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EMC (NYSE:EMC)

Q4 2010 Earnings Call

January 25, 2011 8:30 am ET

Executives

David Goulden - Chief Financial Officer and Executive Vice President

Joseph Tucci - Chairman, Chief Executive Officer, President, Member of Mergers & Acquisitions Committee and Member of Finance Committee

Tony Takazawa - VP

Analysts

Louis Miscioscia - Collins Stewart LLC

Maynard Um - UBS Investment Bank

Richard Gardner - Citigroup Inc

Aaron Rakers - Stifel, Nicolaus & Co., Inc.

Amit Daryanani - RBC Capital Markets, LLC

Jayson Noland - Robert W. Baird & Co. Incorporated

Shebly Seyrafi - Capstone Investments

Kaushik Roy - Wedbush Securities Inc.

Daniel Ives - FBR Capital Markets & Co.

Ananda Baruah - Brean Murray, Carret & Co., LLC

Kathryn Huberty - Morgan Stanley

Rajesh Ghai - ThinkEquity LLC

Mark Moskowitz - JP Morgan Chase & Co

Ittai Kidron - Oppenheimer & Co. Inc.

Operator

Welcome, everyone, and thank you for standing by. [Operator Instructions] I would now like to turn the conference call over to our first speaker, Mr. Tony Takazawa. Thank you. Sir, you may begin.

Tony Takazawa

Thank you. Good morning. Welcome to EMC's call to discuss our financial results for the fourth quarter of 2010. Today, we are joined by EMC Chairman and CEO, Joe Tucci; and David Goulden, EMC's Executive Vice President and CFO. David will provide a few comments about the results that we released this morning. He will highlight some of EMC's activities this quarter and discuss our outlook for 2011. 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 a journey to the cloud. After their prepared remarks, we will then open up the lines to take your questions.

We would like to point out that we will be referring to non-GAAP numbers in today's presentation, unless otherwise indicated. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure today in our press release, supplemental schedules and the slides that accompany our presentation. All of these are available for download within the Investor Relations section of emc.com.

As always, we have provided 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 EMC's filings with the U.S. Securities and Exchange Commission.

And lastly, I will note that an archive of today's presentation will be available following the call. With that, it's now my pleasure to introduce David Goulden. David?

David Goulden

Thanks, Tony. Good morning, everyone, and thank you for joining us today. I'm very pleased to report that EMC had another great quarter to finish off a year of excellent operational and financial results. Q4 revenue, non-GAAP net income, non-GAAP EPS, and free cash flow are all new quarterly records for EMC. We also achieved a record-breaking year in 2010, with revenue of $17 billion, an increase of 21%. Non-GAAP operating margin for the full year of 22%, up 460 basis points; non-GAAP earnings per share of $1.26, up 40% from 2009; and free cash flow of $3.4 billion, up 31% and 27% higher than non-GAAP net income.

2010 revenue, non-GAAP net income, non-GAAP EPS, and free cash flow are also new annual records for EMC as well. Clearly, our vision and strategy are on target. The market is primed and ready, and we have the right assets to help our customers on their journey to the cloud. As a result, in 2010, we executed on our triple play to simultaneously invest meaningfully in our business, take market share and improve profitability.

First, looking at the investments we made in our business. We stepped up investing in research and development by 16% to approximately $2 billion, including software development costs that were capitalized. We invested $3.2 billion on key acquisitions, targeted at high growth areas and invested substantially in our go-to-market capabilities, including our international sales infrastructure and expanding our channel network.

Secondly, the market share gains we achieved were impressive, with faster market growth in areas like virtualization, security and storage, with especially strong share gains in back-up and archiving and in the high-end. For the full year 2010, we grew 21%, almost twice what we estimate was the growth for our total available market.

Finally, even while investing in our business for growth and achieving sizable market share gains, we were still able to deliver a substantial leverage for our business in 2010. Products designed to deliver greater value, services driven more efficiently and faster growth in our higher-margin businesses all contributed to a 340 basis point gain in non-GAAP gross margin over last year.

The improvement in non-GAAP operating margin was even greater, up 460 basis points to 22% for the full year due to the operating expense efficiencies we also achieved. Let me point out that these are also very strong gains over 2008.

As we head into 2011, we're even better prepared to see the potential in front of us than we were in 2010 as we have expanded our market opportunity with the acquisitions of Greenplum and Isilon. We've extended our reach down market with the addition of a VNXe family of storage systems. And we've put an even greater distance between ourselves and our competitors across our storage portfolio with a newly refreshed and unified mid-tier storage family, new and enhanced products in our backup and archiving offering and valuable new software offerings for our flagship VMAX, to name just a few.

By building out the strongest product portfolio in our history, we've positioned ourselves in the intersection of two of the most sweeping trends in IT: cloud computing and big data. This is where we expect 2011 to be another record revenue year with continued improvements in profitability. We are confident we can grow revenue 15% to $19.6 billion, expand non-GAAP operating margin by about 100 basis points to approximately 23%, grow non-GAAP net income 20% to approximately $3.25 billion, grow non-GAAP earnings per share 16% to $1.46 and continue to meaningfully grow our strong free cash flow.

This is remarkable growth, particularly for a company of our size and also considering the very high bar we set ourselves in 2010. We also remain committed to double-digit revenue and earnings growth for the next several years.

