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EMC Corporation (EMC)

Q1 2007 Earnings Call

April 17, 2007 8:30 am ET

Executives

Tony Takazawa - VP

Joe Tucci - Chairman, President and CEO

David Goulden - VP and CFO

Analysts

Laura Conigliaro - Goldman Sachs

Aaron Rakers - A.G. Edwards

Dan Renouard - Robert W. Baird

Harry Blount - Lehman Brothers

Shebly Seyrafi - Caris

Paul Mansky - Citigroup

Ben Reitzes - UBS

Katie Huberty - Morgan Stanley

Toni Sacconaghi - Sanford Bernstein

Tom Curlin - RBC Capital Markets

Bill Shope - JP Morgan

Kevin Hunt - Thomas Weisel Partners

Presentation

Operator

Welcome and thank you for standing by. At this time, all participants 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.

I would now like to turn the meeting over to Mr. Tony Takazawa, Vice President, Global Investor Relations. Sir, you may begin.

Tony Takazawa

Thank you, Laurie. Good morning. Welcome to EMC's call to discuss our financial results for the First Quarter of 2007. Today, we are joined by Joe Tucci, Chairman, President and CEO; David Goulden, EMC's Executive Vice President and CFO; and Frank Hauck, EMC's Executive Vice President of Global Marketing and Customer Quality.

David will start things off by walking you through EMC activities and financial results for the quarter. Joe Tucci, will then spend some time discussing his market outlook, EMC's execution of the strategy and the progress we are making towards our annual targets.

After the prepared remarks, we will then open up the line to take your questions. Today's slides contain important information that is necessary to understand our results and commentary. We encourage you to view them on EMC's website at www.emc.com. An archive of the audio and slide presentation will also be available following the call.

As always, the call this morning will contain forward-looking statements. 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. 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 option, restricted stock, and amortization expenses.

With that, it is now my pleasure to introduce David Goulden. David?

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David Goulden

Tony, thank you. Good morning and thank you all for joining us today. I am going to walk you through our Q1 2007 financial results. Looking across our business, we are pleased with our performance this quarter and the progress we have made towards our 2007 operational and financial goals.

In summary, Q1 revenues were $2.975 billion, up 17% from Q1 last year. Q1 earnings per share were $0.15, up 36% over Q1 last year and free cash flow was $586 million, up 37% from Q1 last year.

Now, let me go through the numbers in a little more detail. Starting with Q1 revenues, where we finished the quarter on track, we achieved 17% growth over last year including approximately 200 basis points help from currency.

Looking at our corporate revenues, systems revenues were up 6%, software revenues were up 29%, and services revenues were up 21%, all compared to Q1 of last year.

Strong contributions from RSA information security and VMware really moved the needle on growth in software and services and also contributed to the year-on-year gross margin improvements. These results demonstrate the benefit of our strategy and an improving software mix.

Turning to revenue by geography, I'm pleased to report we had strong double-digit growth in North America, EMEA, and APJ. Revenues from North America grew 16%. This region has consistently delivered strong results over long periods of time, and I'm pleased with the continued success. EMEA revenues were also up 16%, and we continue to expand our presence through sales and research and development investments in this region.

Reporting on the growth opportunities we see in this area, we announced plans in February to invest $100 million in Russia over the next four years. Part of this investment will be a state-of-the-art software development center in St. Petersburg, and this new center will join our other software development operations in Belgium, China, India, Ireland, Israel, Russia and of course the United States.

In March, we expanded our alliance with one of our largest partners in EMEA, Fujitsu Siemens to continue to build our 10-year alliance. The two companies will create new frameworks for advanced data center architectures.

In APJ, revenues were up 28% over last year, which is significantly higher than the market growth rate. This region had a very strong quarter, which was helped by a single large transaction. But even without this transaction, this was the fourth quarter of accelerating growth in APJ and we're extremely pleased with the progress our management team is making in this important marketplace.

Other news in this region this quarter was our first acquisition in India, Valyd Software, which provides database and file encryption solutions. This is one small example of our focus on creating a global information infrastructure company where we can expand our presence locally and draw upon technology talent from around the world.

