EMC Corporation Q4 2007 Earnings Call Transcript 

| About: Dell Technologies (DVMT)

EMC Corporation (EMC) Q4 2007 Earnings Call January 29, 2008 8:30 AM ET

Executives 

Tony Takazawa – VP Investor Relations

David Goulden – Executive VP, CFO

Joe Tucci – Chairman, President, CEO 

Analysts 

Brent Bracelin – Pacific Crest

Keith Bachman – Bank of Montreal

Paul Mansky – Citigroup

Shebly Seyrafi – Caris

David Bailey – Goldman Sachs

Bill Shope – J.P. Morgan

Kaushik Roy – Pacific Growth

Chris Whitmore – Deutsche Bank

Katie Huberty – Morgan Stanley

Brian Freed – Morgan, Keegan

Bill Fearnley – Ftn Midwest

Tom Curlin – RBC 

Presentation 

Operator 

Welcome to the EMC fourth quarter earnings conference call.  Parties will be in a listen only mode until the question and answer session of today’s conference.  At that time you can press star one to ask a question.  This conference is being recorded.  If you have any objections you may disconnect.  I’d like to introduce your speaker, Mr. Tony Takazawa. 

Tony Takazawa 

Thank you Julie, good morning to everyone.  Welcome to EMC’s call to discuss our financial results for the fourth quarter and the full year of 2007.  Today we are joined by Joe Tucci, EMC Chairman, President and CEO, David Goulden, EMC Executive Vice President and CFO.  David will provide a few comments about the results that we released this morning and he will highlight some of EMC’s activities this quarter.  Joe will then spend some time discussing his market outlook, his execution of the strategy and how EMC is positioned in the marketplace.  After the prepared remarks, we will then open up the line to take your questions. 

I would like to point out that we will be highlighting various non GAAP numbers in today’s presentation.  Reconciliation of our non GAAP comments to our GAAP results can be found in the disclosure today in our press release, supplemental schedules and the slides that accompany our presentation.  All of these are available for download within the investor relations section of emc.com.  In addition, we are providing a full eight quarters of GAAP and non GAAP information to help you reconcile EMC’s consolidated results with the EMC information infrastructure business and the results of VM Ware within EMC.  Last quarter, we received very positive feedback from you regarding these schedules and I am pleased to say that we are increasing the transparency of this disclosure.  

[Unintelligible] the call this morning will contain forward looking statements.  The information concerning factors that could cause actual results to differ can be found in EMC’s filings with the US Securities and Exchange Commission.  Lastly, we will note that an archive of today’s presentation will be available following the call on emc.com.  With that, it is now my pleasure to introduce David Goulden.  David. 

David Goulden 

Thanks Tony, good morning and thank you for joining us today.  I’m pleased to report that EMC demonstrated a very strong performance across the board in the fourth quarter and in 2007 and we’re well positioned for continued success as we enter 2008.  Had solid execution and as a result we exceeded our growth, profitability and free cash flow goals for the year.  

For today’s call you should all have the consolidated results from our press release in front of you.  I’m not going to take time to repeat those now.  Instead, I’m going to start by highlighting some results that we know you’re very interested in, namely the results from our EMC information infrastructure business.  This business is comprised of our information storage, content management and RSA security businesses.  I will then make some comments about our consolidated results which will also include VM Ware. 

We’re starting with the EMC information infrastructure business results.  Q4 revenues were $3.4 billion, up 15% and non GAAP earnings per share were $0.26, up 23%.  Q4 operating cash flow was $895 million, up 62% and free cash flow was $688 million, up 98% from Q4 last year.  For the full year, revenues were $11.9 billion, up 14% and non GAAP earnings per share was $0.79, up 20%.  Full year operating cash flow was $2.5 billion, up 43% and free cash flow was $1.8 billion, up 86% from last year. 

We are very pleased with these cash flow results in 2007 and you’ll note that free cash flow was approximately, was a little over $100 million higher than our non GAAP net income.  In Q4, the information infrastructure non GAAP operating margin was 18.3%, up sequentially and flat year on year.  During Q4 we made investments in some startup businesses, such as Mozy, we hired sales people for our BRIC and other high growth countries and for our commercial business and we paid out sales force compensation accelerated tied to our strong full year revenue results.  As a result, SG&A expense grew faster than revenue sequentially from Q3 to Q4.   

Now I’d like to cover the revenue results from each of our information infrastructure business segments.  First, let’s take a look at our information storage business.  In Q4, information storage revenues were up a very solid 14% over Q4 last year.  We saw our storage business accelerate throughout the course of the year reflecting strong momentum.  For the year, information storage revenues were up 10% over 2006, growing faster than the market and representing share gains.  In the high end, Symmetrix revenues in Q4 were very strong, up 12% over Q4 last year and up 3% for the full year.  Continued to be very pleased with the demand we’re seeing for our DMX4 system, which is the highest performance, most cost effective, secure, energy efficient and easy to use high end array on the market today. 

Turning to the mid range, Clariion revenues were up 15% over Q4 last year and up 18% for the full year.  We achieved strong share gains in the mid tier storage market this year, driven by the strength of our product portfolio that spans across this market segments.  We were also seeing that customers wanted choice across fibre channel, iSCSI and ISP connectivity in the mid and low tier.  EMC’s extremely well positioned here with our Clariion CX3 dual protocol systems which offer both fibre channel and iSCSI, with our NS20 and NS40 multi-protocol systems which offer fibre channel iSCSI and NAS and our new AX4 comes in either fibre channel or iSCSI configurations. 

