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EMC Corporation (NYSE:EMC)

Q4 2006 Earnings Call

January 23, 2007 8:30 am ET

Executives

Tony Takazawa - VP

Joe Tucci - Chairman, President, CEO

David Goulden - CFO

Bill Teuber - Vice Chairman

Frank Hauck - EVP of Global Marketing and Customer Quality

Analysts

Laura Conigliaro - Goldman Sachs

Toni Sacconaghi - Sanford Bernstein

Bill Shope - J.P. Morgan

Shebly Seyrafi - Caris

Aaron Rakers - A.G. Edwards

Keith Bachman - Banc of America

Andrew Neff - Bear Stearns

Brian Freed - Morgan Keegan

Dan Renouard - Robert W. Baird

Harry Blount - Lehman Brothers

Kevin Hunt - Thomas Weisel Partners

Presentation

Operator

Welcome, and thank you for standing by. At this time all lines are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today's conference is being recorded, if you have any objections, you may disconnect at this time.

Now, I would like to turn the meeting over to Tony Takazawa, Vice President, Global Investor Relations.

Tony Takazawa

Thank you, Sherry. Good morning. Welcome to EMC's call to discuss our financial results for the Fourth Quarter and Full Year 2006. Today, we are joined by Joe Tucci, EMC's Chairman, President, and CEO; David Goulden, Executive Vice President and CFO; Bill Teuber, Vice Chairman, and Frank Hauck, Executive Vice President of Global Marketing and Customer Quality.

We will go through a few prepared remarks this morning, and then after those remarks we will open up the lines to take your questions. Today's slides contain important information that is necessary to understand our results and commentary. So, we strongly encourage you to view them on EMC's website at EMC.com. An archive of this audio and slide presentation will also be available following the call. As always, the call this morning will contain forward-looking statements and information concerning factors that could cause actual results to differ can be found in EMC's filings with the US Securities and Exchange Commission.

In addition, all of the numbers we discuss today will be presented on a GAAP basis, unless otherwise indicated. We are focusing on the GAAP numbers in an effort to simplify the discussion for you. For those of you interested in analyzing the non-GAAP numbers, we continue to provide a schedule in the press release that will help you adjust the GAAP results for stock options, restricted stock, and amortization expenses. And we would like to point out that David is a bit under the weather this morning. But I am going to hand it over to David right now. So David.

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David Goulden

Thanks Tony and good morning. Unfortunately, I have been under the weather. As you see here I completely lost my voice. So I am going to save a little voice I do have for Q&A, and I have asked Bill Teuber to take you through my prepared remarks this morning. Thank you.

Bill Teuber

Thanks David. Good morning and thank you for joining us today. I am going to walk you through our Q4 and 2006 financial results, and then our business outlook for 2007. Looking across our business, we are very pleased with our Q4 performance. We had strong bookings quarter and achieved the seasonally normal increase in backlog in Q4. Let me go through the numbers in more detail. The Q4 revenues were a record $3.215 billion, up 19% from Q4 last year, and $55 million higher than our guidance on the Q3 earnings call. I will say, the new security division of EMC added approximately 5 percentage points of growth this quarter.

Q4 GAAP earnings per share were $0.18. This includes a restructuring charge of $0.06, $0.05 of tax benefits from audits from prior years, and $0.02 of tax benefits from a catch-up in the tax rate for the first three quarters of 2006. I will discuss these adjustments in more detail later. Excluding the restructuring charge and tax benefits, Q4 EPS were $0.17 or $0.02 higher than our guidance on the Q3 earnings call. This $0.02 improvement is comprised of approximately $0.01 from a lower tax rate in Q4 than the 26% we estimated, plus some favorable impact from the financing we completed in Q4 and approximately $0.01 from better operating results.

For 2006, revenues were a record $11.155 billion, up 15% over the $9.664 billion we reported in 2005. EMC's new security division added approximately 1 percentage point of growth for the year. As shown in the slide in front of you, 2006 GAAP earnings per share were $0.54, up 15% over GAAP reported earnings for 2005. Excluding one-time IPR&D, tax and restructuring items, 2006 EPS was also $0.54. This is 35% higher than the $0.40 achieved in 2005, after adjusting 2005 GAAP EPS of $0.47 for stock option expense and removing one-time IPR&D, tax and restructuring items.

We are pleased Q4 ended the year on a high note, with a pickup off of a strong Q3. We believe this momentum in our business bodes well for us as we head into 2007. Turning to a closer look at our Q4 revenue results, revenue growth of 19% for the quarter was clearly very strong, and we saw solid contributions from all business areas.

Starting with our corporate revenue mix; in Q4 our systems revenues were up 12%, software revenues were up 27%, and service revenues were up 20% compared to the prior years fourth quarter. With the full year 2006, systems revenues were up 15%, software was up 20% and services were up 10% compared to 2005. Our product and service revenue mix as a percent of total revenue for the full year was 46% systems, 38% software and 16% services.

Turning to our geographic results for Q4, we are pleased to report we had double-digit growth in all full of our major core geographies. North American revenues were very solid, up 18% year-over-year. Demand in North America continues to be strong, especially in the commercial marketplace. EMEA revenues were also very strong up 22% with good balance across the major countries and regions.

