EMC Corporation (EMC) 42nd Annual J.P. Morgan Global Technology, Media and Telecom Conference (Transcript)

| About: Dell Technologies (DVMT)
This article is now exclusive for PRO subscribers.

EMC Corporation (EMC) 42nd Annual J.P. Morgan Global Technology, Media and Telecom Conference Call May 20, 2014 2:00 PM ET


David Goulden - Chief Financial Officer and Chief Executive Officer, Information Infrastructure


Ken Talanian - JPMorgan

Ken Talanian - JPMorgan

Good afternoon. Welcome to JP Morgan Technology Conference. My name is Ken Talanian. I'm with the software equity research team here at JPMorgan. I am glad to have David Goulden, EMC's CFO and CEO of EMC's Information Infrastructure business with us here today. Welcome David.

David Goulden

Ken, thank you.

Ken Talanian - JPMorgan

And before we launch into our fireside chat, I'll turn the floor over to David to give us some general overview of EMC today.

David Goulden

Ken, thank you. I promise, I will be brief and I'll use no slides. And during the course of our conversation, we may make a couple of forward-looking statements. And those of course are subject to risks and the risks are laid out in our financial statements and that's the end of the legal piece for today.

So a little bit on what's going on in the industry and how we've set EMC up, we believe, quite uniquely to help our customer's bridge through a huge period of transition. The industry is what IDC has coined and we actually think is a very good description going from the second platform of IT, which is a client server oriented platform to the Third Platform, which is social, mobile, cloud and Big Data, and with that applications are changing, how pervasive IT and the business is changing, the infrastructure, those applications run on is changing. But of course, you can't just throw it the older way and get move to the new. You have to go with both. And of course, the first platform of IT, the mainframe, is still alive and well in many of our enterprises.

So it's an evolution, but it's certainly causing a lot of confusion for customers, right now, as they think of their architectural approach and how to approach this brave new world of the Third Platform, but also how they can innovate and save money by more efficiently running their second platform app.

So we set EMC up around the concept, what we call EMC Federation, which is four brands encompassed in three companies under the EMC umbrella. And the first of those is Pivotal, which is a company that we set up recently, which is focused upon helping customers build these new applications for the Third Platform.

Actually, helping them with the tools, so they can write them on top of modern frameworks, usually called Pivotal One, which is a platform-as-a-service capability, built upon an open framework called Cloud Foundry. We're also actually helping them with building those apps themselves through a product Pivotal called Pivotal Labs. So really focused very much upon forward-leaning Third Platforms apps.

And then of course, we have our virtualization layer, VMware, which is helping customers build out software-defined data centers, virtualizing all the infrastructure, also managing in an orchestrated way and increasingly through the acquisition of AirWatch, helping to manage their end-users approval, particularly in the mobile world.

Then we have the EMC Information Infrastructure business, which basically does two major things. It focuses upon the Information Infrastructure itself or the storage infrastructure, including the backup recovery systems around that, and then increasingly converged infrastructure. And now, of course, it's also developing a lot of software and the key storage components of the software-defined data center are coming from the EMC Information Infrastructure part of the business.

And then of course, we have the RSA business, which is our fourth brand, which is managing side of EMC Information Infrastructure, but works across the entire stack. So we've set the company up with these businesses in swim lanes, each focused upon being best-of-breed in swim lane, offering customers' choice.

They have to work with all parts of the Federation, although we clearly would like them to, where they want to, but also setting the company up with a capital structure around that environment. So we, as you know, have part of VMware public, so we can hopefully reflect value in VMware, but also increasingly, so we can attract the right talent to compete in that part of marketplace. We'll do something very similar with Pivotal, when the time is right. So we're actually innovating around our capital structure to really support this federated model.

And then the last thing I would point is, is that within the Federation we are making huge investments. And hopefully, on our behalf, more importantly, on your behalf, in leading in these Third Platform technologies, because I do believe that the IT pendulum will swing and we'll see an environment, in not too distant future, where IT growth is higher than GDP growth, which historically has been, but has not been for the last couple of years, as the Third Platform becomes more established.

