EMC Corporation Management Discusses Q3 2010 Earnings Conference Call

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 |  About: EMC Corporation (EMC)
by: SA Transcripts

EMC Corporation (NYSE:EMC)

Q3 2010 Earnings Conference Call

October 19, 2010 8:30 a.m. ET

Executives

Tony Takazawa - Vice President, Global Investor Relations

David Goulden - Executive Vice President and Chief Financial Officer

Joe Tucci - Chairman and Chief Executive Officer

Analysts

Aaron Rakers - Stifel Nicolaus Investment Advisors

Daniel Ives - FBR

Brian Marshall - Gleacher & Company

Ittai Kidron - Oppenheimer

Rajesh Ghai - Thinkequity, LLC

Amit Daryanani– RBC Capital Markets

William Choi – Jefferies & Company

Mark Moskowitz – JP Morgan Chase

Jason Ader – William Blair & Company

Maynard Um – UBS

Ben Reitzes – Barclays Capital

Kaushik Roy - Wedbush Morgan Securities

Louis Miscioscia - Collin Stewart

Keith Bachman – BMO Capital Markets

Operator

Welcome and thank you for standing by. All participants will be on listen-only mode only until the question-and-answer session of today’s conference. As a reminder, the conference call is being recorded. If you have any objections please disconnect at this time. I would now like to turn the call over to our speaker, Mr. Tony Takazawa. Sir, you may begin.

Tony Takazawa

With me, here at Hopkinton, we have David Goulden, EMC Executive Vice President and CFO. David will provide a few comments about the results that we released this morning to highlight some of EMC’s activities this quarter and discuss our updated outlook for the rest of 2010. Joe will then spend some time discussing his view of what is happening in the market, EMC’s execution of the strategy and how EMC is positioned to help customers on the journey to the Cloud. After the prepared remarks, we will then open up the lines to take your questions. I would like to point out that we will be referring to non-GAAP numbers in today’s presentation unless otherwise indicated. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure today in our press release, supplemental schedule and the slides that accompany our presentation.

All of these are available for download within the investor relations section of EMC.com.

As always, we have provided detailed financial tables in our news release and on our corporate website. These include a lot of financial detail so we do encourage you to take a look at them. The call this morning will contain forward-looking statements and information concerning factors that could cause actual results to differ can be found in the EMC filings with the US Securities and Exchange Commission. And lastly I will note that an archive of today’s presentation will be available following the call. With that, it is now my pleasure to introduce David Goulden. David?

David Goulden

Thanks, Tony. Good morning, everyone and thanks for joining us today. I'm very pleased to report that EMC had another great quarter. We achieved record revenues of over $4.2 billion, up 20%. Record Q3 non-GAAP net income of $649 million, up 35%. Non-GAAP EPS of $0.30, up 30%. Record year-to-date free cash flow of $2.2 billion, up 22%; and non-GAAP operating margin of 21.5% up 80 basis points sequentially.

We continue to execute on our triple play with strong double-digit growth in storage security and virtualization, it's clear we continue to gain share in these key areas of the market, areas where we're already the market leader. With the announcements of VMware View 4.5, storage efficiency technologies like FAST v2 and FAST Cache and the acquisition of Greenplum, it's clear we're investing for the future but more importantly these investments are bearing fruit. And with non-GAAP gross operating margins up 40 and 80 basis points respectively quarter on quarter we continue to improve profitability. We expect to continue this triple play over the long term because of how well we positioned ourselves to capitalize on the fundamental shift to Cloud computing.

Now let me start by taking a few minutes to discuss what's driving our good results. The industry generally agrees that the shift to cloud architectures is no longer a question of if but of when. The answer is it's happening now albeit at different speeds for different companies but all companies go through the same three phases to transform their traditional physical infrastructures to true cloud architectures and to take full advantage of the ability to offer IT as a service. Phase I is the virtualization of IT owned applications which also requires simple, efficient VM integrated storage.

Phase II is a virtualization of business critical applications. This is where SLAs around performance, availability, workload mobility, recoverability and security really matter. Phase III realizes the full benefit of Cloud by taking advantages of Phases I and II together with IT automation, provisioning and chargeback to offer IT infrastructure as a service for the entire enterprise. It's at this phase that you have an elastic cloud of compute networking storage resources and are also seamlessly drawing on compatible public cloud services where it makes sense.

So, let’s look at what EMC offers for each one of these phases. The first phase typically tends to involves small deployments. Typically, it involves the IT departments virtualizing applications they own and manage. For these implementations, which require virtualization, and simple and efficient storage, EMC has VMware's vSphere on our unified storage products. With the majority of customers currently in this first phase, our unified storage frontline has grown rapidly and others are benefiting from this trend in the mid tier as well. Where we're really distinguishing ourselves in this phase is with efficiency technologies like SSCs, FAST and Cache as well as with tight integration with VMware. For example, one well known online brokerage firm in the quarter selected EMC's unified products in large part because of the FAST Cache. It's an ability to accelerate performance to address unexpected workload spikes, could not be matched by either of the other two vendors competing for this deal.

