EMC's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.23.14 | About: EMC Corporation (EMC)

EMC Corporation (NYSE:EMC)

Q1 2014 Earnings Conference Call

April 23, 2014 8:30 AM ET

Executives

Anthony T. Takazawa – Vice President-Global Investor Relations

Joseph M. Tucci – Chairman and Chief Executive Officer

David I. Goulden – Chief Financial Officer and Chief Executive Officer-Information Infrastructure

Analysts

Ittai Kidron – Oppenheimer & Co., Inc.

Andrew J. Nowinski – Piper Jaffray & Co.

Kathryn Huberty – Morgan Stanley & Co. LLC

Abhey R. Lamba – Mizuho Securities USA, Inc.

Ben A. Reitzes – Barclays Capital, Inc.

Toni M. Sacconaghi – Sanford C. Bernstein & Co. LLC

Aaron C. Rakers – Stifel, Nicolaus & Co., Inc.

Bill C. Shope – Goldman Sachs & Co.

Daniel H. Ives – FBR Capital Markets & Co.

Louis R. Miscioscia – CLSA Americas LLC

Maynard J. Um – Wells Fargo Securities LLC

Operator

Good morning, and welcome to the EMC Q1 2014 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer portion of the call. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time.

I’d like to introduce your host, Mr. Tony Takazawa, Vice President, Global Investor Relations of EMC.

Anthony T. Takazawa

Thank you. Good morning. Welcome to EMC’s call to discuss our financial results for the first quarter of 2014. Today we are joined by EMC’s Chairman and CEO, Joe Tucci and David Goulden, EMC Information Infrastructure CEO and EMC’s CFO.

Joe will begin our discussion with his views of the trends happening in IT, EMC’s vision and strategy and how the EMC Federation is managing the transition to the Third Platform. David will then make a few comments on our results and provide a bit more detail on how our various businesses and products are positioning EMC for success in the Third Platform. He will also discuss our outlook for the year 2014.

After the prepared remarks, we will then open up the lines to take your questions. I want you all to be aware that we are providing you with new schedules for pivotal. We have reclassified non-core revenues out of pivotal and into the EMC Information Infrastructure business. These non-core revenues include the Data Computing Appliance and various pivotal implementation services that make more sense within EMC II.

Importantly, this change will give you a better view of the strategic growth within pivotal. These new schedules will include five quarters of reclassified data so that you can have good view of trends here. We have included this information in our press release scheduled and in the Appendix of today’s slide presentation.

We’re providing you with our projected financial model for 2014. This model lays out all of the key assumptions and discrete financial expectations that are the foundation of our outlook this year. We hope that you find this model helpful in understanding our assumptions in context and ensuring that these expectations are correctly incorporated into your models. This model is available as background in today’s slides available for download in the Investor Relations section of emc.com.

Please note that we will be referring to non-GAAP numbers in today’s presentation unless otherwise indicated. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure in today’s press release, supplemental schedules, and the slides that accompany our presentation. In addition all financial comparisons will be on a year-over-year basis unless otherwise indicated.

As always, the call this morning will contain forward-looking statements and information concerning factors that could cause actual results to differ can be found in EMC’s filings with the U.S. Securities and Exchange Commission.

With that it's now my pleasure to introduce Joe Tucci. Joe?

Joseph M. Tucci

Thank you Tony. I would also like to welcome everyone to today’s call. As always, thank you for your interest in EMC.

For sure, the Information Technology industry is now going through a major transformation, a secular shift from the client/server PC era of computing to a mobile cloud big data social networking era. This new era is being called the third platform of IT. And as is in the case of all big IT transformations, we and all the other industry players will play strong disruptive headwinds, as well as new opportunities that are absolutely massive. Opportunities that have executed upon correctly will usher in a decade plus of solid revenue and earnings growth.

Additionally and very importantly, as we navigate through this transition, we and the rest of the industry are facing a global market which is exhibiting an air of caution in spending resulting from an array of economic and political uncertainties around the world. Collectively, these two factors are creating an environment that is not for the same apart.

Against this backdrop, we said EMC’s consolidated revenues and non-GAAP EPS would both grow by 6% this year, including the impact of AirWatch. As part of this 2014 guidance, we said in our Q4 call that for Q1 we expected out top line revenue to be $5.4 billion and produce a non-GAAP EPS of $0.34. Importantly, we also said on our call that we would strive to build storage backlog, in other words our plan call for growing storage bookings considerably faster than storage revenue in Q1.

As you have undoubtedly noticed by now, we exceeded our Q1 revenue forecast by over $80 million and beat our EPS plan by $0.01. And as David will cover shortly, while our storage revenue was down 3%, our storage product bookings that exhibit positive growth year-over-year and thus we did grow backlog. Given that we slightly deal our forecasts for Q1, given that our federation modeling strategies are resonating very well with customers. And given that our Q2 second half product cycles will be quite exciting and robust. I would like to take this opportunity to reaffirm our 2014 guidance of $24.6 billion in revenue, $1.90 per share of non-GAAP EPS and $5.8 billion of free cash flow. Again, this updated guidance now includes the impact of VMware’s AirWatch acquisition which closed in Q1.

And as part of our confidence in 2014 and to honor our pledge to return more cash to our valued shareholders, VMC Board has unanimously voted to raise our quarterly dividend by 15% starting on its first anniversary this July. This would make our annual dividend $0.46 per share. Speaking of confidence, as I eluded to earlier, what really gives us confidence on our future is our strategy, our federation model and by far the most important factor, our people.

So before I turn to our strategy, I would like to thank my 64,000 plus colleagues across the EMC family, the talented innovative people of Pivotal, VMware and EMC Information Infrastructure for their hard work and dedication to our customers. Our strategy is squarely and clearly aimed at helping customers’ transition to the third platform of IT and to help them transform into a more agile software-defined enterprise. And while our customers are undergoing this IT and business transformation, we are also providing them more automation, more flexibility, and lower operating cost for this current second platform IT systems on which they currently run the vast majority of their business.