In addition to the continued growth of enterprise data, our progress is being driven by the convergence of two major trends in IT, cloud computing and big data. Cloud computing can also be described as IT-As-A-Service, leveraging on on-demand, self-reliant virtualized infrastructure to deliver IT-As-A-Service, cloud computing is more efficient, flexible and cost-effective. And while customers are eager to deploy cloud architectures so they can begin capturing the efficiencies cloud computing affords, this is not a transformation that happens overnight, but happens in phases.

Phase 1 is the virtualization of smaller departmental often an IT-owned applications, frequently with simple, efficient VM integrated mid-tier storage. Cost efficiencies are primary benefit here and we saw a large number of customers passing through this phase in 2010. On average, customers have virtualized about 30% of their applications, and are now entering Phase 2. Phase 2 is the virtualization of business-critical applications, ideally with more resilient infrastructure that meets demanding SOAs for performance, availability, workload mobility, recoverability and security. More and more customers are entering into this phase heading into 2011.

Well over half of the company's applications will be virtualized once a customer has completely passed through this phase of the journey to the cloud.

Phase 3 is when a customer is finally leveraging all the power of a fully virtualized environment to provide IT-As-A-Service with automation, provisioning and charge back, and drawing on compatible public cloud services where it makes sense. The early adopters are always just dying to get here. And as a customer's cloud infrastructure develops, they look to building technologies that will secure and protect their operations whilst achieving benefits and agility than ever before. This means best-of-breed and well-integrated capabilities for things like security and backup.

Such transitions to the cloud are becoming the norm, and the vast majority of customers are at some point in their transformation to IT-As-A-Service. What is important is that whether customers are just entering the first phase or well into the third, we have the product portfolio and the service expertise to accompany them every step of the way.

The second major trend that will drive our results in 2011 is big data, which is a primary contributor to the staggering pace of data growth. When we talk about big data, we are referring to the enormous repositories of corporate and external data, including unstructured information created by social media and other web repositories. We're also talking about the associated analytics that unlock the value contained within these massive amounts of data. Big data differs from the transactional and small file data and applications that have traditionally characterized the company's data center. It tends to be more sequential, less transactional and much, much bigger, measured in petabytes rather than terabytes. The tools and platforms surrounding big data require new approaches and capabilities to handle these data sets. With the investments we've made through the acquisitions of Isilon and Greenplum, as well as in our own Atmos offering, we are now squarely positioned to capture much of this large and growing incremental market opportunity.

Overall, given our strong basic technology assets base both broad and deep with virtualization optimization that is second to none, we are becoming the partner of choice as customers consolidate and build out new data centers, either for their own private clouds or to offer cloud services to their customers.

Now that I've given you a sense of what's driving our success in 2010 and going forward, let's look at our Q4 numbers in greater detail. Overall, storage revenue growth accelerates to 17% as we continue to gain share by enlarging our footprint in the data center, as well as through new customer acquisition. Customers choose EMC storage because they want efficiency, simplicity and performance, and EMC delivers. We deliver efficiency through features like FAST VP software, which stands for Fully Automated Storage Tiering with virtual pools, and which automatically optimizes systems and vastly lowers TCO. We deliver simplicity exemplified by our advanced yet easy-to-use Unisphere interface in our mid-tier storage. We deliver performance with unparalleled VM integration of virtual provisioning across our portfolio and as this recent survey indicates, we continue to standout as the storage vendor of choice in virtualized environments.

These differentiators, along with product quality, service and support that are consistently the best in the industry, helps us extend our storage market leadership position in Q4. Our Symmetrix product revenues grew 19% in Q4, there are a couple of key differentiating features here that make our VMAX line so popular. The first of these is its x86 -based scale-out architecture purpose built for virtual environments. This evolution of an architecture to incorporate industry-standard processes enables us to very quickly leverage the improvements made to processes to deliver faster, more reliable and more efficient performance. The second feature that sets it apart from alternatives is our ability to fully leverage Solid State Drive in enterprise storage. We were the first to deliver the value to be had from Solid State Drive and enterprise storage three years ago this month, and we continued to add value with our Fully Automated Storage Tiering software. The latest version of which automatically optimizes systems and delivers up to 40% more application performance and 40% lower cost compared to single tiered systems.

EMC alone is able to deliver this value with Solid State Drives and customers are embracing this value with penetration rates of Solid State Drives and FAST on VMAX climbing once again in Q4. When you add these two features together, the end result is a powerful, trusted and highly efficient high-end platform with a value proposition that customers love.

This demonstrated ability to innovate in ways that respond to customer needs is translating into market share. In fact, we think that when all the numbers are in for the year, we will have registered our biggest annual share gains in the high end in at least 10 years, which is a testament to the power of our offerings here. As customers consolidate district data centers into new environments meant to support cloud deployments either public or private, they choose VMAX because of its highly scalable, usable protecting capacity and a small footprint made possible by cutting edge efficiency technologies. We had numerous examples across the globe in Q4 of customers selecting VMAX for their virtualized environments because of these advantages. With sizeable wins in all verticals of all types, including at a healthcare authority in British Columbia, telecom providers in India and Israel, an energy company in the U.K., a government in the Middle East and a large manufacturer right here in Massachusetts.