In the second phase where virtualization extends to business critical applications, SLAs has become very important. In fact, customers are telling us they want better SLAs after they virtualize. Also, if customers selected to deploy business critical applications on enterprise storage for high SLAs in the physical world, they're not going to deploy them on mid tier as they virtualize. In the second phase, customers look to technologies from VMware like vCenter AppSpeed and vSphere storage and network IO control to help control performance SLAs at the application, storage and network levels. Likewise, they demand that their storage infrastructure extend these capabilities and support these SLAs. For example, EMC's FAST works for storage IO control to deliver industry leading distributed resource scheduling for storage making enterprise apps perform 2 1/2 times better for the same cost.

Customers also look to things like VMAX, VPLEX deduplication and security to meet these SLA deeper in the infrastructure. In Phase I, array based snap on replicate is suitable for backup but in Phase II tight integration of high performance backup like EMC's Avamar with VStorage APIs and with vCenter provides much higher service levels. For example in Q3, a large manufacturing customer who wanted to reduce space and power consumption in the data center and at the same time virtualize their servers and desktops selected VMAX.

We won another deal at a well-known global cosmetics company. In this case, the customer is expanding its VMware implementation and will use Active/Active VM teleportation with VPLEX to raise availability and federate across data centers at a distance. These are great examples of a sophisticated enterprise class technology required in this phase and in these cases, it happened to be technology our competitors could not match. In fact, in Phase II implementations, larger competitors tend not to have all of the necessary best of breed technology and our mid tier competitors don't have the portfolio to really provide a full solution.

Phase III is when you really get to IT as a service. This involves things like integrated stacks, management up and down from physical to virtual and usage monitoring, all of which EMC offers. Our VCE coalition enables hybrid clouds with Vblocks. Our UIM, Unified Infrastructure Manager offers cross domain provisioning, change and configuration management. vCloud Director offers self-provisioning of virtual machines in a multitenant environment and VPLEX facilitates seamless data mobility between private clouds and external providers. Illustrating this, a very large pharmaceutical company this quarter decided it was taking them too long to provision their virtual machines and turned to EMC. Now, as they implement their three year roadmap, they're moving forward with Vblock, with VMAX, UIM and will use VPLEX for an Active/Active datacenter architecture. What these examples demonstrate is that there does not tend to be any one typical cloud deal. Company’s infrastructure requirements are as varied as the companies themselves. This is why it's very important to have a broad and deep range of products and services and as each company develops its cloud infrastructure roadmap EMC can meet their needs through every phase from the departmental to enterprise wide from Tier 0 to the backup of an archive.

Now a common question in the investor community is whose storage works best in virtualized environments? We think the best way to find out is to go ask customers which vendor they trust. As you can see from the results of these surveys, which come from separate sources, EMC consistently rises to the top when it comes to providing infrastructure for virtualized environments. Now there is one smaller competitor that claims to have a lead in virtualized environments but the facts simply don't bear it out. Rather note, it tends to be the bigger, more established companies with broader offerings that come in behind EMC. Customers realize that the journey to a cloud infrastructure can be complex requiring a broad range of process services. As a result, they go with companies like EMC that can provide more.

Public cloud providers are also building their infrastructure on EMC for a number of reasons. With virtualization, being the foundation for public cloud service, VMware is key. With the vast amounts of data being stored and managed by public cloud providers, scalability is critical. For example VMAX’s X86-based scale architecture offers this at petabyte scales. With multitenancy security is critical and the ability to attest to that security is just as important particularly for a public cloud provider. RSA cloud security solution offers this accountability. And enterprise customers need data mobility for true, seamless, hybrid cloud and VPLEX enables the advance federation of resources into and out of the enterprise.

This quarter we announced that several service providers are taking advantage of these technologies for offering public cloud services to their clients and this number continues to ramp. Joe will give you more color on some of these winds in his comments. The various examples I referenced are just a few of the deals we closed in Q3 with customers looking to start or continue to build out their cloud infrastructures both private and public. Our Q3 cloud wins span verticals including government, healthcare, media, manufacturing, energy, services and academia and all of our frontline across VMware, security and storage including high-end and mid tier block and file.

Now that I've given you a sense of what’s behind our strong results, let’s look at the numbers in more detail. Revenue in the quarter grew 20% to $4.2 billion in Q3. The increasing value customers receive from our products and services is driving improvements to our business with non-GAAP gross margin of 60.5%, up 40 basis points sequentially. This improvement was driven primarily by higher storage product margins, thanks to the faster growth of our higher margin storage products. Ongoing operating improvements helped drive non-GAAP operating margins of 21.5%, up 80 basis points sequentially and non-GAAP earnings per share of $0.30, up from $0.28 last quarter and from $0.23 a year ago. Free cash flow is strong and year-to-date was $2.2 billion, up 22%, and $427 million greater than our non-GAAP income for the same period. We ended the quarter with $10.5 billion in cash. Of this a total of $6.2 billion was held in the U.S. with reminder overseas. We spent $500 million on acquisitions in the quarter and $283 million buying back 15 million shares of EMC stock bringing us to $800 million on EMC share repurchases so far this year. We still expect to spend $1 billion on EMC stock by the end of the year. In addition, EMC spent $92 million buying VMware shares and VMware spent $131 million on VMware shares.