In Latin America, revenues were down 4%. In Q1 last year, Latin America benefited from a single very large content management transaction. Excluding this one transaction from the prior year's quarter, the region experienced moderate growth in Q1.

Next, I would like to cover the results from each of our four business segments, Information Storage, Content Management and Archiving, RSA information security and VMware Virtual Infrastructure. Let me remind you, these segments represent the major markets we focus on in IT, the solution sets we bring to customers, and reflect how we run the business.

First, let's take a look at our Information Storage business. Total Storage revenues for Q1 were $2.4 billion, up 8% over Q1 last year. We think this growth is in line with how fast the storage market will grow for the full year, and we believe this percentage growth rate is a little faster than the storage market grew in Q1.

Within the Storage business Symmetrix was down 2% year-on-year against a challenging 10% growth compared to last Q1. CLARiiON revenues were up 9% and bookings continue to grow at double-digit rates. Demands for both products were seasonally normal, and we are maintaining our market leadership as EMC continues to be the vendor of choice in network storage.

Excluding Symmetrix and CLARiiON, growth from all our other storage products was 19%, and I would like to mention a few highlights. As many of you know, recovery management and backup infrastructure consolidation remain a top spending priority with customers. In this business, we enjoyed our fourth consecutive quarter of double-digit growth in network and license revenues. We are also seeing strong continued demand for backup-to-disk solutions to further accelerate data recovery.

Our market leading File Virtualization solution, Rainfinity, continues to be a differentiating technology for us, and is gaining strong acceptance in the marketplace. Customers are using Rainfinity to virtualize file systems and move data without disruption, creating more value from their storage investments and reducing TCO. We achieved another quarter of triple-digit revenue growth here.

IT complexity is a constant pain point for customers, as they continue to focus on better ways to manage availability and performance of their mission-critical IT resources.

The EMC Smarts software family provides powerful solutions for managing these complex infrastructures. And Q1 was another quarter of strong double-digit license revenue growth for Smarts.

Along with selling our own solutions, there is a strong case for developing partnerships to proliferate the use of Smarts model-based technology. And we recently announced an agreement with Microsoft, for some of the Smarts technology to be included in a future version of Microsoft System Center Operations Manager and to develop additional technology to be used in conjunction with current and future versions of these products. We expect this to be a very successful collaboration.

Dell continues to represent approximately a third of EMC's CLARiiON revenue this quarter and 14% of our total revenues.

In summary, we believe our strategy of offering customers comprehensive storage solutions with a differentiated value proposition, positions us well to continue to gain share in the storage markets.

Moving to our Content Management and Archiving software business, total revenues were $172 million, up 3% over last year. As we have mentioned on prior quarterly conference calls, most of the license revenue growth rates in CMA can be lumpy, and this is what we experienced in Q1.

Following a very robust Q4, Content Management license revenues declined 18% year-on-year. However, if you normalize these results from some large transactions I already mentioned in Latin America and in Europe in Q1 last year, Content Management license revenues showed more normal seasonality.

CMA maintenance and professional services were up 30% year-on-year, reflecting strong license growth we achieved in 2006. In other developments, yesterday we announced that we are expanding our Documentum D5 product's ability to provide seamless integration with Microsoft SharePoint Server 2007. Working with Microsoft, we'll provide mutual customers with end-to-end Content Management Solutions that will leverage the two companies' combined strengths.

We continue to expect that the Content Management market will grow approximately 13% in 2007, and we're optimistic, we'll post solid results for the year.

Now, let me turn to RSA Information Security business. Revenues in Q1 were $120 million and on a comparable basis, if we'd owned the business last Q1, revenues were up 25%. This helps to accelerate EMC's overall Q1 revenue growth by approximately 470 basis points.

In Q1, the RSA Information Security business attracted over 1,200 new customers. These results reflect in part, the value of the combined EMC and RSA technology portfolios and RSA's sustained strength in the enterprise, where the focus on identity assurance and robust access controls continues to grow.

