EMC's (EMC) CEO Joseph Tucci on Q4 2015 Results - Earnings Call Transcript

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EMC Corporation (EMC) Q4 2015 Earnings Conference Call January 27, 2016 8:30 AM ET

Executives

Anthony Takazawa - Vice President, Global Investor Relations

Joseph Tucci - Chairman, President and Chief Executive Officer

Zane Rowe - Executive Vice President and Chief Financial Officer

David Goulden - EMC Information Infrastructure Chief Executive Officer

Analysts

Steven Milunovich - UBS Securities LLC

Steven Fox - Cross Research

Maynard Um - Wells Fargo Securities

Rod Hall - JP Morgan

Jayson Noland - Robert W. Baird & Co.

James Kisner - Jefferies & Company, Inc.

Kathryn Huberty - Morgan Stanley Investment Research

Kulbinder Garcha - Credit Suisse Securities

Amit Daryanani - Royal Bank of Canada

Simona Jankowski - Goldman Sachs & Co.

Operator

Good morning and welcome to the EMC’s Fourth Quarter Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer portion of the call. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce your host, Mr. Tony Takazawa, Vice President Global Investor Relations of EMC. Sir, you may now begin.

Anthony Takazawa

Thank you, good morning. Welcome to EMC's call to discuss our financial results for the fourth quarter of 2015. Today we are joined by EMC Chairman and CEO, Joe Tucci; EMC’s CFO, Zane Rowe; and David Goulden, EMC Information Infrastructure CEO. After the prepared remarks, we will then open up the lines to take your questions.

Due to the pending transaction with Dell, we are making some changes to our call format and content in an effort to improve the efficiency of the call today. We’re streamlining our presentation and voluntary disclosures. EMC will also not be providing expectations for Company’s financial results.

Please note, that we will be referring to non-GAAP numbers in today's presentation unless otherwise indicated. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure in today's press release, supplemental schedules, and the slides that accompany our presentation.

In addition, all financial comparisons will be on a year-over-year basis unless otherwise indicated. 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 EMCs filings with the U.S. Securities and Exchange Commission.

Finally, this call does not constitute an offer to sell or a solicitation of any vote or approval. The proposed transaction will be submitted to the shareholders of EMC for their consideration. In connection with the proposed transaction, Denali Holding, Inc. has filed with the SEC a registration statement on Form S-4 that includes a preliminary proxy statement and prospectus regarding the proposed transaction.

After the registration statement has been declared effective by the SEC, a definitive proxy statement and prospectus will be mailed to each EMC shareholder entitled to vote at the special meeting in connection with the proposed transaction.

Investors are urged to read the proxy statement and prospectus in its entirety and other fillings made by Dell and EMC, as they contain important information about the proposed transaction. Investors may obtain copies of the proxy statement and prospectus and other documents filed with the SEC regarding the proposed transaction at the SEC's website or from EMC's website. Information regarding the persons who may under the rules of the SEC be deemed participants in such solicitation is set forth in the proxy statement and prospectus filed with the SEC.

With that, it’s now my pleasure to introduce Joe Tucci. Joe?

Joseph Tucci

Thank you, Tony. I’d like to begin by welcoming everyone to our Q4 earnings call. Thank you for joining us. This morning I’ll focus my formal remarks on three areas; trends in a macro environment and IT spending, a review of our businesses and lastly an update on the progress on our deal with Dell.

From my perspective our results in Q4 were mixed. Well, I am pleased to report non-GAAP EPS of $0.65 I was disappointed that we fell a bit short on revenue, which was $7.01 billion essentially flat year-on-year. However, I would like to point out that it follows 24 consecutive quarters of reported year-on-year topline growth. As an accomplishment that very few our technology peers matched.

I am proud of the more than 70,000 talented and dedicated people across the EMC family of companies. Despite all this tractions caused by the announced merger with Dell and a volatile global economy they worked diligently along with our value partners and focused intently on our customers and their needs, my deepest thanks to all of you.

Let me now turn and comment on several macro trends we’re seeing in a global economy and in information technology and how they are playing out and affecting our customers and the IT industry. Both came back on 2015 it was quite [indiscernible] year. In 2015, we experienced a sharp decline in revenues in a significant number of the emerging marketing countries we serve. As these economies came under pressure.

We experienced business declines in Russian and parts of the Middle East on the back of geopolitical unrest there. We experienced declines in our business in China as the country faced issues with their equity and housing markets leading to a lowering of IT imports. And we experienced significant currency fluctuations and a strong dollar. At the same time in 2015, we experienced an acceleration of three plus broad secular IT trends, which we’ve been maniacally focused on for quite a while.

The first trend was led by the billions of smartphones and connected devices in use, which generate massive amounts of valuable data. The second trend is that more and more companies are embarking on a digital transformation journey to capture and exploit this massive data trove to become more intimate with their customers and more connected with their supply chains and more in tune with their employees and partners. The third trend is that enterprises are accelerating their move to hybrid cloud computing.

In other words, our customers are deploying cloud computing architectures across their private clouds, manage clouds and public clouds to help increase speed, agility and ease of use that lower price points.

And lastly in 2015, on the back of the [indiscernible] IT shifts, we saw a heightened need for a new wave of cyber security oriented towards addressing increasingly pervasive advanced threats. Company’s transformed our business as we see them changing their traditional operating models and buying patterns.

To fund these new initiatives customers are reducing co-ops and their traditional applications and infrastructures. As a result this is one of the most disruptive periods in history of IT for vendors as they manage customer transitions from the old to the new, but these shifts also create enormous opportunities.