Looking at VMware’s pivotal role as a cloud data center operating system of the future, we feel strongly that these relatively small purchases to maintain our ownership level are an excellent long-term investment. Now looking at our geographies, we saw a balanced double-digit growth around the world with strongest growth in our BRIC+13

emerging markets. Joe will provide some more color here. The negative impact of currency on a year-on-year revenue growth in Q3 was 60 basis points. Assuming rates stay at September 30 levels, there should no impact on currency on our full revenue results.

Now turning to a few details about our various products and services. Overall storage related revenues grew 16% with or without acquisition affects. We believe that we continue to gain share in key segments of the storage markets. We are the number one storage due in large part to our technology leadership and this is what continues to define us today. We are the leader in the most important technologies in infrastructure. For example we were the first to introduce SSDs in enterprise storage and the automated tiering software to leverage it. The ability to marry solid state and spinning drives leads to enormous performance and efficiency improvements. We unveiled this disruptive technology almost three years ago and we're clearly benefiting from our leadership here in both high end and mid tier storage systems.

This past quarter, we continued to reap the benefits of our innovation as our Symmetrix product revenues were up a robust 23%. The VMAX architecture leverages standard X86 processing, is highly scalable in terms of both performance and capacity and includes advanced high valued functionality like virtual provisioning and FAST. It is these capabilities which are driving our gains not only in the traditional high end deployments but also in large consolidation plays, private cloud infrastructures and increasingly public cloud environments. I think that the success and brand tradition of Symmetrix leads many to think just in terms of traditional clients storage and of course we continue to set the pace there. However, I would encourage you to think more broadly regarding how this new architecture has been designed to be ideally suited for the new information requirements of virtual infrastructures and cloud environments. It's this combination of our existing leadership position and the rapid penetration of these new cloud focused environments that's driving our strong results.

A great example of this success is a Q3 win at a major global healthcare company. In this deal, VMAX's virtual provisioning and FAST with the ability to tier to SATA drives were key features as these enabled the customer to increase utilization, simplify their environment and reduce CapEx and OpEx. In this case where the customer was deploying VMware, our competitor required three times the amount of hardware to perform equivalently to two VMAX engines. This is a clear example of how VMAX is winning in large VMware consolidations. In this case the customer wanted a storage system that could support 2500 virtual machines growing to 6,000. In fact VMAX has proved itself to be so cost effective and flexible that in many instances customers have consolidated multiple mid tier storage platforms onto one VMAX. This is happening with both EMC and competitive mid tier storage platforms.

As a couple of proof points, we swept the floor of a mid tier competitors products with the VMAX at the global healthcare customer I just mentioned and also in another win of one of the world's leading media and entertainment companies. As customers are moving towards the cloud, EMC is best able to help them along every step of the journey and these are just two more examples. Our mid tier storage business continued to show good growth again in Q3 increasing 22% year-on-year. The software capabilities we announced last quarter for our CLARiiON and Celera platforms Unisphere, FAST v2, FAST Cache and Block Compression for primary storage are being embraced by customers. The percentage of systems shipping with SSDs in the mid tier continues to increase helped in part by the availability of FAST v2 and FAST Cache. These features were definitely a factor in several of the deals we won this quarter, including where we beat out a mid tier competitor in a well-known West Coast university. In addition, we won a project to remove an incumbents mid tier products and we also beat two other vendors at a well-known U.S. based retailer based upon the strength of our VMware integration and significantly better capacity utilization.

Another key benefit of the breadth and depth of EMC's business is that we have a leadership position in some of the hottest areas of technology today. These technologies and products act as wonderful door openers for EMC. This was the case in a recent government project where we leveraged data domains relationships to highlight CLARiiON capabilities in VMware environments. CLARiiON integration with VMware was a deciding factor in the purchase of several CLARiiON systems as initial footprints in a deployment that will eventually scale to several petabytes. That's in addition to the large data domain purchases happening in this quarter. This is just one great example of the synergy and success of our model.

Our backup recovery systems business continues to grow at a high pace. We expect VRS' extraordinary growth opportunities to play out for a long time. This will clearly lead to more success for VRS as a clear leader in the space but it will also drive additional opportunities for EMC to help customers in other ways. As we announced last week, we've added a new division and a whole new set of opportunities to our portfolio. Greenplum, which we announced in July, is the foundation of our new data computing products division. It's first new products, the EMC Greenplum Data Computing Appliance offers the industry’s best price performance ratio, three times more scalability and up to four times as many database cores than competitive systems and data input speed of up to five times that of our competitors.

Our DCA integrates database, compute and storage into an enterprise class easy to implement system that can meet petabyte scale big data requirements. We are very excited to pursue this incremental market opportunity by offering yet another leading edge solution to customers as they increasingly seek the best analytic tools to derive business values from their massive volumes of data. Our RSA security revenue growth accelerated in Q3 to 22% year-on-year. Our GRC and SIM products did well as customers need a way to manage their multitude of discreet security devices. The combination of these capabilities enables customers to have an easy to use governance layer that can oversee and manage other security products throughout their environments. As security and compliance become increasingly important to all customers, and as more infrastructures move towards the cloud, this unique governance and management layer is a key differentiator and enabler in the marketplace. This was the reason we won an important security operation center project at a very large management services customer this quarter. Revenue from our information intelligence group was relatively flat against last year's Q3.

