EMC Q4 2005 Earnings Conference Call Transcript (EMC)

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EMC Corporation (EMC)

Q4 2005 Earnings Conference Call

January 24th 2006, 8:30 AM.


Tony Takazawa, Vice President of Investor Relations

Joseph Tucci, Chairman, President and CEO

William Teuber, Executive Vice-President and CFO

Howard Elias, Executive Vice-President, Corporate Marketing & Technology


Kevin Hunt, Thomas Weisel Partners

Tom Curlin, RBC capital

Harry Blount, Lehman Brothers

Bill Shope, J P Morgan

Laura Conigliaro, Goldman Sachs

Ben Reitzes, UBS

Brian Freed, Morgan Keegan & Company

Shebly Seyrafi, Kaufman Brothers

Joel Wagonfeld, First Albany Corp

Toni Sacconaghi, Sanford Bernstein

Aaron Rakers, A.G. Edwards & Sons, Inc

Clay Sumner, Friedman, Billings, Ramsey & Co


Welcome and thanking for standing by. Operator Instructions Now I would like to turn the meeting over to Tony Takazawa, Vice President of Investor Relations.

Tony Takazawa, Vice President of Investor Relations

Thank you Sherry. Good morning, welcome to EMC’s call to discuss our financial results for the fourth quarter for full year 2005. We will be making references to our slides today so we encourage you to view them on EMC’s website at www.emc.com. And archive of the audio and slide presentation will also be available following the call. William J. Teuber, EMC’s Executive Vice-President and CFO will start things off and walk you through our Q4 financial performance and highlights. They will also discuss our outlooks for Q1 and the full year of 2006, who then will be joined by Mr.Joseph Tucci, EMC’s Chairman, President and CEO. Jo will comment on our strategy, some of our business results and his view of the economic climate in the IT marketplace. After the formal remarks, we will open up the line to take your questions; we will be joined at that time by Mr. Howard Elias, Executive Vice-President of Corporate Marketing and the Office of Technology.

The call this morning will contain forward-looking statements and information’s concerning factors that could cause results to differ from those in our forward-looking statements can be found in EMC’s filings with the US Securities and Exchange Commission. In addition, our financial results contain a number of special items that were previously announced. For Q4 2005, these items include an IPRD charge of $14 million related to our acquisition of Captiva and $80 million charge associated with our announced workforce rebalancing and a tax expense impact of $180 million related to the repatriation of cash. For 3Q 2005, these items include a $105 million tax benefits.

To help you with your analysis we’ve included financial details and commentary relating to non-GAAP measures in today’s press release reconciling our GAAP results to our results excluding these items. With that, it’s my now pleasure to introduce EMC’s CFO, Mr. William Tauber.

William Tauber, CFO

Thanks Tony. We ended 2005 on a high note, as we achieved our annual goals for revenue growth in operating margin. Our solid performance and very positive momentum in 2005 make me confident about our position in the marketplace and our opportunities in 2006. We saw strong performance in a number of areas this quarter. We are pleased with the performance of the Symmetrix line, which was up 19% from Q3 driven by strong customer demand for our recently introduced DMX3. In fact, more than a third of our Symmetrix Systems revenues were from the DMX3 and we completely sold out of the product. Given customer reactions so far, I think we are set up nicely for 2006 in this part of the business.

In addition, our midrange business reaccelerated this quarter based upon our new Switch backends for the Clarion, which we introduced in the second half of the year. We also achieved an exciting milestone in Q4 with our first billion-dollar quarter in software revenues. We had strong performance across all of our products and in particular Content Management finished the year with a bang. I’ll go through each of these areas in more details in a few minutes. As usual, I’ll spend sometime today discussing the following items: the performance of our revenue lines, operating margin improvement, highlights from the balance sheet and some thoughts on expensing the stock options and I will close as usual with our expectations for Q1 in 2006.

Turning to the numbers, Q4 revenues are $2 billion and $710 million, up 15% versus a year ago. For the full year, our revenues were $9 billion and $664 million, up 17.4% in 2004. In Q4, we achieved our goal of getting operating margins in the high teens that came in at 19% and net income for the quarter was $409 million, up 27% over Q4 a year ago. Both of these items exclude the special items previously discussed by Tony. GAAP EPS including those items were $0.06 in Q4 and $0.47 for the full year of 2005. Adjusting for the special items, EPS per diluted share was $0.17 in Q4 and $0.53 for 2005.

In order for you to have a clear understanding of our operating results, we’ve also broken up the non-cash expenses of our acquisition and amortization and the cost associated with deferred compensation, which continues to be a little more than a penny per share for the quarter. Excluding these items, non-GAAP EPS for fully diluted share would be $0.18 for Q4 and $0.59 for the full year. We believe that this is an important way of assessing our performance on an ongoing basis.

