EMC's CEO Presents at Sanford C. Bernstein Thirtieth Annual Strategic Decisions 2014 Conference (Transcript)

May.29.14 | About: Dell Technologies (DVMT)

EMC Corporation (EMC) Sanford C. Bernstein Thirtieth Annual Strategic Decisions Conference 2014 May 29, 2014 2:00 PM ET

Executives

Joseph M. Tucci – Chairman and Chief Executive Officer

Analysts

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

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

Hello everyone and welcome, I’m Toni Sacconaghi, Bernstein’s U.S. IT hardware Analyst. We are delighted to have Mr. Joe Tucci, Chairman, President and CEO of EMC joined us today. Joe joined EMC in 2000 as President and COO and was named CEO in January 2001 and Chairman in 2006. Since his arrival at EMC, Joe has transformed the Company from a largely high-end storage array company into a broad-based storage solutions provider and through the acquisition of VMware the leading provider of virtualization software.

EMC has also created Pivotal to tackle the problems of big and fast data. Under Joe’s leadership the company has typically identified key technology trends early and positioned itself to capitalize on them. During his tenure, EMC successfully integrated several major acquisitions and delivered 14% annual revenue growth since 2002. I’m thrilled to have Joe, join us today. This is purportedly Joe’s last year as CEO.

In the nearly 15 years I’ve known Joe, he has been a consummate professional, as straight as a shooter as they come and a true pleasure to be with. He is going to provide us with some short prepared remarks and then we are going to do a Q&A, so with much gratitude, I’m pleased to introduce, Joe Tucci.

Joseph M. Tucci

Thank you, Toni. Hi, everyone, how are you? Toni, thank you for those kind remarks, it’s great to be here. This is one kind of final, not sure I’m ready for this. But Toni says, there is some prepared remarks, I don’t know how prepared they are, I don’t have any slides, but I do want to start up what’s on my mind and what I think is happening in this industry and what EMC is doing on kinds of site to respond to this and get ahead of this response in a way.

Obviously you’ve all heard most of you heard this before, the industry is in the biggest shifts of its life. We are moving from the client server PC era to a new era defined by mobile computing, cloud computing, big data, social networking, which is changing the entire game.

So, obviously what we are faced with and every company is faced with is that place in IT is our customer we care the most about right, so it’s all about serving our customers, had their applications that run their businesses in these second generation platforms, the client server PC era platforms.

So, obviously we have to serve them very well, and they are not going away anytime soon, these are millions and millions of lot of applications and billions and billions of lines of code. We have to serve that but on the same side, we have to help those customers move to a new generation to mobile cloud generation of applications, and again in there the two things I really going to care about is the application which supports the business process and are going to care about the data.

So we think they are pretty well positioned. So what we’ve done starting at the bottom of the stack is we store information, we are clear leader in both the third platforms storage and the second platform storage for client server and the cloud mobile era. We made huge investments which I’m sure we’ll talk about with Toni, to make sure that we are really leading because we got to playoffs and to win now in this platform. And again, we’ve done a lot of technology to our customers, you get maximum use of their assets both in the second and third platform.

So, storing that information at lower and lower cost points for our customers, making it available faster and faster is critical. So, if the data is stored, people make mistakes, mechanical devices sale, there is evil players in the role we can make sure we protect that data and secure that data.

Next step up, we want to make sure that everything that above how that data is operated on is software-defined that is clearly the future, and we can use that same software-defined technology in the second platform as we are doing the third platform. And we are doing the bulk of that work in VMware and software-defined compute, software-defined networking and we are also doing it on EMC side for software-defined storage.

So, we have the great technologies and basically instead of the management sets of technologies that took place to make all of this work together as seamlessly as possible. It takes a lot of management product hundreds of management products from a couple of dozen different vendors to run a big IT shop, we are replacing all of that with automation software and again VMware has taken the lead on that.

And above that customers want to build applications in a different way, we are leading the industry with an activity called cloud foundry, where you can build an application once and run it on many different kinds of cloud fabrics including Amazon, including Google including Microsoft Azure, including VMware, including OpenStack. Above that we help our customers with their big data problems. How do we take this big, all this stated, we’ve ingested reason over it and act on it in real time instantly, massive amounts of data petra bytes scales data, and that’s what we are doing in Pivotal.