EMC recognize these trends early and we began shifting our strategy several years ago to assure we were well-positioned to manage through disruptive forces of these secular trends, and more importantly to be positioned to capture the massive growth opportunities these shifts will avail.

Today, we have a board portfolio of innovative to offerings in each of the major growth areas. And to give you a quick update in each of our businesses starting with Pivotal. Pivotal continued its strong customer momentum and growth as this highlighted by their work with Mercedes-Benz helping the automaker design and bring to life its first ever connected car application. A great sign that Pivotal is disrupting traditional middleware players it is emerging alongside Amazon Web Services and Google cloud platform as a leader in the modern cloud era.

Pivotal now works with three of the top five global automotive manufacturers on their most important new digital transformation initiatives. Beyond automotive Pivotal is working with some of the leading players in the financial services, insurance, retail and telecommunications industries.

Pivotal has the right software subscription-based business model, the right modern cloud platform and analytics solutions and the right software development services, all working in concert. In short, Pivotal is uniquely qualified to help the world's largest enterprises successfully transform into great software companies.

VMware had a solid quarter with 10% revenue growth. They exited 2015 with over $6.6 billion in total revenues. There are high-growth emerging businesses including areas like virtual networking, end-user computing and virtual SAN that especially well last quarter.

As Pat told you yesterday, VMware’s end-user computing business join both compute and management as $1 billion plus businesses and NSX is on fire with a 100% year-over-year growth and exiting 2015 with a $600 million run rate.

VMware is one of those rare technology companies that has maintained growth as they manage the transition from a maturing core platform in vSphere to their new growth engines. In cloud, I am especially encouraged by VMware's new multi-cloud multi-device strategy. They will provide customers with the ability to run, connect and securely manage their applications across private clouds, the manage clouds provided by their Cadre of the VKN Partners and across the mega cloud providers. Again this is a compelling value proposition for customers one that VMware can uniquely deliver.

Finally, as we announced earlier Zane Rowe will be taken over for Jonathan Chadwick as CFO of VMware. I want to thank Jonathan for his service these past few years and I am extremely excited that Zane remain in the family and bring his considerable leadership skills to VMware. I know he will do an outstanding job.

I am also pleased with Denis Cashman, the 28-year veteran at EMC and currently our Chief Accounting Officer and the CFO of EMC II will take over as EMC’s CFO. I have worked closely with Denis for 16 years. I have tremendous confidence in his capabilities.

Turning to EMC II, we believe the three technology trends are dramatically changing the storage and data center landscape namely flash, software-defined technologies and converged infrastructure. We understood early on how these three technologies would improve cost, performance and agility for our customers and we invested heavily in these three areas.

In flash technology, EMC II pioneered the introduction of flash into all of its arrays as performance accelerator. They also require XtremIO and introduced the truly innovative all-flash, scale out array into the storage market. And since its introduction XtremIO has experienced explosive growth and is the clear market leader by a wide margin.

EMC II has also embarked on an important initiative to re-architect their VMAX and VNX product families to use the next generation of flash technology optimally. These efforts take time and as a result we saw declines in these products in Q4 as customers anticipated these new products in Q4 as customers anticipated these new product introductions. The really good news is as you will hear from David Goulden is that both VMAX and VNX are planning major enhancements and refreshers that will make these systems extremely competitive in the primary all-flash storage market. This is incredibly exciting to us.

In the area of software-defined storage EMC II invested heavily in early and the majority of this investment was through organic R&D. EMC II engineered innovative products like Elastic Cloud Storage for objects and the Adobe file system like ViPR, Heterogeneous Storage Management and acquired ScaleIO for block storage targeting cloud scale mission-critical applications.

VMware also invested organically in software-defined storage and is delivering rapidly growing leading products like Virtual Volumes and vSAN. No other company is anywhere close to having the software-defined storage assets we have between EMC II and VMware. We are the clear leader and the best news is that there is more to come.

Finally, converged infrastructure is another area that continues to grow rapidly. DC had a terrific quarter and as I’ve said previously we remained very committed to our strategic partnership with Cisco. David will talk more about our CI strategy in a fast phase product roadmap in his remarks.

Virtustream, our newest federation company has fortified the EMC hybrid cloud portfolio. It ended Q4 with the strongest bookings quarter in its history. Since our last earnings call, we’ve evolved our approach relative to the integration of Virtustream. Importantly, we wanted to better leverage VMware's enhanced multi-cloud multi-device strategy and a short of Virtustream continues to be a premier [VKN] partner embracing VMware's technology suite.

We have decided to focus Virtustream on two key high growth cloud opportunities. The first area is Virtustream’s heritage mainly to run complex mission-critical business applications on its modern cloud architecture, which features Virtustream’s internally developed Xtrem software technology, a true differentiator.

EMC strength is highly complementary here as its infrastructure principally supports mission-critical applications across its vast global customer base. The second cloud area in which Virtustream will focus leverages EMC's most trusted position in the enterprise storage arena by offering our portfolio of cloud-based solutions for tier data storage archiving backup and disaster recovery.

To help accelerate the second cloud storage thrust, we moved EMC IIs cloud-based commercial object storage service and its managed services business in Virtustream earlier this month. Collectively, the new Virtustream will start out life with nearly $100 million in quarterly revenue. As I’ve said before, we are expecting very high growth in this area. Both Michael Dell and I are very excited about the prospects of our Virtustream business and feel that our combined synergies will drive even higher growth rates for this business in 2016 and beyond.