Beyond the topline revenue numbers, the next important revenue breakdown is the results from our Systems Software and Services. Our Systems revenue grew 19% from Q4 of last year was 48% of our business. Software revenues grew 16% and were 37% of our business and Services revenue grew 4% and were 15% of our business. Now, I will turn to our Product categories within these revenue lines. We continue to provide the supplementary information to give you a better understanding of what happened in our business, given the solutions-based approach we bring to the market, the individual category results will vary from quarter-to-quarter.

First, turning to the components of our systems related product revenue, Symmetrix product revenue was $754 million. As expected, we saw a strong acceleration here between Q3 and Q4 as the new DMX3 had started the ramp. The market is voted on our new products and it’s a hit. And as I mentioned, we sold out of DMX3 and have a nice backlog there going into Q1. We expect that this product will continue to generate excitement and momentum for us in the high end on the storage market.

CLARiiON product revenues of $519 million were up a robust 32% this quarter, which is also its growth rate for the full year. As expected, this business saw a strong ramp as the enhanced products kicked in during Q4. In addition, we also saw a particular strength at the lower strength of the market with the CX300, and Europe led the overall geographic revenue growth.

Our connectivity revenue, which includes our Switching product’s sold as Connectrix and our Celera product’s excluding any disc storage grew 27%. Our mid tier product offerings which includes our CLARiiON, Celera and Centerra products collectively grew 32% in the quarter and 31% for the full year. We believe these results compared favorably to anyone in the industry. Additionally revenues for these products in 2005 were approximately $2.2 billion demonstrated the magnitude of our presence in this part of the market.

Our NASs business including the associated CLARiiON Disk Storage had a great quarter and was up nearly 50% over last year. We believe we’ve gained a significant amount of market share and mind share in 2005 and we will continue this momentum as we move forward into 2006.

Our customers are looking for EMC for much more than they had in the past, the types of conversations we are having and the value proposition we bring to the table had been dramatically enhanced by our ILM strategy in the Products and Services which we have developed in the quarter over the past few years.

Turning now to our Software business, total platform software revenues for Q4 were $450 million, up 9% year-over-year. And Multi-Platform software revenues for Q4 were $441 million, up 15% year-over-year. Now, taking a closer look at the components of Multi-Platform software License revenue, Resource Management software license revenues were $167 million, up 7% from last year. The growth driver here continues to be SMARTS which had a record quarter and year as demand for it’s unique model based technology continues to be very strong.

The largest product in this segment is Control Center, which is roughly correlated to Symmetric sales and saw a very nice sequential improvement. Back-up recovery and archive Software License revenues were $16 million, up 13% from last year. Within this, our network of license revenues were up nearly 20%, as we continue to gain share with this product. That work out very well last year setting new records for both the quarter and the year.

In addition, our EmailXtender product showed double-digit growth in the quarter. Content Management Software license revenues were $64 million up 25% for the quarter. This business ended the year on a high note with total license revenues of $200 million for the full year, up 16%. Looking at this business in it’s entirety including maintenance and services, total revenues were up 21% for 2005 driven by a record quarter year and year in the Documentum prior product shift. We believe that we continue to take share in this market. VMware had another sizzling quarter, license revenues were $87 million, up 55% and Services including maintenance and consulting revenues were $28 million, up 91% over the last year. For the full year VMware had revenues of $387 million, up 78% from 2004. VMware continues to be one of the best performing software companies ever at this stage in its history.

Turning to our Services category, which includes our professional services, system maintenance and other services, total revenues were $403 million in Q4, up 4% from last year. The growth rate in this line was affected by tough comparison last year, however our Professional Services bookings were very strong, our associated differed revenues were up and we see excellent opportunity in this space.

Turning now to the GS, North America continues to be very strong in a broad based market force, revenues here were $1.534 billion, up 14% over last year. We performed particularly well in the international arena this quarter. International revenues were 43% of total revenues reflecting the benefits of our investments in this space. We continue to invest in the international market to drive our revenue growth in those areas where we are underrepresented from either our market share or direct presence.

Looking at the results in EMEA, revenues were $801 million, up 15%. A number of countries had outstanding results here including our Eastern European business as well as Switzerland, France and the Nordics. Additionally it looks like a German economy is firming up, which pose well for 2006. EPJ-A had revenues of $290 million, up 16% from the last year. We are very excited by the opportunities we see seen in a number of countries in this region and we continue to invest in high growth areas like China and India. Latin America had revenues of $85 million, up 28% from last year. Brazil had an excellent quarter, as did some of the smaller countries in this region. Dell continues its strong performance, and when combined with the symmetric revenues they participated in was approximately 13% of total revenues for the quarter.

Turning now for the rest of the income statement and I am very pleased that we were able to reach our operating margin target of high teens this quarter with an operating margin of 19% ex the impact of the special items. While this is a good result, we are not standing still and continue to be focused on this metric as we move forward. As we have been targeting, we continue to strive for an operating margin exceeding 20% in Q4 of ‘06, of course this excludes stock option expense.