APJ revenues were up 13% from last year and up 16% sequentially from Q3. As we indicated earlier in the year, growth in APJ has improved throughout 2006 and we were optimistic about our forward momentum in this important marketplace, and Latin American revenues were up 14%.

With the year, we are pleased we achieved solid double-digit growth in North America, EMEA and Latin America and made significant strides to improve the performance of our Asia-Pacific region.

Next, I would like to cover the revenue results from our four business segments, Information Storage, Content Management and Archive, Information Security and VMware Virtual Infrastructure. These segments represent the major markets we focus within IT, the solution sets we bring the customers and reflect how we run the business.

Going forward, this is the primary way we will be discussing our results with you. First, let's take a look at our Information Storage business, which is defined on the slide in front of you. Total storage revenues for Q4 were $2.67 billion, up 9% over Q4 last year and up 9% for the full year over 2005. Within the Storage business, EMC's Symmetrix revenues were up 4% over Q4 last year and were up 8% in 2006. This is the strongest annual growth rate we have had in our high-end storage systems since 2000. Confirming our leadership position, with our new DMX-3 systems in representing share gains in 2006.

EMC CLARiiON revenues were up 18% over Q4 last year and up 13% over 2005. We achieved strong share gains in the mid-tier storage market throughout the second half of the year on the back of our CLARiiON CX3 launch in May. We are quite confident, we also gained share in the mid-tier storage market for the year.

Now I would like to highlight a few other areas of interest within the storage business. In the backup space, EMC network or licensed revenues were up 14% for the quarter and 10% for the year and a market we believe is growing mid single digits. This is another area where we were gaining share.

The EMC's Smarts resource management software product family continues to perform extremely well. Q4 was another strong quarter and license revenue growth for this product family was up over 100% for the full year. The traction we are seeing in model based management is excellent and we are very excited about the growth opportunities here.

The EMC's Rainfinity File Virtualization software continues have great acceptance in the market with triple-digit Q4 revenue growth. During the quarter we also saw great reception in the marketplace for EMC's RecoverPoint software, a new product we recently announced as a result of the acquisition of Kashya, RecoverPoint provides comprehensive data recovery were ahead over genius storage environment. Recently, our Infoscape product won a 2007 Technology of the Year Award for best data classification solution from InfoWorld magazine. Infoscape, helps customers automate a number of ILM test, thereby mitigating risk and reducing storage cost. This technology leverages the investments EMC has made in software technologies, including the acquisitions of Smarts, Legato and Documentum, and we are very proud of this recognition for our technology innovation.

Dell continues to represent approximately one-third of CLARiiON revenues and 15% of our total revenues in this quarter.

Turning to our Content Management and Archiving business defined on this slide in front of you, total revenues for this business in Q4 were $203 million, up 43% over last year and up 42% for the full year resulted in record revenues for both periods. We also had very strong software license bookings in Q4.

In Q3 we told you that we had a couple of large enterprise content management opportunities that did not close by the end of the quarter and that we expected those deals to close in Q4. We are pleased that all these orders came through as expected across many other multimillion dollar transactions in the quarter. Among the highlights in the quarter, we are an all time record number of large deals over million dollars and a record number of total sales transactions. Also EMC Documentum had its largest transaction ever, this was with a major financial services firm. Content Management and Archiving software license revenues were up over 40% in 2006. In this market we gained a lot of share in our strategic acquisitions helped to accelerate our growth and expand our market presence.

Now, let me turn to RSA, the new security division of EMC. Revenues in Q4 were $114 million, since we announced the acquisition of RSA at the end of June, bookings have accelerated in a very strong order -- with very strong order momentum in Q4. On a year-over-year comparable basis, Q4 revenues of $114 million were up 26%. In 2006 revenues of $119 million were up also to 26%. The growth -- this rate of growth demonstrates the robust opportunity for our new security products and services.

During the quarter, RSA added 2000 new customers, a significant increase over the division's previous record. RSA's consumer protection solutions were chosen by 3500 new and existing customers in 2006 as a result of federal guidelines with stronger authentication practices in online banking and concerns over credit card fraud and identity theft.

Focused on identity assurance access control and key management in encryption continues to grow throughout the enterprise and we are very optimistic about the momentum we experience in this business.

VMware had another outstanding quarter and a fantastic 2006. Total revenues were $232 million, up 101% in Q4 and up 83% in 2006. For the year, the VMware eclipsed the $700 million revenue mark. VMware's revenue growth accelerated each quarter in 2006, reflecting growing customer acceptance and trust and the compelling value proposition provided by VMware's virtual infrastructure. VMware continues to receive important recognition for its broad portfolio of virtualization products.

In November, Pacific Gas and Electric in California announced the first ever utility financial and center programs to support virtualization products and projects and data centers. Under this program, customers can earn a rebate of up to $4 million for using VMware technology to reduce energy consumption. Also, VMware recently received the InfoWorld Technology of the Year Award for the best server virtualization solution in the hardware virtualization category for the third year in a row. As VMware prepares to celebrate its 9th anniversary this month, we are very proud of their accomplishments.

In 2006, we achieved solid growth and market share gains in each of our four business units. We are focused on the right markets and we believe EMC is poised for continued success as we deliver strong information infrastructure solutions to customers to address their critical IT priorities.

Before moving on, I would like to make one housekeeping comment. Today, I have just walked you through our four business segments, each aligned with our target markets. This is the way we are running and measuring our business and this is the way we will discuss our business with you on a going-forward basis. As you can see, this break up makes a lot more sense in terms of analyzing EMC, and gives you a good view of the key drivers in our business.