So as you can see, we have pretty complete stack and that’s very relevant to customers and we use that stack to help them today and we use that stack to bridge in for tomorrow and lead for the tomorrow. To do that we’ve taken an interesting and unique and probably somewhat misunderstood kind of approach and we call it a federation, where we have companies that we totally own and majority own.

So, obviously we totally own RSA for security, we totally own EMC for storage and data protection. We own 80%, have 97% voting control of VMware where most of the software-defined and automation technologies are happening and then of course we own consolidated about 86% of Pivotal and which is where the big data and the new cloud reservoir of applications is being built. So when you go into a customer, we are much more relevant than we’ve ever been in our past.

In each of these companies the missions are aligned. One depends on the other, built on the other. But, again, you can take these and you can use them as a card giving customers choice, which I think is going to help to find a winner in the third platform.

We’re not forcing you to use our technologies. You can use Pivotal without using VMware. You can use VMware without using EMC, but when they all work together you get a special layer of magic. So that’s what we’re doing. And, again, that helps us attract talent because these young people love being focused on a mission that’s going to change the world.

Their mission is clear. Their mission is crisp. They’re going to get reward on how they accomplish their mission. And then of course when the family comes together, it’s extra special. So that’s in a nutshell what we’re doing and you can decide how prepared that was, but I’m just in kind of little bit of pros. I want to look at across what we are attempting to do and in my belief we are doing.

So, again, Toni thanks for having me and I’ll sit down and join you. Thank you for coming too by the way.

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

Thank you. I have a series of questions, but I’d love to welcome here as well. There are question cards on the seats. You can those fill out and pass them to the central aisle. So, Joe, maybe we can start by just talking about the storage industry in general.

Joseph M. Tucci

Sure.

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

If we look at third-party market data, revenue growth in broadly defined storage industry has been anemic relative to history over the last few years, zero to 2% or 3% last couple of years. And also terabyte growth, which historically had been 40% to 50% a year, last couple of years it’s been more in 20s. So what do you think is happening in the storage industry and do you think that these depressed levels of growth on both the revenue and the terabyte side is due to cyclical factors or secular factors?

Joseph M. Tucci

I think it’s both. I think the bigger. If you look what the industry has done it’s done a phenomenal job and this isn’t just us on efficient technologies, technologies like thin provisioning, technologies like fast switch which continually take data and push it to the lowest cost possible tier, technologies like deduplication technologies like, technologies like compression, technologies from the drive vendors themselves both flash based or hard drive based to give you bigger and bigger media to work with.

All these efficiency technologies have played a tremendous role in helping and customers are now using them. And for a while a custom, they use them in a certain maybe non-crippled application, not using them everywhere. So this is really the lion’s share of what’s happened.

There is a secular shift too and that customers basically want to move to a cloud environment. Now when I say cloud environment that doesn’t mean customers want to all go to a public cloud. What I believe most customers want to do is they want to take their shops and use cloud technologies to make their shops more efficient, much more efficient. So they’re trying to prolong life, right. We call our guys in the field call sweat the assets.

So if you’re sweating your storage assets longer you keep the servers longer et cetera to get and you create some pockets of cash because all those IT budgets are going up as much as our CIOs have likened to go. So they pretty use these pockets of cash to invest in these new clouds, their own private clouds, and of course some data goes to public clouds. So that secular shift is going to continue and I think that, well I’m sure we’ll get to it, but there is a lot of technology and a lot of investment we’ve placed there and we are doing very well in that new area. And that’s going to bode well for us over time, but right now that’s exactly what’s happening.

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

So when you talk about some of the cyclical factors, a lot of it was technology innovation, is originally when you started to speaking about that all of those, almost unlike the secular that you’re having more deflationary pressure than you’ve had before. Is the belief that you had a sort of a unique period of so many different new deflationary technologies that you’re going through this period that has incremental deflation and eventually you will come out of it or I guess the question is why is that not...