In addition, the division's consumer identity protection, data security and information and event management solutions also reported strong year-on-year growth.

The main focus of our Security business is to provide information-centric security solutions for customers that enable them to secure the information, secured access to the information and manage the information for compliance and security audits.

Our RSA Information Security business has achieved 25% plus year-on-year growth every quarter we've owned it, which validates the strategic focus to this business and demonstrates strong execution.

In February, we unveiled new RSA security features for the Symmetrix DMX-3, making DMX-3 the most secure high-end storage array in the industry. We plan to continue to introduce stronger authentication, authorization and audit capabilities across entire portfolio to further secure the overall foundation of our customers' information infrastructures.

We continue to believe the security market we address, will grow approximately 17% this year, and we expect to continue take share.

VMware is the leader in x86 virtualization and had another record quarter revenues, up 95% from last year's $256 million. This continuous fast growth is mainly fueled by the rapid expansion of customers using VMware's several products in production environments. In fact, in a recent third-party survey of a 1,000 VMware customers, over 85% said, they were using VMware virtualization products in their production environments.

Clearly, there is very strong interest in the forthcoming partial IPO of VMware, and we believe this offering will provide both EMC and VMware with a number of significant advantages, including unlocking more of VMware's value for EMC shareholders, strengthening VMware's ability to recruit and retain employees through equity, more closely tied to their results and reinforcing EMC's commitments to VMware's open platform strategy.

We plan to file the initial S-1 registration statements with the SEC very soon. And subject to the time needed for the registration statement to be declared effective, we anticipate completing the offering this summer.

In summary, we are pleased with the aggregate revenue results from our business units this quarter. We continue to believe we focus on the right markets, and have the best information infrastructure solutions to help customers address their most critical information management priorities.

Now, turning to rest of the income statements. There are always a number of moving parts between revenues and operating income. So, I'll provide you with a little color and insight.

On a year-on-year basis, gross margins were up 50 basis points. This was a good result, driven principally by the larger contribution of software to the revenue mix. However, hardware margins in the quarter were down, driven by an atypically higher mix of lower-margin storage hardware products. I want to emphasize that Symmetrix and CLARiiON margins were flat year-on-year, and a reduction in hardware margins this quarter was principally a mix-related issue.

Now, taking a look at operating expenses, these were up as a percentage of revenue by 90 basis points from Q1 of '06. This increase was driven by the VMware business, where we are investing for growth and preparing the IPO and the addition of the RSA Security business, which we did not own last year.

Excluding these businesses, operating expenses as a percentage of revenue, were down approximately 190 basis points year-on-year, reflecting good execution in our cost control efforts.

Operating margins were down 40 basis points from last year. Excluding both VMware and Security, operating margins would have been up 50 basis points, and we remained focused on driving improved operating leverage going forward.

During the quarter, we continued to work on our integration plan for EMC to improve efficiencies across the Company's business and reduce costs, whilst helping us to present a more unified One EMC experience to our customers.

We made good progress towards the program this quarter, and we will continue to have a laser focus on our cost base, expense management, and driving operating leverage.

Our Q1 tax rate excluding the one-time benefit was approximately 23%. These benefits were comprised of several resolutions of a number of items from prior years.

Now, let's turn to cash flow and point out some of the additional ways we are working to drive shareholder value. Cash from operating activities in Q1 was $809 million, up 27% from Q1 last year. Driving these improvements was growth in deferred revenues and a benefit from a significant reduction in taxes paid.

Looking at other balance sheet metrics that impact operating cash flow, DSOs were 47 and inventory churns were 6.9. Free cash flow in Q1 was $586 million, up 37% from Q1 last year.

CapEx was $171 million, which is slightly up from last year, and includes our continued investments in VMware's new headquarters, which we anticipate completing this summer. After that we should see declines in CapEx. The software capitalization for the quarter was $52 million.