The XEP platform continues to be very popular and IAG won a number of significant new customers in the quarter. Clearly the rollouts of virtual infrastructures and the build out of private and public clouds drove the strong growth of VMware in the quarter, up 46%.

The excitement around VMworld with over 17,000 attendees is a great example of the impact VMware has on the industry. At VMworld we made a number of announcements including vCloud Director, VMware View 4.5, vShield and vFabric. We also made a number of announcements around how other EMC products are being integrated with VMware including Unified Infrastructure Manager Version II which when deployed with vCloud Director and VBlock creates what's essentially a vCloud in a box.

Other announcements include an EMC storage infrastructure with secure authentication which when combined with View 4.5 sets a storage efficiency record of $38 per client, the best in the market due to tight integration of all these various technologies. We also announced a strong RSA VMware cloud security and compliance solution, another industry first that will help ease the security concerns of customers as they move towards the cloud. Because virtualization is the foundation of cloud computing, a key to success with VMware is bringing the virtual infrastructure and the information infrastructure together. And while we encourage others to work with VMware, we work harder than anyone else to integrate the virtual and information infrastructures. With over 60 different integration points now between EMC and VMware including support for all the VMware APIs we lead in VMware integration.

Recognizing the difference such tight integration makes in performance a global medical technology company purchased both client and Solaris systems in the quarter. It was a combination of the VM plug-ins, unified architectures and features like FAST and FAST Cache all for one vendor that drove this deal for us.

Our results this quarter and for the last several are great indicators of the strength of our strategy and business model. The move to cloud is underway. All of IT is moving in this direction and while customers are moving they're spending towards these new architectures at varying speeds, the tidal wave of change is definitely real. We are leading in the hottest areas of the move to the cloud and we have the broadest portfolio across all the key customer requirements, from virtualization, storage to security information governance. And while we cannot control all the economy or IT spending, we believe that we will certainly continue to grow and gain share due to our leadership position in this rapidly growing opportunity.

So, looking at the environment the opportunity ahead, our unique competitive position and the strength of our strategy and model, we are once again raising our expectations for 2010. We now expect to achieve $16.9 billion in revenue, non-GAAP operating margins of 21 to 22% and non-GAAP EPS of $1.25. This reflects revenue growth of 20% and EPS growth of 39%, a very robust growth and even better leverage. As you can see, strong growth in leverage and investments have been the standard for us since 2004. And with the results and outlook we reported today it's clear we're continuing on this trajectory. But what's most exciting is that the fundamental shift to cloud architectures is only in the early stages and we believe we are better suited than anyone else to capitalize on this trend as it unfolds over the next several years. We fully expect that the triple play of shared growth, investment for the future and financial leverage we're delivering this year can be maintained over the long term.

So in summary, our strategy is clear. The business and operating model are in place, our investments continue to pay off and the cloud opportunities are very big. As a result, we expect to continue to deliver double-digit revenue and double-digit earnings growth for the next few years. I'll now turn the call over to Joe, who'll provide some more color on the quarter and what we see through the end of the year. Joe?

Joseph Tucci

Thanks, David, and a warm welcome to everyone attending today's conference call. As always, thank you for your interest in EMC. As Tony said, I am currently in Beijing and thus actively participating in today's earning call from approximately 6,000 miles away from my colleagues. But I trust the marvels of communication technology will make the mechanics of this call appear seamless.

Overall, I was very pleased with our performance in Q3. In fact, our top line revenue was the best in EMC's history as we posted solid growth on both a year-on-year sequential basis. I am also proud to report that we continue to create leverage in our P&L while investing in the future. To this end in Q3 we added approximately 1700 professionals to consolidate at EMC in the areas of sales, emerging high growth markets, R&D and VMware. Our goal is to develop more innovative products and maintain strong growth. And most importantly we established EMC and VMware as clear thought leaders with substantial momentum in private, public and hybrid cloud computing. We firmly believe cloud computing which enables IT as a service is the next big transformational wave that is shaping the information technology landscape.

Our success in Q3 would not have been possible without the hard work and dedication of the 47,000 people of EMC and VMware around the world. I want to thank them for their leadership and congratulate them on their accomplishments. I would now like to make a few comments on the global economy and more importantly our view on IT spending trends.

On the economic front, on a consolidated global basis, we continue to see a slow recovery, albeit with a few bumps in the road. Pretty much in line with what we've been saying all year and looking forward we expect this trend to continue. Closer to home in IT spending terms we are seeing real strength in rapid growing and emerging geographies, moderate growth in the U.S. and Japan, most of Europe, albeit with a bit of choppiness in a few countries, and solid growth in countries such as Australia, Canada, Mexico and South Africa. Additionally across all markets, the very good news is that the demand for virtualization, information storage, information protection and information security and governance are areas where EMC/VMware is the leader are growing considerably faster than the IT average. This is evidenced by the fact that in Q3 we grew on a year-on-year basis 21% in the U.S., 28% in APJ, 22% in constant currency, 14% in Europe, 19% in constant currency and approximately 30% in emerging markets. This balanced geographic growth demonstrates that we are focused on IT markets that are growing much faster than the IT market as a whole and more importantly we are clearly taking share.