Let me now turn an update you on our merger with Dell. As I’ve said before, the coming together of Dell and EMC is a game-changer. It creates a powerhouse in the technology industry with approximately $80 billion in revenue. Our combined assets are better positioned to navigate the major changes in our industry and lead in the new world. Customers have been overwhelmingly positive about this combination. They see that we will be a strategic partner with more heft and breadth will leading technologies that are critical to their success.

Technologies around digital transformation, software-defined data centers, hybrid cloud, converged infrastructure, mobile and security. And very importantly the people of the EMC and Dell are embracing the combination. They understand that together, we are better positioned in the market and that this will create new and more opportunities for them over the long run.

I am pleased to report that progress on closing the transaction remains on track on the original terms and timeline. We have filed the primary proxy statement and prospectus and we are working to finalize it. We have submitted request to regulatory approval globally and most importantly our teams are working together seamlessly on integration planning, say we are ready to go day one.

On the VMware side, Mike and I are both incredibly excited by the prospects for this great Company and I firmly believe that Mike will be an outstanding steward for this franchise. Subsequent to closing of the transaction Michael will be VMware's largest shareholder. I know he will be laser-focused on increasing the value of VMware for all stakeholders and we will ensure that VMware has the right resources and people that fully realize its potential.

Thank you again for being with us today. I’d now like to turn it over to Zane to take you through the quarter.

Zane Rowe

Thanks Joe. Good morning everyone. This morning I'll discuss our consolidated results and provide some additional detail on Pivotal, VMware and EMC Information Infrastructure. First, I'd like to add my thanks to the extended team across our organization for all their efforts and focus this quarter.

Our Q4 consolidated revenue totaled $7 billion, flat year-over-year and up 3% on a constant currency basis. EPS was $0.65. Our regional results were heavily impacted by currency fluctuations and the economies of the few countries. Consolidated revenue in North America was flat year-over-year. EMEA was down 1% as reported and up 7% on a constant currency basis.

APJ was flat year-over-year as reported and up 4% in constant currency. The region continues to be significantly impacted by softness in China. Latin America was down 16% as reported and down 5% in constant currency. Brazil continues to be a challenging market in this geo. For the full-year 2015 consolidated revenue was $24.8 billion, up 1% year-over-year and up 5% on a constant currency basis. EPS was a $1.82.

Looking at the quarterly results for the three major businesses; Pivotal grew revenue 25% year-over-year. As we previously mentioned annual recurring revenue or ARR is another way of measuring Pivotal’s progress as they've been transitioning from a license to a subscription model.

In Q4, total ARR was over $100 million, up 40% sequentially with strong performance in all geographies and product areas. Pivotal had tremendous customer momentum during Q4 highlighted by Ford Motor Company’s announcing a three-year strategic collaboration with them. Beyond automotive in the fourth quarter Pivotal book the largest Cloud Foundry deal in history with a Fortune 50 retailer.

Pivotal continues to expand its customer base across many industries including automotive, financial services, insurance, retail and telecommunications. VMware revenue was up 10% year-over-year and up 13% in constant currency. There were a number of highlights this quarter in particular with the emerging parts of the business. In Q4 end-user computing license bookings including AirWatch grew over 20% year-over-year on a constant currency basis.

EUC is now at over $1.2 billion total bookings annual run rate. VMware has greater than 62,000 EUC customers across the desktop, mobile, identity and content collaboration solutions. We believe it continues to gain share against the competition in both desktops and mobile. There was also continued strength with VMware’s NSX network virtualization solution. NSX’s Q4 bookings were up over 100% versus last year with an annual bookings run rate of over $600 million.

VMware also had the largest enterprise agreement quarter in the Company's history. 42% of the bookings in the fourth quarter came from enterprise agreements with more customers taking advantage of the expanded solution offerings. EMC Information Infrastructure revenue was $5.1 billion, down 4% year-over-year and down 1% in constant currency. The storage business within II was also down 4% year-over-year and flat in constant currency.

As Joe, mentioned while the spending environment remains challenging the major trends in IT remain intact. We are encouraged by the discussions we’re having with customers regarding how EMC and eventually the combination of Dell and EMC can help them with their digital transformation.

In addition we have an exciting lineup of new and refreshed products coming this year, which will offer customers compelling functionality and value. David, will provide more details on our Information Infrastructure business in a few minutes.

Taking a look at gross margin trends for the quarter and the year the results were significantly impacted by the change in VCE accounting and FX. For Q4 gross margin was 63.6% down 180 basis points as reported. However, adjusting for the impact of VCE accounting and FX changes gross margins were up 40 basis points year-over-year.

In 2015, the reported gross margins were 62.4% down 160 basis points as reported and adjusting for VCE and FX gross margins improved by 50 basis points year-over-year. In Q4, gross profit was up 1% versus last year excluding the impact of VCE accounting and FX changes. On a reported basis, gross profit was down 3% year-over-year with the net impact to EPS of $0.05.

Operating expense was up 3% excluding the impact of VCE accounting and the benefit from FX. Operating expense was up 5% year-over-year as reported. Within EMC II excluding the impact of VCE accounting and the benefit from FX, operating expense was down 2% year-over-year due to good expense control by the team. On a reported basis, operating expense impacted EPS by $0.05.

Other income improved year-over-year. The largest portion of this benefit was once again the elimination of the VCE expense from this line last year. The net benefit to year-over-year EPS was $0.04. Lower share count helped EPS by $0.03 versus last year.