Let me give you an example from this past quarter that illustrates why VMAX is the high-end platform of choice. One of the largest plastic manufacturers in the world recently consolidated to three main data centers globally and was looking to replace the entire storage infrastructure in Europe. Because they had to use VMware for server and desktop virtualization, VM integration was a chief consideration for the storage they selected.

Our ability to provide highly reliable and scalable storage solution, highly integrated with vCenter was key to displacing Hitachi here. Moreover, our robust backup offerings and our integration with VMware's virtual disk development API enabled us to become this customer's global backup standard as well. They're now using Avamar, Networker and Data Domain to meet their backup requirements which, like many customers, vary throughout the global environments.

Mid-tier product revenue grew 23% in Q4 and was up 20% from Q3, representing a healthy acceleration from the sequential growth of 5% last quarter. This was especially encouraging as our product refresh coming in Q1 was hardly a secret. While we continue to have customers approach the EMC for traditional network storage requirements, we also saw strong growth from customers working through early phase or departmental deployments of virtualization. Our long list of mid-tier competitive takeouts in virtualized environments in Q4 attest this is happening across the globe in just about every vertical, with customers range from health care, tech and Internet to manufacturing, government and transportation.

As customers virtualize their data centers and standardize their consolidated environments on to a small number of trusted vendors, EMC stands out as the best-of-breed and best VM-integrated information infrastructure provider. This is winning us new customers, who need a vendor who can do more than just Phase 1 storage. EMC consistently stands out as the best candidate for consolidations like this in the mid-tier because of our affinity with virtualized environments, because of the simplicity of our unified systems and because our market leading backup solutions that span customer's backup requirements.

A great example in Q4 of a win due to these advantages came as Momentive Performance Materials. This large silicon producer standardized upon VMware and View across the enterprise and was looking to standardize infrastructure for their remote data centers as well. With our simple, efficient and VMware-integrated mid-tier unified products, as well as Avamar in our arsenal, we were selected as their storage standard globally.

We expect cases like this to become much more prevalent in 2011, with our refreshed and expanded mid-tier product set. Having earned the trust of thousands of mid-tier customers with platinum storage products and services in their main production and disaster recovery environments, we are focused on expanding our footprint into departmental and remote offices. Our VNXe line will be very important here, as well as in reaching down market into the SMB space.

Our Backup Recovery Systems division, which includes Data Domain, Avamar and Networker continue to fire on all cylinders. Our resounding success here stems from our differentiated deduplication technology and also from the EMC effect, which is our ability to deleverage our brand, our focus on research and development, and our global sales infrastructure to maximize the ROI from our acquisitions. The aforementioned customer examples are great illustration of this affect. Our market-leading dedup technology sought after by customers frustrated by antiquated backup approaches. This challenge is now so common to our backup offerings have become a natural additional solution in accounts where the initial engagement was something entirely different.

This same approach is being applied to our acquisitions of Isilon and Greenplum. Our model is to select differentiated technology that adds clear value to customers in rapidly growing adjacent markets that are complementary to our own and then broaden its reach to exposure to our global sales channels, the backing of the EMC brand and other investments to maximize value.

This strategy augments our portfolio to meet the challenges of big data and helps to solidify our position as the cloud technology provider of choice. Early indicators of the success of this strategy are all good. Greenplum did very well in Q4, and we're especially pleased with the fast ramp of the Data Computing Appliance. Built on Greenplum technology, the Data Computing Appliance combined leading innovation in workload management, fault tolerance, and advanced analytics with the fastest data loading on the market today, which is important given the vast amount of source data needed to run analytics. Customers value all this plus the fact they can get the DCA up and running very quickly.

Isilon's momentum continued with record revenue in Q4 on stand-alone basis, well above the company's expectations prior to the acquisition. In its six generation, Isilon scale-out technology has matured and is mainstream, enterprise ready, and meeting the big data challenges that characterize today's IT environments in a growing number of vertical markets. This is a great momentum even before the benefit of the EMC effect.

On a going forward basis, Isilon will be included in our mid-tier storage number, but it was not included in our Q4 revenue as we closed this transaction very late in the quarter. Complementary to Isilon is our Atmos offering, which uniquely focuses on globally distributed environments with object interfaces to data. We remain confident that the two together will reach a $1 billion annual run rate during the second half of 2012.

Our services organization is definitely benefiting from the transition to cloud architectures as cloud-related consulting engagements increased over 40% in Q4. As customers build out private cloud infrastructures and even begin to bridge towards utilizing the capabilities public clouds have to offer, EMC's trusted advisors have pooled in, helped customers architect the foundation for delivering IT-As-A-Service, a trend which even further increases EMC's relevance in next-generation data centers.

One of the fastest and easiest ways to accelerate the transition to cloud architecture is with the Vblock, and the strong VCE momentum we experienced in Q3 has only accelerated in Q4 with the number of deals closed more than doubling quarter-on-quarter. As expected, deployments span a lot of these cases and verticals and are happening globally as a converged infrastructure is universally appealing. Vblocks enable customers to get cloud infrastructures up and running on best-of-breed technology in a fraction of the time required by traditional deployments of competitive technology stacks. Referenced architectures or technology alliances that put fort to compete with Vblock are still do-it-yourself assemblies, and lack the very advantage that make Vblocks popular, one SKU, pre-configured with a single manager interface and ready to deploy. A Vblock is best-of-breed technology that dramatically simplifies cloud deployments and customers are embracing it.