Starting with Q1, we will no longer be providing the supplementary revenue data in the old format. To help you with your analysis going forward, we have provided eight quarters of this new segment data so that you can analyze EMC on the same basis we are analyzing ourselves.

In addition to total revenues for each of the four segments, we will also provide color on key product lines, especially within storage, as we did today. Of course, we will continue to provide you with revenue profiles showing our corporate mix, i.e., that is total system software and services, as well as our geographic mix.

Turning now to the rest of the income statement, consolidated gross margin for the quarter was 54.1%, up 140 basis points from Q3 '06. Service margins were up 80 basis points and product margins were up 160 basis points. Taking a closer look at product margins, the increased was driven principally by volume, but also helped by mix.

Our operating income margin in Q4, excluding onetime items, was 14.5%, this was up 160 basis points in Q3 '06, also excluding onetime item. During the quarter, EMC finalized and accelerated integration plan for EMC in most of the 22 acquisitions we have made over the past three years. We recognized the pre-tax restructuring charge of a $167 million or $0.06 per diluted share. This includes the $175 million charge, we discussed on the Q3 conference call, partially offset by some adjustments to restructuring charges we have taken in the past.

Final consolidation plan affects approximately 1350 employees and eliminates excess facilities and other contracts. The plan will improve efficiencies across the company's business and reduce cost while helping us to provide a more unified one EMC experience to our customers.

Turning to the tax section, there are a lot of moving parts this quarter and it's incredibly complicated. I would like to attempt to walk you through the detail and doing so, I refer you to the slide in front of you and we can cover any questions that you have in Q&A.

Q4, we had a net tax benefit of $77 million, which equated to an effective tax rate of negative 25%. Excluding the tax impact of the $0.06 restructuring charge, which I explained earlier and excluding $0.05 or $112 million of onetime tax benefits related to prior years, our Q4 taxes were $73 million or an effective tax rate of 15.2%. The $0.05 of onetime tax benefits from prior years has comprised primarily favorable resolutions of income tax audit in several European countries and the US from periods through 2004.

Q4 taxes also included a $42 million or $0.02 catch-up in our tax rate, related to the first three quarters of this year. This resulted from re-enactment of the R&D tax credit and changes in our domestic international income mix. Adjusting for all these items, our Q4 tax rate was 24%. Important to note that while we are not including the $0.02 catch-up in our normalized view of Q4 EPS of $0.17, we are including it in our normalized view of 2006 EPS of $0.54, because it does relate to the first three quarters of the year.

Turning to the balance sheet. We ended the year with cash and investments of $5.6 billion, up slightly from Q3. November, we successfully completed a convertible debt transaction with net proceeds of approximately $3.4 billion to pay down the $2.2 billion short-term credit facility used to fund the purchase of RSA Security. On the embedded call option overlay and repurchased $946 million of EMC shares. In addition to these funds, we spent an incremental $244 million bringing our aggregate buyback in Q4 to $1.2 billion, which were used to purchase 95 million shares.

For the year, we exceeded our repurchase goal by deploying approximately $3.8 billion to repurchase 302 million shares and retire a $125 million of convertible debt. This concentrated effort, effectively utilized the cash resources to reduce share count. In Q4 '06, the ending share count was [2.122 billion] down 11% from the ending share count in Q4 '05.

In 2007 we are committed to spending at least $1 billion on our stock repurchase programs. We continue to believe in share buybacks, as an effective way to return value to our shareholders and had an outstanding buyback that was -- in having an outstanding buyback authorization of 140 million shares at the end of 2006. So far this year, we've already purchased 20 million shares.

In 2007 we will also continue to use cash for tuck-in acquisitions and to maintain a healthy balance sheet.

Turning back to Q4, we spent approximately $155 million on the Avamar acquisition. DSOs came in at 48 days flat over Q4 of last year. Inventory was $835 million down about $60 million from Q3. As we expected, turns improved from 5.9 to 7 in Q4, more in line where we aimed to drive the business.

CapEx for the quarter was 212 million and 718 million for the year, with our One EMC IT initiatives and various facility projects being the major contributors for the year.

Now turning to our financial guidance for 2007, as we indicated in our press release, we are making a change to our practice of the last few years and moving to annual financial guidance. Our decision to move the annual guidance is based on our viewpoint that the company and its investors should focus on EMC achieving strong annual performance, clearly with a continued view towards quarterly progress, but with year-on-year performance, that's the real benchmark for success.

With our focus for 2007 being on integration, leverage, organic growth, and One EMC, there are fewer moving parts. But it's more reasonable to provide guidance on an annual basis. Of course, each quarter, we will continue to provide both data and color on how the business is performing, and let you know how we are tracking against our annual targets.

In 2007, our view is that IT spending will continue to be robust. We are well positioned to some of the best growth markets in IT today. We will continue to be one of our customers' most trusted technology partners and we are confident in our ability to continue to show strong results in each of these four markets.

For 2007, we expect EMC's revenues to be at least to $12.7 billion, representing 14% growth over 2006 and also representing growth at or above the projected market growth rate in each of our four business segments.