Our breadth of choice is paying off here in a number of ways.  For example, in Q4 over 50% of our Clariion CX3 unit sales were again dual protocol, fibre channel and iSCSI systems.  In addition, our NAS business had a great Q4 headlined by the Celerra NS20 products which had excellent results in its first full quarter of availability.  The NS20 is shaping up to be one of the fastest growing products we’ve ever brought to market.  This product is making a real impact on the market and is very popular with customers in channel faunas for its ease of use.  In fact, a couple weeks ago, I personally installed one in less than 15 minutes. 

In addition to strong storage systems growth, there are several important trends that are also driving growth in our information storage software products.  Demand for backup and recovery solutions continues to grow and revenues from our [abora] software which includes our Avamar and network of products were up double digits for the quarter and for the year.  Additionally, the trend towards backup to disk continues to gain momentum, while backup to tape is declining.  A recent survey indicated that the number of customers offloading primary storage to tape will decline from 60-70% today down to 30-35% in 2009. 

Other trends in storage include demand for file based commercialization and model based resource management.  Our Rainfinity and Smart Software products both grew double digits this year as a result.  I’d also like to comment on the progress we’ve made in building out our storage go to market capabilities.  As you know, we’ve been putting a lot of focus and investment in our commercial business and I’m pleased to say that our storage product sales to commercial customers hit a $2 billion run rate this quarter and revenues were up 25% this year.  It’s great to see our efforts paying off. 

In Q4, Dell represented 12.6% of EMC total revenues.  Within this total, Dell was about one-third of Clariion revenues and the balance came from a broad mix of EMC’s information storage, content management, security and VM Ware products. 

As you’ve seen from our recent announcements, we continue to raise the bar and entered into new storage markets in the first few weeks of 2008.  We were the first information storage provider to introduce enterprise class flash drive technology into high end systems in addition to several other new capabilities like virtual provisioning.  Our technology innovation and leadership for the high end market continues to outpace our competitors. 

We introduced our new Clariion AX4 network storage system.  This is a highly flexible and scalable SAN system for small and medium businesses that supports iSCSI or fibre channel SAN and works especially well in VM Ware environments.  We entered the consumer storage market with our EMC Lifeline software that we sell through OEM partners.  This powerful new storage software is designed for the consumer and server market and helps people centralize all their digital files, photos, videos, music, business records, safely and securely, all in one place. 

In October, we acquired Berkeley Data Systems, more commonly known as Mozy, which is an online backup and recovery service for desktops and laptops from remote Windows servers and is very popular with consumers.  Last week, we introduced our new Mozy enterprise service designed to help large enterprise customers.  We’re very excited about this market growth potential. 

EMC has the broadest and most integrated portfolio of information storage products and solutions in the marketplace.  Our portfolio now expands across the consumer, mid tier and high end markets and our products are known as the most reliable in the industry and supported by the best service organizations.  We will continue to expand our storage portfolio this year, bringing out new products faster than anyone else whilst moving strategically up and down markets. 

Turning now to our content management and archiving business, we had strong growth in Q4 and revenues were up 17% over Q4 last year.  Within this, license revenues were up 8% and maintenance and professional services revenues were up 25% over Q4 last year.  Last quarter, we expressed confidence in our pipeline of business, in enhancements we made to our go to market model and in the overall competitiveness of our D6 product portfolio.  These factors, along with our partnerships with several of the leading global systems integrators drove our strong finish to 2007. 

For the year, content management and archiving revenues were up 13% over 2006, after a sluggish start, we saw this business accelerate through the end of the year heading into 2008 with good momentum.  It continues to be an avalanche of unstructured data being created by businesses across every vertical market and they’re looking for scalable solutions to effectively manage their huge volumes of content.  At the same time, customers are looking to improve their business efficiencies, increase productivity and meet compliance and risk mitigation requirements. 

EMC is the only content management provider that offers customers a comprehensive unified content management platform to manage all types of content across the enterprise within a common information infrastructure.  Our content management and archiving business has the right products and the right partners to achieve continued growth and share gains this year. 

Now let me turn to the RSA information security business.  Revenues in Q4 were up 30% over last year and up 24% for the full year on a comparable basis.  We’ve seen consistent strong results from this business throughout the year.  EMC is the only information infrastructure vendor with a dedicated security division and we have an unparalleled breadth of solutions that address many areas of risk across the data center. 

Our dedicated focus on information centric security and our ability to provide holistic solutions to risk management are very strong competitive advantages.  Information is a top priority to customers and this is driving information security [story] is a top priority for customers and this is driving strong demand for our information discovery and classification services and our identity [surance] data security and security information and event management products. 

Over the course of the year, we’ve strengthened our security portfolio through acquisitions and via synergies with EMC products.  The addition our RSA business is benefited from EMC’s strong alliance partner network.  Looking ahead, we believe the market demand for information centric security solutions will continue to be strong and we’re well positioned for future share gains in the security markets we serve. 

An important factor in the success of our EMC information infrastructure business is our services organization which spans across our information storage, content management and RSA security businesses.  Just to give you an idea of how important this organization is to our customers, the services revenues grew 19% in 2007 to $3.4 billion.  Over 11,000 information infrastructure professionals work in this organization.  Approximately half of our information infrastructure services revenue and the fastest growing part is generated by our professional services organization that is helping customers lower their IT costs, meet service levels, protect their information and gain maximum value from the use of our products. 

We are seeing demand for our professional services business continue to grow.  Several of our recent engagements have been generated by our expertise in compliance, risk assessment and virtualization deployments.  We expect these type of projects to be a strong focus for our service organization in the coming year and a strong catalyst for sales of EMC information infrastructure solutions. 

With all this demand, we’ve made investments in our integrated service delivery model and made acquisitions to expand our expertise and services capabilities.  We are very proud of EMC’s services and believe they’re an important competitive advantage.  No one else has the number of people nor the level of expertise to match EMC’s information infrastructure services capabilities. 