Vblock customers in Q4 include service providers like Sonda Brazil, our first official VCE partner in Brazil, who'll be offering new cloud computing services to its customer based upon Vblocks. And Harris Corporation, which is investing in its cyber integration center to offer trusted enterprise cloud solutions to its customers.

Corporations build out private cloud architectures are standardized on Vblocks as well. With Vblocks, customers can efficiently deploy highly secured cloud-based applications for business innovation, whilst reducing the capital and operating expenses associated with procuring, deploying and maintaining IT. The benefits to EMC of VCE are important. The majority of VCE deals are incremental to EMC, in addition to our traditional best-of-breed storage solutions, we now complete with the integrated plays with our best-of-breed converged infrastructure. Now we're positioned to win both ways.

Our RSA Security division finished 2010 with all-time record Q4 revenues of $209 million, up 28% year-on-year, driven by strength across product lines and geographies. RSA achieved excellent growth in 2010 with revenue growth accelerating every quarter this year. This strength stems from the fact that security continues to be foremost priority for CIOs and also from RSA's thought leadership and product leadership within security. Part of our competitive advantage is that many of our offerings span both physical and virtual infrastructures, which is ideal as customers build out their clouds. As cloud environments grow in popularity, the built-in security RSA provides is increasingly relevant. RSA will continue to stand apart with offerings to enable IT departments and cloud provider alike not only to ensure compliance and security but to prove it as well.

Revenue from our Information Intelligence Group was roughly flat in Q4, as customers transitioned from purchasing enterprise-wide content management solutions to application-centric solutions with Documentum xCP. We believe we have a lot of the right assets to address the enormous opportunity to be had in the capture, management and governance of unstructured data. Information governance is increasingly a focus for corporations today while industries like insurance and healthcare are demanding case management solutions like those built on our xCP platform.

VMware grew 38% in the quarter to a record $835 million as customers are eager to benefit from the efficiency and agility that VMware's product set enables. VMWare is making good progress in expanding its market globally. We're expanding footprint within the data centers as well. Approximately 30% of a data center server applications on average, are virtualized today. We expect this figure to climb over 50% within the next two years.

VMWare will continue to leverage its unique basic technology assets to expand the technical and market leadership position we hold today. We have freelance strategy focused for modernizing infrastructure, applications and end user computing, VMware is positioned at the core of the movement to IT-As-A-Service.

Looking more closely at our financials. It is evident that the strategic combination of our technology assets, which we've been assembling over last several years is resulting in clear value for our customers and for our shareholders as well. Overall, we grew revenue in Q4 19% to $4.9 billion reflecting solid double-digit growth from all of our geographies and especially our BRIC + 13 markets, which grew over 30%. The higher value we're delivering to customers is translating to better profitability for us. Non-GAAP gross margins increased 140 basis points sequentially and 230 basis points year-on-year to an impressive 61.9%, driven by volume and mix shift towards higher margin products. This expansion, coupled with ongoing efficiency gains in our operating expenses drove non-GAAP operating margin of 300 basis points year-on-year to very solid 25.4%. These improvements drove non-GAAP earnings per share to $0.42, up 27% from $0.33 a year ago. We ended the year with $9.5 billion in cash and investments. Partly driving this cash balance was a 31% growth of free cash flow in 2010 from last year to a full year free cash flow of $3.4 billion. This is well above non-GAAP net income for the period and a very good results.

We've also been investing some of this cash in our future, including $2.3 billion on acquisitions in Q4 with a 2010 total of $3.2 billion. This investment in key technologies, products and businesses, adds to our portfolio and drives growth. In the consolidating IT market, the strength of our balance sheet to make these investments is very important. We've also been returning cash to our shareholders via share purchases. In Q4, we repurchased 8.9 million shares of EMC for approximately $200 million. In 2010, we returned $1 billion to shareholders via our repurchase program. In addition, in 2010, we spent a small amount of $399 million to purchase VMware shares while VMware spent $339 million themselves on share repurchases. Given VMware's position as the cloud data center operating system of the future, we believe our relatively small approach just to maintain our ownership level are an excellent long-term investments.

Turning now to 2011. The global economic outlook, while it could be better, is certainly a bit brighter than it was last year at this time. Joe will give you some more color about what we expect. What is clear is that the vast opportunity available to us at the crossroads of the mega trends of cloud computing and big data.

EMC is particularly well-positioned to take advantage of this opportunity with a refreshed product portfolio that meets customers needs for efficiency and simplicity. A services organization that's one of the most trusted in the industry, one of the most advanced and capable go to market organizations in the industry, a strong and growing partner ecosystem and our expanding role as a trusted cloud technology provider across the globe. We had never been better positioned. This alignment of IT trends with our capabilities gives us a high level of confidence and strong momentum as we look ahead. As a result, in 2011, we expect to grow revenue 15% to $19.6 billion to expand non-GAAP operating margin around 100 basis points to approximately 23%. This is on top of the significant improvements we made in 2010. To grow non-GAAP net income, 20% to approximately $3.25 billion; to grow non-GAAP EPS 16% to $1.46; and to increase our buyback of EMC shares for $1 billion in 2010 to $1.5 billion in 2011.