Additionally what drove this demand is the ever-continuing growth of information and the innovative uses of this information by our customers as they drive for higher and higher levels of productivity while meeting the mandate for risk mitigation and adherence to proper governance and compliance policies. What adds to our confidence in our future is the thought leadership, innovations and strong product roadmap we have in a new big wave of IT, cloud computing. It is our firm belief that cloud computing will transform enterprise IT shops as the customers migrate their IT data centers into private clouds. This transformation will also happen in a service provider community as they build out an extensive number of very large enterprise class public clouds.

Additionally the actualization of private and public cloud computing will provide our customers a massive benefit, namely the ability to run applications more flexibly with a lot more automation at a significantly lower cost while ensuring that the attendant policies and service levels are adhered to. But even lower costs and more flexibility can be achieved as customers take advantage of both private and public cloud computing by federating or operating their various application loads between their own private clouds and the public clouds of their chosen service provider partners. We call this cloud implementation the hybrid cloud. I assure you the vast majority of our R&D budgets, our acquisitions, our go-to-market motions and the build out of our partner ecosystem is aimed at leading and winning in this game changing hybrid product opportunity. The importance of having a world-class partner ecosystem cannot be overstated. I firmly believe no one IT company could possibly possess all the IT resources to go it alone and very importantly every single customer I speak with wants, in fact demands, best of breed and choice.

To this end, our partnership with Cisco is deepening and our VCE coalition is gaining significant momentum in the market. As proof, I am again pleased to report that our Vblock sales are well ahead of plan. Our partnership with systems integrators such as Accenture, CSC, Cap Gemini, Wipro, TCS, Deloitte and others continues to grow strategically and tactically. And last on the service provider front, we are building a number of very deep alliances with many of the leading telcos and service providers around the world. In Q3 we announced partnerships with the following companies: France Telecom’s Orange Business Services, SingTel's Alphawest, Saudi Telecom, Cable and Wireless and Terremark, and you can expect many more announcements over the coming weeks and months.

In summary, EMC is executing well in today's IT market. We have a great product and technology portfolio and a go-to-market prowess to capture the opportunity that the private and public hybrid cloud-computing wave offers. Thus, I reaffirm our belief that we can achieve double-digit growth rates over the long term and to help you better understand why we are so confident in our future we will host an investor and analyst day in Q1. I'd now like to turn it back to Tony to moderate today's portion of the -- Q&A portion of today's call.

Tony Takazawa

Great. Thanks, Joe. Before we open up the lines for your questions as usual we ask you to try to limit yourself to one question including clarifications, which will enable us to take as many questions as possible. Thank you all for your cooperation in this matter.

Operator, can we open up the lines for questions please?

Question-and-Answer Session

Operator

Thank you. At this time we are ready for the question-and-answer session. (Operator Instructions) Our first question, Aaron Rakers of Stifel Nicolaus Investment Advisors. Sir, your line is open.

Aaron Rakers – Stifel Nicolaus Investment Advisors

Yeah. Thanks, guys and congratulations on the good quarter. So my question is going to be around basically the cloud strategy as a whole, you guys lay out obviously a clear picture of where you’re going from a strategic perspective. Can you help me understand where clustered NAS fits into your thought process around cloud or the market that you look to address going forward?

David Goulden

Sure, Aaron. Basically we have a very successful high end NAS product with Celera. There are a lot of developments that we are investing in there with products coming to market. Clustered NAS is really all about how you handle a global namespace. We have really solid plans in that area and I feel comfortable with our road map. As always, I would like to keep some surprises so we don’t -- I don’t want to tell you exactly when we’ll release new products but I will say we have a very robust product line for 2011.

Aaron Rakers – Stifel Nicolaus Investment Advisors

Thank you.

David Goulden

Thank you.

Tony Takazawa

Thanks. Next question please?

Operator

Daniel Ives of FBR. Sir, your line is open.

Daniel Ives - FBR

Yeah, thanks. Can you speak to the federal in the quarter relative to expectations?

David Goulden

Yeah, Daniel. Sure. We, in federal we saw a good quarter-on-quarter growth in the quarter as expected but relative to the rest of the business it wasn’t quite as strong again as expected. So good sequential growth and pretty much in line with where we expected it to come out.

Daniel Ives - FBR

Congrats, again. Good quarter. Thanks.

Tony Takazawa

Thanks, Daniel. Next question please?

Operator

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

Brian Marshall – Gleacher & Company

Hi, thanks guys. I’d like to echo the nice quarter. Looking at, I mean it appears that most of your business plans are fully optimized at this point. I guess I’d like to focus on the one that doesn’t appear to be, the Information Intelligence Group, the old Documentum, I was wondering if we could get an update here, kind of what you see out there for this business unit and how strategic this is going forward relative to kind of the focus on the hybrid cloud? Thank you.

David Goulden

Okay, Brian. Sure. A couple of things. First of all when we think of the hybrid cloud, one of the big phenomena today is big data and you know big data is going to come in a couple of different forms. It’s going to come in the structured form and that’s obviously where Greenplum and the DCA that we just announced are important and it’s all going to come in the unstructured form again which is why Documentum is still a very important part of the overall strategy. Now within the IIG business, there’s a couple of things happening underneath the surface. That business is transitioning from a large enterprise, license type business to a smaller application dependent business so we’re moving from the traditional PLA to the kind of smaller XEP application oriented rollout. So underneath the surface you’re seeing that churn occur, and that’s why you’re seeing the top line relatively flat, but strategically it still has a great role in the cloud strategy.