Looking back at 2007, we achieved solid growth and market share gains in each of our business units.  We grew revenues and information storage 10%, [unintelligible] and archiving 13%, RSA security 24%, all clearly faster than the market growth rates and representing share gains in all three businesses.  We believe these growth rates and share gains reflect the success of our strategy to deliver solutions sets to a differentiated from both our traditional competitors and from small start ups. 

Looking ahead, we expect our core markets to continue to show good growth driven by the explosive growth of information.  In 2007, IDC estimated the amount of digital information created was growing at nearly 60% per annum.  This growth rate might actually tick up a bit when they provide an update to their projections this quarter.  The important point is that this information explosion is driving the need for new technologies and new approaches for customers trying to manage it all and clearly some of the major areas where customers need help are storage, content management and security. 

Most of these drivers, we expect the market to readdress to again show good growth in 2008.  Taking into account the uncertain economic environment, we currently anticipate growth in information storage of about 5%, content management of about 8% and security of about 16%.  Combined, this is a total addressable market growth rate of approximately 7% in 2008. 

Given the dedicated focus we have on these markets, the strength of our offerings and the share gains we achieved in 2007, we plan to again outpace the market this year.  We expect EMC information infrastructure revenues to grow around 9% to approximately $13 billion this year and we expect EMC information infrastructure non GAAP EPS to grow around 11% to approximately $0.88.   

I will now turn to a few highlights of EMC’s consolidated results.  Total fourth quarter revenues were a record $3.8 billion, up 19% from Q4 last year and included approximately 320 basis points from currency.  Our non GAAP earnings per share were $0.30, up 28% and included $0.04 from VM Ware. 

For the full year, EMC consolidated 2007 revenues were a record $13.2 billion, up 19% over 2006 and included approximately 230 basis points from currency.  And EMC consolidated non GAAP earnings per share were $0.91, up 26% and included $0.12 from VM Ware.  So you can get a sense of the impact of VM Ware, I’ve broken out the VM Ware results as recognized within EMC on the slide as well.  As you can see, they had a great quarter and a great 2007. 

As VM Ware said last night, they expect revenues to grow approximately 50% in 2008.  Within EMC, we expect VM Ware non GAAP earnings per share to grow around 33% to approximately $0.16.  The difference in these growth rates is primarily due to the accounting for the minority interest in VM Ware not owned by EMC.   

VM Ware virtual infrastructure is having a tremendous impact on the IT marketplace.  VM Ware’s growth is being fueled by the rapid expansion of customers using VM Ware’s products and production environments.  We are very encouraged that we continue to see VM Ware virtual infrastructure as a key driver for network [story] deployments.  In fact, a recent survey estimates the penetration of network storage attached to servers in the enterprise will grow from 48% in 2007 to 77% in 2009, driven in large part by server virtualization.  This bodes well for EMC’s business in 2008.   

Turning now to a few other consolidated income statement and balance sheet items.  I’m pleased to report we had double digit growth in all four of our major geographies, North America, India, APJ and Latin America in the fourth quarter and for the full year 2007.  There are a few key factors driving this balanced growth that also position us well for continued success. 

First, we’ve focused this year on investing our worldwide presence.  We now do business in over 50 countries and revenue from our international operations was up 23% in the fourth quarter and up 22% for the full year.  Within this, I’d like to note the revenues from out higher growth countries were at $1 billion run rate in Q4.  We defined our high growth countries as the four traditional BRIC countries plus another 13 emerging countries where we have a fast growing presence.   

These 13 countries are in Southeast Asia, Latin America, Eastern Europe and the Middle East and Africa.  We’ve established centers of excellence in Russia, China, India and Israel.  These centers both expand our local presence and help us leverage the intellectual capital and economics available within these regions.  We are excited about EMC’s future opportunities in these emerging markets and we are only just starting to recognize the return for the investments we are making. 

Secondly, we continue to expand our go to market model.  In addition to our extremely strong [unintelligible] sales force, we’ve focused in the last 12 months on strengthening our channel relationships and our velocity channel partner program is stronger than ever.  And it’s great to see we’ve been recognized for our efforts.  We were ranked number one [unintelligible] businesses 2007 annual report card survey for network storage and storage management software.  And in November we were named CDW’s partner of the year. 

And third, we’ve expanded and strengthened our strategic partnerships and alliances.  Partner with the top global systems integrators and outsourcers, such as EDS [Excensia] and [We Pro] and see tremendous opportunity to leverage these relationships with customers around the world, including the emerging markets. 

While investing in our worldwide footprint, expanding our sales distribution and strengthening our strategic partnerships, we’ve built a strong foundation for continued success in 2008.   

Now turning to a few balance sheet metrics of cash flow results.  EMC consolidated cash flow from operating activities in Q4 was up 50% from Q4 last year and for the full year it was up 46%, both excellent results.  A few balance sheet metrics that impacted Q4 operating cash flow include inventory churns which were 7.7, up from 7.0 in Q4 last year and DSOs which were 55 days up 1 day from Q3 mainly due to VM Ware.  We continue to focus on driving DSOs closer to 50 days. 

I am very happy to say we are reporting excellent consolidated free cash flow results for the quarter and for the year.  Consolidated Q4 free cash flow was $712 million, up 78% from Q4 last year and for the full year, EMC consolidated free cash flow was approximately $2.2 billion, up 79%.  We are very pleased with these strong cash flow results. 

An important way we return value to shareholders is through our use of cash.  In Q4, we spent $351 million to repurchased approximately 16 million shares.  For the year 2007, we returned a total of $1.45 billion to shareholders by repurchasing 89 million shares.  In Q1 ’08, we plan to deploy $550 million towards our share repurchase, consistent with what we told you in October and looking ahead, our Board is currently considering an increase in our repurchase authorization. 