We ended the quarter with $14.8 billion in total cash and investments and $1.2 billion in EMC domestic cash excluding VMware. We returned $229 million to shareholders via quarterly cash dividend and we did not repurchase any shares in Q4.

Free cash flow was $1.5 billion for the quarter. We generated $3.9 billion in free cash flow for the year, which is close to the forecast we shared with you in July. We are on track with $850 million cost reduction and business transformation plans we announced last year.

In Q4, we achieved our initial $50 million in expense reduction target. Most of the aggregate cost reductions are coming from our non-headcount related initiatives and we are making significant progress in numerous areas including direct materials and manufacturing, process simplification and integration and third-party spend.

We are making great progress in and expect to exceed our cost reduction goals. And I want to thank the teams for all their efforts towards achieving these targets. We are confident in the combined strength and future of Pivotal, VMware, EMC II and now Virtustream. These companies offer an unparalleled portfolio of industry-leading products and solutions.

Combined with Dell, we will build one of the world’s premier IT powerhouses, which will further benefit our stakeholders and customers. Together, we will seize the opportunity to capture synergies across this enhanced portfolio. The combined business will have significant free cash flow generating capability and a powerful balance sheet. The financial strength of this combination will now enable us to grow and lead the IT industry.

On a personal note, I look forward to staying in the family and I am excited about joining the VMware team to help drive long-term growth and shareholder value. I couldn't be more pleased to welcome Denis Cashman to his new role. He will do a great job.

With that, I’ll now turn the call over to David to discuss the EMC Information Infrastructure business. David?

David Goulden

Thanks Zane. Good morning everyone and thank you for joining us today. I would also like to thank the entire EMC II team for their hard work and focus to ensure that EMC continues as the industry leader as our industry goes through one of the biggest transformations in its history.

As we look at the external environment, customers continue to be in either transactional or transformational spending mode and in some cases both at the same time. Customers in a transactional spending mode are buying just enough and just-in-time for their traditional environments and we saw this in our stronger maintenance renewal bookings throughout last year.

Customers in transformational mode are either transforming their existing IT systems towards a hybrid cloud or building and deploying new digital applications to transform their business. In either of these scenarios they need a modern datacenter infrastructure based on flash, scale out, software-defined, cloud-enabled and trusted technologies.

Against this market backdrop, our storage business performed broadly inline with our recent expectations for the year and grew 3% in constant currency for the full-year. In Q4, we saw a little more pressure in our high-end and mid-tier business related to product cycles and we are addressing those very early this year.

Within storage, our emerging storage is very well and became our second largest product related bucket in Q4. I want to clearly point out that we are actively investing in innovation and transforming our storage portfolio well ahead of our pears to position us well. IT budgets are moving and to accelerate a leader position in the next wave of IT. Our market share in the emerging category is higher in most cases than our share in traditional storage which is a good indicator for the future.

In flash, XtremIO, our all-flash array expanded its market lead. Bookings for 2015 will well over $1 billion. We also achieved over $1 billion in revenue in 2015 as well. Another way of looking at this XtremIO’s Q4 revenue exceeded the cumulative revenue for the last four quarters of our closest public competitor in this space.

As well as outstanding competition, we continue to innovate them with unique capabilities like our recently introduced Integrated Copy Data Management or iCDM. iCDM allows administrators and application owners of critical enterprise applications like Oracle and SAP to make an automate the management of instantaneous and space efficient vertical copies of their production data.

Flash is not about a single product, it’s a key technology across our portfolio and later this quarter we’ll take another quantum leap in flash with the launch NGA of DSSD. DSSD will change the game for flash in the enterprise delivering mind blowing performance bandwidth and latency for high performance business applications like Adobe Analytics and ultra high-performance databases. We believe that DSSD is unique and highly differentiated in the marketplace.

This quarter we will also introduce a new flash-optimized or flash VMAX that will significantly change the way flash is deployed in high-end primary storage. And in Q2, we will introduce a new flash-optimized mid-tier storage family which will change the used cases for flash in the mid-tier. Converged infrastructure continues to grow constantly faster than the infrastructure market in general. And in 2016, we expect over 20% of all external storage will be purchased as part of a CI System.

EMC continues to lead in converged infrastructure. VCE had a very good year and exited the year with an annualized demand run rate of over $3 billion. Multiple customers are spending more than $10 million annually with VCE and a largest customer who was also a new customer spent over $70 million this highlighting the customers are shifting towards buy versus build and as a result of seeing better TCO faster outcomes on a more agile business.

After successfully integrating VCE with EMC II this past year, we look forward to continue strong partnership with Cisco for extending our lead in Vblocks and for networking systems across our CI portfolio. As a recognized leader in the integrated infrastructure systems although we call the blocked category of CI according to both Gartner and IDC, we are now expanding our CI portfolios include blocks, ranks and appliances to create the most comprehensive converged platform life in the industry.

In Q4, we introduced our new rank scale hyper-converged platform VxRack. We are encouraged by our early wins and growing pipeline for VxRack. An important focus was in 2016 is the nascent rapidly growing hyper-converged appliance market segments. For the last several months EMC and VMware partnered very closely to develop a new next-generation hyper-converged appliance family that uniquely leverages technology from EMC, VMware and VCE and will change the game in this part of the converged infrastructure space. Stay tuned for an exciting joint EMC, VMware announcement in a few weeks time.