Brian Marshall – Gleacher & Company

Thank you.

Joe Tucci

David’s right. There’s a lot of moving pieces there and we are in the transition with our XEP strategy, which will make Documentum platform a lot more lightweight, a lot more SAS enabled and as we get through that transition we expect we’ll see better growth.

Brian Marshall – Gleacher & Company

Thanks, Joe.

Tony Takazawa

Thanks, next question please?

Operator

Ittai Kidron of Oppenheimer. Sir, you may ask your question.

Ittai Kidron - Oppenheimer

Thanks. A question for David and first of all again, congratulations on the numbers. With regards to the gross margin in your core EMC business, 55.5% this quarter. I can’t even remember the last time you got such high gross margins and with some of your larger competitors making a lot of acquisitions and trying to accumulate a lot of assets after years of non-activity in your area? How should we think about gross margins in your core business going into next year and also VMware provided some initial growth thoughts on 2011 last night, would you care to do the same with regards to your business?

David Goulden

Well, first of all, no, we’re not going into 2011 at this point of time other than to reiterate my comments I said earlier that we’re looking to execute our triple play over the long term and certainly next year we’ll be looking at double-digit revenue growth and double-digit earnings growth and those are the only if you’d like stake I’m putting in the ground right now relative to 2011. Relative to gross margins, yes, we have seen nice expansion in the non VMware side business. As I mentioned during the quarter what we’ll be seeing is a mix shift towards higher gross margin products, so we’re doing very well with things like our NAS products, VMAX, like our DD Products and some of our storage software and that mix shift is helping the margins grow sequentially. I would point out to you that gross margins we equate that as an indicator of the value we’re providing to the customer and the more value we’re providing to the customer the better gross margins are going to be within the business, so that’s what’s happening beneath the surface there.

Tony Takazawa

Okay, Thanks. Next question please?

Operator

Rajesh Ghai of Thinkequity, LLC. Sir, your line is open.

Rajesh Ghai – Thinkequity, LLC

Yes, thanks. Thanks for the good question. So, a number of your large competitors have announced integrated appliances for the cloud. I want to understand what your views were on this competitive activity and whether you believe your Vblock strategy was an adequate response?

David Goulden

Well, I don’t think Vblock strategy was a response. I think we started it. Kind of the first integration of taking the cloud OS, VMware, the connectivity and network, the server and the storage and putting it together was pioneered by us, so I don’t think we’re reacting at all. I think others are reacting to us. Us and Cisco, we’re not giving out numbers yet but what I told you is true. We set what I thought was a pretty aggressive plan for Vblock and I repeat what I said, we are well above our plan that we set for ourselves both last quarter and this quarter and for the year, so it’s going well.

Tony Takazawa

Thank you. Next question please.

Operator

Amit Daryanani of RBC Capital Markets. Sir, your line is open.

Amit Daryanani– RBC Capital Markets

Thanks. Good morning and thanks for taking my questions. Just a question around your, 3Par was acquired by HP amidst a bidding war. How do you guys think Par being at HP changes the landscape in high end storage, especially for VMAX I guess given HP’s sales and services? And secondly how to you think the EMC Dell relationship goes further given their keen interest on all the storage assets versus reselling CLARiiON?

David Goulden

I don’t think the 3Par changes the landscape at all. We’ve been -- 3Par is 10 years old. We’ve been competing with it for quite a while. For HP, will they make 3Par more successful? I‘m sure they will. I think what you’re going to see there is in large substitution for their high end EVAs and for business that they previously funneled through Hitachi. So I really don’t see that changing the landscape at all. As far as the Dell relationship, obviously we took a setback as Dell went after 3Par and obviously cooled things off. We are again in discussions to see if we can do something more meaningful and lasting. Both companies would like to do that but the key is it’s got to be meaningful and it’s got to be the last thing for me to tell you that it’s back on track. So I can’t tell you that yet but I can tell you we’re in serious discussions and there is intent on both parties to do that but obviously 3Par move from Dell was a setback to the relationship.

Tony Takazawa

Thanks, next question please.

Operator

Our next question, William Choi of Jefferies & Company. Sir, your line is open.

William Choi – Jefferies & Company

Okay, thanks. Need a quick clarification at first. Storage grew 16% . You said SIM up 23, mid tier up 22%, so what was in storage was below 16% and then the question is really if you could talk about the low end products you guys have talked about bringing that out in Q1? What would be kind of the margin and revenue ramp profile of this? I would imagine these things would certainly have higher software integration to them and related to that if you could update us on how you are doing with channel push there? How many partners you have been able to add and what kind of metrics we could talk about? Thanks.

Dave Goulden

Okay, Bill. I’ll start and I’m going to pass it over to Joe for the second part. So, in terms of storage you are right. The total storage business was up 16%, SIM 23, mid tier 22. Remember that in the storage business, well first of all those numbers that I gave you for SIM and mid tier are product only numbers. In the storage business there’s also products and services and there’s maintenance and professional services. Also there are a number of others products in there including some of the third party products we sell through – like the Connectix switches and our Select line. So that’s the difference between the 16 and the 23 and the 22. And for updates on mid tier, I’m going to pass that over to Joe.