In mobile, we are helping customers empower their mobile workforce with enterprise mobile management and mobile security. In cloud computing, we are providing customers with a software abstraction and automation layer of technology across their compute, network and storage resources. This software-defined datacenter approach helps customers form very efficient private cloud that works seamlessly with a wide choice of compatible public clouds.

This hybrid cloud software-defined datacenter approach will yield customers more control over their IT, more flexibility and more choice and far lower costs. And to provide customers with an open platform for developing and operating new cloud applications that can be run on multiple leading private and public cloud infrastructures and not lock the customer into any particular one, we have helped form the Cloud Foundry foundation. The Data Cloud Foundry foundation includes industry leaders such as IBM, GE, Intel, HP, SAP, NTT, Accenture. There are many, many more players who have and will join Cloud Foundry and back this important past initiative.

In Big Data, our customers need to ingest huge amounts of data quickly then reason over it and act on it in real time. This Big/Fast Data capability will (indiscernible) of game changing new agile software-defined business models in virtually all industries. The ability for an enterprise to innovate quickly around this phenomenon will likely determine its success or failure, perhaps even its life or death. In security, the mandate for customers to assure and protect identities is paramount as is the ability to examine information packet flow and content. On top of this, the ability for customers to form information governance rules and to measure a compliance with these rules is also critical.

To maximize our focus, assure strategic alignment and capture the massive opportunities that will be presented to us in this transition to the third IT platform, we at EMC have implemented our unique and powerful federated operating model. In our federated model, VMware will take the lead in providing an enterprise/solution for empowering the mobile workforce. EMC Information Infrastructure or EMC II will partner very closely with VMware and provide information storage capabilities that meet the required needs for speed, robustness and cost for this opportunity.

In cloud computing, VMware will drive the software defined datacenter and the hybrid cloud. EMC II will drive a software-defined storage technology named ViPR for block, file, object, and HDFS. This technology will work on top of EMC’s arrays, competitors’ arrays and vanilla white box storage. Additionally, EMC II, with partners, will also supply complete converged infrastructure systems of server, storage and network. And very importantly, EMC II will fully partner with VMware and its franchise partners on vCHS and also continue to partner closely with other important service providers on their cloud initiatives.

In our Cloud Foundry, and Big and Fast Data initiatives, Pivotal will take the lead with EMC II helping to build out customers’ physical HDFS data legs and VMware helping provide software-defined datacenter technology options. And of course, in Security, RSA will provide industry leading identity protection and verification technology, look for anomalies and stop suspect packet flows while assuring strong governance, audit and compliance.

Additionally, going forward, the EMC Federation is collectively, incredibly well positioned to play a new and potentially very large markets, which are now only in their infancy, exciting markets around Network Function Virtualization or NFV, and in and around the Internet of things. Knowing more about our technologies, our missions, our products and our opportunities, please join us in person, or virtually at EMC World on May 5 through May 8.

In closing, I’m incredibly excited about the opportunities the EMC federated companies have before us. And by our overall strategic position, we are number in storage in the second platform and we are well positioned for and growing very rapidly in the third platform. We are number one in virtualization and leading the software-defined data center and hybrid cloud charge.

We are clear innovator, in a new rapidly emerging generation of application and data fabrics and we are leader in several of very important growth areas in cyber security.

Thank you again for being with us today, and now let me turn it over to David Goulden, to present more details and color on both the EMC Federation and the EMC II, David?

David I. Goulden

Thanks Joe. Good morning everyone and thanks for joining us today. For the first quarter of 2014, EMC reported revenue of $5.5 billion a non-GAAP EPS of $0.35 both slightly ahead of where we told, we’d be in Q1 including AirWatch. Compared with Q1 year ago, Pivotal grew 41%, VMware grew 16% and EMC Information Infrastructure declined 3%. The differences in growth rates among and within our businesses reflects some of the transitions in the industry as well as changes we made to our own business in the first quarter, I’ll cover these changes shortly.

In our major geographies, revenue growth was flat in North America, up 8% in EMEA, down 2% in APJ and down 11% in Latin America. Our BRIC plus 13 markets were down 1%.

As we indicated in January, in Q1 we modified our fulfillment practices in our storage business, to mitigate extra costs in trying to fill high volume of orders at quarter end. The decision to fill those orders more rationally did result in a smoother close. Although we have more work to do on inventory. As expected this change in business practices resulted in Q1 revenue being lower than in seasonally normal.

While the level of unfilled orders increased versus Q1 a year-ago, they did not grow as much as expected, because our Q1 revenues were higher than anticipated. These unfilled orders will continue to build in Q2. The good news here is the storage forward bookings grew inline with our growth expectations or storage for the year.

Looking at line items driving our earnings growth, consolidated gross margins in Q1 was 62.8% down slightly compared with Q1 of last year. Looking at II, margins were down year-on-year, primarily due to volume. Excluding fixed cost, storage product margins would have been up from last year’s Q1.

Pivotal have a high mix of Professional Services revenue because more of a software license orders are now being recognized on a subscription basis. VMware’s gross margin declined from last year’s Q1 due to AirWatch as well as ongoing investments including DCHS.

Operating expense grew 8% as we continue to make major investments across EMCii, Pivotal and VMware in high growth areas such as flash, software-defined data center, software-defined storage, converged infrastructure, Big Data storage and analytics has hybrid cloud and mobile. The increase in OpEx over last year amounting to about $0.06 per share.

Our tax rate for the quarter was slightly higher than last year’s Q1 unheard on a year-on-year EPS compared by a $0.01. We benefited by $0.02 in the quarter versus later year from lower share counts reduced by the retirement of our convertible debt on our buyback program. As a result non-GAAP earnings per share in Q1 was $0.35, a $0.01 ahead of our expectations.