There are additional assumptions and expectations in our earnings release. But I’d like to take a moment and point on a couple here. First, I’d like to point out an accounting requirement that has an increasingly meaningful impact on our fully diluted share count and therefore on our EPS calculation. The impact comes from the accounting for our outstanding convertible debt. As the EMC stock price goes above the $16.08 excise price of the convertible, accounting rules results in an increase in our calculated fully diluted shares. In other words, the stock price going up is leading to the accounting calculation for the number of fully diluted shares to also go up.

You will probably want to be mindful of this impact as it can be quite large, whilst the debt is outstanding. For example, assuming an average stock price of $25, this would result in approximately 75 million shares added to the fully diluted share counts.

Based upon our non-GAAP net income expectations for 2011, this would equal $0.05 per share. This $0.05 is pretty meaningful compared to the 2010 impact of only $0.02 per share. Taking this example a step further, the comparison of non-GAAP EPS of $1.46 versus $1.26, which represents 16% growth in 2011 would instead be $1.51 versus $1.28 or 18% growth, i.e., higher EPS and high EPS growth. I believe this is very important for you to understand because while this accounting impact has significant impacts on diluted non-GAAP earnings per share, the impact will be going away upon maturity of the convertible debt due to the hedges we have in place.

In other words if a debt had already reached maturity, these accounting shares would not be in the calculation. So it is an important factor to keep in mind, and we've included a table in our supplemental schedule that illustrates the impact of share price changes on our diluted share count due to this accounting treatment of our convertible debt. One other consideration in regard to our modeling for 2011 is the non-operating expense line. We expect to increase by roughly $25 million from $75 million in 2010 to $100 million in 2011. The primary driver of this increase is our additional investment in VCE.

In conclusion, with our commitment to continue our triple play, our reinvesting for growth, gaining market share, and delivering leverage, we head into the year with a major focus on reinforcing our position as the provider of choice for cloud infrastructures. So, while we expect to continue our excellent track record in 2011, more importantly, we're also establishing EMC strategically for the long term. There is no shortage of market opportunity, and we've never been better positioned.

With that, I'll turn it over to Joe, who will give you more color on the outlook, the quarter, and the vast opportunities that lie ahead.

Joseph Tucci

Thanks, David. I would like to begin by adding my welcome to everyone who has joined us for today's conference call. Thank you for your interest in EMC. Overall, I was very pleased with our performance in Q4, and I am proud to report that Q4 capped a truly strong year for EMC in 2010. A year marked by rapid growth, market share gains, financial leverage and significant investment in technology innovation. Even more important is the fact that in 2010, we positioned ourselves very well, not only for 2011 but well beyond.

I would like to publicly congratulate the 49,000 people of EMC and VMware on their many accomplishments and thank them for their leadership, their laser focus on our customers and for their dedication. And on their behalf, I would like you to know that they are charged-up and excited about our future prospects. For sure, EMC and VMware are clear front leaders with compelling technology that would help our customers on their journey to private, public and hybrid cloud computing, which will enable the massive benefits that IT-As-A-Service has to offer, mainly, increased agility and significantly lower costs.

Today, I will not talk much about our cloud strategies or our innovative products, services or partners, as in exactly two weeks from today, we are hosting a strategic forum for investors and analysts. Paul, Rich [ph] and I like would like to invite you to join us for this event in person in Boston or via the web.

I would now like to make a few comments on the 2011 macro environment and contrast this outlook with what we saw one year ago as we began 2010. Last year at this time, we said we expected IT spending to grow 3% to 5% in 2010, and we've said EMC's TAM or total addressable market, would grow considerably faster in the 6% to 8% range. We also said on that call that EMC's plan for 2010 was to gain share and we set our goal to grow faster than our TAM. Our 2010 target was $16 billion, which represented a 14% growth. We now believe IT spending grew in the 7% to 8% range in 2010. EMC's consolidated TAM grew 10% to 12%, and EMC grew 21% or to be totally fair, a little over 19% on an apples-to-apples acquisition-adjusted basis.

For 2011, our forecast is for EMC global IT spending to increase 5% to 7% and EMC's TAM to grow in the 8% to 10% range. And as David has said, our plan is for a 15% growth to $19.6 billion, while growing non-GAAP EPS to $1.46 per share, an increase of 16%.

As is our custom, the outlook we provided you today of $19.6 billion in revenue and $1.46 per share is exactly the same numbers our Board of Directors has approved for management's plan. Additionally, EMC's Board will also approve a free cash flow goal for management at our upcoming board meeting, which we will share with you in our proxy.

In 2011, we will focus on growing faster than the markets we serve, thus taking share, provide financial leverage and continue our investments in innovative products and solutions, and as always, we will strive to meet and beat our plan. So what gives us confidence in our future? First is our belief in our cloud/IT-As-A-Service vision, which is tightly coupled with a very developed strategy for private, public, and hybrid cloud computing. Second is the incredibly rich, and I do mean, incredibly rich product lineup and roadmap we had going for us in 2011.