In Q4, we spent $183 million on acquisitions across our four business units and for the year we spent $692 million on acquisitions.  Acquisitions helped EMC in several and important ways.  They extend the reach of our business with new products and put us into adjacent markets.  They improve the value of our technology platforms for customers and they strengthen our competitive edge.  In 2008 we’ll continue to focus on smaller tuck in acquisitions.   

We ended 2007 with cash and investments of approximately $8 billion.  $3.9 billion of this is held in our overseas operations and in VM Ware.  Our investment portfolio is in good shape and managed conservatively.  We have no collateralized debt obligations, no collateralized loan obligations and no structured investment vehicles in our investment portfolio. 

Now just a few other items I’d like to mention that impacted our consolidated income statement that you’ll want to keep in mind in your models.  In Q4, our consolidated GAAP tax rate was 13.2% and for year it was 18.4%.  For the year excluding onetime items, our tax rate was 19.4%.  Over the course of the year, we made enhancements to our international tax structure and improved the profitability of our international operations. 

These improvements caused our actual 2007 tax rate to come in lower than our earlier projections of approximately 22%.  In 2008, we expect the EMC consolidated GAAP tax rate to be around 20% and the non GAAP tax rate to be around 22%. 

The next two items are very important and are not factored in to most of the models that we have seen.  EMC consolidated stock based compensation expense for 2007 was $0.13 a share.  In 2008, we expect this to be $0.18 a share, an increase of $0.05 on the year.  The majority of this is due to VM Ware.  Amortization of intangibles for 2007 was $0.06 per share.  In 2008, we expect this to be $0.08, an increase of $0.02 year on year. The majority of this increase is due to timing of amortization for RSA intangibles. 

And finally this quarter, we took a pretax restructuring and IP R&D charge of $35 million.  Approximately $22 million of this was for an increase in the severance expense associated with our Q4 ’06 One EMC plan.  This restructuring is almost complete with just a small piece of finalizing Q1.  And the remainder of the charge is rebalancing actions that are underway and will be completed in early 2008. 

In summary, our consolidated EMC performance in 2007 was very solid and we’re very pleased with our company’s accomplishments this year.  Now I will finish my remarks with some more comments about our expectations for 2008, this time on a consolidated basis. 

As one of the most trusted technology partners in IT, we believe EMC is well positioned for continued success.  We expect consolidated EMC revenues to be approximately $15 billion and our non GAAP earnings per share to be approximately $1.04.  There are a number of reasons why we’ll continue to be successful this year and beyond.  We are aligned with a key IT trends and priorities.  Our business is focused on the right growth markets.  We’re successfully expanding our presence with commercial customers and in high growth countries.  We’re entering some important large Greenfield markets.  Our product portfolio is stronger than it’s ever been and we’re focused on driving efficiencies across the business. 

When you add all this together, we have a very strong and diversified business model.  The model gives us advantages in the marketplace where our traditional competitors do not have the focus and expertise and startups do not have the scale.  Our operational game plan is very much in place and our goal is to continue to gain share and deliver solid results in 2008.  With that, I’ll turn the call over to Joe. 

Joe Tucci 

Thank you David, I would like to add my welcome and thanks to all of you who have joined today’s conference call.  I am very pleased with EMC’s execution and performance in Q4 and throughout 2007.  We said coming into the year that we would make 2007 our breakout year and I believe it was in several dimensions.   

Let me take a quick look at the four key initiatives that underpinned our success.  First and foremost was our laser focus on exceeding the goals which we set for ourselves at the beginning of the year.  We achieved full year’s revenues of $13.23 billion against a goal of $12.75 billion.  Excluding the onetime gain on the sale of VM Ware shares to CISCO, we achieved adjusted GAAP earnings per share of $0.72 against a goal of $0.64 and we achieved free cash flow per share of $1.02 against a goal of $0.71 for the year. 

Very importantly, these results were delivered very consistently, quarter upon quarter, demonstrating the robustness and power of our business model and strategy.  Second, we organized ourselves into four business units, storage, content management and security which collectively executed on our information infrastructure strategy and VM Ware which executes on its virtual infrastructure strategy.  We’ve made it easier for both the customers and investors to understand our strategy and distinctive value. 

Third, in the middle of the year, we will launch the very successful initial public offering of VM Ware.  This IPO clearly met its key goals of unlocking shareholder value and putting a brighter spotlight on VM Ware and the power of its virtual infrastructure strategy. 

And last, we launched our One EMC initiative.  A One EMC business model interlocked our storage, content management and security business units to help create rich information based solutions for our customers.  Synergy made EMC easier to do business with and helped drive our top line.  Our One EMC business model also provided for shared services and support that provided leverage to the bottom line. 

Obviously these accomplishments would not have happened without the commitment and sacrifices of all the people in EMC and VM Ware that they made throughout 2007.  I would like to publicly thank them for everything they did to make sure our customer’s experience was second to none. 

Now turning to 2008.  The economic environment will for sure be more challenging and more uncertain than it was in 2007.  Forecasts do point to global growth both in GDP terms and IT spending, so there will be opportunities for EMC to grow.  But as I look at 2008, I truly believe EMC has never been better positioned.   We have the best product line in our history and a very favorable product cycle.  Our proven go to market model is firmly in place and we have plans to hone it even more. 

Perhaps most important, EMC is well positioned in areas where IT spending will grow the fastest this year.  CIO survey after CIO survey point out that virtualization, storage, security and risk management, business continuity, compliance and energy efficiency are top ten spending priorities.  And again, this is where EMC is positioned and focused. 