We expect our quarter revenue progression in 2007 to follow normal seasonal patterns. This means a typical progression of revenues throughout the year with Q1 being seasonally lower than Q -- than the prior Q4, Q2 being a step up from Q1, Q3 having broadly similar revenues to Q2, and Q4 being the strongest revenue quarter.

Since this is our transition quarter to annual guidance, to give you a starting point in the last three years, Q1 revenues have been between 22.7% and 23.2% of annual revenues. Achieving operating income leverage, there is a major focus for 2007 in addition to our One EMC restructuring program, we have several other initiatives queued up during the year to help drive efficiencies.

For 2007, we expect EMC's GAAP EPS to be at least $0.64 representing 19% growth over 2006 EPS of $0.54. We expect the tax-rate to be in the mid 20%, including the benefit from the recently reintroduced R&D credit. We expect the impact for stock-option expensing to be approximately $0.09 in 2007 and acquisition, amortization will be approximately $0.07.

With that, I will now turn the call over to Joe.

Joe Tucci

Thanks Bill. And let me add my welcome for all of you who have joined us for today's conference call. As always, thank you for your interest in EMC. I was proud of EMC's overall performance in Q4, without a doubt it was a solid quarter for us. A quarter that marked a strong finish to what I believe was a successful 2006. But to be totally candid, 2006 was also somewhat disappointing due to the inconsistent quarterly performance.

While we grew revenues 14% year-over-year, excluding security and normalized EPS grew 35% in 2006 over 2005, our execution was choppy and not up to EMC standards. 2006 was the year of two distinctly different halves. In Q1, our performance was barely adequate, we follow that up with a clear miss in Q2. In the second half of 2006, EMC came to life, and without a doubt Q3 and Q4 were strong by any measure. And very importantly, we believe this positive momentum and energy that we built up in the second half of the year will propel us to a successful 2007, and that success will be brought by consistent performance. Bill did a good job of covering and commenting on Q4, in 2006, so let me jump right into 2007.

For EMC, 2007 will be a year where we focus and execute on our core information infrastructure strategy, products and solutions. And over year, we focus and execute on a deeper integration in our development centers of our products and technologies, coupled with a deeper integration of our marketing, sales, support and services organization that bring these information infrastructure products and solutions to our customers and prospective customers. 2007 will be a year, we continue to focus and execute on a great success and massive opportunity, around VMware. And 2007 will be a year, we focus and execute on consolidating our backlog and support capabilities across of all of EMC. Collectively this focus coupled with crisp execution will give us more purpose and fire power in front of our customers, and help our integrated share of the 2007 IT spend, enhancing their customer satisfaction with EMC as a whole, while giving us some more efficient cost structure, assuring that 2007 will be EMC's year. To assure we attain this level of integration, focus and execution, it is our intention to not acquire any large companies in 2007. Obviously, if a great opportunity comes along, that is highly accretive and been highly beneficial to EMC and its shareholders, we would reconsider, but as I speak today, I can unequivocally state, that we have no large acquisitions planned. It is our expectation over, we will continue to enhance our product offerings and gain time to market and execute on several tuck-in acquisitions, much like we did last year with Avamar, Kashya and Network Intelligence.

When I look out on to 2007, everything I read and listen to points to a solid global economy. Forecast for IT spending predict an increase of approximately 6% over 2006, pretty close towards the increase in IT spend was in 2006 over 2005. Even better news for EMC is that, we are clearly participating in several of the hottest IT market segments. Segments that rank as top IT spending priorities in CIO survey, after CIO survey. These top 2007 IT spending priorities include Virtualization, Storage, Security, Content Management and Archive and Energy/Data Center efficiencies, all of which are right in EMC's wheel house. Again, I repeat the statement I made earlier, EMC has never been better positioned. Capitalize on the opportunities and ensure both specialization and focus along with consistency, we have organized EMC into four business units: Storage, Content Management and Archive, Security and VMware.

Those of you viewing today's presentation on the web, you can see the products and services that make up each of these business units. And as Bill noted, we will also report to you on each of these business units. EMC through this four business units is well positioned in large IT market segments. Collectively, we believe the target market for EMC in total will be approximately $60 billion in size this year. We expect to be number one in this market with slightly over a 20% share. Being number one is great, but having more than $45 billion of upside market opportunity is simply fantastic.

Let's examine each of our four major segments, and how we are organized around them. Let's start with our storage business. Expectations for the storage market to grow almost 8% in 2007 to approximately $50 billion in size. EMC is very well positioned in storage market for 2007 in fact, we are in the best shape we have been in sometime now. We have the broadest portfolio of hardware and software products with industry leading functionality and performance. We invest the most in R&D, and virtually all the intellectual property involved is our own. Our storage hardware lineup boosts the best environmentals, and we have a clear security advantage. You will be hearing a lot more about this later in Q1 in an announcement will be making.

We firmly believe, we have a considerable advantage based on our industry-leading quality ratings. In fact, even in the mid-tier space, we have been able to achieve [5 9's] availability, something no other competitor has been able to achieve. Coupled this -- coupled the superb quality with EMC's renowned service organization that sets a very high bar for our competitors.

In 2007, we also have a very robust product refresh cycle, and we will also announce a long list of new features and functionality. And finally, we are extremely well positioned to capitalized on a major opportunity that is before us, namely next generation back-up and recovery with our industry leading back-up-to–disk hardware and software products and solutions. And just to put one other issue to bed, we did declare GA, and we had revenue in our 4 gig SIM in Q4.