We generated $946 million in free cash flow in Q1 30% higher than non-GAAP net income, on cash and investments at quarter end were $15.3 billion, as we use $1.7 billion in Q1 retire our convertible debt and back to $1.1 billion with the acquisition of AirWatch, repurchased approximately $400 million worth of EMC shares and returned about $200 million to shareholders via our quarterly dividend.

As Joe said we are very pleased to announce today that we are increasing our quarterly dividend by 15% starting July 1. At this level and with our committed buyback program we expect return over $8 billion of cash to our shareholders over the course of 2013, 2014 and 2015.

Our uses of cash reflect a healthy balance of investments in our future we return to shareholders today. Our investments in the business are critical to our long-term success. The priority of customer today is to drive competitive advantage by harvesting the forces of mobile, social, cloud and Big Data, forces to characterize the third platform of our IT.

However, most enterprise workload resides on second platform infrastructures, so customers are carefully evaluating how to leverage these second platform investments as we plan for the third. As a result they are looking for technology partners that can support both.

The EMC Federation bodes some of the industry’s best assets across the third platform drivers on mobility cloud and Big Data, now more importantly we’re making progress in each. Pivotal is winning many flagship enterprise customers who want to build modern cloud-agnostic applications and reason over their troves of data.

VMware it’s in the early innings of a huge opportunity building out software-defined data centers, improve the end-user compute experience, and adding seamless connections to external clouds via vCHS.

And EMC Information Infrastructure is partnering with enterprise customers to build our private clouds including new web scale environments for applications with highest Pivotal requirements, and partnering with cloud service providers to standard new value-added cloud services.

The second platform will continue to be a very large market for a long time to come and there is plenty of opportunity for EMC’s innovate and gain share. We have an industry leading position and that installed base and customers are looking for ways to make their second platform environments more efficient, technologies like flash, hybrid arrays, software-defined storage and software-defined data center are some of the fastest growing areas of IT, as they make the second platform more efficient to customers and set them up well to bride their platform.

As we provide you with the summary of the quarter and an update on how we see the industry our business evolving, we’ll highlight our progress in five key technology areas flash, Big Data, software-defined data center and software-defined storage, converged infrastructures and cloud. These technologies play an important role in modernizing the second platform and in building out the third.

Starting with Big Data and Pivotal, in its successful first year of operations Pivotal is way to a solid foundation for growth with differentiated technology in Big Data analytics and platform as a service Pivotal is now focusing exclusively on software and strategic services in driving a business model that reflects this. As part of this in Q1 we transferred the data computing appliance and Pivotal implementation services to the EMC Information Infrastructure business.

Visibility to direct resources to where they make more sense within EMC is one of the main benefits of the federation model. Looking at the growth of Pivotal on this new basis, Pivotal grew revenue 41% over last year’s Q1, while bookings grew significantly faster.

As we mentioned last quarter revenue growth does not reflect the growth in demand as Pivotal builds out in subscription based revenue stream. We’re very pleased by the fact that Pivotal has captured a marquee or b marquee custom in almost every major industry sector. We have landmark booking wins in Q1, with wins of a major global telco, a large U.S. based bank and a global consumer electrons manufacturer. The combination of high value strategic services in the Pivotal One platform are driving customer adoption and excitements.

The global media companies engage with Pivotal Labs to build an application using Pivotal cloud foundry to drive the future of revenue enablements. And Pivotal Labs is also connecting a healthcare provider to its customers with a secured application that leverages the power of Big Data analytics.

For the cloud to deliver to its full potential form in the intra application should be able to run seamlessly on any cloud, and this is the reality we are enabling with Cloud Foundry. The growth of cloud foundries and industry standard continues as we have been adding many new sponsors will be announced in the very near future. We have confidence of laying the foundation for Open Source software developments and governance for next generation applications now we will expand Pivotal’s market opportunity exponentially in the future. This is because we believe the open always wins in the long run and we are still in the early stage of building out next generation applications.

Turning now to VMware and the software-defined data center and cloud. VMware’s industry position in both of these is unparalleled. Our offerings in SDDC continue to gain traction with the mix of license bookings or non-standalone vSphere over 45% in the quarter versus 30% a year ago, and as such is showing strong momentum with a growing number of pilots and increased production use. VMware’s hybrid cloud business which includes its VSPP program and vCHS more than doubled again year-on-year in Q1 and will continue to ramp with the robust road lying ahead including the vCloud Government Services which is on track to GA in the second half of the year.

VMware’s third strategic objective end user computing has also gained momentum. In Q1, VMware introduced its new depth software as a service offering on vCHS and completed its acquisition of AirWatch in early of this month refreshed its VDI solution with the launch of Horizon 6 which stands out for its integration with VMware’s SDDC components. With the stronger portfolio than ever VMware is on track for another year of solid execution in 2014.

Now turning to EMC’s Information Infrastructure business. As you know for sometime now, the growth rates in a storage industry have been pressured by several factors. These include the deployments of the efficiency technologies to extract resources within the tighter spend environment as well as the introduction of new infrastructure paradigms for the next generation workloads.

CIOs are evaluating the best way to move forward prioritizing third platform technologies to drive top line growth and spending on second platform technologies only as much as they have to. We have seen this dynamic play out in our own results for the past few quarters as customers studies their alternatives. The effective customer pools stemming from these cyclical and secular factors was most pronounced in the high end this quarter.

Several additional factors contributed to the year-on-year high end decline as well including our new quarter end fulfillment practices and maturing product cycle and double-digit growth in Q1 of last year. While these additional pressures will ease as we move through the year, overall storage growth will be driven by our emerging storage as well as by our unified and backup segments and helps by a series of very strong announcements across the portfolio we have planned for this year. As expected, overall storage revenue declined in the quarter. But excluding VMAX storage revenue grew 6%. We are very pleased our growth in our Emerging Storage segment which includes a number of third platform technologies accelerated 81%. Storage bookings in Emerging Storage helped to offset slightly lower than expected bookings in the high-end.