Joseph M. Tucci

Well, if you apply efficiencies data grows and you got to grow, right. And if you look at IDC’s latest report, and you’ve done a really good job. And they do work very closely with Berkeley and others to get this data. And they’ve been very accurate, amazingly accurate when you look at these. They filed the first report in 2000, how much data will grow. They are now seeing over the next seven years they’re just going to grow 44 times. That is unbelievable, right, just unbelievable growth. So the opportunity is there, Toni.

And again it will come in different forms and we’ll capture it in different ways and that’s why we’re making these big investments, which I’m sure we’ll talk about in our future storage products, which by the way last quarter on a run rate basis by quarter our score was $1.8 billion growing at 80%. So these things we are doing that to basically capture that kind of storage information and store it in a new way is a big business. $1.8 billion run rate business and growing at 80% something like that.

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

I’m going to come back to that in a second, I just want to finish that sort of a top down drop. You’ve always been very thoughtful about the state of IT spend. I think you’ve talked about IT spending this year being about 3%. If you try and think about normalized IT going forward, whenever normal maybe. What is that level and what do you think storage is – level of spending is relative to that.

Joseph M. Tucci

Storage has always been one of the tough times of IT spend to store. This mike does not like me. So if you look now double mike. If you look back it’s IT group 4% storage for 6%. So it’s been a pretty – so but the last you look back the last 18 months or so, it’s reversed itself, storage has actually grown a little slower than IT spend and I’ve given you the reason for that. I really think it’s the kick in these efficiency technologies. And I won’t go through that – bore you with that list again.

I think going forward, if it’s true that data is going to grow 44 times in next seven years. I suspect you’ll see maybe not one and a half, but certainly more than one times the rate of IT spending. And I think IT spending is well over time increase, because if you look at this whole phenomenon of the software they have good networks to see backup. Software-defined enterprise where you see the software, the prime models like Amazon and what they have done to the book industry.

What Hoover has done to delivery industry. You can go and know what Google has done to this paper industry, and classified ads and advertising, I mean these top or defined models are going to – and companies invest and CEOs are getting it. And they are pushing these new agendas and they are – so IT is going to be at the heart. The role of the CIO change and actually be elevated because that is going to generate a lot of the drive and the business model of the company going forward.

So I’m very optimistic going forward on IT spending, I mean when that will kick in but it’s there. So CEO after CEO wants to talk about the subject and their investing heavily in it.

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

You talked a little bit about EMC’s emerging growth businesses perhaps we can just spend a second on before we get in some of those on the traditional storage business. I think last year at the Analyst Day, you talked about the VMAX business growing at about 1% to 2% on a go-forward basis, and you talked about unified and recovery and now you have to demonstrate multitasking in addition to having done back up before Joe, so your true technology.

Joseph M. Tucci

Real time upgrade.

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

If you pull this off seamlessly you can answer my question at the end of this. You are truly a technology executive so.

Joseph M. Tucci

My tie is on fire.

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

Open tie surgery right here. Give me this one, does this works, that one works, this one works. All right, we are done.

Joseph M. Tucci

Entertainment, I am the afternoon entertainment.

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

So on the traditional storage business, you had said at your last analyst day that VMAX maybe grow 1% to 3% per year and that unified backup and recovery would grow 3% to 6% a year. It almost feels as though the distinction between sort of platform two and platform three storage in terms of growth maybe even more polarized than perhaps what you characterize a year ago. Is that fair or should we be thinking about those kinds of sustainable growth rates, three or four year growth rates that you’ve turned out last year is still largely reflecting your views.

Joseph M. Tucci

I would say that when you look at the VMAX and really high end storage market from platform two, it’s going to be a relatively flat or maybe slightly down market. I think the VMAX you will see that 3% plus growth and I think the growth in the newest ones are going to be faster than I thought.

So when I look through the whole kind of our whole line-up I’m actually okay, and I think we are in a great shape, but this is playing out a bit in real-time and we always tell you what we think it does our current thinking and we’ve seen quite a few chapters over there now so. And again you are going to see the thing VMAX or a VNX very subject to cycles. When we introduce the new model because it’s got a huge basis, so obviously the VMAX we said is very due for a refresh and that will happen in the second half of the year for sure. And when that happens we’ll get a bit of an uplift and then it gets to the end of it’s kind of life cycle. You will see a little bit of slowness and then the next one will come out and so it will be more cyclical more subject to refreshes.