So let’s dissect the statement I just made.  EMC has never been better positioned.  And in doing so I would like to answer a question that I have been asked quite a bit lately, it goes something like this: assuming there is a downturn this year, why is EMC better positioned now than it was back in the 2001-2002 downturn?  Now the answer is it’s night versus day. 

Looking back to 1999 and 2000, a significant portion of our revenues came from dot-com’s, new wave tel-co’s, e-business ventures, et cetera.  When the ’01-’02 downturn took place, almost all of these companies stopped buying from us.  In fact, a fairly large percentage disappeared altogether and much of this equipment came back in the market. 

In ’01-’02, we were still primarily only a high end storage company.  We sold a vast majority of our products in large developed countries.  Our pricing strategy was to price at a significant premium and with the downturn our ability to premium price was diminished.  To cap things up, our flagship product, the Symmetrix [five bup five] was at the end of its product cycle and help was quite a ways off.   

Fast forward to today, EMC in 2007.  Let’s start with a look at our storage lineup and strategy which is in the midst of the strongest product cycle EMC has ever had.  The new DMX4 began shipping four and a half months ago and is going strong.  Two weeks ago we announced the most comprehensive virtual provisioning capabilities in the market.  This will take [fin] provisioning to new heights.  We also have announced flash drives and new software to utilize them properly.  I truly believe flash drive technology will revolutionize the storage array industry over the next several years.  EMC was first here and we will lead this charge. 

CX3 is the most widely deployed mid tier platform in the world and a new innovative software we announced last July continues to provide strong market [menum].  We just launched our new dual protocol low end array DX4, it’s off to a very strong start and we will set the bar in the iSCSI storage market segment this year. 

I recently announced a unified storage product family that supports fibre channel SAN, iSCSI and NAS, the NS20 and NS40 is just plain white hot.  Q4 market second quarter in a row that we just sold out.  Look for us to extend this line up this year. 

I recently announced Centera gen 4, features lower storage costs and reduces power consumption by 67%.  The new Centera clearly helps customers meet their needs for archiving their important information securely and cost effectively with quick access.  2008 will mark EMC’s entry into the rapidly growing web 2.0 storage market.  In fact we have already GA’d an all new hardware system which has been shipped to a limited set of customers.  Look for us to launch a new OS for this system later this year and we will make a more of an expenses flash at that time. 

Finally, we announced at the recent consumer electronics show our first storage software solution called lifeline for the consumer soho markets.  First two partners here are I-Omega and Intel.  I think you will agree we have a very strong storage lineup in 2008, a very sharp contrast against 2001. 

Now turning to our content management archiving business unit which we didn’t even have in 2001-2002, here too we have a strong product lineup and a very favorable product cycle going for us.  Big news in 2008 in our content management business is the integration of document input management with business process management with document output management.  This will uniquely position EMC to handle a full life cycle interaction of information for our customers and their customers. 

On the input side, we are moving our solutions from high volume scanning to multi function capture.  Multi function capture supports capture via scanning, via faxing and from electronic forms.  This input is then processed by our new solar based documentum 6 or D6 platform as its better known, which has had very strong and a very broad market acceptance.  The robust D6 platform supports transactional workloads, supports the knowledge worker via the web, supports interactive customer experiences like rich media and assures compliance. 

Finally, the pending acquisition of Document Science will mark our entry into the multi channel document output management.  In other words, we will manage and personalize the output to print, to the web, to self service portals or to email.  Secret source here for our success is both the depth and completeness of our content management solutions. 

In our RSA security business, again another new business segment since 2002, we also have a strong 2008 product lineup and cycle going for us.  In 2008 we will launch the next generation of our authentication platform.  We will continue our focus on securing the information itself through additional encryption solutions and a robust centralized key management platform.  We will launch our data or loss prevention solution based on technology we obtained from our Tablus acquisition.  We will continue to help our customers prove compliance with our extremely successful envision products suite.   

You’ll hear more about the 2008 RSA products and plans at the RSA conference in San Francisco on April 7-11.  The RSA conference is the industry information security conference and this year over 18,000 people are expected to attend.  There will be more than 220 sessions and over 350 exhibits. 

But the real power of EMC’s information infrastructure comes to life when we blend these best of breed products from across our business units into solutions for our customers.  Our virtual infrastructure strategy called for storing the vast amounts of information that enterprises of all sizes generate everyday on a proper tier of storage, extremely reliably and very economically. 

Once this information is properly stored, we apply software technology to assure that this information is always available, to assure the information itself and the access to that information is secure, to assure compliance when the information is archived, organize and manage unstructured information so it becomes a true asset, help customers manage and get maximum utilization from our IT resources by applying a range of virtualization and resource management technologies. 

Also, key to our information infrastructure strategy is a broad set of services that helps our customers design, implement, manage and support their information infrastructure.  These solutions are delivered by our over 1,100 people service organization, by our all important partners who are the world’s leading service, systems integration and outsourcing companies. 

And now I want to add some comments on our global go to market initiatives as well as some of our other new avenues of opportunity for EMC in 2008 and beyond.  As David said, during 2007 we continued to build out our centers of excellence around the world.  Centers now exist in India, China, Russia and Israel.  In Q4 we opened up an integration center for Southeast Asia and Singapore.  We made these investments not only to draw upon the talent that exists in these regions but also to be closer to our customers in multiple ways in those fast growing parts of the world. 

2007, our BRIC plus 13 companies represented nearly $1 billion of revenue for us.  Both the markets and EMC’s growth rates here are strong and while we are pleased with the results of the investments we have made to date, we believe these markets represent an exceptional opportunity for us.  We are investing in sales and services resources to capture it. 