Looking at the elements that make up the operating margins, lets start with gross margins, which was 54.8% for the quarter, up 80 basis point from last quarter. The elements of the changes are as follows. Volume was up 140 basis points. In the mix and the price cost other lines had an offsetting impact of 25 basis points and 35 basis points respectively.

Turning now to operating expense, SG&A was $706 million or 21.6% of revenues, down 100 basis point from Q3. R&D was $262 million in Q4, or 9.7% of total revenues. For the full year we spend over billion dollars in R&D. We believe this investment to be an important part of our strategy as we move forward. We intend to continue the aggressive product development cycle we have been on over the last few years. This quarter, we also recorded an IPR&D charge of $14 million for Captiva and an $80 million charge for workforce rebalancing, which Joe will take you through in his comments. Finally the tax line this quarter contains $180 million charge for the repatriation of cash, excluding this our cash rate nudged up a bit this quarter.

Turning now to the balance sheet a few other items, we ended the quarter with $7.355 billion in cash. When you look at how we deployed cash this quarter we spent $334 million on acquisitions and used $400 million to buyback EMC stock. This year we broke the billion-dollar mark in our stock buyback and acquired approximately 74 million shares during the year.

Looking at our cash positions over the last eight quarters, we’ve generated approximately $3.3 billion before acquisitions and buybacks. More than 85% of our cash has been put to use for buybacks and acquisitions during that time.

For Q4, DSOs came in at 48 days, up a few days in Q3, inventory was $725 million and insurance calculated and the total tax basis were 6.7. We continue to be focus on getting this metric back to seven, as we get further through this transition of DMX3. CapEx was $182 million and depreciation and amortization was $190 million.

Now I want to talk a little about our stock options expensing since I know it’s a topic of great interest. Let me start off by saying unequivocally that we will strive to bring this expense down overtime. While we believe that broad based equity ownership by EMC employees has a tremendously beneficial impact on the company. We also recognize that it is prudent to reduce the associated expense.

For your modeling purposes we are currently expecting accounting for stock options to impact our 2006 results by approximately $0.09 per share, at down about 30% from $0.13 in 2005.

Now moving to our expectations for 2006 in Q1. We are very excited about the opportunities we would see in 2006. As we start off this year, there are number of factors that are driving my confidence and optimism for this coming year. First of all we expect to see continuing momentum from our 2005 performance. The solutions focus that we offer is resonating with our customers and the value proposition that we provide them will only get stronger in 2006. Secondly, in the later half of the year we rolled out new versions of high end Symmetrix and enhance our existing mid tier strength with CLARiiON, Celerra and Centerra. We saw a solid ramp of these products in Q4 and expect to continue our momentum as we introduce additional products this year starting with a major announcement later this week.

Thirdly, the breadth and depth of our entire staff software portfolio continues to develop and grow both organically and through acquisitions. The strength of our software strategy is becoming increasingly apparent in both the interest we are receiving from customers and the results we are delivering. We continue to see excellent opportunity for all of our software solutions with more products announcements also coming this year.

Finally Joe and I are just back from our sales kickoff, the excitement there was palpable and we both believe there was no finer sales team anywhere in fact, anywhere in the world. These factors indicate that our overall business model is striving, our competitive differentiation and strength is increasingly apparent and we expect we will continue to gain share this year as the result. So given these factors we believe that our 2006 revenues will continue to significantly outgrow the market, we see a revenue range of a $11.1 billion to $11.3 billion with earnings in the range of $0.63 to $0.66 per diluted share before options expense.

For Q1 we expect revenues to be between $2.57 billion and $2.59 billion and earnings of $0.14 per share before options expense of approximately $0.03. Before I turn the call over to Joe I want to mention that you have probably heard someone coughing and sneezing in the background, Joe is slightly under the weather and so you will hear a few more coughs and sneezes. I can assure you we have our best people on it and with Joe back to full capacity within a few days. So now here is Joe.

Joseph Tucci, Chairman, CEO

Thanks Bill. And welcome and thanks to all of you who have joined us for today’s conference call. Looking back on 2005, I believe EMC had a great year both operationally and strategically. Our information life-cycle management strategy, products and solutions sets hit directly on the areas of IT spend, they were of the highest priority, these areas include compliance, disaster recovery, storage software and SANs to name a few.

Looking to 2006, you can see in the Morgan Stanley’s CIO survey of top IT priorities that our ILM strategy is positioned very well and it is on 7 of the Top 20 for this coming year. I will comment more on 2006 later but right now let us examine the various elements of the EMC’s ILM technology stack and our success in 2005. I’ll start with our storage platforms.