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

Let’s talk a little bit about the emerging platform three businesses, maybe start with flash, so conceptually at a high level, we have a largely generous PM audience here at the conference. Do you think about flash emerging as a media and enterprise storage is something that is helping financials for the industry or hurting, so is it deflationary or is it inflationary. And how is it impacting EMC in terms of, is it something that’s helping revenue or on balanced being yet one more efficient technology that is shrinking revenue dollar?

Joseph M. Tucci

I think it actually helps, if you look at EMC we shift, others make more noise about it. We shift far more flash than anyone else we far more. And I think, it actually helps but what’s really happening when you build the new application is not about these new flash companies lot of them overplay it.

I think the statistic is you took all data and stored it only on flash and you are only able to store 5% of your data. So most of data still going to be stored on spinning drives but again what you want to do is data that is more persistent, it’s going to live a long time. You want to keep that on spinning disk because it’s far less expensive and than when you want to get it closer to processes you bring it up to flash and then you want to actually process it memory.

So you are seeing kind of hot warm and cold tiers of storage in memory, flash, spinning drives. So you build in these new systems very differently and we’ve invested a lot in that kind of technology to make sure that happen seamlessly. But the flash play obviously is definitely an helpful to margins and helpful to growth.

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

So in the instances I think you talk on your earnings call that more than 50% of your rates today shift with some component of flash on it. And so if we take that sort of mean array that’s going out with a few percentage points of flash capacity, not safe for that hot tier. Is that displacing any traditional disk, as folks are saying well, before we used to have extra capacity to makeup for the performance gap for a hot tier and now we’re putting flash, and yes the flash costs more, but we’ll put one terabyte of flash whereas before we may have put in 10 terabytes of disks.

So if you compare a standard array that has single digit percentage of flash today is the total value of that box lower, neutral or higher.

Joseph M. Tucci

It depends it can actually, it can actually be any of the three depending on how you actually, how much flash shots we put in, the more flash we put in the more is going to cost. The assumption that some of the flash people make is that you can offer that’s only can you have, and of course we have those two and we’ll talk about that.

You can do very well on disk too, so they always compare is totally dedupe or compressed flash to just raw disk. But what’s really happening out there is you’re compressing and deduping on both layers. You can’t dedupe a little more efficiently for sure when you have flash, but you can dedupe very well on both and most of deduplication happens in memory, so the real thing you want to stack, lot of cores, lot of memory and then you could – and then your deduplication gets better.

So, and that’s exactly what we are doing, so the more flash to have as a rule, the more there is certain application like our VDI, where flash is very unique and you can do that extra layer of dedope which makes it extra efficient, but in most applications you want to mix, you want drives, you want terra drivers, you want a terra flash and you want memory. And you will see what those things you want to process in memory in flash not process but you always process in memory but in storing memory in flash on hard drives and that’s just the way it’s always going to be. This is the new way.

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

And if you think about all-flash applications obviously with XtremIO EMC as a competitive offering there, but if you think about that marketplace where an all-flash array makes sense. How significant a portion of the market is it today and is it five years from now? Is it 20% or more ultimately?

Joseph M. Tucci

It could be. I think you’ll see for a long, long time the vast majority of the market be hybrid where you’re going to see disc and spinning disc and flash technology used together. And really if you look inside the array, you really use three technologies. There’s a big memory tier in there to it with some core cash. So we see a tier memory, a tier flash and a tier and actually most of the arrays will be built. And then there will be some special purpose which will be all-flash and then you’ll be next. Go ahead.

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

And in that flash evolution, so if 20% might be the end-state for workloads that would benefit from an all-flash array where are we today?

Joseph M. Tucci

I’m not sure of exact statistic, but as I said every quarter it’s a remarkable movement, how many of our system ship with a tier flash. It’s a vast majority now and I suspect that will continue to grow to where almost 100% arrays will ship with flash.

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

Maybe we can talk a little bit about software-defined. So I think the 10,000-foot concern around software-defined is, well, if the world moves to software-defined, doesn’t the value of the hardware get discounted, prices fall, margins fall and the value is captured in the software? And I think the perception is, well, look EMC is trying to be a leader in software-defined and we’re captured on the software side.