Now, turning to our use of cash, we continue to believe in share buyback as an effective way to return value to our shareholders. In Q1, we were a little opportunistic and spent $489 million to buy approximately 35 million shares. We've committed to at least $1 billion in share repurchases this year, and this puts us little less than half way towards our target.

The average diluted share count for the quarter was 2.122 billion, down 12% from the average share count from Q1 last year.

In addition to our baseline 2007 share repurchase commitments, we continue to expect the use of proceeds, a portion of the proceeds from the forthcoming VMware IPO towards returning additional value to EMC shareholders, whilst enabling them to retain majority ownership in the strategic EMC business. We ended the quarter with cash and investments of $5.8 billion, up slightly from Q4.

Looking ahead, with our continuing focus for 2007, being our integration, leverage, organic growth, and One EMC, we are on track to achieve the annual targets we set out in January of at least $12.7 billion in revenues and at least $0.64 of earnings per share. The progress we've made towards these goals in Q1 gives us continued confidence in our ability to meet or exceed these targets.

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

Joe Tucci

I would like to start by adding my welcome to all of you participating today's Q1 conference call. Thanks for your interest in EMC.

Overall, I believe Q1 was a solid quarter for EMC. As always seems to be the case in Q1, we got off to a slow start, but we picked up ahead of steam in early March, which propelled us to a very strong close.

I am very proud of how the EMC team has been executing our strategy in driving results, and I want to thank everyone in EMC for their continued hard work.

In Q1, we intensified our focus in execution on our information infrastructure and virtual infrastructure strategies, which were very well received globally by our customers.

I am particularly pleased with the growth and momentum of our international businesses. Especially APJ, which grew 28% year-on-year as our new management team there continues to make progress and gain traction in this important region.

Turning to the IT capital spending outlook for 2007, it is shaping up pretty much as expected. In Q1, we did see a slight caution on IT spending in the North America enterprise segment. And don't get me wrong, I do believe there is still plenty of IT spending going on in the US. The year-on-year increase is not quite as robust as it was last year, year-on-year.

Conversely, in the EMEA and APJ regions we saw an up-tick in IT spending. So overall, we remain optimistic and believe we are on track to meet and hopefully beat our annual revenue, EPS and cash flow targets.

Again, this was pretty consistent with the view we had coming into 2007. So, why do I feel so optimistic about 2007? Well, first and foremost, EMC's strategy, products, and solutions sets are squarely focused on the areas of technologies, where CIO's are increasing their spending year-on-year.

Blending the results of the last several IT spending surveys that you have all seen, these seven technology segments consistently appear in the top ten. For those of you, not viewing the webcast today, they are Virtualization, Storage, Security, Voice over IP, Enterprise 2.0 and Service-Oriented Architectures, Storage and Software as a service, Energy and Data Center Efficiency.

In Virtualization, VMware is consistently mentioned as the virtualization platform of choice. EMC also has industry-leading technology for file virtualization with our Rainfinity products and a network-based SAN Virtualization within Vista.

In Storage, obviously EMC is the clear leader here. And again, we are consistently mentioned in each survey as a company CIO intends to increase spending with.

In Security, EMC is well positioned with RSA. A strong authentication, identity management, encryption, key management and event management are at or near the top in this important technology area.

In Voice over IP, EMC Smarts is winning CIO mindshare as being chosen to manage converged IP networks. In the Enterprise 2.0, Service Oriented Architectures, VMware, Smarts and Documentum have strong positions in place here.

In Storage or Software as a service, we have nothing yet. But stay tuned; we will launch an offering here soon. In the energy and data center efficiency here, with server consolidation, especially when coupled with their powerful VMotion and ControlCenter combination. Also, EMC enjoys a powerful consumption advantage with Symmetrix over other high-end storage systems and our mid-tier products also stack up quite well.

Another fact that gives me confidence in 2007 is the progress we are making on our One EMC initiative. I truly believe our business unit approach to the market in Storage, in Content Management and Archiving, and in Security, blends the important attributes of focus, specialization, with cross-alignment and synchronization in front of customers, while properly controlling costs with shared centers of excellence. And very importantly, our global service organization, which just passed the 10,000 people mark, further unifies the experience our customers have with EMC.