Overall, storage product bookings which of course includes VMAX grew the pace consistent with our full year expectation for our storage revenue growth. Our emerging storage business encompasses best-of-breeds assets in areas that are thriving with the shift of Third Platform including flash with XtremIO, software-defined storage with ViPR and cloud where storage provide a need for distributed object storage are met with Atmos and Big Data analytics which continues to be most rapid expanding used case for Isilon.

Let’s discuss the five key technology we mentioned earlier, Flash, Big Data software–defined data center, converged infrastructure and cloud, and how EMC Infrastructure business is capitalizing upon them. Starting with flash, where we have a very strong position. In its first full quarter general availability, XtremIO have continued its very strong momentum. We began shipping our 20 terabyte XtremIO systems which are key to increasing XtremIO use for data basis and analytics applications. XtremIO won dozens of new customers in a quarter along with business from many repeat customers, who have been impressed with XtremIO’s consistently high and predictable performance in real world workloads.

These workloads are typically random inversely such as VDI and Virtual Service or consistently high performance such as very high speed transaction processing, requirements which XtremIO was specifically architected. XtremIO’s architect results and performances simply doesn’t change as the system is filled or as the higher load grows. And we have a very aggressive roadmap this year for XtremIO future expansion and EMC portfolio integration.

As successful as XtremIO is, the vast majority of flash capacity shipped by EMC is in a highly storage race. Over 70% of VMAX and VNX2 systems shipped with some flash capacity and in all, EMC sold more than 17 terabytes of flash in Q1 alone, up over 70% over last year and we believe way ahead of anyone else. With this portfolio offerings to accommodate the variety of applications for flash, including our service-side software, EMC is the industry leader in enterprise flash storage. We continue to innovate and expand our lead in flash as its role in the data center grows.

The Big Data phenomenon is what we have been talking about for sometime and this is an area in which Isilon really shines. Growth continues to be a major contributor to our emerging storage growth and Isilon's fastest growing used case by far it’s the Hadoop analytics.

In Q1, we continued to see the power of the federation work, customers are using Isilon as they support best-of-breed solutions from Pivotal. They are also using Isilon with other Hadoop distributions. This new end market is in addition to Isilon's traditional strongholds in media and entertainment and its growing presence in enterprise workloads. With this expanding variety of used cases, Isilon continues its track record of success and gaining share yet again in Q1.

An important trend is driving major transformation is software-defined storage. Within software-defined storage, we have a number of assets across the federation. ViPR, ScaleIO and vSAN from VMware. ViPR is our flagship enterprise wise software-defined storage platform. ScaleIO and vSAN are software-defined storage products to bolster an internal server based storage into virtual network storage for which are very different. A full software-defined storage platform requires both a control plane and a data plane and ViPR uniquely provides this separation. The ViPR controller is the [closing] (ph) layer that abstracts and standardize the management of EMC and non-EMC storage and present that storage to multiple, physical and virtual environments including VMware.

The ViPR data plane provides the object, HDFS and other software defined storage data services that customers can run on existing arrays or on dense commodity hardware. ViPR is programmable enabling customers to consistently automate and add features to the entire storage environments and to build hyper-scale file storage capabilities. ScaleIO creates a pool of storage that can scale across thousands of servers and present itself as an external block array, which can be managed by the ViPR controller and exposed to any physical or virtual environment including those from VMware, OpenStack and Microsoft.

As we complete our integration plans, ScaleIO can be simply pull it off out the block data service of ViPR. VSAN introduced in February creates a pool of storage that is exclusively nice accessible via VMware ESX. VSAN scaled out the size of a single ESX cluster, two nodes and is very easy for VMware admin to use. ViPR is delivering value to customers today. For example, a large telecom in the UK selected ViPR in Q1 to provide the software defined storage platform for that cloud offering. With ViPR, the customer has fully automated software defined block and object storage across both EMC and non-EMC arrays. In this example ViPR were just one part of the much bigger win as the customer also selected our SRM software with single-plane glass reporting for all their storage EMC and other. ScaleIO for low-cost high performance block storage on commodity hardware in existing service and EMC is consulting a professional service to implement and maintain the environments. At EMC world in weeks, you will be hearing a lot more about SES, our very excited developments here.

Another force that is transforming the industry and our business is converged infrastructure. After exiting 2013 and this demand run rate of $1.8 billion, VCE continue its momentum into Q1 with demand for Vblocks once again growing at well over 50% and over half of the Vblocks unit sales in the quarter going to new customers. Since Vblocks were first introduced in 2010, both enterprise and services providers alike have been adopting converged infrastructures in part because of the easy speed with which Vblocks allow the customers to standard private or public clouds. A great example is Fox Sports in Australia to use the recent relocation as an opportunity to build a private cloud on Vblocks. With 40 to 50 terabytes of data moving daily and daily growing by 3 terabytes per year Fox Sports wanted an infrastructure that would handle the enormous amounts of traditional broadcast media but also new media which require twice as much of storage.

The on-premise’s infrastructure as a services solution on Vblocks has provided them with IT that was rapid to install given the short timeframe for the move and that is easy to maintain. Growth of our VSPEX referenced architectures built around VNX continued on its rapid pace in Q1 with demand more than doubling year-on-year once again. This is due in no small parts of our channel partners who have wholeheartedly embraced VSPEX and shared in its success. Now two years on the market, our momentum indicates we’re building on the leadership position we quickly captured in this space. We are very pleased with our growth in converged infrastructure and continue to be the clear leader in CI.

The four technology we discussed so far; flash, big data storage, software-defined storage and converged infrastructure, are enablers of cloud infrastructures, both public and private. The adoption of IT as a service is creating a new era of IT agility, efficiency and choice with clients and our entire storage portfolio covers need from well-run private and hybrid clouds through the public clouds.

EMC’s next-generation backup and recovery offerings are a good example, allowing customers to build efficient data protection-as-a-service infrastructures. Our recent announcements include cloud features such as data isolation with securable dependency for private or public cloud deployments, the ability for multiple data owners to access data protection how and when they want it, as well as flexible capacity-based licensing that unlocks the right capabilities when they’re needed.