In 2005 the anticipated Symmetrix DMX3 was incredibly well received and as you know we have only the largest number, we’ve only announced the largest members of the family up to now. That will change, I am pleased to preannounce that we will be in London this Thursday to launch both new lower end members of the DMX family as well as high end expansion. Our particular success in the Symmetrix DMX family was our replication technology, concurrent SRDF, SRDF/A and STAR all had banner year. The high-end DMX products with their massive consolidation capabilities really hit the mark.

The average DMX 3 sold in 2005 shipped with over 60 terabytes of raw storage, far and away the largest as any high-end array. Clearly customers trust EMC, in our DMX 3 technology for the most demanding information needs. And as we continue to rollout new models and functionality, included a new high capacity, low cost fiber channel drives, we expect to grow this business in 2006.

We believe that the total mid tier storage market grew around 15% in 2005 and an EMC’s mid tier offerings: CLARiiON, Celerra and Centerra, we call them “The Three Cs” internally, accounted for 2.2 billion of revenue for a 31% growth over 2004, and this was a tough compare as 2004 was incredibly robust for us, we grew a whopping 46% over 2003.

To put this in perspective EMC has a business year, which is approximately 35% larger than net aps comparable, storage hardware and software business and we have grown it faster in each of the last two years.

Also last year we kicked off our entry into the small business network storage market, a market that is expected to reach more than 2.5 billion by 2008. Like we did in high end and mid tier markets our goal here is to be nothing less than the leader in this space.

As you can see on this slide EMC has market share leadership across all major storage system categories through Q3 2005, and with our strong finish in Q4 we expect our results to be similar for the entire year. Storage systems is a great market with a great potential and we have never been better positioned. Looking at the software tiers of our ILM stack, as we progress through 2005 the leveraging power of EMC really started to kick-in. This was demonstrated by a significant acceleration of our software revenue in back up, recovery and archive. The category we call BURA.

We grew this line up of products 27% year-over-year with great success of our Networker, Dantz Retrospect and Xtender family of products, all having record use. We clearly gained a thunder share in this category as the market grew only in the upper single-digit range. In Enterprise Content Management, our total Documentum business comprised of license, maintenance and professional services was up 21% year-over-year. This business has really flourished as the key intelligence layer of our ILM strategy.

Clearly EMC was the top share gainer and with the addition of Acordist (ph) for records management and Captiva for image capture and management, this has positioned us as a leader in this field with 2005 pro forma revenues of approximately $525 million. ILMs power really comes through for customers as we assemble several of our best-of-breed products into solution stack implemented by a worldwide service organization. Our service revenues were up 27% year-over -year and the final element that made and makes our ILM strategy so successful is our vast partner network. And partner network includes technology partners such as Cisco, Microsoft Oracle, SAP and Tech Data. System Integrators and outsourcers such as EDS, Accenture and BearingPoint and System and Distribution partners such as Dell, Fujitsu, Siemens, Unysis Tech Data and ABNet, clearly a world class partner ecosystem.

In addition to and in support of ILM, I believe EMC is very well positioned in two game changing technology arenas. The first is the virtualization; I absolutely believe that in three years the vast majority of customer’s infrastructures will be virtualized. EMC as a virtualization product line up that is second to none. First and foremost is VMware with its virtual infrastructure for x86 environments. VMware is now a $460 million run rate company and I firmly believe it still has it’s best years in front of it. In fact you’ll see in this series of recent Goldman Sachs CIO surveys that VMware consistently ranked No.1 as the overall largest share gainer of customer’s IT budget over the next 12 months.

We also broadened this market this past Q4. And this is EMC’s network based storage virtualization product. We are totally convinced that storage virtualizations will be an important market and the optimum place to virtualized storage is at the network layer.

And third, in our third virtualization offering is Rainfinity file virtualization. Customers have countless files across their enterprise at various levels in their infrastructure. EMC erased and then virtualized these files providing a global name space and unified coordinated access, and by the way we will also be announcing new Rainfinity products and capabilities in London this Thursday.

The second game changer is the way in which IT infrastructures will be managed in the future. Moving from traditional frameworks to model-based management topologies. Here we are very well positioned with the industry’s best technology by accomplishing this EMC Smarts. The first exponentiation of this technology is being used today in the carrier and service provider market. Providing real-time, root cause analysis for large complex network infrastructures. And I’m pleased to say that EMC Smarts has taken very significant share in 2005 and it’s important in large market segments.

Later this quarter we’ll begin shipping our first applications of this technology applied to storage networks. In overtime we’ll build this capability across additional IT domains to provide more common resource management across the enterprise. The investments we’ve made both organically and via acquisitions that deliver tremendous value to our customers.

Proof of that is the recognition we’ve recently received from InfoWorld 2006 Technology of The Year awards where EMC was the only company to take four awards, three based on our virtualization products, VMware for server and desktop and Invista for storage, we won the fourth – and then fourth category, with Documentum and Content Management. But the best proof of all is the fact that our customers have rewarded us with our first billion-dollar software quarter.