As we look further into 2008, we are also well positioned, we see our several Greenfield opportunities for EMC.  The SMB is the fastest growing segment of the information infrastructure market, we are now focused on it and we have new products which address the needs of customers in that segment of the market.  We will get to these customers ourselves and with our channel partners.  Our partner ecosystem is strong and getting stronger every day. 

The web 2.0 space is rapidly expanding and again we have new products to meet the opportunity.  We have the sales teams in place and thus we have the ability to get into another significant information infrastructure market where we have not played in the past.  Additionally, the introduction of our new consumer focus products such as lifeline and our SAS offering Mozy, we are building the ability to get to the consumer and soho markets.  These are also fast growing and large markets and we have not been part of our opportunity profile in the past. 

Any way you cut it, you can see we have many existing and new products and ways to attack the market in 2008 and we are well positioned and focused on success.  To demonstrate our focus and commitment to success in 2008, I would like to share with you the financial goals that the EMC Board of Directors approved for EMC management this year. 

Our revenue plan is to achieve $15 billion in sales and our non GAAP EPS is $1.04.  The Board plans to add a free cash flow per share metric at an upcoming meeting and these three goals will be published in our proxy filings this March.  With that, I would like to turn it over to Tony to moderate the Q&A portion of today’s call.  Tony. 

Tony Takazawa 

Thanks Joe.  Before we open up the line to questions, as usual, we ask you to try and limit yourselves to one question and that includes clarification.  That will enable us to take as many questions as possible.  We thank you all for your cooperation in this matter.  Julie, can we open up the lines for questions please? 

Question-and-Answer Session

Operator 

Thank you, at this time if you would like to ask a question, please press star then one on your touchtone phone.  Please un-mute your phone and record your name clearly when prompted.  Again, press star one if you have a question.  Our first question comes from Brent Bracelin, Pacific Crest, your line is open. 

Brent Bracelin – Pacific Crest 

Thank you, Joe, really wanted to ask first question around, Dell obviously, you had a very strong quarter but the Dell contribution did decline sequentially for the first time during what is seasonally a strong quarter and was flat year over year.  Why did you see the Dell contribution trend down and how should we think about that Dell contribution in 2008? 

Joe Tucci 

Brent, the real guts of the partnership we have with Dell, which we’ve extended and is a very important partnership through 2011 is based on the Clariion product family.  And as you can see that was still approximately one-third of our revenue.  We did consciously and Dell consciously, there are some other products that Dell used to sell where their margin profiles were lower and as they change their business model they would say less emphasis on products like Symmetrix, so in the core areas that we’re partnering on, we’re still very pleased and it’s still a very strategic relationship for us. 

Operator 

Our next question is from Keith Bachman, Bank of Montreal, your line is open. 

Keith Bachman – Bank of Montreal 

Hi guys, thank you, Joe I was just hoping you could talk a little bit about the cadence of orders relative to the macro backdrop and how you see the pipeline against traditional seasonal trends in the March quarter.  Thanks. 

Joe Tucci 

Keith, let me do it this way, I mean obviously we are stating in several different ways that this market is more uncertain.  We’re being very clear that we think there absolutely is going to be IT spending growth in 2008, however it will be a couple points less we believe right now than it was in 2007.  Today we haven’t seen much negativity happen in the market but obviously I think it’s prudent upon us to be cautious and it was some caution in our guidance and as we gave the guidance we’re factoring all the strength that we have in the underlying company and the relative unknown in the market and doing the best we can to give you a [unintelligible] but you know today we have not seen much on a downside to tell you the truth but again as we go forward I think being cautious is the order of the day. 

Operator 

We have a question from Paul Mansky, Citigroup, your line is open. 

Paul Mansky – Citigroup 

Hey Joe, thanks for taking my question,  I guess, within the context of your market share gain statements, relative to some of your larger competitors, and I know we could potentially put Dell in that category down at the lower end of the market, but I’m more specifically thinking HP, IBM, Sun, some of the legacy guys, they collectively retrenched around the bubble, they kind of took a step back from the storage market, but we very much see them looking to regain some of their IP content here recently [viak] was issuing internal development.  How do you see that competitive dynamic shaking out over the course of the upcoming year?  Do you see some competitors dropping off, others picking back up, just any type of color you could relate for us would be appreciative. 

Joe Tucci 

The investments here are immense, we’ve got tremendous benefit from what we call our One EMC initiative and ask you can see I think we did what we should do.  Number one is we delivered upside throughout the year and number two we invested a lot of that upside back into the business and I believe the game and storage business is going to be, you know it’s a very high investment area and one where, I mean customers don’t want to buy separate systems for [din] provisioning or de-duplication or spin down or a lot of these other techniques that are very important. 

So what we’re doing is we’re taking all those and building them into our core products, every one of those capabilities.  And the good news is everyone is either here now or will be here shortly and available for 2008.  So mostly what’s happening is you’re seeing one offs being bought and we’re developing some special products too [light] for the web 2.0, I just alluded to and for lifeline for the consumer.  But most of what we’re doing for our core market is building all those capabilities in.  So I still like the shape we’re in.   

Obviously it’s a big market, it’s got growth rates above the IT industry average and you’re going to get some competition and we’ve always had competition but you know we have the size, we’re going for $15 billion this year, we have the 11,000 service people, we’ve got 9,000 people in our selling and customer facing organization on that side.  So we’ve got a strong position and we’re going to continue to strengthen it.  We’ve got the balance sheet to do that both organically and through acquisitions and that’s where we’re going to play it.  So yeah it’s more competition but it’s the same competitors we’ve always had. 

Operator 

We have a question from Shebly Seyrafi, Caris, your line is open. 

