remember we said that apples-to-apples growth in Q1 was 20% comparable apples-to-apples growth in Q2 is 21%. So, then of course in that as we mentioned we got different transitions going on within the products, it doesn’t make sense to breakout numbers for the individual products themselves.

Ittai Kidron - Oppenheimer

Just to follow-up on that, in your discussions with your customers given that this expectation of a new platform, are you seeing any customers delaying or sitting on the sidelines and waiting for the new platform to come along, any purchasing decisions delayed because of this?

Joe Tucci

Yeah. Let me say two things. The number that David gave you that was little bit over 21% growth year-on-year is the way to look at it because you really as David said our sales force is good and has a lot of sway with customers and for sure we would have sold some more of our own devices like CLARiiON and disk library, which now we are forcing and it's setting our sales force to shift data to the main product. So, the best way to look at this is apples-to-apples is assuming we owned Data Domain a year ago, and we obviously do own them today.

That difference in growth all in mid-tier right, which is meeting the product only is over 21%, so it's very solid growth and it's real growth. The second question you're asking is you want more color I think on what our plans are for mid-tier refresh. We started and worked incredibly successfully with -- when we announced, before we announced VPLEX. What we did is put out a big piece of the software to bake into our then DMX-4 line, so that you're not announcing all new software and all new hardware at the same time.

We basically, like that model so much, and customers adopted it so much. We are doing the same thing now. So, what you just saw and David took you through FAST Cache Unisphere several other, and there is a pretty good laundry list of products, that is the new operating system that will be on the refreshed hardware products. We told you, David just told you that our new low-end, right, our new low-end will be introduced in Q1, all right? We also told you the fastest growing piece at mid-tier by far is and I mean by far is the low-end.

So, we are very optimistic about this new low-end, and that the impact it's going to have.

Ittai Kidron - Oppenheimer

All right then.

Joe Tucci

So, last piece you want to know is when we are going to introduce the high end of mid-tier? I got have some surprises in life. So, I'm not going to give you that one, but again software first. We told you when we are going to do the low-end, and our -- we -- I like our position in the mid-tier, I think it's going to continue to get stronger and stronger.

Tony Takazawa

Thanks. Next question please?

Operator

Richard Gardner from Citi, you may ask your question.

Richard Gardner - Citi

Okay, thanks. I just, one quick one and then a follow-up. Dave, last quarter you were willing to give us actually a point number for the mid-range revenue. I was wondering if you would be willing to give that number again this quarter.

David Goulden

Richard, I told you it was up 12% so you can figure it out.

Richard Gardner - Citi

Okay, very good, and then I wanted to follow-up on an earlier question. Regarding operating margins, I think you can make a -- I know that you are as such not ready to take up your operating margin guidance from the 20 to 21 level for the current year, but it does seem like you can make a pretty compelling case for a continued rise in information storage margins. Thanks to increasing software mix, and hardware cost improvements over time, and I'm just wondering if philosophically that's the right way to think about things longer-term or whether you will chose to actively manage long-term operating margins to the 20 to 21% level and invest most of that back into top line growth.

David Goulden

I think I kind of give you a couple of key hints on that but let me make it clearer. First of all, we should be very pleased that we have operating margins to where we are today for a long period of time, we've been striving to get operating margin north of 20, we are there today, and I think that’s actual progress and obviously results is a result of what we've done in terms of mix and cost management and a whole bunch of good things across the business.

Also, I have talked you about our triple play where we want to have a balance between gain market share, investing for the future and improving profitability. We said the over long-term we will be focused on being able to deliver all three of those. There will be some balance between anyone over a period of time but overtime, we plan to deliver all three. So, we do have an eye upon expanding operating margins overtime but also we talked about a significant investment in cloud software, repositioning so we can position ourselves to our public and private clouds. So, we'll have a balance between all three.

We've committed also over the next few years, we'll give at least double-digit revenue and double-digit earnings growth. So, I think we've given a number of indicators to say that we are suppose to follow, but we were certainly not going backwards and we will overtime be able to expand our operating margins as well. It's really balanced and we’ll play that balance carefully and we'll communicate to you where we are any point in time in that balance.

Richard Gardner - Citi

Thanks.

Tony Takazawa

Next question please.

Operator

Kaushik Roy of Wedbush, you may ask your question.

Kaushik Roy - Wedbush

Thanks. Congratulations, good numbers. One clarification, in the prepared remarks you mentioned, the metrics product revenues grew 32% year-over-year and mid-tier products revenues grew 33% year-over-year but in the press release the total products are up only 27% year-over-year, can you help us understand that?

David Goulden

Just look at the press release and see what you are referring to.

Kaushik Roy - Wedbush

The storage product, its [2077], which is up 27%.

David Goulden

Yes, you're looking at the schedule attached to the press release and looking at storage broad growth. While, still there are some other things in there including things like SAN Switches, some resold products product through our select line, there are other things in the total storage product, we gave you the kind of two major parts of it.

Kaushik Roy - Wedbush

And then mid-tier product revenues, it's up 32%, is it apples-to-apples that means does it include a Data Domain as if you had Data Domain in Q2?

Joe Tucci

No. The apples to apples is slightly over 21%.

David Goulden

Apples-to-apples growth to mid-tier is 21% as mentioned little bit at 33% is the reported revenue growth. Now as we said, the real way to count or judge our performance in how we're doing in the mid-tier is the 21%. Which again, we think is good given our position in the high-end of the mid-tier but also I think our sequential improvement’s in the mid-tier is 12% "it's also a good indicator".