Our next business unit is Content Management Archive. In 2007, the CMA market is expected to grow 13% over last year to approximately $4.6 billion in size. In fact, in each of the last three years, we grew our contact management business faster than any other major player. Bill mentioned many of our achievements in this space during Q4 and 2006. Well what gives me a great comfort here going forward is the fact that we have the broadest product portfolio, we have two differentiation with our unified enterprise contact management architecture, we have embedded many technology elements for this broader product portfolio into other great EMC products. A terrific example is with our award winning product Infoscape. And very importantly we have a significant new product launch scheduled for the first half of '07. That will represent a big leap forward in the enterprise content management industry.

Our next business unit is security. And to capitalize on a strong brand recognition of RSA is, this business unit will be bear the RSA name. We have firm plans in place to leverage this technology in our other products and with customers. In my many conversations with customers, they know that their future successes depend on how well they manage information. But fortunately they are also learning daily that they cannot secure what they can't manage. EMC's information -- infrastructure vision of storing, protecting, optimizing, and leveraging information allows customers to both manage and secure their information. Truly securing information requires securing the data itself, the people that access the data and the transactions that can connect to them. This is why we firmly believe, RSA is such an important part of our competitive advantage.

The security software market we address is expected to grow 17% this year to approximately $4.4 billion. We have a robust stable of products, including token-based ID managements, which represent a very predictable double-digit growth opportunity for us. Risk-based identity management authentication is even harder. It is white hot right now. Most banks for instance are requiring strong authentication or two-factor authentication to sign on to their applications. We are also building this authentication in to many EMC products. The same with encryption. We are building it into appliances and into EMC storage products. And since customers are going to encrypt on a variety of different platforms at different times, the core requirement around encryption is robust, centralized key management, and the RSA product excels here. And lastly, we offer security event management, software and appliances to help customers track and assure that their security policies remain compliant.

Further demonstrating the power of the RSA security plan, I am pleased to note that the RSA security conference, which is the Global Security Conference event, will take place on February 5 through 9th in San Francisco, and we already have 15,000 registered attendees.

Our last business unit is VMware. VMware continues to be the undisputed leader in the market for X86 virtualization. The VMware's 2006 year-over-year growth was 86%, and Q4 growth was a 101%. And I am confident that VMware will finish 2007 with over $1 billion in revenues. We have great product momentum. In 2006 VMware received 30 awards for innovation and product excellence, this included eWEEK's award for being one of the 25 most influential products over the past 25 years.

VMware Infrastructure 3 shipped in June of 2006 and has already been broadly accepted. In Q4 of '06, VMware Lab Manager, a product enables automation and self service for test and development environments was launched. We also launched VMware's Desktop Initiative. VDI uses virtualization to provide full desktop, server hosting, for centralized management and security in a way never possible before.

A recent virtualization market survey by IDC showed 76% of companies are adopting or are planning to adopt X86 virtualization in the next 12 months. This past year free VMware player and free VMware server had 1.9 million and 1.2 million downloads respectively further broadening the market for virtualization. We are dedicated for VMware's community source model, where we will continue to proudly partner with the vast majority of the industry's leading technology companies.

In closing, I would like to reiterate that we believe that the strategic moves we have made over this part few years, puts us in a great position for 2007 and beyond. And now let me turn it over to Tony to handle the Q&A portion of today's call.

Tony Takazawa

Thanks Joe. Sherry, can we open up the lines for questions please?

Question-and-Answer Session

Thank you. (Operator Instructions). Laura Conigliaro from Goldman Sachs, you may ask your question.

Laura Conigliaro - Goldman Sachs

Yes, thank you. You have got a number of programs in place to the designs to help earnings, even apart from revenue growth. For example, you have already about $0.035 from doing that convert that you referred to, which was never really rolled to into street numbers post that deal, and you never quantified your one EMC program beyond the actual people related layoff, that how much that could save in '07 and '08. when we put all this together, isn't your at least $0.64 target number already extremely low and maybe you can help us with some of those savings.

Joe Tucci

Lets us see if David wants to comment or Bill wants to comment on any more specifics here Laura. What we have done is, we have said at least $0.64, we have said at least $12.7 billion, so it is obviously our goal to beat those numbers, but on the other side we want to make sure, that we have put out good targets and targets that we think are realistic, and as you have seen, I think 19% to 20% growth on the bottom line is positive and obviously we will work everyday to beat that number.

David Goulden

Laura, I will try to add, actually I want, but cant start talking.

Joe Tucci

Well, obviously Laura, there is some impact from our side is $0.03 impact next year on a GAAP basis now. So obviously that impacts some of the positives that you see there.

Bill Teuber

Thanks Laura. Next question please.

Operator

Our next question comes from Toni Sacconaghi of Sanford Bernstein.

Toni Sacconaghi - Sanford Bernstein

Yes, thank you. Good morning and David I hope you feel better. In terms of this quarter, you didn't see the normal sequential operating leverage that you see where OpEx typically goes down 100 basis points or more as a percentage of revenue. Was that solely due to RSA being folded in which had the higher expense structure, or did you make some conscious investments to try and drive incremental growth this quarter. And then just related to that, you did -- I presume as you mentioned, there is an opportunity to consolidate some of that. You mentioned it was an accelerated plan, and you used that word deliberately. Can you give us a timeframe for the expected workforce reductions associated with that plan please?