Third, the timing of that product roadmap. For starters, the fact that one week ago today, we launched a record breaking 41 new and enhanced storage products. This gives our sales force and channel partners virtually entire year to sell these high value products. And by the way, we’re far from done. There are many more exciting products, which we will launch throughout 2011. Fourth, is our preparedness to take those products to market and delight our customers via our well trained and motivated people, via our technology and service partners, via our channel and distribution partners, via our programs, and via our VCE coalition with Cisco which is now 700 people strong. Our best-of-breed convert infrastructure products and message is resonating very well with customers as VCE continues to outperform its plan by a considerable margin. Fifth, and very importantly, is our momentum and our will to win.

With that, I’ll now turn it back to Tony to moderate the Q&A portion of today’s call. Tony.

Tony Takazawa

Thanks, Joe. Before we open up the lines for questions, we ask your cooperation in limiting yourself to one question. This will enable us to take as many questions as possible from as many different people as possible. Bridget, can we open up the lines for questions please.

Question-and-Answer Session

Operator

[Operator Instructions] We do have our first response from Amit Daruanani from RBC Capital Markets.

Amit Daryanani - RBC Capital Markets, LLC

Just a question around the March quarter. Historically, the quarter seems to be down about 9%, 10% for you guys. Do you think it shakes out any differently this time given the fact you have a lot of product refreshes that I believe will generally be available later in the quarter? And how do you think margins will shake out in the March quarter as well?

David Goulden

Well, let me comment on the seasonality of the year. We don’t give quarterly guidance, but what I'll tell you is we expect the contribution of each quarter for a revenue percentage basis to the full year to be relatively consistent with the historical averages. And if you look over the last six years and you kind of draw an average of that, we're expecting roughly similar contributions to total revenue from each quarter.

Operator

Our next question will be from Ittai Kidron of Oppenheimer.

Ittai Kidron - Oppenheimer & Co. Inc.

David, could you give us a little bit more color on the impact of Isilon on the top line and how accretive was it to your annual earnings guide?

David Goulden

We're obviously expecting Isilon to continue to grow nicely from what was a very strong 2010. I pointed out to you in my remarks that in the fourth quarter, they did better than the guidance they gave on the standalone company. So that's a good sign going into it. I'm not going to give a specific number for the overall 2011, but I'll tell you it will be nice growth from 2010. As we mentioned to you when we announced the acquisition, it’s going to be marginally accretive to non-GAAP EPS in 2011. It’s a big investment year for us in 2011. And we also said by the time we get to the back half of 2012, we get to $1 billion annualized run rate between Isilon and Atmos, at that point in time, it will be contributing at a level more commensurate with our overall operating margins.

Operator

Our next question is from Aaron Rakers of Stifel Nicolaus.

Aaron Rakers - Stifel, Nicolaus & Co., Inc.

My question is on free cash flow generation. I know that you guys don't give a target in your proxy, but over the last couple of years, you’ve been running 19%, 20% roughly of revenue from free cash flow or about a rate that’s about 30% higher than non-GAAP earnings. So with that as we look forward, given what you’ve talked about in guidance, is there anything that changes that trend or how should we think about free cash flow generation?

David Goulden

Aaron, you’re right. We’ve done a very good job. We continue to expect to do a good job of driving our free cash flow higher than our non-GAAP net income. At the moment, we're still kind of finalizing all, fine tuning all those details. We have a conversation coming up with our board. So at this point in time, I will tell you that we're confident that we'll continue to show healthy growth in 2011, and we should be well above our non-GAAP net income, but beyond that, we just need a bit more time to give you a more specific number.

Operator

Our next question is from Mark Moskowitz of JPMorgan.

Mark Moskowitz - JP Morgan Chase & Co

I wanted to get a greater color if I could though, David, around the operating leverage. You’ve made some significant investments in R&D in 2010, and you are taking up your 2011 operating margin target above what the consensus is expecting. But I want to get a sense in terms of R&D, how much of wiggle room do you have there, could that drive another point or so of operating margin improvements?

David Goulden

No, Mark. When we look into 2011, and we’ve given you, you're roughly 100 basis points of non-GAAP operating margin leverage, the biggest piece of that, over half of that is going to come from continued improvements to our gross margins, and the gross margin improvements come from a couple of areas. Obviously, volume health, but also we pointed out this year, the mix shift, particularly within storage towards a higher margin products is a good thing. We expect that to continue into 2011 as well. So we expect a little bit more than half of the operating margin leverage in '11 to come from our gross margin. Then within OpEx, expects probably a little bit more from SG&A than you'd expect from R&D.

Operator

Your next question is from Katy Huberty of Morgan Stanley.

Kathryn Huberty - Morgan Stanley

As we know, everyone in tech is dealing with tough compares going into 2011, but in light of the 41 new products you announced last week, do you think you can maintain close to the 17% growth you saw in the storage business, particularly in 2011?

David Goulden

Well, Katy, you are right. I mean, we are facing tougher compares, and we've given you an overall growth number of 15%. So if you think about that and you obviously think about what VMware’s growth numbers are, then we're expecting a little less than 15% for the overall ex-VMware business, so not at the 17% range, but I still think that will be -- we've given you a growth rate for the year that’s going to maintain a significant share gains and we're very confident about the competitive position we have. We expect to gain shares in all the major segments in the storage marketplace this year.

Joseph Tucci

Katy, we'll talk to you more about this in two weeks, but we really think that we're on to the future of storage when we -- kind of the vision for both enterprise data and what we call big data, and we think that's definitely going to help us propel our growth.