And if you look across the Federation, we are making significant investment. For example, in VMware with our investments around NSX and AirWatch; Pivotal is clearly significant investment across the entire part of our business; and within EMCii, I think of things like ViPR, our software-defined storage platform; the Elastic Cloud Storage platform, that we just announced for web-scale systems; the SSD XtremIO, and all the platform enhancements, which we're making to our platforms like Isilon, VMAX, you'll see coming during the course of the year, we're making significant investment.

So not only are we recognizing the shift to the Third Platform, we are innovating I think in a way the company is organized around. And we're putting a lot of money where our mouth is, if I can use that, in terms of making investments across the whole business to make sure that as the Third Platform becomes more established, we're there to pick up the wave as it reaccelerates.

Ken Talanian - JPMorgan

You held EMC World in Las Vegas, a couple weeks ago, and I was wondering if you could just share some of the highlights that came out of the event?

David Goulden

It was a great week. We had about 15,000 people there, about 10,000 customer and partners and then a number of other people, including I think a number of people in the room had the opportunity to join us there as well. The whole theme of the concept was around this concept of redefine, because we are trying to really encourage customers to embrace this change and think of redefining their businesses around the Third Platform technologies.

The highlights from an announcement point of view, most of those were on the first day were around flash with the commitments to XtremIO and pointing out how unique the architecture is, with the acquisition announcement around DSSD. And in the software-defined storage arena around ViPR 2.0, around our new cloud-scale, the Elastic Cloud Storage platform, and then all ramp together in terms of helping our customers rapidly move towards well-run hybrid clouds. Those are the major themes around EMC World.

Ken Talanian - JPMorgan

When I was it EMC World, I did notice that the theme was redefined. But when I talked to investors, many think about EMC's current position and then grapple with the secular headwinds that are facing the storage industry, coupled with this evolution of the data center. Can you maybe discuss the framework for looking at this business?

David Goulden

Yes. I think first of all, it's important to recognize that there are both secular and cyclical issues impacting IT spend right now and impacting storage spent as well. The secular trends really are those macro trends defined by the move to a Third Platform and the new technologies around the Third Platform applications, and also the new deployment models, more, on-prem, off-prem choices in the Third Platform than there were in the second platform. And the cyclical trends are just more people being cautious and spending only what they have to on the existing systems, whilst they figure out what they're going to do in the new world.

Quite honestly, to help you understand what's going on within our business that's why at our forum, a year ago, we started breaking our storage revenues out into buckets to kind of broadly map against those environments. So you can see what's happening in the higher-end, you can see what's happening in unified and backup those technologies, born in the second platform, not exclusively second platform technology, but came from that era.

And then we're also showing you the high-level growth. I think last quarter it was 81%, we're getting in our emerging storage category, which is more technologies-aimed at the Third Platform. So I think we are giving you a framework to kind of look at evolution of the business and some of the ebbs and flows as the secular and cyclical both play out.

Ken Talanian - JPMorgan

And so when we think about storage, it's pretty clear that there is a slowdown in storage. And from an investor standpoint, it's often difficult to decide for whether that slowdown is representative of just secular issues or perhaps if there is a purchasing cycle issue within that mix. Can you maybe discuss the slowdown, when you think it might stop? Are people really just pausing and if so when can we expect them to buy again?

David Goulden

Ken, picking up a little bit upon my answer to the last question, there is no doubt that times of change, customers are being cautious. And what we're seeing for last couple of years is actually a fairly unique situation, where we're in a period of economic growth, albeit relatively moderate, but we're still in a growth environment, but IT spending is being less than GDP growth, which we've not seen that in last 30 years, apart from when we were in a recessionary environment.

So you see the whole industry being impacted by this as people are grappling with the changes and they're doing two things. So certainly customers are buying just enough, no more they need to for second platform, but also they are looking to drive efficiencies out of the second platform technologies.