Joe Tucci

Obviously, we’ve said and I’ll repeat it that we think we have a very, very competitive, very excited about it, a low end product coming in Q1. We’ll announce that in early Q1. It is on track. It is in beta now. It is doing very well and again I’m very excited, so stay tuned and we’ll announce that in Q1. It is the fastest growing market in storage and again we’re excited to be, we’re very excited about the prospects of entering that market in a big way, in a big, big way.

Tony Takazawa

Thanks, David. Next question please?

Operator

Mark Moskowitz of JP Morgan Chase. Sir, your line is open.

Mark Moskowitz - JP Morgan Chase

Yes, thank you. Good morning. I wondered if you could give us some update on the (inaudible) recovery business in terms of the revenue run rate previously (inaudible) just wonder if you can give me an update there? Can you also talk about the cross fund opportunities in the heritage data domain account?

David Goulden

Mark, I got the first part of the question in terms of the run rate. Could you repeat the second part please?

Mark Moskowitz - JP Morgan Chase

Yes, the other piece was if you could just talk about the cross selling opportunities within the data domain accounts in terms of heritage data domain. What type of pull through are you seeing there?

David Goulden

Great. Mark, so on the run rate, we mentioned that in the first quarter data domain and Avamar lines combined had reached the billion-dollar run rate, which was ahead of plan. We said we’d get to that level in 2010. We got there in Q1 and that’s continued to increase sequentially into Q2 and again into Q3. So we’re not going to break that out again once we got beyond our billion dollar run rate but we are continuing to see sequential growth and obviously the run rate is now higher. In terms of cross selling some nice opportunities. I mentioned for example in my prepared comments where we cross sold into a data domain account, a large CLARiiON project that’s going to scale up to petabyte type scale and of course there’s good BRS opportunities to the EMC account. So the good news is when we will look at BRS, A, it’s opening new doors for us, and B, we’re also able to increase our footprint inside of the year, the EMC account. So it’s working both ways. It’s certainly a win-win from that point of view.

Tony Takazawa

Thanks. Next question please?

Operator

Jason Ader of William Blair. Sir, your line is open.

Jason Ader – William Blair

Thank you very much. My question is on the implied sequential growth guidance for the top line for the core business for the information infrastructure. It’s around 14% if my math is right. That seems slightly stronger than seasonal so given your comments on the economy being sort of in a slow recovery I was wondering if you could add any color on why you think that’s going to be as strong as the implied guidance suggests?

Joe Tucci

Actually Jason, are you talking Q3 to Q4 sequential growth?

Jason Ader – William Blair

Yes. 5-year average was something like 13%. This implies around 14% so I think it’s a little bit better than the historical?

Dave Goulden

Yeah, Joe. Jason’s talking excluding the VMware just to clarify his comments.

Joe Tucci

You know, it’s close, Jason. Basically what we’re doing is like we do all the time. We get bottoms up forecasts, so we then put a little bit of management wisdom hopefully on those forecasts, and we’ve been pretty accurate through the year and this is where we’re coming up and so we’re – obviously we see it. So we don’t see the market falling down. We think there’s good opportunity out there for IT and especially in the areas we are, virtualization, storage, information protection, information securities. Those areas are hot and I suspect they will remain hot for the foreseeable future.

Tony Takazawa

Thanks. Next question please?

Operator

Maynard Um of UBS. You may ask your question.

Maynard Um – UBS

Hi, thanks. In terms of the three phases to get true cloud, can you talk about what inning we’re in Phase I rollouts and as we move from Phase I to Phase II do you think we get a pause because of either a hesitancy to move to mission critical apps or maybe because we have to digest before we start consuming again or do you think this is a seamless transition between the two phases? Thanks.

Joe Tucci

I think it’s pretty seamless. Customers are seeing phenomenal reliability. The VMware OS continues to get the highest marks in the industry for stability and high quality in their platform and of course with the advent of Nehalem servers we’ve given you that six to eight cores and tremendous power. Customers have seen the reliability, the capability and they’re definitely, definitely moving to Phase II without a pause and I think Phase II will be very successful.

David Goulden

And Jason just to pick up on it. As I mentioned, the requirements and the benefits if the change from the phase is, phase I is really about consolidation cost reduction. Phase II customers are looking for costs but they’re actually looking to increases their SLAs as they virtualize which requires a whole set of technology to drive optimization around those SLAs. So it really changes the game very much from a VMware point of view but also from a storage point of view, the requirements of Phase II are very, very different. That’s why I gave you some examples in my script because the ability to seamlessly reach Phases I and Phases II really sets us apart.

Joe Tucci

By the way, speaking from first hand experience, our own IT shop. We had moved a substantial number of our mission critical apps, as a matter of fact all of our CRM apps from, to this world and we’re seeing great opportunities. So we’re clearly drinking the kool-aid and getting a very good taste.

Operator

Ben Reitzes of Barclays Capital. Sir, you may ask your question.