Operator

Our next question is from Rajesh Ghai of ThinkEquity.

Rajesh Ghai - ThinkEquity LLC

I just wanted to follow-up on those last questions. So if I strip out VMware's guide and strip out about $500 million for Isilon, the implied growth for the rest of the business is about 10%, which is in line with what you said the market growth would be around 8% to 10%. So, considering the product refresh that you guys had, is that conservatism or is that an expectation of market growing slower?

David Goulden

Well, Rajesh, first of all, we gave you a TAM, which is for the overall business. So the TAM, the total adjustable market growth we gave you, 8% to 10%, is what we believe the weighted average growth rate will be of all the markets which we’re serving, including the scale at NAS marketplace, including the VMware markets. So you can't really take our overall growth and then strip out those two pieces and compare it to our overall TAM because now you’re comparing apples and oranges. Obviously, the adjustable TAM, if you took out Isilon and VMware would also come down from a growth basis as well, and you’ve picked a number four for Isilon. We’re not commenting on the specifics, but that would be exceptionally high growth for Isilon in 2011.

Operator

Our next question is from Richard Gardner of Citi.

Richard Gardner - Citigroup Inc

I was just hoping you could spend a little bit of time talking about the impact of the VNX and VNXe transitions on mid-range gross margins in 2011?

David Goulden

Well, in terms of gross margins, we’re expecting the combination of the two to be relatively gross margin neutral. We are expecting to get little bit higher margins on VNX. I mentioned to you before that if you looked at our traditional mid-tier business, our NAS margins for the Celerra line were a little stronger than our SAN margins on the CLARiiON line and the converged infrastructure has a stronger software stack, and we expect to get slightly higher margins there. We expect VNXe on average to be slightly lower margins. Obviously, we’re into a more competitive price point down there. But in total, we expect the two to be relatively neutral to our overall gross margin profile compared to 2010 in the mid-tier for those two segments.

Joseph Tucci

Just to add a bit of color, our margins in the mid-tier, even on the older products, are pretty good. Our focus is not as much on getting more margin percentage in the mid-tier, it's getting a lot more growth and a lot more margin dollars in the mid-tier, and that's going to be the real brunt of our focus.

Operator

Our next question is from Daniel Ives of FBR Capital Markets.

Daniel Ives - FBR Capital Markets & Co.

Yes, Joe, I'm just interested in terms of talking to customers throughout Q4. Is there anything surprising you in terms of specific vertical strength, product strength, bigger deal flow, just given your vast experience?

Joseph Tucci

It sounds a little tripe. It's pretty much what we expected. I mean, for sure, the recovery is broad based. Big financials and the financial sector is certainly strong. Telcos are showing good signs of life. The manufacturing base we have, retail, it was pretty broad based. So we're very pleased in the -- the growth in storage is significant, and obviously, we got to give our customers tremendous value and if we do that right, we can maintain margins and grow margin dollars like I said.

Operator

Our next question is from Shebly Seyrafi of Capstone Investments.

Shebly Seyrafi - Capstone Investments

Can you give us an update on the Backup Recovery Solution segment? I think a few quarters ago, you said it's about $1 billion run rate. Is it about $1.5 million to $2 billion now? What's the growth rate you stated? Is that still near 100%? Or are we coming down to let's say 50%?

David Goulden

Again, we'll give you a little more color on that in two weeks, but it's well, well -- two wells, over $1 billion.

Operator

Next question is from Ananda Baruah of Brean Murray.

Ananda Baruah - Brean Murray, Carret & Co., LLC

Just comment on the call about, I believe, cloud-related conversations, or engagement, growing 40% in the quarter. Can you give us a sense of what that type of activity has been in recent quarters, so I guess are those types of conversations, the growth rate actually accelerating as we enter the year here?

David Goulden

Ananda, I gave you kind of a couple of data points relative to that. One, I think the one that you’re referring to as we talked about the number of professional consulting engagements we’re getting in terms of helping customers define their cloud architectures or their journey to the cloud, up 46 compared to Q4 of last year, and this is kind of an all-time record level for us. Quite honestly, if we had more people with our consulting skill set, we could be doing more, even more than we’re doing right now. There is certainly a huge opportunity and a great appetite amongst our customers to help them layout those road maps. So we think it’s a very good leading indicator for how quickly people are going to move their technology forward as well.

Joseph Tucci

David said it right. The interest is incredibly high, probably as many people as we could possibly free up to consult and talk with our customers on this cloud subject, whether it be the private side or public side, for sure, we could absorb. So, the interest is high. The customers are planning and, we expect 2011 to be the year that this really starts picking up and continuing on to 2012 still on a pretty good upward trajectory.

Operator

Next question is Jayson Noland, Robert W. Baird.

Jayson Noland - Robert W. Baird & Co. Incorporated

Joe, I wanted to ask about VCE, it seems like field commentary has improved recently. There are some changes made to the structure last week, but any additional metrics you can offer up and how big of a deal is VCE long-term?