Additionally, what gives me confidence in 2007 is our VMware subsidiary, which as Dave has pointed out, is doing incredibly well. And also as we pointed, out we intend to sell 10% of VMware to the public in initial public offering this summer. We believe this action will help increase excitement around VMware and help assure its continuity to success.

And lastly, I am confident in 2007, because of the strong pipeline of new and exciting products that we have recently launched or will launch over the next eight months. We have today the software, the hardware and the services that will drive next generation disk-based backup/recovery solutions. And we have several more new and innovative products coming in this area.

We have recently and will continue to introduce new storage products that take EMC down market into higher-growth, higher-margin storage segments. Among these new products will be lower-end IP SAN offerings coupled with leading software functionality. And we will continue to introduce lower-end, all-in-one appliances that are hallmarked by superior price performance, ease of use and rich software functionality. And we will launch timely product refreshes of our major storage platforms.

EMC's product cycles have been fast than our competitors. They have been running 30 months between product refreshes. We have been running anywhere between 16 and 24 months for product refreshes. We know when our competitors will refresh next, and we will be right there.

In short, 2007 is the year of focus, integration and execution for EMC.

With that, I will 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 line for your questions, as usual, we ask you to try to limit yourself to one question, including clarification. This will enable us to take many questions as possible. So, thank you all for your cooperation in this matter. Laurie, can we open up the lines for questions please?

Question-and-Answer Session

Operator

Yes, thank you. At this time, we are ready to begin the question-and-answer session. (Operator Instructions). Thank you. Our first question comes from Laura Conigliaro with Goldman Sachs. Ma'am, your line is open.

Laura Conigliaro - Goldman Sachs

Great. Last quarter, you did talk about historical seasonality in order to give us a better sense of possibilities for the March quarter. If we extrapolate that, what you’ve just reported to the full year, we do get numbers that are nicely higher than the $12.7 billion target, granted you got a plus 9 after that. Is there some reason why we should be thinking that your seasonality will be noticeably different this year?

David Goulden

Laura, this is David. I think the seasonality will be in a fairly typical range. I think, if you look at what we told you last time, Q1, Q2, Q3, Q4, we did point out a few other things that helped us here, in Q1 a little bit in the currency, the large transaction, which we talked about in APJ. You need to factor those in and look into the overall year.

Tony Takazawa

All right. Next question please.

Operator

Thank you. Your next question comes from Aaron Rakers with A.G. Edwards.

Aaron Rakers - A.G. Edwards

Yeah thanks guys, congratulations on a good quarter. I guess my question is on the operating expense side. It looks like in the first time for more than two years actually OpEx has come down. So my question is, what type of leverage can we think about in this model? And maybe set the stage for that by any update in terms of the 1,350 employees taken out of the company, how far are we on that and what OpEx structure looks like over the next several quarters?

Joe Tucci

I am going to turn that over to David. Aaron, this is Joe. I just want to say that, as we've said many times, we are incredibly focused on gaining leverage in controlling our operating expenses throughout EMC. But it is the major focus and it will continue to be a major focus, and that's why we are getting the results. And Dave, you can elaborate on the question a little more?

David Goulden

Yeah to give you a bit of color, Aaron, I'd say the one benefit here of the business unit focus is we really are able to look at the businesses and look at the expense ratios for each one quite carefully and manage that way as well as manage on a consolidated basis. You saw the improvement that we've made year-on-year when you pull out VMware and Security.

Relative to the restructuring program, I don't want to give you a specific number, but I'll tell you that we're about a third of the way through that in terms of the overall targets that we've set for ourselves, albeit, clearly those were coming in towards the end of the quarter.

Aaron Rakers - A.G. Edwards

Thank you very much.

Joe Tucci

Thank you, Aaron. Next question please?

Operator

Yes. Dan Renouard with Robert Baird, you may ask your question?