But then the follow-up question invariably that I get is does that math work? If you are to decouple your arrays, your revenue today, you report on an integrated basis, hardware plus software and folks would say, okay, so if EMC is selling traditional storage, maybe 70%, 60% of the value is hardware and 40% is software. If that hardware gets cut in half or a quarter, can the software really become that much bigger to compensate for what I lose for in hardware? So again at a high level, is that a mischaracterization by the marketplace and how would you address that?

Joseph M. Tucci

Well, let me give you an observation first and then I’ll address your question. We have spent – I think we haven’t disclosed it and I won’t today, but we have put a tremendous amount of money into [Piper] (ph), which is the most comprehensive in our software-defined storage answer. That said, and again we didn’t disclose this price either, but we paid a lot of money, trust me, for DSSD. So why would we do that if we thought it was going to matter with software. So there’s actually innovation every level. Last time I look software hasn’t run very well without hardware and I think that will remain the case. And there’s a tremendous amount of innovation being put there.

So I want to point out a real life example where we spend a lot of money on Piper and a lot of money DSSD, just as one is pure software defined and one is pure kind of – we think what it can do hardware. This is rack scale storage.

The other side of the coin, I think you got to – considering this whole debate, Toni, is the amount data that's going to grow, right. So last time I checked gross margin dollars count a lot and you are going to get a lot of software which is high gross margin dollars, yes you’ll get some, we’ll get more, we’ll get some in this internet of things, Hadoop and HDFS, Hadoop HDFS object storage becomes more prominent in new wave.

This scale and if you look at the margin dollars from the software you look at the margin dollars from the hardware because of the just what scale, this is 44 times what we have today. It’s actually a fine good answer. So that’s what I would point here, okay. So if we didn’t have the scale, I think the point I think you are alluding to would be true, but with the scale and if you could really be a winner there and capture as we plan to win there, it’s not true.

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

And if we, I mean how quickly do you think software-defined can evolve in the enterprise. So when I say that and again this is a continuum obviously and I’m trying to force upon new point in times, but is there a point in five years, are you seeing discrete software-defined offerings being embraced by enterprises and increasingly intelligence being captured more and more in that software-defined layer and the increased prevalence of arguably more commodity hardware where branded, intelligent hardware is a significantly lower percentage of what it is today. Are we there in five years or is that unrealistic?

Joseph M. Tucci

A lot of it depends, the key driver here is the developer in the app. The application which supports the company or an entities enterprises business process right. I mean that is how you serve your customers through an app is how you work with your supply chain through an app and how you build through an app and it depends in the way that app was built, but the app was built that was looking for services to come that are built deep into Symmetrix, but that app needs what Symmetrix take care of it or they will be new innovations like DSSD say let the hardware handle that with hardware what you will call the hardware there, obvious there is software, a lot of software in the hardware layer.

Don’t forget that, but passes through the hardware layer for normally that handle you can do it better and that’s the way we’re built on a software-defined storage. So basically you’ve got two things happening once. So yes there is a trend that way as you point it out but there is also the reality what I said and just go ask customers how soon they are going to replace their apps that they spent five years building or three years building, they knew this is a timetable but man it’s a long time table. So…

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

Who are going to be the most formidable players in software-defined storage and more broadly the software-defined data center beyond EMC and VMware over the next three to five years?

Joseph M. Tucci

It’s kind of why where I started my remarks, I mean if you look at everyone’s, I’ll pick as any large company that's not talking about without a doubt we started it, actually without a doubt Google started it to be really fair, but obviously for commercial most user applications we started it, with what we did with VMware, with virtualization and of course now bringing it to networking, bringing it to storage, bringing in automation layers in, but if you really look at how this was done it was Google that basically kind of instantiated both of these technology early as they built out their what they are really were doing, what Google have to do.

They only had a index, the entire worldwide web so they can search it, this is quite a bit of information and they had to do things in a fundamentally different way, so they kind of proved the concept. And so every established cloud uses this technology. So whether it’s Amazon or whether it’s Google or whether it’s Azure and whether it’s Facebook or Twitter or you name it, they all use this abstraction, software-defined technology.