Joseph Tucci

The biggest thing we changed is -- part of what we did with VCE was funded by the four founders of VCE, a company called Acadia, and that caused a lot of confusion because the initial concept there was that we would build these converged infrastructures, cloud, private clouds and public clouds out for our customers. Help our customers run them and then eventually turn them over. And what we turned more Acadia in is a real kind of systems house, which basically is helping customers spec out their needs and doing old fashioned selling, and that’s been well received. And of course, Michael Capellas is Chairman and CEO of that. I said it's 700 strong on its way to 1,000 this year. So we don't, either Cisco or us, have given any specific data points, but we did set out what I thought was a fairly aggressive plan, and again, I said we were considerably ahead of that plan. So, all points to good things ahead.

Operator

Next question is from Kaushik Roy of Wedbush.

Kaushik Roy - Wedbush Securities Inc.

Can you give us some color if you’re assuming any Dell OEM contribution in 2011 and if Dell is likely to OEM the mid-range VNX?

Joseph Tucci

Let me do it this way. For sure, our relationship with Dell has moved from strategic to tactical. For sure, it’s now mainly competitive. To give you some evidence of that fact, the Dell OEM business with CLARiiON, our CLARiiON business to Dell that they OEM was down to approximately $55 million in Q4. As a reminder, Q4 has been historically our largest quarter of the year with Dell. So the Dell-driven revenue now, which is their OEM business, the one they drive by themselves, is actually getting quite small now. And I might add that our other channel, mid-tier channels grew over 44% in Q4. So, obviously, you can see where our major focus. Now that being said, we have thousands and thousands of joint customers with Dell that we sold together, and Dell sold using our products, and we will -- and a lot many of those customers expect us to work together. And for our part, we’re most willing to work together, and there are discussions underway. So while it's highly, highly unlikely, almost impossible that they'lll sell the VNXe. There are some considerations that they will resell VNX, and those discussions are undergoing, but I want to kind of end it where I started. It's a tactical partnership. But again, when we partner in front of customers, we'll partner strong, and if we give our word that we’ll go together with a customer, we’ll go together and help our customer. So that’s kind of where it is.

Operator

Next question is from Louis Miscioscia of Collins Stewart.

Louis Miscioscia - Collins Stewart LLC

Last quarter, you talked about the three different phases of virtualization, the first one being IT-owned apps and business-critical apps, and finally, IT-As-A-Service. Could you just give us some thoughts as to where it is? Has it changed much quarter-to-quarter? And maybe as you look out to 2011, we get to year end, where do you think the customer mix might be for that?

David Goulden

The first phase is mostly virtualized, everything you can, IT took the lead, CIO took the lead, and the applications that they were in control of in Tier 3, Tier 2 apps, are the ones that moved first and the results were nothing short of fantastic, with the advent of vSphere. Customer started then getting enough confidence, and most customers now are in Phase 2 where they're now getting those same kind of benefits by moving their mission critical apps. And that’s going quite well. And that’s the phase we’re in now, and probably we'll stay in most of the year, all year in my opinion. A few leading-edge customers, and getting into next year, customers will want to move to more [indiscernible] IT-As-A-Service self portals, giving users more agility, giving users more control, making the applications run under a set of metrics that are policy and service level based. Then that kind of that's where this journey is headed. So, I would say we're just in the beginnings of step two. Two interesting data points, right now there are more -- as server shipments go more, applications are running on -- not as server shipments, as applications go, more applications now are running on virtualized servers than they are on physical servers. So that kind of chasm was crossed in actually in 2009 and that trend is continuing to grow. That being said, the potential that customers could virtualize, they are about 30% there on that journey. So again, pretty healthy data points. The ROIs are fantastic, and the quality of the virtualized infrastructure from VMware is fantastic and customers are going to continue to invest there. And also as you know, that has a tremendous impact on security and storage and protection, which we take care of from the EMC side of the family. So, all signs are good.

David Goulden

We have time for one more question, and then we'll have few concluding comments from Joe.

Operator

Our final question will be from Maynard Um of UBS.

Maynard Um - UBS Investment Bank

If you look back at 2010, clearly, two of you have seen much faster growth when you look at the product revenue indicating share gains and presumably from the more traditional larger IT vendors. As we look into 2011, can you just talk about your 15% growth target and understanding that product is only a portion of that, but is there more share to gain or to be had from the traditionals or is this now a zero sum gain with share battle between kind of the pure plays or maybe we're underestimating kind of the overall market again given some of the key secular trends. Can you just give us some color on the balance of that?

Joseph Tucci

I'll go back to an IDC study which came out last year where they said, and they predicted that information that’s stored on disc arrays will grow 44 times from the end of 2011 through 2020, 44 times, so information is still growing, and like always, that information needs to be protected. That information needs to be secured, it needs to be managed, and it needs to have intelligence added to it. Those are all things that EMC is focused on, and so we see great potential and so it's not a zero-sum game. Obviously, our plan is to take advantage of the expansion and new features that customer wants, we want to take share and, of course, expand it to new markets, an example of a big, big new market is this video based, big data based side of the storage equation which is going to be huge. So, we are very optimistic, and again, we'll chatter a lot more about that in two weeks. So, again, I want to just thank everybody for joining us. It means a lot to us that you have this great interest in EMC, and we thank you for that. Hopefully, you got out of today, we have a good plan, and we are very excited about our prospects not only for 2011 but beyond. And once again, I'd like to close by inviting you all to join us for our strategic forum on February 8. Have a wonder day, everyone.

Operator

Thank you all for your participation in today’s conference. That does conclude today’s call. You may now disconnect. Thank you.

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