Shebly Seyrafi – Caris 

Yes, thank you very much, so I noticed that in your seasonally strong calendar Q4 where you were up 16% sequentially in revenue, that your gross margin was basically flat on a percentage basis sequentially and that’s abnormal and usually you’re up close to 1% point sequentially, I’m wondering what happened and what you expect to achieve with your gross margin longer term as VM Ware and other software increases as a percentage of the mix, do you have any kind of targets over the next year or two?  Thanks. 

David Goulden 

Yeah, Shebly let me take this one.  We’re not going to give you gross margin targets, I think you can see that we’ve factored some offering leverage into the guidance which we gave you for 2008, particularly for the EMC infrastructure business.  But to answer the first part of your question, let me just kind of give you a flavor for what’s happening in gross margins and I think your comment was really to do with the gross margins for the EMC infrastructure business.  

What we saw happening sequentially, first of all we pointed out to you the investments that we made in the SG&A line, normally you’d expect leverage in the SG&A line in Q4 as well and we’ve invested out back into the business in the areas which I spoke about.  On gross margins what is happening is a couple of phenomenas inside EMC infrastructure.  The first is that product margins are improving and product margin improved sequentially and they improved year on year.  And what you’re seeing that as our professional services becomes a bigger piece of our services margin that has a slight headwind effect on services margins.  So the increase in product margins was slightly offset by reduction in services margins both sequentially and year on year.  

Operator 

We have a question from David Bailey, Goldman Sachs, your line is open. 

David Bailey – Goldman Sachs 

Yes, thank you very much and good morning.  Could you just give us a little more detail about where you expect to gain share, particularly in what areas and how much acquisitions will contribute to the 9% top line growth in your core business? 

Joe Tucci 

I guess you got two separate questions I think.  You know most of the growth we had this year, we did a number of small acquisitions, none of which had any significant revenue profile to it in 2007 so the vast majority of what we did in 2007 was organic, so not sure how to answer that going forward.  I mean what we put forward is the organic we do expect obviously to be a few tuck in acquisitions in there that won’t again like we did last year. 

In the first part, the areas of growth are pretty much the ones that we talked about.  I mean on the new side, the SMB market is, we don’t have much share there at all, so everything we do there is going to be upside growth.  The web 2.0 market we don’t have much share there at all, anything we do there will be all upside.  In the BRIC countries, we talked about, we had good growth significantly above the EMC average but we know we can and will do better and that’s going to provide upside in the BRIC plus 13 countries. 

In the storage and software as a service, that’s kind of a startup business for us, that’ll come on and add growth then of course our traditional markets where customers are worried about business continuity and customers are worried about and want to save money by consolidation.  I mean those are all strong markets for us and we’ve been nothing short of killing it in the commercial marketplace.  So I think that kind of hits upon the broad areas you mentioned. 

Operator 

We have a question from Bill Shope, J.P. Morgan, your line is open. 

Bill Shope – J.P. Morgan 

Okay thanks, Joe in the past you’ve talked about the differing expectations for the high end storage systems business versus the mid range and lower end storage systems business.  Obviously this quarter we saw some convergence, you know clearly I’m assuming is temporary from the product cycle but can you give us an update on how you think about that dynamic, the relative growth differential between those two? 

Joe Tucci 

Yeah I think, Bill we’ve been pretty consistent in saying that we think the high end storage market is a mid single digit grower, lower to mid single digit grower.  Obviously that gets affected very much by product cycles.  We’re at the end of a product cycle, it might slow down and you get a new product cycle as you saw here, it sped up and I think that’s going to continue.  You know the one nuance is that as you scale out these systems with the now thousands of drives that you can put in them and now with the new ability to put our unique ability to put [satir] drives inside a Symmetrix and adjust quality of service.  

So that means as we put an archive layer or drives in a [Symmetr] we can make sure that we don’t let that kind of workload deteriorate the performance from an online transaction processing workload.  So as we put those capabilities in, it actually becomes a pretty inexpensive way of adding another tier of storage.  So that could give it some revival but with that caveat we still expect it to be a mid single digit grower and a business that has got great cash flow and one we have a great position in. 

Bill Shope – J.P. Morgan 

And on the mid range? 

Joe Tucci 

The mid range I think is going to continue to be a double digit grower for us and as I said, we are a strong believer that certainly in the mid range and in the low end that the multi protocol systems are going to dominate.  We have a tremendous success because in these systems you buy the system and then as the customers workload changes and grows they can use iSCSI SAN, they can use the fibre channel SAN technology or they can use a network attached [safer] for file and print work.  

And to be able to do that and have that kind of flexibility is a tremendous advantage. So between those multi protocol systems and the dual protocol systems which are fibre channel and iSCSI, our systems I think have great legs on them to continue to grow in that mid teens range. 

Operator 

We have a question from Kaushik Roy, Pacific Growth, your line is open. 

Kaushik Roy – Pacific Growth 

Congratulations on a great Q4.  I understand you’re not giving Q1 guidance but can you comment how much of your yearly revenue typically comes from Q1.  Last year I think you mentioned it was about 23%, so do you expect similar in 2008?  Historically EMC Q1 revenues have been down 5-6% sequentially so do you expect similar in Q1.  And then second, within your full year revenue guidance are you including any impact of currency, if so, how much? 

Joe Tucci 

At the risk of getting punched by David, I’ll broadly state that I wouldn’t expect our calendarization this year to be much different than it was last year.  David do you want to comment on the currency? 

David Goulden 

We really haven’t factored in currencies, it’s very difficult to predict and we don’t make explicit assumptions about what’s happening with currency in our guidance. 

Operator 

We have a question from Chris Whitmore, Deutsche Bank, your line is open. 

Chris Whitmore – Deutsche Bank

Thanks very much, wanted to come back to the gross margin issue and the overall pricing environment.  Given the ramp of DMX and the mix of software, I would have expected a little bit more margin leverage on the gross margin line, was there a change in pricing during the quarter or the competitive environment?  Thanks. 