We have been leading bringing it to the enterprise if you will. But now if you look to and your IBM they are talking software-defined strategy, Cisco is talking software-defined strategy, HP is talking software-defined strategy so it is the way it’s gone. I mean there is no doubt in my mind, irrespective of EMC, VMware in the lead we have, this is just going to happen and those work, look at Amazon, look at Google of course it works, the thousands and thousands of customers we have it works.

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

What does public cloud mean for EMC and what impact does it have on EMC?

Joseph M. Tucci

Obviously I actually see as mostly opportunity. But obviously so and so threat to because there is a few companies out there I actually just named them, it’s like a handful of companies that are building their own software-defined and their own clouds like Amazon like Google, like Microsoft and have the engineers to do it, and of course we provide the technology to other cloud vendors that one has specific, there is community cloud, there is industry cloud, there is tremendous opportunity out there.

Also what you are seeing, probably on the back of the Snowden incident that you’re seeing around the world and privacy is the tip of the iceberg and big thing underneath is protectionism, and these countries want their data, their precious data in their country. And they are going to build clouds, and they are not going to let us take all this data and store it any cloud we want any place in the world.

There is terrific opportunities for us to help each of these countries build their own using our technology kind of like the Intel Inside but that country’s cloud so I view that it is being opportunistic obviously some of that information that used to be stored on one of our devices in a customer data center might be in a public cloud. So I’m not able to but I think when I look at the whole macro point if we embrace it and lead this software-defined cloud era we’ll do very well.

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

Joe, any sense on EMC’s market share within infrastructure-as-a-service and software-as-a-service player, if let’s say we exclude the big three or four fully integrated cloud vendors if we take those guys out, do you guys try and track whether at most and your various other products you believe have a relative share compare in cloud environments that’s the big four relative to enterprise environment?

Joseph M. Tucci

I think we did tremendously well and I’ve never seen it, Toni. I try to be as kind of open as I can and transparent. So I’ve never seen it as a percentage, but I think we’re if not the leader among the leaders I would, think we might be the leader. David Goulden said on the last conference call that we now have an Exabyte. They wanted cloud scale players. That’s a tremendous amount of storage and we put that in most on the last 18 months. So we’re doing extremely well. We talked our business to service providers. It’s always, I think just about the fastest growing that at BC or two fastest growing every quarter when we announce. So it’s a great business for us.

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

Okay. I want to talk a little bit about some financial aspects of the company. So one thing that has struck me is that in the last five quarters in particular, if we take out VMware, core EMCs gross margins have declined. And historically if we did that same analysis gross margins were increasing. And you’ve talked about some of the considerations, but I was wondering if you could provide your perspective on why that is happening and whether that trend –if and when that trend ultimately reserves.

Joseph M. Tucci

David Goulden gets into tremendous detail on this, but I’d tell you what I look at. I look at the field booking margins and I could say it’s those last quarters that you mentioned the field booking margins have been incredibly flat. Now obviously when you turn to revenue what you’re saying is truth and what’s happened here is three things. One is volume, one is the fact that we’ve gotten hit by kind of an industry. One of these industry events where you get a very sizable bad lot, a particular product and it really jacks up our service cost for a while as we do a lot of replacement with end customers and a lot of that – a vast majority of that happens on our nickel and service first. So we’re getting it there. And the third thing is we are trying out to build inventories and as you do that your volumes gets again another thing that’s exacerbating volume.

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

Now even if they are flat, so let’s take the debt bookings are flat. Historically they were growing, right. They averaged about 150 basis point increase per year. And again you don’t give us the reporting detail. My belief is software was becoming a higher and higher percentage of the solution. And so, are you seeing any changes in your software attach rate relative to what you were seeing before because even accounting for those three reasons if we x amount it, it doesn’t look like it’s improving at the trajectory.

Joseph M. Tucci

Remember what I said on the new side, Toni. We’ve been keeping these flat while growth has been going down a bit because of the efficiency of technologies, right, volume, the first piece of volume. And we’ve been shipping. We built $1.08 billion business to service providers of these new wave technologies that we’ve talked about. So I’m actually saying this is really good news because we can do this in the transition and then the volume starts kicking in. We’re going to be okay.