David Goulden

Tony, thank you. We did pick up a higher percentage of operating expenses with RSA. So that's a fact. Also we made some R&D investments consciously in Q4. Relative to the accelerated plan, we just finalized that plan at the end of last year. We started the reductions and they will occur throughout 2007, they all will be able by the end of '07. In some cases, we need to consolidate some processes and systems before we can actually impact the people. That will occur on a pro-rata basis throughout the year.

Bill Teuber

Thanks. Next question please.

Operator

Bill Shope of J.P. Morgan. You may ask your question.

Bill Shope - J.P. Morgan

Okay, great, thanks. Quick question on the software segment, can you give us some commentary on the competitive landscape this quarter, we have seen results basically all over the place from your competitors, so I guess just a little color on the environment that will be helpful?

Joe Tucci

You are right, that's a good question. The results have been say, so much choppy, on a software side, so IBM have good quarter there was a number of companies that we were little bit disappointing. We obviously had a good quarter. I do believe there is opportunity out there, but I do think more than anything else, I think I have showed in IBM it shows with us. Rather than buying a point software solutions customers more and more want packages, bundles solutions sets rather than buying point products. And I do think that ability to do that we have that is really been driven into our sales force is going to benefit as more and more everyday and probably that's probably we saw in IBM, so that's my basic fear, my basic belief and a basic way we are driving EMC is that point products are driving customers not but if you can package these together, really make them solve business problems. It just the way we headed the game and that's what we were doing and that's what's given to our success. And the amount of multiple deals, most compound deals we have had is at all time high, compound deal was made a customers order stores they ordered management software from us and said they were a content management.

So two, three, four, four types of -- four categories of kind of software they were ordering from us, because we have done a good job of putting it together. And in one EMC it means two things. One thing is how we work our product groups across what we are doing in Storage. So, not only -- by now having all the products -- related products, the highly related products in the Storage group together bringing some synergies, but is also the way we picked up at the Storage group, Product group work seamlessly with the Security group which work seamlessly with the Content Management would also works with VMware. So, that those things are getting as great benefits. And on the other side of one EMC, we have now combined our channels organization, so at one channels organization VMware outside of that, but other three groups is one channels organization, we have one global accounts program, we have highly coordinated our go-to-market. So, these things -- same things with services, we consolidated our services across those groups. So, it has given us both efficiency and a better way to present our solutions and that's resonating with all the customers.

Joe Tucci

Thanks Bill, next question please.

Operator

Next question comes from Shebly Seyrafi from Caris.

Shebly Seyrafi - Caris

Yes, so thank you very much. So, you are not providing quarterly guidance anymore, but if you take the $12.7 billion annual guidance and multiplied by the high-end of your typical historical range say 23.2%, you get 2.9, $5 billion, little less than consensus. Are you sending a message there and maybe you can also talk about the pipeline in the backlog exceeding Q4 for the business?

David Goulden

Okay. Well, we gave you a hint revolving guidelines. We would encourage you to stay within the range that we gave you and looking if you want again in our transition. As we said Q4 was strong from a bookings point of view and we have a normal seasonal build-up in backlog in Q4. [Joe, if you want to join]?

Joe Tucci

I think Shebly, if you look at it, last time I looked consensus was 2.96. So, if you went at high-ends its 2.95, we are not telling you to go correct 10 million. We are just trying to say this is where we have been. If you look at -- they said 2006 a year or two has, we pretty much if you looked at our guidance while we are at the low end of our guidance we certainly are in the ranges of what we gave you. A year ago -- more than a year ago for 2006, we got there choppy but. And we will execute better on that but also if we look at the last bunch of years. It typically is as David said is been between 27.2 and 22.7 and 23.2 and that's we just wanted to kind of give you a hint that they were going to have normal kind of seasonality and -- but I am not -- we are not saying anybody to go back and change your guidance.

Shebly Seyrafi - Caris

But you are going to have the full availability of the 4-Gig DMX-3, I would think that will help more than seasonally in Q1?

Bill Teuber

We [kept saying it] shall we bid, nobody seem to care. Even though they both were available in Q4. How many customers have -- they are not been caring, as lot of them haven't change their fabrics and it doesn't matter as much you think these high end machines are not like mid-tier, with the cashing ability you have you don't see as much benefit as you do in the mid-tier. So we don't think that can put us -- some of our competition made a big to do about it, but we didn't see it -- we didn't see it costing us a single sale. What I -- but I keep reading about analyst report and that's why through to my remark, so we got it out there now but I don't think that will help us up.

Shebly Seyrafi - Caris

Thank you.

Joe Tucci

Next question please.

Operator

Aaron Rakers of A.G. Edwards, you may ask your question.

Aaron Rakers - A.G. Edwards

Yes, thanks for taking the question I guess mine is on more on the margin story playing out here. I believe a while ago you guys talked about ranges for gross margin 52% to 55% and also I think more of the leverage comes in the play in the SG&A line. Where you talked about 25% to 27% excess to revenue ratio, do you, I guess, can you give me some color on where the bigger the opportunity is for margin expansion? And do you see that SG&A long-term guidance of that 25% to 27% potentially coming into your provision in 2007?