Looking into 2006, I am bullish on the economic front; Global 1000 companies have record cash levels. Surveys show that these companies will significantly increase capital expenditure in 2006. And I’m also optimistic about the resurgence of the economy in Western Europe, and survey show that IT spending will be up in 2006 around the world.

This taken together with the acceptance of our ILM strategy, our significant capabilities in virtualization and model based management coupled with a very strong and I mean very strong EMC product cycle, I’m extremely confident in our ability to grow and continue to take share in 2006. Before going to the Q&A portion of today’s call, I would like to comment on the workforce rebalancing we announced on January 6th.

In the past three years EMC has acquired 12 companies and bought the assets of an additional five. These acquisitions brought with them a workforce of over 4000 individuals including a significant component of middle management and Vice Presidents. And over those same last three years EMC has hired over 5000 employees across the globe. And I’m sure you would agree when you hire that fast you can’t back thousands.

So despite all of our growth and success over the past two years I believe we have the opportunity to thin the ranks of middle management and VPs as well as a number of sub quarter performers. So we took an action to reduce management layers, accelerate integration inefficiencies and reduce and replace underachievers. We see a vast opportunity for faster growth all around the world. So we’ll reinvest 100% of this replacement headcount in our sales and ask the organizations to drive growth and in our development organizations to drive innovation and faster product cycles. Undoubtedly some of these expense dollars will be saved but that was not the motivation for this action, again it was and is all about growth. We received a lot of questions on the timing of this action, to that I say implementing this type of action when you are doing well and hitting up all cylinders is absolutely the best time. I am convinced this will make a stronger and help accelerate EMC’s growth in 2006 and beyond, and now I would like to turn it back to Tony to moderate the Q&A.

Tony Takazawa, Vice President of Investor Relations

Thanks Joe and before we open up the lines, as usual we ask your cooperation in limiting yourself to one question including clarifications and we’d all agree that its working pretty well, so we thank you for your help with this. Shirley, can we open up the lines up for questions please.

Question-and-Answer Session


Operator Instructions Aaron Rakers of A.G. Edwards & Sons, Inc. you may ask your question.

Q - Aaron Rakers

Yes, thanks guys, nice quarter, I wonder if you give a little bit more clarity on the high-end business going forward, it sounds like you guys are set to do a refresh of some of the lower end solution and I just kind of want to get some sense of you know timing of those product shipments, how you guys manage the evaluation cycle initially in a quarter and if there is a little bit of a concern that we might see some hesitation at least for a quarter or so on those products? And then additionally if you can talk a little bit about you know the high-end business, I think last quarter you talk about a third of the DMX3 shipping with a full capacity, what was that metric this quarter, and what do you expect going forward?

A - Joseph Tucci

Aaron this is Joe. I don’t anticipate any hesitation whatsoever and that’s because we now have the mass of big products in the market for quite a while now and you know costumer confidence that we can handle systems with 960 drives on them and certainly as we start putting less drives on them, they are going to be even more cost, so I expect to know kind of no hitch in the take up as we did a little bit in the early stages as would 13% in the first quarter that we had a 12% or so. In the first quarter we had the products out there, I think as we put systems out of that size customers really want to kick the tires but they’ve been out there a long time, have to hit in the lower end product of this line, if we taken up immediately from customers. We gave those figures once, I don’t want to talk about, the new figure I gave which is a real figure that’s across the entire line that we shipped in all 2005, the average churn price was – it was bit over 60, so that I could give you a degree and size, other than that I am not going to comment on which size we are shipping and not.

A - Tony Takazawa

Thanks Aaron, next question please.


Toni Sacconaghi of Sanford Bernstein, you may ask your question.

Q - Justin

Hi, its Justin for Toni, I just have a question about the your outlook and your EPS guidance sort of implies gross or operating margin expansion about 150 basis points year-on-year on 16% revenue growth, this year you did 300 basis points on 17% revenue growth, throwing the fact that you’ve recently announced a layoff and that there should be some benefit from that, just wondering if you could give us some more color around why you don’t expect a little bit more operating leverage?

A - Joseph Tucci

First I would really like to answer that but first, I am not picking on you, but you know this is not a layoff, this is absolutely the rebalancing, we have given 100% of those record stack immediately to, as I’ve said the sales group which is sales and pre-sales and to our development organization to hire, so as we eliminate we will be hiring immediately. So this really isn’t any kind of reduction in force, this is truly getting some of the blow out at the middle management and this is truly getting some of the under achievers out of the company and we wanted to replace in areas to clearly drive integration, innovation and growth but that’s maybe a little sensitive.

Q - Justin

No. I understood but the question still stands that way.

A - Joseph Tucci

Let me – I will turn it over to Will, I decided to say that. Sorry.