The strongest driver of growth in backup and recovery this quarter was Data Domain, which had another excellent quarter and continue to support our leadership position in this market, illustrating advisory customers of the modernized and backup architectures.

Off-premise cloud providers are making use of our entire storage portfolio to stand up offerings for their customers. Our service provider partner program, which exclusively focuses upon supplying information infrastructures from our partner-as-a-service offerings, has been our fastest growing vertical every quarter for the past two years. This program continued its rapid expansion in Q1 and is now at $1 billion run rate.

This number only represents the demand from named top service providers in our SP partner program. In addition, there are several other ways customers are consuming EMC infrastructure in the cloud. When you consider the technology we sell, service providers were not included in the SP partner program. So software companies who use our technology to stand up software-as-a-service to customers who buy our technology to deploy in service provider data centers and also our sales of value-added content providers we estimate our overall 2013 revenue for off-prem cloud used cases was well over $2 billion.

Atmos, which we believe is the leading commercially-available object storage system on the market today, has contributed to this success as its geographically distributed object storage architecture provides an ideal foundation for web-scale content depots. We’re excited about our future in the cloud, including the growing storage capabilities within [BCA JASS] (ph) and you can expect to hear more about our plans in just a couple of weeks.

Our strategy for success in storage over the long-term depends heavily on the success of federation overall. Many of our biggest customers are looking to take full advantage of scale and architecture to leverage the data in their domain and in these instances the complementary technologies, Pivotal and VMware are critical. It is the EMC Federation that enables us to have strategic conversations and bring the critical mass required to succeed in the Third Platform.

RSA is often a part of these strategic conversations and security is a primary consideration when customers look to build out their next-gen strategies. RSA did well against a strong year ago compare, up 5% in Q1. Security Analytics and Archer, each grew over 25% again this quarter and again that represent close to 30% of RSA’s revenue.

Actionable analytics are critical to any agile and responsive IT security strategy. For example, within 36 hours of the public disclosure of the Heartbleed bug, our security analytics customers could download new updates which led them identify Heartbleed-related vulnerability and spot attempts of exploitation. Our leadership position in the security space was evidenced by record attendance of the RSA Conference in February of nearly of 30,000 attendees, clearly very strong interest in security and in the RSA brand.

Our Information Intelligence Group revenue was slightly off or expected to be this quarter. Although, we’re quickly growing our subscription bookings, which can be further earned out over the life of the contracts. For example, all of Syncplicity’s revenue is subscription and revenue here was well over twice what it was in Q1 of last quarter. Syncplicity’s trial implantations quickly go viral in the enterprise, but it also makes sense to host Syncplicity in a private cloud, driving storage amount as utilization grows. A great example is a tech company that started off with a 500 seat trial a year ago, amounted to 6,000 to (indiscernible) is now 50,000 seats and on their way to 150,000 seats.

EMC II service organization is playing a key role in facilitating cost federation deals. A great example of this is engaged in Q1, a large global telco influenced Pivotal Cloud Foundry to use for our customers’ big data team. The trust of customers has developed over the years with EMC and with our brand is important asset in winning new partnerships for next-generation build-outs.

We will position within EMC II. I’m fortunate to have such a broad base of stakeholders who are dedicated to our success. I’d like to thank the EMC team, our partners and our customers for their support this past year. Our outlook is unchanged. We still expect IT spend growth and storage growth to be broadly similar to what we were in 2013. As we said in January, we expect the combination of our higher and lower growth offerings in storage to result in 3% storage growth for the full year, which we believe is fast, now appears in the space.

With our strong foothold in Second Platform environments and some of the most exciting IT assets in the industry helping us propel customers to the Third Platform, we’re well positioned to meet our 2014 targets, which now include AirWatch; revenue of $24.6 billion, up 6% year-on-year, non-GAAP operating margins between 24% and 24.5%, non-GAAP EPS of $1.90, up 6% year-on-year and free cash flow of $5.8 billion.

EMC is at the threshold of expansive opportunity and we are very confident we’re on the right track with our federation model. We have the right technologies in Pivotal, VMware, storage and security and are making progress in the key areas of flash, big data, software-defined data center, converged infrastructure and cloud. And we have the right team of people committed to mobilizing the power of the federation for customers.

With that, I’ll turn it over to Tony to moderate the Q&A. Tony?

Anthony T. Takazawa

Thanks, David. Before we open up the lines for your questions, as usual, we ask you to try and limit yourself to one question, including clarification. This will enable us to take as many questions as possible. We thank you all for your cooperation in this matter. Rebecca, can you open up the lines for questions please.

Question-and-Answer Session

Operator

Thank you. We’ll begin the question-and-answer session. (Operator Instructions) Our first question is Ittai Kidron from Oppenheimer. You may ask your question.

Ittai Kidron – Oppenheimer & Co., Inc.

Thanks. First, just a clarification and then a question. Just David, on the annual revision, is that just the inclusion of AirWatch or there are other things in that are making for the $0.05 correction? And then on the high-end where you’ve seen, according to my math, about a 20% plus type of contraction on a year-over-year basis. How recoverable is this? How soon is a product cycle coming here to address this? What is that that you think is within your control versus not within your control and your ability to turn this business around?

David I. Goulden

All right, great. Thank you. So let me handle those in turn. So, yes, just to clarify, our guidance for the year has not changed. When we guided last in January, we did not include AirWatch into the guidance and the changes to the guidance are only for the addition of AirWatch. There’s no other change on guidance for the year. So I know a number of people had a little bit of confusion around that. AirWatch basically had about a $75 million impact on the top line and a $0.05 impact on the non-GAAP EPS and that accounts entirely for our change in guidance from January.