Bill Teuber

Aaron, this is Bill. Since I talked about it and that was years ago, I mean, we come off -- we have not come off of that, but have gone away from line item guidance, that's got to be two years ago when we moved away from doing that. So, we have been talking about growing the top line and growing the bottom line faster than top line and gaining leverage for quite sometime. But even if you go back to last Analyst Day, I did talk about the individual elements of the income statement.

Aaron Rakers - A.G. Edwards

Well, I guess--

Bill Teuber

I will let David, jump in on.

David Goulden

Let me answer that. We may recall -- we are very focused upon operating a good leverage. And we are not going to tell you exactly where it's going to come from, but I will tell you certainly we're focused upon making sure it comes from a combination of margin and operating expenses. As Bill said, you should really look for spread alternately between the top line and the bottom line for the company.

Bill Teuber

And I will just add last bit color on it. The emphasis we have now in this company right down to the middle management on creating operating leverage is very, very significant and that's where are focusing. And we want to go to top line faster than we have been told you, so we gave you 14%. Our goal is to be that and we want to create significant leverage between that and the bottom line, and we have a number of factors both that will affect the margin and a number of factors that will affect the -- say SG&A below that.

Aaron Rakers - A.G. Edwards

Thank you.

Joe Tucci

Thanks Aaron. Next question please.

Operator

Keith Bachman from Banc of America.

Keith Bachman - Banc of America

Hi good morning everybody. I wanted to go back to cash flow if I could for a second. Last year being 2006 you reduced the share count by about 11% or fairly aggressive on your buyback. I think you said Bill in the prepared remarks you were looking more at a $1 billion target level, if I heard you correctly. I just want to A, confirm that; but B, just try to get some color on how or what are the key variables as you are thinking about your buyback and significant step down so to speak. Is it targeting more cash flow levels using your operating cash flow or can you just give us a little more color on how you think about the buyback, that will be great. Thanks.

Bill Teuber

Well Keith what I said was that we are going to spending at least 1 billion on the buyback this year. That's not -- that doesn't preclude us spending more, but that's what we are prepared to commit to right now.

Keith Bachman - Banc of America

And Bill is the reason for -- well perhaps you are just leaving some open end to do additional amounts, but I am just – clearly what the variables would be that would either cause you to exceed that or go inline with that?

Bill Teuber

There is a number of factors that come up during the course of the year. We look at obviously, we talked about tuck-in acquisitions, if we see something like another Avamar out there. We think this is going to be a terrific acquisition for us, cost you the same way. This is going to depend on what we see out there and sort of on the M&A front. Its also going to depend on where some of our cash is, whether its -- how much of its international. Clearly we have built up some more internationally as you saw at the low tax rate means our internationally business did quite well. That's -- you really can't excess that for buying back your shares Keith. So there is a whole host of issues that we have to consider as we look forward to that. We are confident that we are going to do at least a billion and as we get more aggressive on that line item we'll let you know.

Keith Bachman - Banc of America

Okay. Thank you.

Joe Tucci

Thanks Steve. Next question please.

Operator

Andrew Neff from Bear Stearns, you may ask your question.

Andrew Neff - Bear Stearns

Sure, just a couple of clarifications really. One the -- you said you're going to have the historical data for with a new write-down, where are you posting that? Second just to clarify is your annual guidance can be a rolling four quarters are you going to give the year than as you run out than next year you give the following year. And could you talk about -- the question I have is really can you talk about the relative profitability of the four groups?

David Goulden

I will take the first two. The annual guidance will be for year. So we'll give you '07 and this time next year we'll give you '08. In terms of the extra data we'll give you now on the earnings call as we have done today. And Joe the profitability of the business is one over to you.

Joe Tucci

Yeah. Obviously the three purer software businesses have better returns than the Storage business which has a combination of higher-end software in it, and as you saw they have higher growth rates and as David said we expect and as our plan to beat the growth rates collectively and would end by each business year. That's how it's been measured. So obviously if we do that when you saw 17% growth for security VMware 50, 50% plus growth opportunity in that market, 13% I think it was for Content Management, so obviously those businesses by definition should be -- will be a higher growth and better profitability.

Andrew Neff - Bear Stearns

Okay, thanks very much.

Bill Teuber

Andy, just one other thing, the new schedule for the fourth segment is available on the web with our press release today.

Andrew Neff - Bear Stearns

Okay. I will see it. Okay, great. Thanks.

Bill Teuber

You can download it in excel.

Joe Tucci

Thanks next question please.

Operator

Brian Freed with Morgan Keegan, you may ask your question.

Brian Freed - Morgan Keegan

Good morning. Thanks for taking my question. With respect to the VMware, it looks like its accelerated on a year-over-year basis, each quarter this year, this quarter over 100% year-over-year. Do you see this sustainable going forward and how do you see the competitive offerings from XenSource and Virtual Iron and their lower respective price points is impacting your VMware business.

Joe Tucci

It's really interesting, when I saw this, when we bought VMware, they thought the total market could someday potentially reach maybe $2 billion, now I am seeing multiples of that as an estimate for the market potential. You are not going to get a market this big and this hot, with out other competitors. That being said, as Bill said, they celebrate their 9th anniversary. These products are in their two-third generation. Tremendous ecosystem or partners that have built around it so, without a doubt, the market growth is going to be there, without a doubt there will be more competition. But I think, VMware is incredibly well placed and well situated and has a heck of a lead, and if we keep executing aggressively, we should be just fine.