David Goulden 

Chris, no we look at that as we mentioned to you before we kind of look at what’s happened to pricing in both the high end and the mid tier separately.  I’d tell you the pricing declines were seasonally normal in Q4, so that was not a factor. 

Operator 

Next question is from Katie Huberty or Morgan Stanley. 

Katie Huberty – Morgan Stanley 

Yes, thanks, does the plan to continue reinvesting upside into the sales and distribution initiatives that you mentioned such that SG&A as a percentage of revenues may not fall as much as some expected given the One EMC initiative? 

David Goulden 

Katie, let me take that, I mean certainly we absolutely produced leverage in the business last year in EMC information infrastructure and the One EMC program helped.  But we also delivered above market growth rates and we’re entering into new markets.  So what we’re doing is taking the opportunity to invest the leverage we are generating in the business back in expanding the business both in a geographic point of view into new markets and into the commercial and SMB segments.

 
So we are taking advantage to take leverage that we have built, put it back into the business and generate above market growth and that’s been our approach as we’ve gone through the year. 

Katie Huberty – Morgan Stanley 

And that continues in ’08? 

David Goulden 

Yeah, you should expect that to continue, we’ve talked about entry into new markets and we’ve given you guidance which would indicate that we continue to have market share gains, so yes. 

Operator 

Next question is from Brian Freed from Morgan, Keegan. 

Brian Freed – Morgan, Keegan 

Hey guys, good quarter, as you look to your ’08 guidance, I mean the headline reaction is you guided lower than the street on a GAAP basis and I understand that it’s primarily related to higher non cash expenses than most of us on the street were expecting.  Can you talk a little bit more about the factors and assumptions that are driven those higher non cash expenses from your part? 

David Goulden 

Certainly Brian, let me take that, you’re absolutely right, when we looked at most of the street models and as you would expect this too we kind of looked at everybody’s model before the call and most people were probably about $0.10 light on the amount of stock based compensation and intangibles compared to what we’ve guided at.  And then of course most people didn’t have the lower tax rate which would have brought you up by about $0.04, so probably if you kind of took people’s guidance and you normalized it, there’s about a $0.06 difference, so we actually probably did better in guidance than you were expecting to us on a normalized basis.   

Let me kind of talk to you about the pieces, why stock based compensation and intangibles are higher and I don’t think why people haven’t factored it in.  I mentioned the intangibles, there’s going to be an increase this year in $0.02 on the acquisition intangibles and that’s basically due to the timing of the amortization of the RSA intangibles.  Simply it’ll be a higher number in 2008 than it was in 2007, so that’s a couple cents of a difference.   

The other area where people I think did not have this factored in because the numbers just weren’t clear is stock based compensation.  We said stock based compensation would go up by $0.05 a share this year and basically $0.03 was due to VM Ware.  Of course the options we issued during the IPO and subsequently throughout the year have become a fairly large expense, non cash expense in 2008.  And then on the EMC side, there’s a couple of pennies a share increase in stock based compensation principally due to two factors.   

One is that we were issuing options at the end of 2007 at $19.11 a share, those would be options we issued in 2006 at $9.75 a share and also in 2006 we did not have a senior management team basically, senior vice presidents and above in the grants and we did in 2007.  So those are all the factors and hopefully they’ll help you normalize your models. 

Operator 

The next question comes from Bill Fearnley of Ftn Midwest. 

Bill Fearnley – Ftn Midwest 

Yes, good morning, could you guys give additional color, Joe you talked a lot about going after the SMB market more and more, what’s the overall effect on SG&A, gross margin, operating margin as you go into these lower markets.  Is the margin profile better or worse than the core?  Thanks. 

Joe Tucci 

We actually think the gross margin profile is going to be better.  Or I shouldn’t say it that way, we actually think the operating margin profile will be better.  Probably what you’ll see is we’ll use gross margins might be a tick lower because we’re going to use more channels, sales to attack that market, more inside sales to attack that market.  And on the other side the operating margin should actually be a little bit higher. 

Tony Takazawa 

Thanks Bill, we have time for one more question and then Joe will have a few concluding comments. 

Operator 

The next question is from Tom Curlin of RBC. 

Tom Curlin – RBC 

Hi, good morning, as we approach actually calendar 2009 and the more I guess beneficial tax treatment of VM Ware.  How are you going to weight strategic factors versus financial and valuation factors in deciding what to do with your interest in VM Ware in terms of keeping it versus spinning it out and can you just elaborate on what degree or specifics in terms of strategic versus valuation side. 

Joe Tucci 

Tom, I’m not going to get in those specifics now, I mean a couple of points though.  First and most importantly, both EMC and VM Ware are performing very well and that is the first and most important thing for us all because that builds long term shareholder value.  As we’ve said before, VM Ware has only been a public company for two quarters and we are very pleased with the performance, our asset mix has no plans to distribute at this time.  But I assure you, management and the Board is focused on doing what will create maximum shareholder value for both sets of shareholders over the longer term.  I know I’m not answering your specific question but that’s all I want to comment on that now.  Thank you Tom. 

Well let me thank everyone for your interest in calling in today for our conference.  I really do appreciate it.  We are clearly focused on success in 2008.  I believe we have a great set of products and our strategy is resonating well with customers and very importantly we have momentum.  If you walk around the halls of EMC, there’s a winning attitude.  I believe we have a first rate management team and we are very fortunate to have 37,000 very talented people throughout the world committed to our success this year.  So I can’t help but obviously we’re facing uncertain economic times but EMC itself couldn’t be better positioned.  And again thank you for your interest today.  Bye-bye. 

Operator 

That concludes today’s conference, you may disconnect at this time.

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