Now let me move on to the High-end, and yes, as we showed you on the chart it’s down little over 20% year-on-year this quarter. So let me explain a few things going on. So the first thing that’s going on is there’s a number of math factors and what I mean by math factors is, a) we had a tough compare against Q1 last year where it grew double-digits. Importantly, the changes in business practice that we implement at quarter end and the building of backlog impacted our Symmetrix line that made the year-on-year growth look a lot worse than the actual underlying bookings growth. So biggest factor math.

Second factor that you talked to, obviously as you know over the years, the High-end is very depended upon product cycle. The moment we have a maturing product cycle, we do have a refreshed plan during the year, not I’ll tell you exactly when. We don’t want to impact our own business more we have to, but that is certainly a factor.

And the third factor, which is the industry backdrop and I mentioned it in my prepared comments is basically people are buying only as much as they have to typically of second platform technologies due the cyclical factors driven by the economy and people stretching the efficiency and life of their platform. And also some sector factors that people just are evaluating alternatives generally in the data centers. So that third factor will stay worse, but the first two are very much within our controls. So the first one is the math, which will go away in subsequent quarters and then we do expect to see a boost from the product cycle later on during the year.

One important thing that I’ve mentioned is that we watched our installed base of Symms very carefully because that’s one of the key metrics that we track. And it’s interesting that last few quarters despite a lot of consolidation because what’s happening in the Symm market is people who are moving from the old DMX technology over to VMAX-1 to VMAX-2 will often tend to consolidate multiple frames into one. Despite that consolidation factor the installed base of Symmetrix has remained essentially flat over the last several quarters, which means that to the extent that we’ve been consolidating frames we’ve also been selling new frames out into the marketplace, not the key metrics, which we track.

So undoubtedly there is a little bit of churn at the low end of the base with some of the older systems, but installed base has remained very flat, which is also very important because we’re not losing installed footprint, which means the opportunity to rebound and get some growth back into Symm basis out for us. So hopefully that gives you a number of factors around Symmetrix will be helpful.

Anthony T. Takazawa

Thanks Ittai. Next question please.

Operator

Next question comes from Andrew Nowinski with Piper Jaffray. Your line is open.

Andrew J. Nowinski – Piper Jaffray & Co.

Hi, good morning. Congrats on the nice quarter. I was just hoping a little more color on the public cloud market. I know you said you generated in excess of $2 billion in revenue from off-premise deployments, but I’m curious if that’s extending your sales cycles, those customers evaluate the economics of the public cloud. And then, could you also provide your views on how Cisco’s recent public cloud announcement impact EMC?

David I. Goulden

Okay, so Andrew let me take the first one. And Joe, may want to comment on the second one. So the existence of the public cloud is one of those secular factor, I just mentioned in my last answer, disclosing customers to look where they should be deploying their workloads and really it is all about workloads. So there is no one size fits also certain workloads are better in a hybrid cloud or a private cloud and some workloads maybe whilst to the public cloud.

So to the extent that the cloud is out there and it is clearly a growing phenomenon in the marketplace that is one of the secular factors that just impacting the people and creating this general poles in the market places as people look at second and third platform technologies.

What we wanted to do in terms of give you a couple of data points is first of all, demonstrate to that we have a fair amount of our business actually going into a cloud partner program, our search partner program. But then it is much more than that when you look at the totality what we sell to public clouds. So EMC storage technology is very prevalent in public clouds. And you see a significant chunk of our business in 2013 came from that’s related market. Joe?

Joseph M. Tucci

Maybe a little lazy, but if you look what’s happening here and you go back to what was called platform one Mainframe and Minis you kind of got all in one. You got your server, your compute, your network all from one vendor. Yes, you provide some plug compatible devices, but the management, the control locking from one vendor. In platform 2, we went for silos. So they became a storage industry and networking industry, a server industry. On top of that it was another initiatives build the management industry to help to move it all together, and scale up technologies rule today.

If you look a Platform 3, which is happening it’s kind of taken a little bit of both of those but it’s basically recombining at least at the controller layer and software for the control storage network and compute the management software from many made different vendors is being replaced with a layer of automation, and scale out technologies rule. So what you see is companies like Cisco, companies like us, obviously are trying to provide the software-defined layer.

And of course, they want to use their own technologies and their clouds. But another factor I think to succeed in the future is co-opetition, you are going to have to understand that you are going to compete in more areas but there is very, there is a lot of power in cooperating. And that’s what we’ve done with BCs, so the partnership with Cisco is still strong. My guess is as we both go for software offer, software-defined scale out, reuniting in a way of storage computing network. You know obviously to be areas of rough, but again the companies they are going to do best, they are going to understand how to do co-opetition. So that’s kind of where we are and you can see that BC, John is very committed to BC, I’m very committed to BC. The company is very committed – both companies very committed to BC and it’s doing extremely well.

Andrew J. Nowinski – Piper Jaffray & Co.

Thank guys.

David I. Goulden

Thank you.

Anthony T. Takazawa

Next question please.

Operator

Our next question comes from Katy Huberty with Morgan Stanley. Your line is open.

Kathryn Huberty – Morgan Stanley & Co. LLC

Hi, thanks. Last night, VMware talked about $100 million contribution from AirWatch, this year and then you obviously beat the first quarter by $75 million that’s the AirWatch contributions you’ve got, $175 million in upside over the last three months, but you are only creates any the full year by little less than half of that. So just can you talk about has your view around the next three quarters changed over the past three months, or should we just view that as conservatism as you continue to rebuild the backlog, to the Air, thanks?

David I. Goulden

Katy, thank you. Let me address that so, VMware, did talked about $100 million of contribution from AirWatch but basically if you look at what the VMware’s mid-point of guidance is in April compared to mid-point of the guidance in January, it is up by $75 million. So basically, what happened for AirWatch is it didn’t change the expectation of AirWatch contribution to our license revenues that did go a little bit more expect the contribution services revenues but the within (indiscernible) million and we reflected that in all numbers, so that’s why $75 million.