In the software-defined storage space ViPR, ECS and ScaleIO had a good year with both certified customers and with large enterprises that are in transformational mode. We also released software-only versions of VNX and iPhone this past year and we will continue to strengthen our SDS portfolio when new releases coming this year including a virtual addition of data demand.

While our products provide the modern datacenter infrastructure building blocks for our customers that truly transformative business opportunities for EMC come from our federation solutions such as the Enterprise Hybrid Cloud, the native hybrid cloud and the business data like to help customer to accelerate time to value for that transformational initiatives.

For example when one of the largest Fortune 100 healthcare organizations was looking to transform their current IT systems they selected a federation EHC solution to help modernize and automate their current data centers . And for the next phase in the IT transformation they are working with Pivotal Labs to embrace agile programming and deploying Pivotal Cloud Foundry and Pivotal Big Data Suite to build their next generation apps and data fabrics.

Now turning over to our security business, RSA continues to make progress to transition the mix and momentum in their business towards their growth areas. And for the year its growth portfolio was up double-digits. And our Enterprise Content Management business grew its license bookings was also improving profitability for the full-year.

In closing, I'm very excited about our position in 2016. We have significant new announcements in the first half of this year to further expand our Storage and Converged Infrastructure portfolio. Our entire Storage and Converged Infrastructure portfolio is built on the architectural pillars of the modern data center. These pillars are Flash, Scale-Out, Software Defined, Cloud Enabled and Trusted technologies.

At EMC II we are uniquely positioned to help our customers modernize and automate their data center infrastructures to set the foundation for their IT and business transformations. Furthermore, as the EMC federation we can help drive our customer's full IT and business transformation initiatives as well.

Finally, our combination with Dell wants us to change the enterprise IT landscape for ever by creating an IT powerhouse with our mass portfolio, scale and reach.

With that, I'll turn the call over to Tony for Q&A. Tony?

Anthony Takazawa

Thanks, David. Before we open up the lines for your questions, as usual we ask you to try and limit yourself to one question, including clarifications. This will enable us to take as many questions as possible. We thank you all for your cooperation in this matter.

Tori, can we have the first question, please?

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Our first question is from the line of Mr. Steve Milunovich with UBS. Sir, your line is now open. You may ask your question.

Steven Milunovich

Thank you very much. Joe I wanted to get your sense on a couple of trends in the industry that you alluded to. On the Flash side I think study that you funded suggest that through compression and so forth you could take 18 terabytes and put them into three. So it appears Flash could be extremely deflationary on Storage industry revenues I was curious what your thoughts are on that. And then also do you believe that standalone Storage companies can survive in the future given the importance of the Converged platform and obviously you are merging with Dell?

Joseph Tucci

Steve I’ll let David start, he is one step closer obviously as I said Flash is one of the megatrends that's changing the infrastructure business forever, the infrastructure hardware business and software business forever.

Then I’ll let David comment and you are right I do think that, I do believe that if you get to certain size and certainly we’re there and many others are there. Playing in the Storage alone is not a good strategy for the future David told you 20% of Storage will be sold as part of Converged infrastructure that number is growing incredibly rapidly.

So obviously that's not where you want to be in life and that's part of where we've been moving the company over the years and it's also part of in my heart of what we're doing in this merger with Dell.

David Goulden

Yes. So Steve, on the technology side obviously Flash has moved a long way and we - in my comment refer to number of announcements we’re going to be making this quarter without revealing too much of them you'll certainly hear us talk about 2016 being the year where we really believe that all Flash systems should be the standard for primary storage.

So that will be a big shift from where the market was and so talking more in hybrid terms really think that the technology house advanced to the stage with the latest 3D NAND technology and things like 3.8 terabyte drives, which of course you need to offset your system to optimize to use them that big and that fast, which is why we talked about the re-architecting we can really come to market with a complete family VNX, VMAX, XtremIO, DSSD leveraging this latest technology and basically use all-flash all the time for primary storage.

Now when it comes to the CAD data compression technology you were talking about that really is application dependent one of the things that makes these systems price competitive in fact maybe even more so than a hybrid system is the fact that using flash you can use compression dedup another data efficiency technologies.

Those bring the effective price for gigabyte down to about the same or maybe a little bit less than the hybrid, so depending upon your application with the compression you can get maybe 2X factor with dedup and you can get a little higher and of course you could also do instant snap copies and things which you can't do is effectively with disk.

So it’s really bringing systems down to the same effective price. It’s not massively deflationary because they are still much more expensive to all media, but you can do more things with that media and basically produce a flash system, which is effectively the same price for effective terabyte as a hybrid that gives you much more performance.

Anthony Takazawa

Thank you, Steve. Next question please?

Operator

Thank you. Our next question is from Steve Fox with Cross Research. Your line is now open. You may ask your questions.

Steven Fox

Thanks. Good morning. Just along the similar lines, but maybe a bigger picture question. As you look at sort of your whole emerging storage platform and how end-users are sort of changing their storage use cases. Can you talk about how that plays into your portfolio in 2016, what is accelerating maybe a little bit more than maybe you thought just 90 days or 180 days ago. And then I had a quick follow-up. Thanks

David Goulden

Steve, sure. Yes, this is David. Let me take that. Obviously, just ground ourselves in where we are very pleased with how the emerging storage portfolio came and grew during to the year and as we predicted [indiscernible] back in January, we actually do get the situation in Q4 where it became the largest cloud related bucket out of those three, which we’ve historically given.