A - William Tauber

Let me address this way Justin - first of all our focus is on operating margin and we said operating margins continue to increase our target its beginning to cross 20% I didn’t say who what and clearly that is something we are very focused on. If you look at the overall increase in revenues at the high end of the range we are looking at the 17% increase there, if you go down to EPS line we’re 25% so you know we still have you know quite a bit of leverage left in the model and you know how we do on that during the course of the year we will wait and see, we are obviously very sensitive to that as you are and we are very focused on it but you know we think it’s appropriate outlook for right now and as we get deeper into the year we will update you.

Q - Justin

Alright thanks.

A - Tony Takazawa

Thanks Justin, next question please Shirley.


Joel Wagonfeld of First Albany Corp.

Q - Joel Wagonfeld

Thank you, question on DMX-3, if you can give us any color around the volume of backlog you mentioned and also why mix would have had a negative impact sequentially on gross margin given the strength particularly at the high end of the DMX-3? Thanks.

A - Joseph Tucci

Joe, on the backlog question we don’t really talk about what the number – numerical backlog is but we have just - we did have as I said we sold out of the DMX-3 and then we have a nice backlog there going into Q1. In terms of the mix, the mix really came out of you know some of the changes in the services business and so you know really wasn’t related to either changes in the product side or in the software side, we are really in 25 basis points in that.

A - Tony Takazawa

Thanks, next question please.


Shebly Seyrafi of Kaufman Brothers, you may ask your question.

Q - Shebly Seyrafi

Yes, thank you very much. So you talked about after this recent headcount reduction actions, you are going to go back to hiring again, compared to the 16% revenue growth that you are basically forecasting for 2006, what kind of headcount growth do you expect to achieve this year?

A - Joseph Tucci

Shebly, that’s not a figure that we really give out, it gets complicated with acquisitions and, where we put our people so in terms of a metric around headcount growth we will end up with more people at EMC at the end of 2006 than we have at the end of 2005 that I assure you independent of any acquisitions but I am not going to give you a headcount growth this time.

A - Tony Takazawa

Thanks Shebly, next question please.


Brian Freed, Morgan Keegan & Company, you may ask your question.

Q - Brian Freed

Thanks. I read your recent document on Goggle desktop relationship announcement did you comment on how this fits into your overall content management strategy and also how you guys there are looking to address the Microsoft’s share points product in light of this partnership?

A - Howard Elias

This is Howard. So the announcement was really related to Federated Search and as you probably know our documents from products today allows search across its own repository but also across multiple repositories in a federated way. And what we have now just done is extended that to the Goggle platform and the Goggle desktop to include that so you can do now sort of a unified enterprise search across those multiple repositories so it really continues to extend and expand the RILM strategy in the enterprise space.

Q - Brian Freed

Then how do you look to address share points?

A - Howard Elias

In share point we actually have the integration where we can again go import back and forth between office and share point and enterprise content management, as you know share point is a tool for sort of the workgroup space and documents in this really enterprise content management and we do have the integration capability with SharePoint today.

A - Tony Takazawa

Thanks Brian, next question please.


Ben Reitzes from UBS, you ask your question.

Q - Ben Reitzes

Yeah good morning, thanks. Joe and Bill, services were little below our expectations and that had deepened our view the past few quarters, can you just talk about what is happening there, it seems like you obviously made up in software in CLARiiON and other places but just your views for services and how we should look at maybe differs in the backlog going forward and what that does for growth?

A - William Tauber

Ben it’s Will. You can see that from our deferred revenues they were up considerably year-on-year they are up about 20% year-on-year, up 100 million quarter-on-quarter so we had a very good quarter in the service side, just some of it dipped into deferred versus in the income statement, so bookings were strong as I said, defers were up, we continue to hire aggressively in that space, we are delivering a lot of value to our costumers to our services organization, we are going to continue to do that.

A - Tony Takazawa

Thanks Ben, next question please.


Laura Conigliaro of Goldman Sachs, you may ask your question.

Q Laura Conigliaro

Yes thanks. Given the tail wins created by your upcoming product cycle which starts on Thursday and the fact that you seeing very optimistic about storage in general and the fact that you’ve made a few comments suggesting that some economic environments that have been dragging are picking up. And then of course you deferred revenue, which you just referred to. Either why shouldn’t you be able to grow at more than two times the industry level which I guess the last time you commented on you said was 7% on an organic basis or why shouldn’t you think that the industry level should be a little bit higher and you should be able to grow say two times that kind of level and also can you clarify how much of the revenue in your ’06 revenue number is from acquisition?