In terms of the Q1 beat, you are right, we’re actually beat our Q1 outlook by a little over $80 million about $70 million of that was in the storage business and if you remember back to the early part of my prepared comments, we said the reason for that was that basically we didn’t build our backlog quite as much as we expected to and you can think of it intellectually in terms of that’s extra backlog is why we’ve beaten the – we now have to build our backlog up in the Q2. So those two things both have normalized out which is why we are increasing our full-year guidance from what we actually said initially in January by the extra AirWatch and to beat this quarter and storage will be made – will be basically used to build up additional backlog in Q2.

Kathryn Huberty – Morgan Stanley & Co. LLC

Thank you.

Anthony T. Takazawa

Thank you. Next question please.

Operator

Our next question comes from Abhey Lamba with Mizuho Securities. Your line is open.

Abhey R. Lamba – Mizuho Securities USA, Inc.

Yes, thanks. Your EMEA sales were an outperformer as a region now it was something in the market that was mainly your execution, can you talk about the drivers for outperformance in Europe?

Joseph M. Tucci

Yes, thank you. We’re actually very pleased with obviously with what happened in Europe particularly grading on the period. We actually had the strength across almost every single market in Europe during the quarter only one country, and I am not going into – calling out single countries by name, but only one country however whole portfolio didn’t showed a decent growth. So everybody was up around that 8% average. We do think it’s good execution. So we’re just very pleased with how things went to Europe last quarter.

Anthony T. Takazawa

Thanks Abhey. Next question please.

Operator

Our next question comes from Ben Reitzes with Barclays

Ben A. Reitzes – Barclays Capital, Inc.

Yes, thanks a lot. Could you talk about in a little more detail how you get to the 3% growth in storage for the year, you talked about high-end but other products and other things that you are excited about perhaps into the second half because those growth rates have to be pretty robust and then if you don’t mind there has been talk in the press around the Project Mystic where perhaps there is an integrated appliance with VMWare around selling VSAN coming as well in the second half. Is there any commentary around that and could that be material? Thanks.

Joseph M. Tucci

Well, Ben, thank you. Let met take that. So let me explain to you how we get the 3% storage growth for the year. It’s actually relatively simple compared to with what we did in Q1 as the baseline. So as we said in my comments, our storage product bookings which is the key indicator for the quarter given all the change in backlog, you really have to kind of look at what happens to story for our bookings, our story for our bookings for Q1 grew very much inline with the 3% that we said we grew the storage out for the full year. So I know to get to the 3% for the year, we just need to maintain our bookings growth rate throughout the year. Now, we’re going to have a lot of help going through the year compared to what we had in the portfolio in Q1 because we have a very robust set of product announcements throughout the year, starting at EMC World and in a couple of weeks time but then there will be a couple of another major announcement faces during the course of the year as well.

So we’re very excited about what we’re going to have adding into the portfolio over the course of the year and I don’t want to get into specifics around individual projects and code names and things like Mystics is all sorts of speculation in all sorts of industries about what is going to be announced by rather when should we get to the announcements and talk about of the curve.

Ben A. Reitzes – Barclays Capital, Inc.

Okay, thanks.

Anthony T. Takazawa

Next question please.

Operator

Our next question comes from Toni Sacconaghi with Sanford Bernstein

Toni M. Sacconaghi – Sanford C. Bernstein & Co. LLC

Yes, thank you. You’ve commented that your bookings growth was lower than you had anticipated in your original outlook, and it appears as though perhaps your backlog build was maybe 50% to 75% of what you had expected it to be. Can you confirm both those statements and I guess I have the opposite question which is the bookings growth was weaker than you thought for Q1? Why are you confident in maintaining your guidance?

David I. Goulden

Toni, we did not say that bookings growth was lower than we expected. We said the bookings growth was inline with our expectations of revenue growth for the full year, so just to clarify that point. On the second point, you’re right that our backlog builds was less than expected by roughly the amount that we have achieved revenue during the quarter.

Now in the interest of total and full transparency, I would tell you that internally we may be strived to do a little bit higher than the bookings growth rate at the 3%-ish level we talked about for the year, but that was on internal expectation as opposed to anything that we would have baked into our guidance. So relative to what we have guided our bookings growth rate is absolutely inline with what we expect revenues to come out for the full year. Thank you.

Toni M. Sacconaghi – Sanford C. Bernstein & Co. LLC

Thank you.

Anthony T. Takazawa

Thank you, Toni. Next question please.

Operator

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

Aaron C. Rakers – Stifel, Nicolaus & Co., Inc.

Yes, thanks for taking the question. I want to ask you about free cash flow generation. I know that you guys have reiterated the full year consolidated free cash flow. But when I am look at the Q1 results and go back overtime, I think on average you have done between 26% to 28% of full year free cash flow in Q1. This number today would imply about 16%. So in order to hit that 5.8 number, is there any underlying assumptions or anomalies that you are making to that free cash flow for the next couple of quarters?

David I. Goulden

Aaron, yes thank you. Let me answer that as well. So a few things happened to free cash flow in Q1 by the way all of which we expect as we put our plan together for the years. So first of all, obviously free cash flow was impacted by lower net income, which was obviously driven by the changes in our business process and the lower revenue growth that was the first factor.

The second factor is we had significant increase in tax payments, Q1 this year versus Q1 last year that we expected. The third factor was our CapEx spending was up in the quarter principally because we acquired one of our properties overseas in one of our international markets just made a lot of sense from a CapEx point of view. And then the full factor was overall timing of payments.

So we expected all those going into the quarter. We knew that Q1’s cash flow was going to be lower than historic average. We understand all the differences and we’re on track to the 5.8.

Anthony T. Takazawa

Thanks Aaron. Next question please.

Operator

Our next question comes from Bill Shope with Goldman Sachs. Your line is open.

Bill C. Shope – Goldman Sachs & Co.

Okay, thank you. Have you seen any changes to the product cost and margin profile as a result of the backlog changes? Or is that something that actually the tailwinds later this year? And I guess related to that last quarter you have mentioned that your bookings margins were higher than the recognized margins, so could you get some similar color for what you saw this quarter?