We expect, yes, whilst we are not giving you any overall detail for 2016. We expect to see a continued strong growth in that area. If you think of the key technologies in that things like iPhone, things like XtremIO, or software-defined storage those are all being driven by some of the secular trends that Joe talked about.

I think the other thing is relating back to our prior answer. We do expect in our mid-tier and in our high-end this shift all-flash all-the-time to really give us some revised growth opportunities in those markets as well. So I think the portfolio going into 2016 just in great shape.

Steven Fox

Great. And then just real quick, the 20% number you talked about for CI, how does that changed during the course of the year?

David Goulden

Yes, this is an interesting data point, it’s a little bit we are trying to intersect two kind of market trends, one how big is CI and how fast is it growing and how much of the total storage marketplace is consumed in the form of CI. When we talk about 2016 being a little over 20%, we think it's probably three or four points more than it was in 2015 which shows a pretty big increase in adoption when you think of how large the overall storage marketplace is and the CI is becoming an increasingly important piece of it.

Joseph Tucci

And don’t think it is only from kind of just a lot of questions come I think from a hardware perspective, but think of why we did VMware and value now in a software-defined datacenter, software-defined networking, software-defined storage, software-defined compute.

Think of it in terms of CI, which David talked about, think of it in terms of cloud. This is one of the reasons we’re taking so many assets out of EMC II and putting them into Virtustream to make sure that we get those cloud services offerings. And so there is a great opportunity in what we are doing and of course doing more with Dell, we think will bring us to the next level and make this company a real winner long-term.

Steven Fox

That’s very helpful.

Anthony Takazawa

Next question please?

Operator

Thank you. Our next question is from Maynard Um with Wells Fargo. Your line is now open. You may ask your questions.

Maynard Um

Hi, thank you. Joe, you said you're confident in the deal closing in the terms of the Dell deal. There's obviously a lot of concern that Dell may have difficulty raising the funds for the transaction given the markets and the stocks actually, your stocks has been trading below the cash offer on the deal at certain points in time. So any specifics you can share on what gives you that confidence in the deal closure and on the original terms. And are there any backup plans that you or the Board are considering and if you could give us a timeline of key dates I think that would be extremely helpful? Thanks.

Joseph Tucci

Yes, let me start hear. I mean because this gives about five questions in that - better in that one. Look, this is a really big deal and there is a lot of noise in the system and there's lot of people have a lot of opinions, a lot of them are not based on a lot of fact. But there is increased and it certainly as we are doing there is a tremendously increased market volatility and I think it’s really fair to say this environment is not been kind to any security right.

So that gives us strength as we have a binding solid merger agreement in place. We are highly confident on the contractual terms we have in place that we will meet those contractual terms. There is significant penalties in place both ways if this doesn't happen. The banks are fully committed and again what does that mean. I mean it mean that the banks have told us they can raise the money were split rated those things, we can do it even improve that rating and you got to speak to Dell about.

So this gives us confidence if you look at our progress, if you look at our cash flow we are right on target. If you look at how we are performing against peers these are all important metrics. How we are performing against our peers? We are performing better than our peers. That’s’ why I pointed out that as reported. Forget about currency, we’ve had 25 quarters now in a row, the last one being flat and the previous 24 grow year-on-year.

There is very few companies that are really our peers that weren’t born in the cloud error so to speak that can say that kind of – so basically we’re going to perform and of course you asked about the timing. We said that the S-4 is filed is when it becomes effective we will be more aggressive out there with you, but that the timeline for this deal closing is still between May and October and that will be probably dependent on a couple of the foreign antitrust approvals. So we are confident. We know what we’re doing and again focus on cash flow, our cash flow was really good.

Anthony Takazawa

Thank you, Maynard. Next question please.

Operator

Thank you. Our next question is from Rod Hall with JPMorgan. Your line is now open. You may ask your questions.

Rod Hall

Yes, thanks for taking my question guys. I guess I wanted to maybe drill into the macro commentary you started off with Joe a little bit and Zane if you got something to add to this that would be interested as well. The North American growth rate was relatively flat in Q4 I think year-over-year about 0.8% and we also saw deterioration of LATAM. I guess I’m curious on a couple of front, one I would like to get a little bit more color on what you think trajectory looks like regionally.

And then Joe maybe if you could comment a little bit on where you think we are in the enterprise budget setting process particularly in the U.S. right now. Is there a lot of visibility where it is prices are going to reset budgets or is that coming later and just what do you think the outlook is this year for enterprise IT spending? Thanks.

Zane Rowe

Hey Rod. This is Zane. I’ll start and then Joe can give you an update. As I discussed I mean when you look on a constant currency basis I actually thought that things came in I would say as expected were not for a number of key countries within those economies. I mean obviously we’ve seen softness in China all year and that had a meaningful impact on our APJ results which would have been positive were it not for the Chinese impact.

And then even EMEA was impacted by Russia, which is down significantly and then of course Latin America. We’re seeing probably more widespread pressure in Latin America, but of course that was heavily influenced by Brazil as well. As far as you know we are not getting into guidance into the year, but I would say we generally are expecting things to continue as they are, we are not expecting sort of dramatic shifts as we look at the future in any of those economies around the world.

Joseph Tucci

I think two comments, when you look at the U.S. a lot of that was on the back of kind of what David pointed out. I have been very forthcoming in saying majority what’s happening in IT is on the back of these huge secular trends that we’ve talked about many times, but that doesn't mean is not cyclical effects and you saw a bigger stall in the U.S. because the U.S. was probably better in tune with the product cycles that we are having in products like VMAX and VNX.