Dan Renouard - Robert W. Baird

Hi. Thank you. I wonder if you could give us some insight on the reference to the hardware gross margin, you referenced mix and Symmetrix there and CLARiiON being flat year-on-year. Maybe you can just give us a little bit more detail there in terms of what drove gross margin? Do you view it as a one-time or how would you view that gross margin for the products that are playing out through the year? Thanks.

David Goulden

Yeah, Dan, certainly. What I wanted to do is, clearly once you look at the numbers and get a little bit beneath the covers and do the kind of analysis that you will do looking at our services margins and taking software 80% or 85% and back into hardware. You would see that the hardware margins were down, which is what I wanted to point out to you. What I wanted to make sure is that you understood the reason for that. Obviously, margins can be down for a couple of reasons. If they are down because of basically pricing and margin compression for a single product line, that's a tough thing to recover from. And that's why I pointed out that's not the case for Sym and CLARiiON.

So, this quarter typically a little bit of an atypically high mix of some of the lower margin products, some of the third party products that EMC resales Connectrix, and a few of those partially driven by the way that the quarter panned out from a bookings point of view. But also in terms some of the backlog changes that we carried from Q4 into this year or kind of drove that slightly a typically high mix. So, we do believe that during the year that mix will improve.

Tony Takazawa

Thank you, Dan. Next question please.

Operator

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

Harry Blount - Lehman Brothers

Thanks. Joe you ran through the list of spending priorities and how EMC matches up with that. On the stay-tuned part of the software and service, you indicated you are going to launch the new product there. I wanted to tie that with your acquisition strategy. Last quarter you basically said, you're done with major acquisitions, do you still stand by that and therefore should we expect software and service primarily as an organic growth vehicle?

Joe Tucci

I think, Harry, the first part is what we were saying is, when you think of the backup recovery space and you think of the archiving space, we will have an alternative to customers rather than say, here is your hardware, here is your software, here is your services. We can charge by the drip and we will host all that for you on one of our premises and one of our partner premises.

So that's what the service will look like. Those are the areas we'll be focusing on. In terms of how much we do ourselves, how much we do with partners and how much we do by getting a jump start, by doing a not huge but smaller acquisition that’s something I still want to keep to ourselves.

Harry Blount - Lehman Brothers

Thanks.

Tony Takazawa

Thanks Harry. Next question please.

Operator

Shebly Seyrafi with Caris, you may ask your question.

Shebly Seyrafi - Caris

Yes. Thank you very much. So last quarter, you talked about a typical percentage of annual revenue for the next quarter. Looking at the last three years, your Q2 has ranged between 23.7% of annual revenue and 24.3%. I am wondering if you could say that's a typical type of expectation you expect for the June quarter as well, and using the high-end of that range will imply about $3.1 billion.

Joe Tucci

This is Joe. I am going to take David off the hook. So maybe, you guys can do the math as well as we can and we try to get to you. We said that we expect this year to have fair seasonality. We stick by that statement, and you guys can do the math and come to your own conclusions.

Shebly Seyrafi - Caris

Okay.

Tony Takazawa

Next question please?

Operator

Paul Mansky with Citigroup, you may ask your question.

Paul Mansky - Citigroup

Great, thank you. I guess without trying to put you on the hold for any type of specific guidance on Q2, which obviously you are not providing. But maybe if you could just talk about trends that you have seen exiting the quarter and entering the new quarter on a geographic basis that we have seen continued softness in the US enterprise, Europe still continuing to show some strength as well as APJ on a normalized basis?

Joe Tucci

Well, obviously, I had it pretty much wrapped up in my remarks. When I say softness in the US enterprise, what I am saying is, again, the year-on-year growth is definitely what we are seeing so far less than it was, say in 2005 and going into 2006. So, we will see if that continues or not.

And conversely, we do see the international markets year-on-year spending increasing. And overall balance, we think we are setup for that. I think the real opportunity for us is going to come in focusing down market. Clearly, those markets are growing faster than high-end or mid-tier storage, and clearly the margins are better there. When you get into the big accounts everything is a beauty contest with a bake-off and obviously, the companies use their size to get better pricing.