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

Okay. Maybe we can talk a little bit about cash priorities, you were here last year and you were very declarative in saying our number one priority is to look for acquisitions. And I think you even commented and said like we made a lot of earlier stage acquisitions, but we wouldn’t be surprising if we made something that had more revenue. And so I was wondering can you comment in terms of cash priorities, is acquisition still the top priority for the company in terms of cash usage and I will just leave it with that.

Joseph M. Tucci

Yes, I think first comment on your point, then I will give you an exact answer. First, I guess I should apologize, because I didn’t do what I said. I might do. We continue to buy clearly I see such vast opportunity in this third platform of IT again this mobile, social, cloud computing, big data, an opportunity that we continue to invest there with new technology. And those technologies are all producing if you will red ink and not a lot of revenue at this juncture. As a matter of fact if you just take the last two years it’ over $5 billion – over $5 billion.

And on the VMware side we did Nicira and AirWatch. On the EMCii side we have done DSST most recently, StreamIO, ScaleIO and then of course we have invested organically into Pivotal, hundreds of million dollars in the Pivotal, which is in the big data side. And into Piper. So all of those things are not producing huge amounts of revenue yet, but they are huge costs, so I didn’t do what I said I was going to do. I just see so much opportunity, I continue to say I am going to play orphans and be a big winner in this third platform of IT.

That said our official policy which I announced stating which we are doing and I will give you example for this year is 50% of EMCii’s free cash flow will be spent on giving back to our investors. This year these are round numbers, you will see $2 billion in buy backs and about $1 billion – a little less than $1 billion, a little over $2 billion and $3 billion together in dividends. So you just saw 15% dividend increase, so 50% is – and then the other 50% we are going to continue to buy and I am not going to predict whether there will be a lot of revenue producing or more setting us up the win in the third platform.

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

And as your view on size of acquisition which has always been string of pearls, you kind of bounded it at around maybe $3 billion to $4 billion, $5 billion at the high end. Is there any change to that outlook in terms of a willingness to do a larger deal?

Joseph M. Tucci

I have always said right that if there was something out there that I felt could really move the needle, I consider it. I have always said by bend was to continue to string of pearls. But so I said it’s a good way of not answering your question and leaving a lot of latitude for myself, but is the way I think.

I mean if there is something really good that I think will power our strategy. This is I really think we had the right strategy I consider it, and on the other side I can assure you just things and string of pearls that we know – we will most likely do right now as i tell you, and I can ‘t tell you which one.

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

I won’t push you on it. So maybe we can go lightening round as usual ones, I’m over zealous and the number of questions that I’d like to get in and from the crowd. So I think we can try and work through as many as possible that would be great. Also on portfolio management, you talked about your business is notable emission and not talking about your content management business. What synergies exist between that business and the rest of EMC and why is it still part of the portfolio and not a divestment candidate?

Joseph M. Tucci

One of the exciting things we are doing in a content management business which has actually helped us with we would declined for a while and now we find that there is slight growth which is a major improvement. We could make in a more cloud based and number two we’ve got into this sink and share business with simplicity and we think it’s great opportunity for us.

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

Are there any natural unique synergies with it in the core portfolio?

Joseph M. Tucci

Once again with the tremendous storage drag and basically once we get these things more applet-based, more cloud-based you pull – it works on a software-defined data center, we’re volatizing on what we are doing on big data.

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

Similarly on the security side, is there maybe you can help us understand how do you see those synergies come alive everyday?

Joseph M. Tucci

When you meet with a customer up to the board level, there is no area they would – they are more willing to spend it in the security. The amount of the tax now is just growing astronomically, unfortunately and what we are doing with security analytics, but we are doing with governance risk and compliance, applications what we are doing with our advanced Identity Protection and Verification technologies, are really selling well. And if you look at that business outside of the token business, I mean this is a very rapidly growing business and one we really like.

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

So the public document said that you have an employment contract to see through February 2015 and that I think it said it’s some time prior to such date Mr. Tucci will fully transfer his role of CEO to a successor and become solely Chairman of EMC and Chairman of VMware. Is there any reason why we shouldn’t expect that path to continue? So we have to create a slot for Chairman next year if we get you back to the conference.