In this world nothing is kept as secret. So I think these two new refreshers and systems that David is talking about are huge to us I think that was effect. So we did have our product cycles affect here for sure. And most that I had showed up in the U.S. first as it always does.

In spending trends in our customers I don't think any customer world is holding back now and what they are willing to spend on security, especially the security around protecting against advanced threats not inside the firewall, not mode protection to really picking it up in that area and David said we’re seeing that. We are also spending significantly and big on digital transformation.

And of course they are spending some money and saving some money and basically how do I modernize my private cloud and use and get the benefit of using public cloud. So this cloud strategy is both the positive and a negative and that's why we think things like VMware’s new multi cloud, multi device strategy important things like Virtustream are important things like our software-defined storage is important. So we think we are well-positioned there and as again I’ll go back to our track record versus others, which is really a key metric in this deal is very solid.

Anthony Takazawa

Thank you. Next question please.

Operator

Thank you. Our next question is from Jayson Noland with Baird. Your line is now open. You may ask your question.

Jayson Noland

Okay. Great thank you. I wanted to ask about all-flash array market. Joe you’ve - looks like you have four different products on the market XtremIO, VMAX, VNX and DSSD coming pretty soon. It sounds like there are specific parts of the market that have different needs and then the competitive dynamics there’s lots of different players, who do you see the most often, do you expect the legacy players to have a big play in all-flash also?

Joseph Tucci

Yes, well I’ll let David and then I will make couple of my comments. Before David goes maybe I will start a little bit. There is no one answer to your question. I mean the beauty about being us is, we’re probably the only one that our competitors see everywhere. We see different competitors and different tiers and we’re introducing I think what’s going to be incredibly exciting the DSS product, which is way above where Storage sits today, its probably more high-end flash pricing, but more memory kind of DRAM kind of performance.

So basically if you look at the strata we are saying as DRAM, there is the DSSD tier, there's the high-performance primary storage. So you know we're basically using flash up and down a line and with that alternative – so we’re the only ones I know that are playing is and with software-defined, we’re the only ones I know that are playing flash as broadly and as significantly I don’t know think that any competitor is doing, we are doing. But go ahead David.

David Goulden

Hey Jayson. Just to pick up on Joe’s comments I mean I think we’ve demonstrated successfully, we can match the portfolio and our strength really with our big customers is the fact that we have this [best of three] portfolio because there is no such thing as one platform [indiscernible] workload.

So as Joe talks about DSSD is going to address a whole new class of workloads, XtremIO and VMAX are playing in broadly similar markets but with different attributes and the new mid-tier line cap fits underneath that. So we really have the market exceptionally well covered and of course leading with an all-flash in general and primary storage again giving way a little bit about what you can hear in terms of the launch.

And then last but not least we have key technologies like ViPR and SRM to clock all that and make it basically very transparent to our customers they just see virtual ones, they don’t necessary have to know what underlying storage system its on, but we [indiscernible], so we given the combination of this complete portfolio approx that they can provide for the different workloads and also a very consistent experience from the infrastructure system up to the application which is really being a power of our portfolio.

Anthony Takazawa

Thanks Jayson. Next question please.

Operator

Thank you. Our next question is from James Kisner with Jefferies. Your line is now open.

James Kisner

Thanks. So I was hoping you would comment on the competitive environment and storage. Some of your smaller competitors have indicated that incumbents like EMC have increased the disconnectivity recently, is that the case and you are seeing the competitive environment is towards intensify or is really just more of the same? Thanks.

David Goulden

James. Yes, this is David. Let me take that. I mean clearly in a market that certain segments of the market have matured and overall growth rates have slowed down little bit obviously is a more competitive environment. We’ve been facing into that I can give you a couple of data points that might help you one of the things that we’ve been looking at very much all year is, what’s our gross margin look like in storage on a normalized basis what I mean by taking out the impacts of FX taking out the impacts of VCE to look at those on an apples-to-apples basis.

And yes this being an increasingly competitive environment but mix shift has moved positively such the way when I look at either Q4 or the full year gross margin on the normalized basis is basically flat with 2015 which we think is quite given the technology shifts and the competitive pressures in the industry. So yes, we have seen a more competitive intensity and yes we’ve been responding to that, but we’ve also been seeing a positive mix shift towards some of our higher growth and richer margin products have kept the overall profile of business in good shape.

James Kisner

Thank you.

Anthony Takazawa

Thanks James. Next question please.

Operator

Thank you. Our next question is from Kathryn Huberty with Morgan Stanley. Your line is now open. You may ask your questions.

Kathryn Huberty

Yes, thank you. Have you seen any impact on sales cycles just overall demand as it relates to the announced trends transaction and any plans to provide transparency on which products survive under the new parent company?

Joseph Tucci

Let me first comment on first, we don’t hear us bring this up, right, I mean because we don't believe in using excuses we’ll tell you like it is, but that said obviously even personally I could tell you that – the deal of this size causes [indiscernible] and you do have to take an extra lap around the track to go explain. The good news is once you explain to customers, once you explain to your people they both – those an important audience is right I mean your customers and your people as you can approach customers without the people.

Once you get them understanding what we could create here, we do get a positive effect, but it does as I said of course another lap around the track and so it does cause accident to system and certainly that was some of the miss, but we didn’t alluded to it at all because we think this merger in the best interest of all parties we are great from our shareholders to our people to with customers and we work that everyday. But as we get into more and more it’s becoming more and more better understood. So Dave you want to take the second part of that question.