David I. Goulden

Yes, absolutely Bill. So a couple of things, if you go back to my prepared comments, we did say that, if you take out the impact of fixed costs on the margins because obviously from a storage product point of view, revenues were lowest. So backing out the impact of fixed costs, our margins on our storage product revenues were actually higher than they were in Q1 a year ago. And they reflect two things, one is the impact of the backlog rubbing in and the second would be a very comparable year-on-year overall booking margins. So our booking margins were basically similar, we’ve got a benefit from the backlog.

In terms of the changes of business practices on the fixed cost just kind of where they impact things mainly. With a little bit of benefit you see our inventory levels are still high than we likened to be we have got a bit more work to do on inventory in the factories. And as we’ve continued to work that down, we expect to get more benefits into the fixed costs.

Bill C. Shope – Goldman Sachs & Co.

Great, thank you.

Anthony T. Takazawa

Thanks, Bill. Next question, please.

Operator

Next, we have Daniel Ives with FBR. Your line is open.

Daniel H. Ives – FBR Capital Markets & Co.

Yes, thanks. Joe, could you really just talk going into this year after a 1Q versus last year, can you maybe compare and contrast relative to product cycle. What you’re hearing from your sales customers and should all go that will be interesting comparison. Thanks.

Joseph M. Tucci

I don’t know if it has changed a lot, I mean I think obviously we are deeper into the transition that were customer realization that there is something big happening here and we call this Third Platform of IT. They understand that on the back of the Internet of things and the ability of having telemetry in almost every device they are going to be able to and to be able to analyze that collect it, analyze it and act on a newer plan. They are going to be able to change their business models and their industries are changing.

So there is a lot more focused on the future, that is causing caution on today, because obviously if you know you’ve to move to the future, you might say, what is the minimum I could spend on today to get to the future. And to give me the maximum amount of torch power if you will to spend on to move to the future. So obviously that is all excalating, it would be pockets of economic uncertainty out there around the world. There is obviously the emerging markets are little softer and there is lot factors affecting those markets. So I think it’s pretty much the same, but I guess we are in the later inning of the game.

So last year in the second innings we are probably in the fourth inning this year. And it’s a pace of change to accelerating. And we are mixing no words, this is a huge secular shift, one personally I am excited about, because I think we have great assets to I believe we have great assets to capitalize on that. And again, it’s, as I said in my remarks not for the fainter heart, but if you do it right it’s going to be the best rewarded pay off.

Anthony T. Takazawa

Thanks Daniel.

Daniel H. Ives – FBR Capital Markets & Co.

Thanks.

Anthony T. Takazawa

Next question, please.

Operator

Our next question comes from Lou Miscioscia, CLSA. Thank you.

Louis R. Miscioscia – CLSA Americas LLC

Okay, great. Maybe you can give us some more color on the emerging market is down a bit or is that still better than others. What you’re seeing from a storage perspective and maybe a specific comment on China if you could?

David I. Goulden

Yes, Lou. Our emerging markets were actually impacted a fair amount by currency, also impacted bit by currency. So while we are down, one we were up one in constant currency, and BRIC plus 13, the biggest factor for us, it was last year really tough year-on-year compare in Brazil, we had 68% growth rate in Brazil, last year we had 37% growth rate in Latin America, because of that. If you take out Brazil or BRIC plus 13 markets were up by 7%. So much stronger the balance, so leverage within APJ, China was actually our strongest market. So we feel good about the progress that we are making in China. So I’ll give you a little bit of color from the puts and takes around the emerging markets.

Anthony T. Takazawa

Thanks Lou. We have time for one more question and then we’ll have a few concluding comments from Joe.

Operator

Thank you. Our last question comes from Maynard Um with Wells Fargo.

Maynard J. Um – Wells Fargo Securities LLC

Hi thanks. So you talked about the benefits coming from the new product cycles at some point post to EMC World and beyond, but also talked about the secular trends in the pausing in spending as customers make IT decisions. So I’m just wondering relative to your full year guidance, if you can just talk about the balance between those two things and then also may be just share some of your views about what you are embedding for the full year in terms of macro and geography and maybe U.S. federal spend. Thank you.

David I. Goulden

Maynard, yes let me start with the last one, we are still anticipating the IT spend and storage spend will be roughly the same as 2013. So no bounce back in IT spending. Relative to assumptions for the year on pause, we always find that the pause factor is greater in the first quarter because in addition to any secular or cyclical issues around pause, all customers are still trying to get their budgets in place and finalized. That’s always a factor that goes into the first quarter.

So the fact that we had storage for our bookings growth in the first quarter that was inline with our expectations for full year growth in storage, is actually quite restoring force because you got the pause, we’ve got relative to the new products for the year that got low point of the product cycle for what we announced initially because, obviously nothing is announced yet, the first things what we announced in the couple of weeks time at EMC World.

So when you go through the year and you say that the pause should be a little bit less hopefully and the product cycle should be stronger, and that is actually a good sign for us getting to the numbers for the full year. And those are some of the assumptions we are basing our continued confidence around making our full year number around.

Anthony T. Takazawa

Thanks Maynard. Joe?

Joseph M. Tucci

Well, let me again just start, where I finished where I started. I just want to thank you for being with us today. We truly and deeply believe that the EMC family of companies has great assets and great people that are really positioned and well positioned for the Third Platform IT. Customers trust us in this current client-server. Therefore, we think we are well positioned to help customers on that journey as they transition their IT but more importantly transition their enterprises, their companies into more of a software-defined, more flexible, more gradual enterprise. We have again really talented people. These talented people are excited about our future and our opportunities.

And again I invite you to join us for the EMC World either in person in Las Vegas or virtually we will do most of it over the web. So you can get a good feel, if you don’t want to travel, and you will learn a little more about what we’re doing across their companies. And so thank you very much for being with us and will see you soon.

Operator

Thank you. Thank you all for attending today’s conference. You may now disconnect.

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