So, it's a great part of the market, and we are just starting now to come out with our new product sets. And I think executing well on this is going to be a good opportunity for us going through the year. And that goes across all our markets and of course, that's where we got to invest in our channels and where we got to invest and continue to build out our lower-cost sales force. Well, that falls on Bill Teuber's shoulders now. And as we do that well, I think that's one of the things we are looking for. So, I think the geographic picture you've got. And I think I wanted to put in where we think if we execute well with the products suites we have coming out, it can be opportunity for us.

Paul Mansky - Citigroup

Thank you for that.

Tony Takazawa

Thanks Paul. Next question please?

Operator

Yes. Ben Reitzes with UBS, you may ask your question.

Ben Reitzes - UBS

Yeah, thanks. Dave, could you talk a little bit more about free cash flow? According to my calculations, I am seeing about $0.28 in the quarter, something in that range, double EPS. Free cash flow was an issue for you guys last year. It was little lumpy, and for a few quarters it was below EPS. It looks like you really got on the right track here. Can you talk about how free cash flow is looking this year, vis-à-vis your GAAP EPS estimate of $0.64?

David Goulden

Yeah, Ben, first of all, as I am sure you picked up from our comments on the call this morning and some of the things that we put in the proxy statements as well, free cash flow is a major focus for us this year. Up and down in the company, we've laid a focus upon it. We are looking at all the things that drive it. And we would certainly expect this years free cash flow to grow faster than EPS will grow. I don't want to range that, but certainly we are looking to have faster growth on free cash flow.

I would say when you point out Q1, and I would kind of agree with your math in terms of calculating the per share calculation. Obviously, we do have the benefit from a significant reduction in taxes paid compared to last year. But even without that, it was a very healthy growth.

Ben Reitzes - UBS

Thanks a lot.

Tony Takazawa

Thank you, Ben. Next question please?

Operator

Katie Huberty with Morgan Stanley, you may ask your question.

Katie Huberty - Morgan Stanley

Good morning. Joe, you talked about VMware as a driver of server virtualization. But how does that then impact the need for network storage? Many CIOs are talking about the need to step up the percentage of servers attached to storage over the next several years and we would just love your insights.

Joe Tucci

Well, first of all, I hate to categorize. So, I think we are doing VMware to server, so we categorize it only as server virtualization. This is a platform, which virtualizes anything related to the X86 platform. But that being said; you are right, [we chose] a lot for server virtualization. And when that happens, you pretty much have to have network storage. Each of the virtual machines or each of the physical machines or virtual machines has its own storage. That storage has got to be pooled, which means networked. So obviously, that's a good trend for us.

As you know, we work for VMware openly, and they have other storage partners, which as sitting over both companies, I encourage. Because I think making this a ubiquitous open platform is the best for us. But it does absolutely positively favor network storage and of course, that's where we have a 100% of our focus.

Tony Takazawa

Thank you, Katie. Next question please?

Operator

Yes. Toni Sacconaghi with Sanford Bernstein, you may ask your question.

Toni Sacconaghi - Sanford Bernstein

Yes, thank you. Can you comment on your buyback? It sounds like your provision for this year of $1 billion would allow room for $500 million according to your current plan. That seems particularly light, given proceeds from VMware that are likely to be $1 billion or more and your expectation that cash flow is going to be a lot higher than EPS. Can you comment on your willingness to go above the billion and update us on what you believe is the required gross cash required to run the business?

David Goulden

I'm sorry a couple of questions in there. First of all just to be clear, I did say in my remarks that over and above the $1 billion minimum target we will look at returning some of the IPO proceeds to shareholders, potentially in the form of buyback, although we haven't finalized just that. So as we get close to the IPO, we can update people of our intentions. Obviously as we get more feeling for pricing ranges and value and cash inflows, etcetera.

And then just to reiterate what we said about the cash we need to run the business as we look forward into 2007. That number is about $4 billion and it's made up of about $2 billion of cash. It is essentially certainly trapped a little bit in our overseas operations, $1 billion of flow we need to run the U.S. business, and then just about a $1 billion of cushion. So we really need about $4 billion, certainly the level I feel comfortable to keep the business operating. And then as I said, we will basically update the buyback outlooks when we get closer to the IPO.

