EMC (EMC) recently reported financial results for the third quarter of 2012. Third quarter highlights include record consolidated revenue, net income and EPS. The consolidated revenue for the quarter was $5.28 billion, an increase of 6% compared to the same quarter of 2011.
Third quarter GAAP net income attributable to EMC at $626 million was up by 3% year-on-year. Third-quarter GAAP earnings per weighted average diluted share showed an increase of 4% year-on-year to $0.28. Non-GAAP net income attributable to EMC for the third quarter was $881 million, an increase of 7% compared to the same quarter of the previous year. Third-quarter non-GAAP earnings per weighted average diluted share were up by 8% compared to the same quarter of 2011 at $0.40. During the third quarter, EMC generated operating cash flow of $1.44 billion and free cash flow of $1.14 billion, which equated to year-on-year increases of 12% and 16%, respectively. The company ended the third quarter with $10.6 billion in cash and investments.
During the third quarter, revenue from EMC's network storage platforms portfolio, which includes EMC's high-end and mid-tier storage platform products, grew by 2% year-on-year. Revenue from the high end Symmetrix storage product portfolio, which includes the company's VMAX systems family, grew by 5% compared with the same quarter of the previous year. Revenue from the company's portfolio of mid-tier storage products was flat on a year-on-year basis. The company's consolidated third quarter revenue from the U.S. increased 8% year-on-year to $2.9 billion, representing 55% of consolidated third quarter revenue while revenues from business operations outside the U.S. grew by 4% year-on-year to $2.4 billion and represented 45% of consolidated third-quarter revenue. Consolidated revenue is expected to be between $21.60 billion and $21.75 billion for full year 2012. Consolidated GAAP operating income is expected to amount to 17.8% of revenues for 2012, while consolidated non-GAAP operating income is expected to be 24.5% of revenues.
Consequently, consolidated GAAP net income attributable to EMC is expected to be between $2.72 billion and $2.77 billion in 2012, while consolidated non-GAAP net income attributable to EMC is expected to be between $3.70 billion and $3.75 billion in 2012. Excluded from consolidated non-GAAP net income attributable to EMC are stock-based compensation expenses, intangible asset amortization,and restructuring and acquisition-related charges. Consolidated GAAP earnings per weighted average diluted share are expected to be between $1.24 and $1.26, while consolidated non-GAAP earnings per weighted average diluted share are expected to be between $1.68 and $1.70. Consolidated net cash flow from operating activities is expected to be $6.1 billion and free cash flow is expected to be $4.9 billion for the year. Excluded from free cash flow are $800 million of additions to property, plant and equipment, along with $400 million of capitalized software development costs. GAAP net income attributable to the non-controlling interest in VMware (VMW) is expected to be $150 million. Non-GAAP net income is expected to reach $250 million for 2012.
EMC is the global leader in both the enterprise storage system market and the storage software market. EMC's share of the global software market has increased significantly over the past few years. I expect this growth to continue in the coming years. EMC is currently the leader in the global storage software market with a share of approximately 30%, according to research firm IDC. IDC research shows that revenue from IT cloud services is expected to reach $72.9 billion in 2015, growing at a compounded rate of 27.6%. This is more than four times the growth rate expected for the global IT market as a whole, which is estimated at 6.7%. This represents a huge market opportunity for EMC and VMware, which are in the business of helping customers to make the transition into cloud computing. This market could be even bigger if you take into account the potential of mobile phone based virtualization, which is being spearheaded by VMware.
I believe that VMware (80% owned by EMC) has the most growth potential for EMC. VMware is the market leader in virtualization software for both desktops and servers. VMware's desktop software allows users to run multiple operating systems from a single PC, whereas the server software allows companies to increase utilization. Though VMware's share in the virtualization software market has been reduced from 50% in 2005 to 45% in 2012, it is still the market leader and able to charge a premium for its features, such as live migration.
The company has lost share to the likes of Microsoft (MSFT), Citrix (CTXS) and Oracle (ORCL), as they have also aggressively pursued the virtualization software market, but I believe that VMware's share of the market will continue to be significant. EMC and Lenovo Group have entered into a strategic partnership to resell storage equipment and servers made by EMC. These two companies will test their products in China before expanding to other places. This partnership will provide EMC with access to the massive Chinese market. The two companies will also set up a joint venture to sell storage equipment to small and mid-sized businesses.
I believe the market is substantially undervaluing EMC. In addition to meeting consensus estimates for the third quarter, EMC has demonstrated its ability to grow in adverse economic conditions and cope with soft IT spending. The downward revision of guidance in the outlook for the year is both conservative and realistic. Finally, I do not believe that EMC's current stock price of $25.21 reflects the true value of its 80% stake in VMware. If you believe in the future prospects of the cloud computing and data storage markets, I strongly recommend that you consider buying EMC today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.