Joseph M. Tucci

I’d rather guess speaking earlier, but when I said sort of Board is, that’s like a target date. First of all, we’re blessed with some of great CEOs in the federation today. And if they think the timing is right and it’s little previous to February I’m fine with that. If they think they’d like a little more time, I’m fine with that. And I’m talking about years, I’m talking in terms of months. So there is no kind of bright line to understand that February 6, 2 o’clock in the morning, there is a lot of flexibility and obviously Toni, if asked and the best way the Board is indicating, they’d like me to, I would grandly stand as a active Chairman.

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

Okay. So I was hoping if you could comment on potential activism at EMC. There are at least two activist firms, institutional activist firms which have built positions in EMC over the last several quarters. There are investors who say, look x VMware, stub EMC is trading at eight times earnings. That’s a preposterous valuation given the assets of the company and the vision you’ve outlined. So I guess the question is: a, do you still have high conviction that as Chairman and CEO VMware remains entirely in the EMC Federation; and b, if an activist does get involves and pushes for such a change what reaction is there?

Joseph M. Tucci

We welcome all shareholders. We’re under the label of activist or not I mean I care not. I mean, what we’re going to do is look them in the eye and say, here’s what I think, here’s why I think that and I really do believe. If you look at the forces, if you look at the opportunity of this third platform and a software-defined data center and what’s happening in storing this huge amount of HDFS data and working on it and centers being built, inflammatory being built into everything and the opportunity, collectively it’s just a lot stronger story. And then if you look who is going at this market, these are big companies. These are companies called IBM, these are companies called Cisco. I think you break it up. You just weakened every part.

So I just think it’s better together. And like you said, at some point in time, I don’t know what the point is, is it a proof point, you used to point and of course it’s now. Toni said ridiculously well. And if that’s the case I think sooner or later our model will work, people will recognize it and the value will come and hopefully an activist or any other industrial will buy us for the reason I’m saying, you’re doing the right things and have a little bit of patience as we place these future bets.

A lot of our competitors has been borrowing big money, buying back and are getting some significant rewards, but already placed as many bets to the future and what’s going to happen as you make this chasm. So I like where we’re going. And as you said, and I pointed before my age, why wouldn’t I want to play the short game, because that’s just not the right built. You want to play a longer game and that’s the investors we got attracted, see the value of what we’re building and it is stronger and better together. So I don’t have any plans and all. You didn’t ask me the question, but I don’t have any plans to buyback the 20% we don’t own. I don’t know any plans to sell any of the 80% we do own.

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

Okay. And I’ve often been sort of a pain in the butt and said, well, what, Joe, if you got a 50% premium offered for VMware tomorrow, would you sell it and you’ve always generally been very resolute and straight shooter, too cheap an action, basically said, no, I have tremendous belief in this business. So I’m going to be that annoying analyst again that says, Joe, if you have an offer tomorrow for $150 a share for VMware, is that something that you consider and I understand those short and the long-term cash? Is that more? We’re getting more.

Joseph M. Tucci

Look, am I operating this? You are a proxy. Some of you are investors, some of you work, are in the investor community, all in the investor community. I work for you. So obviously if there’s something compelling enough and it’s just ridiculous, you do it. Like one time I was coming of this stage and I think VMware, I don’t know, I fear with that market, it was before I take it public, right. And remember now we pay $635 million for this asset.

So Toni says to me, if I give you $6 billion right now on the spot, would you sell VMware, right? This is just after six months after we bought it. I just bought it for $635 million. So it was 10 times my money. And I said, not on a bet, no way. And I think I answered that in about a nanosecond and today it’s worth about $42 billion or something like that. So I was right.

And if this switch to the software-defined data center works which and I believe that it will. If we capture that territory and you can remember now that the software-defined storage piece comes from EMC, if we can work together and capture the hybrid cloud opportunity, cloud share with $150 will be cheap to Amazon. I would never say yes, to any number, but I guess there is a ridiculous numbers where if I didn’t say, yes, you would kill me, so I would probably say, yes.

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

All right, Joe, as usual I appreciate you candor. Thank you very much for your participation. I hope we’ll find a way to get you back here next year.

Joseph M. Tucci

Hope I can break your mike.

Question-and-Answer Session

[No Q&A session for this event]

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