A - Joseph Tucci

I now believe Laura that you know I said 7 or 8 and I believe and I said probably closer to seven and now I absolutely believe the eight number. So as you’ve seen our guidance we expect to grow twice as fast as the eight and of course you would like us to do more and we are going to attempt to do that. One of our ways of doing that I think if you looked at our productivity numbers for our sales. They are nothing short of excellent. And this was the way of getting more resources in the sales and hopefully if we file the resources and get them up to speed fast we can drive upside. So that’s certainly what we are going to do, obviously in our range of guidance we gave you some of that upside in through the year. So we are quite bullish and I do believe that the total mark we categorized now, as ILM will be probably north of what it was last year. So it came in pretty close to eight last year and we are seeing a solid eight right now, that’s despite the fact that we probably would loose the point concurrency. So as I was saying in real terms the market accelerated from 8 to 9, so we’re pretty bullish and we are going to go after some of that upside we gave you a little bit of it today. And that’s why I get a little bit touchy when people refer to it as a layoff, it really is rebalancing, I’m trying to get more people out there on the street and rather than only drive productivity which obviously, you always continue to drive the last distance by getting more of productive sales for example. Bill, do you want to handle that?

A - William Tauber

Yeah in terms of what’s patent to the plan Laura, is we closed on Captiva, last day of the year. So that’s a little bit right around $100 million of revenue that’s coming in, if you want bits of pieces but a hundred million dollars is good number to use.

A - Tony Takazawa

Thanks Laura, next question please.


Bill Shope of J P Morgan, you may ask your question

Q - Bill Shope

Ok great thanks. Can you give us some of the key reasons behind the supply shortage for DMX3 other than obviously strong demand where the component or manufacturing related and can you give us an idea when you sold out of the products, if we can understand how many weekend sales you might have left on the table?

A - William Tauber

This is Will. You know we have a hockey stick, right. We sold out of the product late in the quarter. We forecasted how many we are going to sell, how many we are going to make and obviously the demand team went over there, there wasn’t any particular component supply as you, its just a question of, you’ve got to take stab when you don’t have a lot of history as to which you are going to sell in that product. We actually over achieved both on the manufacturing side our original plans but we super overachieved on the sales side so we are very pleased with the update.

Q - Bill Shope

Getting you back on track with demand and supply, so far?

A - Joseph Tucci

Yeah. We do not see any constraints on the supply side right now in anything that we are touching so we are okay there.

Q - Bill Shope

Right, thanks a lot.

A -Joseph Tucci

Thank you Bill. Next question please.


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

Q - Harry Blount

Thanks guys. You mentioned that 12 acquisitions and obviously one of the impacts of that is that you tend to get a silent organization that takes a while for the sales force productivity to gel and perhaps the actions you took here recently is in move to knock down some of those silos but it’s focusing on software particular, can you give us a sense of what kind of productivity progression you guys have seen over the last year or so as the software portfolio has matured in terms of the sales force being able to either sell multiple products across multiple categories or the average deal size or some just general sense of how you are progressing on that front?

A -Joseph Tucci

Well clearly if you look at the category, which we now lump BURA, which is backup, recovery and archives, you know that market is 7-8% growth from what I see in ITC and we did 27. That is happening absolutely because we are getting leverage from what would be the traditionally EMC sales force. And we are aligning these organizations and specializing in creating a great go to market model. I believe the same thing is true in Documentum, I think content management business is up Top 10, we were 21, more than twice as fast. So I think, we are absolutely doing the right things and Harry, you are absolutely right, one of the things we are doing is getting to this as we bring these things closer together and get better alignment and better go to market tactics and cooperation and plans and everything else that goes around these integrations we find that there are levels of management we could take out, and as you take out one manager you could put in three sales guys or two developers to drive growth and innovation and that’s what this whole move was about. So you hit it right on the head.

Q - Harry Blount

But Joe I was focusing more on kind of the cross category sales in terms of, are you able to see one organization starting to sell multiple products I am trying to get a sense of what kind of progression we are seeing there in terms of productivity either on a dollar basis or a product basis?

A -Joseph Tucci

Well, if you take a look at the EMC traditional sales force, following content management is in the ILM stack but they need help. So right there David go, get their partners in Documentum, right and they would work together they found of course Documentum finds it, they could bring in the initiative to work both ways. When you talk about, say something as simple and closer as Networker, our guys obviously go, go a lot further before they have to call and help and our traditional guys. So, each of those areas of the technology stacks which we call ILM has different levels of specialization around it, it’s a complex model but its really working a while in getting a foothold and as the whole thing that we dedicated our kickoffs that was in what we call Segmentation, Specialization and Alignment. And I am sure you guys know a lot about how you go to market, those are the three key areas and that’s where we are really focused on and we think we got a great model and certainly its the best model we have had over the last couple of years in terms of getting Synergies across these companies.

A - Tony Takazawa

Thanks Harry, next question please.


Tom Curlin, RBC capital, you may ask your question.