Joe Tucci

Again, just netted out in the mid-tier, we're kind of killing it in the higher end because you got to also add not only the 21 but part of that reason that will be maximum through 32 is we're consolidating mid-tier there too. So, if we put that again, you can say, you're doing really well in mid-tier in the higher ends.

And we really don’t have a big play at in the lower ends which we now are growing faster. So, that's the common we gave to date but at which is really Q1.

Tony Takazawa

Next question please.

Operator

Wamsi Mohan, Bank of America. You may ask your questions.

Wamsi Mohan - Bank of America

Hi, thanks a lot. Can you talk a little bit about your longer term enterprise data or housing strategy which can be a meaningful adjacent market? It seems like an obvious extension to your current strategy but I'm curious you choose to not to go after a more established bear like a tier data and enter the market for scale as opposed to what could take some time with Greenplum to capture a meaningful part of the market.

Joe Tucci

We will do more of this as it goes, but let me give you a short piece of our thinking. Traditionally, the data warehouse market looks at last months, last weeks kind of data and more and more customers want to look at real time data that’s in their coming out of their systems right now and obviously when you get to cloud kind of scale what do you want do you want to take your card to put data into the cloud, you don’t want to take data out of the cloud specialize it to do a analytics on right?

So, basically the Greenplum technology works extremely well better than anything else we saw in the market in that kind of environment. So, we are here talking about real time. When you are talking about big data, when you are talking about cloud scale data we think the attributes of Greenplum and the way it also works with in the virtualized environment is phenomenal.

So, we went after what we thought was the best technology and we got plenty of go to market prowess surrounded and as you said it's a close affinity to what we do. So, we are quite pleased, this plays out for our future strategy.

Tony Takazawa

Thanks Wamsi. Next question please.

Operator

Louis Miscioscia of Collins Stewart, you may ask your question.

Louis Miscioscia - Collins Stewart

Yes. Thank, can you go back to the macro for a second. I guess when you look at this two different ways. One, last night on VMware's call, they did express a lot of concern about Europe and then second Joe, when you are talking to C level executives what are they telling you about their desire to continue to spend on IT given the concern about the macro-economy.

Joe Tucci

I mean as I said in my remarks, the biggest thing that the executives are interested in is driving their productivity, okay which you could say on the other side hurts a little bit in terms of the unemployment that’s out there but everybody right now because the company say look I got to get, it's a uncertain world, I got to get differentiation out there and I want to drive my productivity and they know that probably the only way to do that is to invest in technology and I think that’s one of the things that’s benefiting IT as a whole right now and as I said on the other side the big back of the chunk that I mentioned is at the Board level the focus on risk management and compliance is phenomenal. So, those as a macro side those are the two things that we see out there and you can almost you see that globally. Certainly you will see it in United States and Europe.

Louis Miscioscia - Collins Stewart

And then as we just think of the comments last night where VMware did seem much more cautious on Europe than maybe your comments, or maybe just clarify your views on Europe.

Joe Tucci

We still think Europe will have moderate growth as I said with the exception of Southern Europe where I did say we are seeing definite downturn in their spending.

Tony Takazawa

Thank you, next question please.

Operator

Katy Huberty of Morgan Stanley, you may ask your question.

Katy Huberty - Morgan Stanley

Thanks. Good morning and congrats on the quarter. Just a follow-up on the last question. IBM had noted some deal push-outs, large deal push-outs in the services business. Did you see any deal slippage at the end of your quarter and just qualitatively how would you characterize backlog or the pipeline of deals going into 3Q?

Joe Tucci

We always see some deal push-out, was it material or abnormal in our case, the answer is no and right now so far Q3 the customers, I haven’t seen a huge change in what order, it be 20 days or whatever it is into I don’t even know what day it is but into Q3 I haven’t seen a market change in customer attitude.

Katy Huberty - Morgan Stanley

Okay thanks.

Tony Takazawa

All right, thanks. We got time for one more question.

Operator

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

Toni Sacconaghi - Sanford Bernstein

Yes, thank you. Joe, you talked about your longer term target to grow revenue double digits and EPS double digit, how are you thinking about acquisition in that target set and maybe, I see the chart over the last seven or eight years, 12% revenues growth. Have you re-run that for what your organic growth rate is, and if you think about your assumptions going forward, how are you thinking about acquisition. Historically, you have maybe done a larger acquisition, $1 billion plus, every couple of years. Is that the kind of framework we should we thinking about sort of a larger acquisition every couple of years, and then smaller ones like Greenplum, potentially more frequently?

Joe Tucci

The answer is yes. But let me just kind of qualify that. I would argue that, I have always said I have favor a string of pearls as opposed a massive acquisition. And I think, from a revenue standpoint, the biggest company we have bought at $400 million on revenue were something there about. So, when you talk on a base of $6 billion and $0.5 billion plus, certainly, that’s not, I don’t call that big.

Okay. But, obviously in dollar value, I would say, you are correct. That would be a trend that you should I think we are going to continue. It’s worked really well, and that’s what I like.

I guess, that’s the last question. So, in closing, we believe you are executing well today. Our strategy for the private and public cloud is right on. We have a product roadmap that is well aimed and downright exciting. We have the go-to market capability and the alliance partners necessarily to bring our innovative products to market. And most importantly, we have 45,000 plus great people, who believe in our vision, in our future. I thank you for joining us, and we will be talking to you and I hope to see you all soon. Thank you.

Operator

This concludes today’s conference call. Thank you for your participation.

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Source: EMC Corporation Q2 2010 Earnings Call Transcript
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