David Goulden

Yes, Kathryn sure. I mean first of all we know broadly I think you know very broadly there is not a lot of overlap between the portfolios, they are quite complementary. With there is some overlap, we’re going to make sure all our customer are looked after and everybody has a roadmap going forward with that technology platform.

Now that might mean that some platforms have merged into common code base and things like that, but we’re going to be very careful to make sure that all our customers buying products right now from either company have a clear go forward path into the future based upon those investments.

Kathryn Huberty

Thank you.

Anthony Takazawa

Thank you, Kathryn. Next question please?

Operator

Thank you. Our next question is from the line of Kulbinder Garcha with Credit Suisse. Your line is now open. You may ask your questions.

Kulbinder Garcha

Thanks. My question for David. On the information storage business and you see most [indiscernible] kind of come down. I know that being that’s probably in the VCE consolidation, but are we at the point in which the gross margin level of these percentage terms may have dropped off, what's been going on there and what do you think about the various mix drivers going forward? Many thanks.

David Goulden

So Kulbinder, I think your question was on gross margin, you broke up just a little bit there, but I pointed out that this year was very important year for us and that the gross margins normalize again taking out the impact of VCE where we did bring some additional lower margin products into our income statement as opposed to in other income when you back that out you normalize for FX.

Our gross margins in storage normalized were basically flat for the year and they are flat for Q4 as well. I think that's a good sign going forward, because we've been able to mix shift a loss I mean obviously over the last two to three years, if you go back to what happened and our gross margins normalized relatively flat in 2014 over 2013 as well. So you kind of look at how much that the mix shift is occurred in the business over the last couple of years.

People thought that obviously when the mix went away from the higher end to some of the newer segments that would be a problem for gross margin, on a normalized basis it is not. I think that's a really good sign as the mix is shifting we’ve been able to hold those gross margins of course in that environments has also become more competitive than it was a couple years ago. So I think all that shows that we’re actually executing well and driving a lot of value out of the new segments of the business.

Anthony Takazawa

Thanks. Next question please?

Operator

Thank you. Our next question is from Amit Daryanani with Royal Bank of Canada. Your line is now open. You may ask your questions.

Amit Daryanani

Thanks a lot. Good morning guys. I just wanted to talk a little bit about X-IO and all-flash VMAX and VNX products here that are launched. Could you talk about what workloads, what application would each one fit into? And then very specifically X-IO I think has always been known very well for inline deduplication compression capabilities. Is that something [indiscernible] into the high-end VMAX or VNX all-flash solutions to leverage that as well?

David Goulden

This is David. I would love to answer that question, but I mean wait a little bit more until we get to the product launches because if I answer too much of that question I mean we are getting away. Let me just put it this way the product launches are Quantum Leap. What we’ll talk about in the new VMAX is not just putting a whole bunch of flash drives in an existing VMAX system. We’ve done a lot of re-architecting, the way that software works, the VMware works, the hardware works to truly take advantage of these new [indiscernible] 3D NAND-technology at scale which is a lot of work.

So I’d like to have that conversation, the context of the product launch. Clearly, we focus through. We think there is great positioning between the portfolios, the very complementary and we are going to add to that with obviously what we’ll do in the second quarter with the new midrange system, but net-net we’re very excited. I don’t think there is any problem here is all this is all good size all opportunity, but I'll get into more detail when we do the launch.

Anthony Takazawa

Thanks. Next question please?

Operator

Thank you. Our next question is from Simona Jankowski with Goldman Sachs. Your line is now open. Please proceed.

Simona Jankowski

Hi, thank you very much. You talked a lot about new products on the roadmap for the next couple of quarters. What are some of the changes in your go-to-market or in your competitive posture that you think you can implement by being private in part of Dell that you couldn't have done as a standalone public company?

Joseph Tucci

Simona sure, I mean that’s a great question and this is also source of things we can do, when we [indiscernible] of course we’ve to be a little bit careful about how far we can go down that pathway. If you just think about it from a very high level point of view EMC has a lot of strength in the enterprise market in the global accounts. Dell plays that role obviously we can provide a lot of value with those relationships and our technology footprint.

Dell has incredible strength in the mid-market place in local government in education, if you go back just a few years when EMC and Dell had a partnership that was wroth almost $2 billion a year revenue for EMC alone and that point in time we’re half the size of the company that we are right now.

So just a complementary nature of the go to market is very, very strong and then the complementary nature of the product is also beneficial, because we talked about the factor storage and service are in some ways re-converging around converged infrastructure and around software-defined - on service and the ability to go to our customer both large and small with the complete enterprise infrastructure portfolio also gives us a ton of benefits. So again it’s an area that we are very infused about and we’ve got teams looking at how we can best optimize after we close.

End of Q&A

Anthony Takazawa

Thank you, Simona. That’s all the time we have for questions. We have a few concluding comments from Joe.

Joseph Tucci

First of all thank you all for being with us today. We really appreciate it. We believe in our strategy and our ability to execute. We continue to believe that the merger with Dell is the best strategic option for our shareholders, our customers, our partners and our people. We believe we will close this transaction under the original terms, on the original timeframe. Once the S-4 goes effective, we will pick up our communication with you, we will be out there with you. And we value you and our investor so much. Thank you for being with us and we will see you soon.

Operator

Thank you. That concludes today’s conference. Thank you all for joining. You may now disconnect.

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