Ben Reitzes – Barclays Capital

Yes. I want to focus a little bit more on the fourth quarter guidance. Clearly, the guide up versus the street expectation for the fourth quarter end earnings, I just was wondering, Joe, you said you did a bottoms up forecast but what is going better than expected and included in that guidance? Does Symmetrix number look pretty strong vis-à-vis expectations? Maybe what are we missing potentially that had you raise guidance that’s better than expected? It seems like a pretty strong outlook? Thanks.

Joe Tucci

Well, you know clearly on the storage side, the stars of the show would be VMAX and our BRS data domain and Avamar products. And the other star to show is our NAS business, our Celera NAS business is also growing tremendously fast, faster than our major competitors. So those would be the stars of the show. Obviously information security is incredibly important and you see the growth in our RSA division’s business. So those are going great and our new entry into Greenplum is showing a lot of progress and a good pipeline. That’s not going to be a major impact in Q4 obviously because of it’s size but still got great growth. So we have several areas that I would call hot and of course you mentioned that you wanted the II side but of course VMware continues to – they raised their guidance also. So pretty good strength across major product lines and then of course we’ve got some -- in Q1, we’re going to enter a new phase with our low end products, so we’re in pretty good shape going forward, in very good shape going forward.

Tony Takazawa

Thanks. Next question please?

Operator

Kaushik Roy of Wedbush Morgan Securities. Sir, your line is open.

Kaushik Roy - Wedbush Morgan Securities

Congratulations on the quarter. One of the concerns during Q3 was if customers are waiting for the unified CLARiiON and Celera anticipated next year, can you comment on what you saw in the CLARiiON product line or what you expect there? Thanks.

Joe Tucci

Well, obviously I didn’t mention CLARiiON as a star but it’s holding it’s own. What we did do which customers are loving, as I said we’re -- as we did with our VMAX platform and before, we have released a lot of the key software on the older platforms ahead of the new announcements. So Unisphere, FAST Cache, FAST v2, new compression technology are being very well received by customers and that’s having an effect. Obviously, CLARiiON is also affected by Dell moving onto EqualLogic, so CLARiiON has a lot to overcome. Our new hope this year, strategy, we think is back on track and we’re looking very forward to the future. So I think it will continue to not be a star in Q4 but it’ll plod along and do okay.

Tony Takazawa

Great. Thanks. Next question please?

Operator

Louis Miscioscia of Collin Stewart, sir, you may ask your question.

Louis Miscioscia - Collin Stewart

Okay, I was going to ask about Europe as to why it has grown less than some of the other geographies but also since you mentioned it that your largest, that your competitor in the NAS area that you’re growing faster than them? I think in their hardware area last quarter they grew 50% year-over-year last quarter. Maybe you could give us some comparable numbers to also take a look at your numbers within the mid tier storage space area for you?

Joe Tucci

Well, think of it like this. I’m not going to give you new numbers but I understand their growth rate and I said that our, if you looked at our Celera alone it grew faster and I say that again. So obviously our Celera is aimed at -- NAS is aimed at the higher end, and that’s a good space to be and we’re going to do a lot of expansion there as I answered to the first question. However where they’re growing extremely fast is an area we’re not in, which is the low end, which I told you we started addressing in early Q1. So that’s kind of how I would -- that’s kind of the macro statement around that.

David Goulden

And then Louis, just to pick up on your question about Europe. As Joe mentioned in his comments, if you look at Europe in constant currency you’ve actually got 19%. So where we did have a currency headwind, I mentioned in my script it’s about 60 basis points for the quarter. Basically all our headwind was in Europe but 19% constant currency is pretty good growth.

Tony Takazawa

All right. We have time for one more question and then Joe will have a few closing comments.

Operator

Our last question, Keith Bachman of BMO Capital Markets. Sir, your line is open.

Keith Bachman – BMO Capital Markets

Hi, thank you. A couple for you David, if I could? Could you talk about a little bit about cash flow, free cash flow? As you think about Q4 specifically what are the objectives that you have and you mentioned 11 double-digit revenue and earnings growth? How should we be thinking about free cash flow, particularly since it’s, on a consolidated basis, it slowed down a little bit this quarter in terms of the growth rate?

David Goulden

Yes, Keith a few comments on free cash flow. First of all, I think it’s, the one metric that’s least helpful to look at on a quarter by quarter basis because of the ebbs and flows and timings and working capital investments, even some CapEx buildup, so I comment that free cash flow for the year so far is up 22%. Year-to-date it’s over $400 million higher than our non-GAAP net income. We’re looking forward to Q4 in the year and looking forward to 2011 and we continue to strive to have our free cash flow be higher than our non-GAAP net income.

Joe Tucci

So again, thank you for joining us. We very much appreciate it. And in closing I want to reiterate that we are executing well. Our strategy for the private, public and hybrid cloud is solid and gaining traction. We have a product rollback that is well aimed and again very exciting and we have the go-to-market and the last part is necessary to bring these innovative products to market. But most importantly we have 47,000 plus great people in EMC and VMware who believe in our vision and our future. So, once again thank you for joining us and we look forward to seeing you in the future, seeing you soon. Thank you very much. Bye, Bye.

Operator

That concludes today’s teleconference. All lines may disconnect. Once again that concludes today’s teleconference. All lines may disconnect.

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