Q - Tom Curlin

Good morning. Not that I am a proponent of this approach but I’ve had a few clients ask me about the potential of spinning out VMware, just given evaluation that that entity could command on an standalone basis. Can you just comment on any scenario where that would make sense for guys and just also on if not maybe run through again, how that keys into the long term Software strategy?

A -Joseph Tucci

Well two sides, first of all, without a doubt, one of the hardest areas in all of IT, both in the data centers and as far as that’s concerned, you need to distribute it, architectures has been going to virtualization of that typical resource. And that happens in multiple layers, right, I mean, so as you saw from the InfoWorld awards, I mean what we are doing in existence importantly, what we are doing right synergies and forth so EMC is going to have a collection of virtualization that is, I think is more powerful together than it has suffered. We run VMware at a highest standards of openness. Even our competitors, even our most staunch competitors are giving us great accolades and we are doing exactly as we said do, we give absolutely free and open access even to our major competitors that use VMware software which makes it a little bit different but we talk about business continuance and other areas that are very important to the ILM stack, I mean, this is a phenomenal asset and I think, overtime it will be, it’s in great hands and we don’t have plans of divesting it.

Q - Tom Curlin

Thank you very much

A - Tony Takazawa

Thanks Tom, next question please.


Kevin Hunt with Thomas Weisel Partners, you may ask you the question.

Q - Kevin Hunt

Hi thank you, I wonder if you can comment on the competitive environment and specifically IBM on its call, it was talking about aggressive pricing in the storage market which based on the MRs and the Nero’s doesn’t seem like it’s really should be the case, and then also maybe you can touch on the ability to sort of, go back to regaining shares with this new product launch upcoming here?

A -Joseph Tucci

Hi Kevin, I don’t know, I mean, lets us face it, I mean, the market out there, I think, in a whole lot of segments by the way, its competitive, it always has and always will be and, let me give you my basic underline fear I have, and that’s that any big organization, whether its HP or whether its IBM whether its EMC or anybody else has the greatest asset of probably their installed base. And I will submit to you that any company as an install base is a section of that install base, alright a piece of that installed base and it is a sizeable piece of that install base, but it really ends up being very loyal and they don’t even wait for your product cycle, so what happens is you know as you have a product cycle that royal base that’s been waiting awhile, this was especially true if you refreshes are slow, now we have been refreshing so fast that we see this happening continuously so when an HP refreshes and gets a pickup you know you get to do these market shares over the long-term, they have a piece of very loyal base that sitting there waiting for them, and when they come out with a better product they buy it, and it is the same thing with IBM, and we also have a loyal base too and of course it is 50s figure base that’s that is not as loyal, right which is more a progress, a more competitive so you play this game at overtime, we’ve got a great product plan family, we’ve fixed everything that the customers have wanted for years, they wanted cash, they now have it, they wanted the ability to move from one system to the other as you know in the old DMX line, we had a forecast to make X number 1000s and X number 2000s X number 3000s now it’s a new line up as you will see, it’s a little bit away but as you see you start with one model and you grow, we don’t have to if the inventory, any particular model of the DMX3 line, it is just adding components seamlessly so you can go from a smaller system all the way up to the system which you have over 2000 drives as we said before, so they are 100% so it’s a very competitive line, it’s the only truly scalable line like that and I think we are going to do just great with it and of course as you get multiple tiers of storage inside that line we think we are going to actually get some significant growth so we are very comfortable and I hear these market share things but when I think when you look at the high end storage, there is three companies I don’t think you are going to see a lot of market things over big period of time and we still are clearly the leader and I do believe we will be the key grower in 2006. Sorry for the long answer.

A - Tony Takazawa

Thanks Kevin, we have time for one more question.


Our last question comes from Clay Sumner of Friedman, Billings, Ramsey & Co.

Q - Clay Sumner

Thanks very much. Gentlemen it looks like the software drag rate for CLARiiON if you will sell substantially this quarter and hardware maintenance growth also seemed to slowdown, can you just help us understand why and is that somehow related to the new CLARiiON products that people expect to come soon?

A - William Tauber

Not so much, Clay, as I mentioned in my comments, we saw sort of strongest performance in CLARiiON at the lowest end which has the least amount of software content so you know that’s one of the factors there, in terms of the mean, the mean it comes around a little bit sort of every quarter so I wouldn’t derive any conclusions from that.

Q - Clay Sumner

Good to hear from you again.

A - Tony Takazawa

Thanks Clay and we’ll turn the call over to Joe for few last comments.

Joseph Tucci, Chairman, CEO

I just wanted to thank everybody for joining us today. I think the messages are clear, I think we are very well positioned with ILM strategy, we are on two new exciting strategies which complement and augment our ILM strategy with virtualization capabilities and our model based management capabilities, we see a robust economy for 2006 we have a larger and best trained sales forces we ever had and we will – I am expecting to have a good year and we will chase upside all year, I assure you. Thank you very much.

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