Tony Takazawa

Good morning. Next question please.

Operator

Tom Curlin with RBC Capital Markets, you may ask your question.

Tom Curlin - RBC Capital Markets

Good afternoon. On the recent announcements with Microsoft and Cisco, are we to take this as your strategy on service desk and support is simply to partner with Microsoft or will you do some similar things with companies like BMC or perhaps on your own from a service desk perspective? And also if that fits into your application management strategy, is it solely a Microsoft strategy, or is that a heterogeneous approach?

Joe Tucci

It will be more heterogeneous. Obviously we've done several things here. Most of that will be Microsoft, some with Cisco as you notice. That's primarily in the management space more than the service desk space. So I don't think we have done anything exclusive at all in the service desk space. So stay tuned, we'll continue to build out an open platform work with many companies.

Tom Curlin - RBC Capital Markets

Thank you.

Tony Takazawa

Thanks Tom, next question please.

Operator

Bill Shope with JP Morgan, you may ask your question.

Bill Shope - JP Morgan

Okay thanks. Joe in the past, you have stated that you've refreshed products on the 12 to 18 months cycle, and it sounds like you reiterated that with your opening comments. Can you clarify where we stand with the Symmetrix business on this time-table particularly since we have had a few minor refreshes since the last major refresh? Just wondering where we start and looking at that 12 to 18 months time-table and whether or not that holds for the Sym business at least at this point in time?

Joe Tucci

Bill. Obviously, I know that answer. At least, you would hope that I would not answer, and I do. But I think, I just work against myself. What I wanted to get out there is, we have a pretty good handle on when the next round of major refreshes are in the high end. Obviously we just we've not longer refreshed our high end mid-tier, if you will, or mid-tier, higher end mid-tier. We know when our competitors in other words HDS, Hitachi and IBM will refresh, we'll have a good idea.

Let's put it that way. And what I said, I'll stick with this. We are going to be very timely with our refresh. We will not be at a disadvantage, and I really said there are a lot of opportunities going to come as we come out with the next phase of CLARiiON and Celerra products, which go down market. And I think, there's massive opportunity there. So, more than that I don't want to say, because you do end up working against yourself.

Tony Takazawa

Thanks Bill. We have time for one more question.

Operator

Thank you our final question comes from Kevin Hunt with Thomas Weisel Partners. Sir, your line is open.

Kevin Hunt - Thomas Weisel Partners

Thank you. Couple, one clarification you mentioned on linearity. You kind of said the quarter started off slow, but then finished stronger. Was that a function of -- obviously you have software now a much bigger part of the mix. So, should we expect that that's going to be sort of the way things go going forward?

Joe Tucci

I hope not. I hope we can improve it a little bit, because we dig it off to a later than normal start. As I said, it just seems that every year I have been here Q4 was kind of a great calendarization and good place to do it. It seems rather easy in every Q1. We have to work a lot harder and I guess that's because we sell so much in Q4. The customers go through bit of an install cycle. But we have to work that. I think again, having more products to go down market. And working comp plans and everything else that we are looking at with our sales force to see if we can do, the kind of incentive, our customers on our sales force to pull orders is going to be in our benefit. Because obviously doing it the other way forces us to have higher inventory levels. And of course as David said, we are incredibly focused on free cash flow this year and that's a tremendous opportunity ahead of us.

So, we've got to work those issues, and Kevin, we are not at all happy where we are. But I just wanted to give you a little bit history there to. So, you can tamper everything I said together and come to your own conclusion.

Anyway, in final comments I want to thank everybody for joining us today. We think we are off to a good start. We believe we're very well positioned. In 2007, a lot of exciting product announcements, the VMware IPO is exciting, and thank you for your attention and we will keep you updated as always.

Operator

Thank you for participating in today's conference. The conference has concluded. Please disconnect at this time.

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