Brian Freed - Morgan Keegan

Do, you think you can grow VMware as quickly in '07, as you did in '06?

Joe Tucci

Probably not, we grew 83 -- I forgot the exact, it was 83% to 86% something like that. So that would certainly not be our plan, but we definitely would like to keep up with the market growth. So there is no real great expectation like ITC was predicting $1.2 billion market, I don't know if that's late or not late, I think it probably is late, so I think there is more potential in that. So, obviously we, as the major participant there, we have great opportunity, but I think to sustain 86, while you never say never, is probably not in the cards.

Brian Freed - Morgan Keegan

Okay. Thanks.

Joe Tucci

Thanks Brian. Next question please.

Operator

Dan Renouard with Robert Baird, you may ask your question

Dan Renouard - Robert W. Baird

Thank you very much and I have got some high level questions for you, Joe, lot of puts and takes in the industry -- and through '06, but may be you could just give us some more perspective on geography, specifically, what's happening in Europe and Asia? Thanks.

Joe Tucci

As I see in Asia, obviously Southeast Asia and China are still extremely hot. Japan is marginally better, I would say. Australia is a good market for us. We go to Europe, Eastern Europe and, we call [MESA], Middle East and Africa is very hot. In Central Europe, I think its going to be a thick better, than it was in '06, probably the US a thick softer, but put it collectively, I think its going to be a good year and US is definitely not going to be a bad market, its going to be a good market, but everything I see and all the surveys I read, point to a thick soft and we are a thick stronger in Europe, so pretty good balance.

Dan Renouard - Robert W. Baird

Great, thanks.

Bill Teuber

Thanks Dan. Next question please.

Operator

Harry Blount from Lehman Brothers, you may ask your question.

Harry Blount - Lehman Brothers

Thanks. Joe, one of the key slide that you focused on was that 2007 is an year of an integration, focus and execution and obviously that's all good goals, but from a [steep] perspective, how are we going to see the progress on that? How are we going to measure it either from improved expense ratios and improved productivity? What type of metrics should we be looking at?

Joe Tucci

Well, we are going to give you pretty good reporting on each of the four business units and so you'll be able to see progress there. Obviously, if we execute one EMC, we should get efficiencies on the SG&A line. We should see more products from the market, which should reduce and accelerate its sales -- which should produce accelerated sales. And you have visibility into all of that. So, this is nothing -- this is just a -- either we think a more efficient and a better way to look at the business, we'll still give you good color in each of the business -- under each of the business units as we've always done. And so I think you will have plenty of opportunity as we do our quarterly reports to track our progress on those fronts. But One EMC is a huge initiative for us, huge.

Harry Blount - Lehman Brothers

Yes. That's what I am getting at, I am not sure yet. Though we have the understanding that the metrics that you guys are trying to benchmark, is R&D has been essentially flattish in an environment where your software business has grown, but your SG&A has kind of been moving in the wrong direction in last few quarters, so that's what I was trying get a bit of sense?

Joe Tucci

Well, its kind of -- R&D is flattish as a percentage, but its growing in finite numbers pretty well. But as we kind of combine many of the activities in sales and as we combine many of the activities in services and as we combine many of the activities in back office, it is just -- it is money we could save and we have -- not as diligently as we need to do, but after that in the past and we are incredibly focused on it right now and we have individual goals that's going to effect how people here get paid, rewarded and promoted. So -- I think you'll have plenty of visibility Harry.

Bill Teuber

Thanks Harry. We have time for one more question.

Operator

Thank you, our last question comes from Kevin Hunt from Thomas Weisel Partners.

Kevin Hunt - Thomas Weisel Partners

Thank you, you had kind of mentioned on the security business, some appliances imply there will be some announcements in Q1, should we refer from that, that there is going to be some new products coming out along there? Like the security line?

Joe Tucci

I was referring to there is a lot of the major announcements -- well, first of all I said, we got tremendously robust in the storage business, talking about right in a second. Refreshed schedule coming up, so a lot of our new products will have the next generation announced. We will -- part of that this quarter we will do, as we will announce the efforts we've been working on for sometime, to build the kind of security that customers are crying for into their storage products, and those are one I was referring to, that would be announced [but obviously] there's things within RSA and things within Documentum and things within VMware where we will also announce, but that announcement there is kind of how we are using the RSA assets within our storage business. And that announcement will be coming up shortly here.

Kevin Hunt - Thomas Weisel Partners

So just to clarify, so you are saying that, it will be embedded within new products or there will be separate products that you don't have today to come out?

Joe Tucci

Both.

Kevin Hunt - Thomas Weisel Partners

Okay, all right, thanks a lot.

Joe Tucci

On closing, just let me again thank you very much for being with us, you got the message, because I heard you repeat it in your question. 2007 is the year we have to breakout and as far as year we are going to focus on integration and execution, I believe the IT spending environment is good, I believe the segments that we are focusing on storage, content management, security virtualization and the efforts we have done around energy efficiencies are going to pay-off big. I don't think we have ever been better positioned in recent, so I have been here. And this one EMC initiative is to drive financial leverage are real. So, thank you again, and I look forward to reporting consistently good results to you, as we go through 2007.

Operator

This concludes today's conference.

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Source: EMC Q4 2006 Earnings Call Transcript
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