When we, as an industry, have delivered a lot of tools for them to drive efficiencies out of the second platform, things like tiering, things like thin provisioning, either tiering with inner system or tiering across systems, et cetera, are all efficiency technologies. Again, much more comfortable when using across a bigger piece of their application base and that has certainly caused a pause in spend, and you see the entire storage industry has been impacted by that.

Now, what I'll point out though is that we acknowledge that we see that, despite that EMC is still growing through this period of time. Our core storage business has continued to grow through this period of time, albeit at a slower growth rate than there was before, and faster than any of our competition. We think we picked between 1.5 and 2 points of market share last year.

And that is not by accident, it's because of the completeness of the portfolio, it's because the store we have for customers in terms of embracing the second platform and leveraging the Third Platform. We really think that we are growing, when rest of the industry is not doing as well, as a direct result of our strategy and our investments.

Ken Talanian - JPMorgan

And so when we think about tiering, you mentioned tiering, flash-based storage appears to be of increasing interest of enterprises. And when I think about it, at least initially used cases for flashes, it was really replacing workloads that were previously on multiple high-performance arrays, where you're doing drive striping. As the technology continues to evolve, can you maybe discuss the impact on EMC storage business?

David Goulden

Yes. That initial used case really was probably saturated 18 months, a couple of years ago, as we've been shipping flash in our storage arrays since 2008 now. So obviously that was the initial case, people in order to get really high-performance out of moveable drives, would basically only use 10% of each drive and just try and use the faster outside rings. And as soon as you replace that with the flash you get an instant benefit.

But right now, over 70% of all of the VNX and VMAX storage arrays that we shipped are new, have a flash tier. So that is now absolutely the standard, and not only do they have the flash tier that have the fully-automated tiering software that will dynamically move datasets up and down the array, whether it's a two-tier array or three-tier array based upon the I/O news requirements for that storage array.

So that is now the standard that was the early use case, now almost every storage systems goes out there, because that's not the only place where we see flash. We see flash in the all-flash segment, and of course with XtremIO, we jumped into market leadership positioned in the fourth quarter with that.

You'll also saw us make an exciting announcement with the acquisition of DSSD. We announced at EMC World to have flash up in the server tier for very high hot edge type of applications, and then you put it all that together and we shipped over 70 terabytes of flash in last four quarters. So that's a significant amount of flash, and we believe, well ahead of anybody else.

So flash is critical, but it's not going to go into an all-flash world. IDC put out a survey recently where they still said that by 2017 over 90% of data stored in enterprises and service providers will actually be on hard drives. So it's a combination of both. It's very disruptive and very important for, what we call the, hot edge, but for the cold or the cool core, it's still much more cost effective to have a spinning media.

Ken Talanian - JPMorgan

And one of the things I noticed is you have a partnership with Cisco and VMware to offer this converged infrastructure. I was wondering if you could just maybe walk through some of the used cases for these offerings and describe the role that EMC plays in that.

David Goulden

VCE has been very successful. It continues to be very successful venture, obviously with EMC, VMware and Cisco as the primary owners. There was a small investment from Intel as well. And essentially the value proposition around VCE or Vblock, which is a product that we make out of VCE, which started off as a couple of products, now its real broader family. It's really simplification and speed and ease.

So what I mean by that is a lot of customers have a significant part of their IT budget in the infrastructure, managing their networks, managing their storage, managing their service, managing all management software around it. And they've become essentially a systems integrator themselves. That's one piece of software changes they have to go and revalidate their entire stack and it takes a whole lot of time and effort to move out changes in the IT products.

Vblock takes that away from customers. They basically -- a Vblock from the factory, it's pre-configured, it's build, they roll into that IT shop, they are often loading applications on it, 24 hours after arrived on the shipping dock, which is unheard of in terms of building out new systems the old fashion way, but importantly when we revise the Vblock and that the next version comes out, the entire software stack is updated in cohesion with. So the customer doesn't have to worry about all that complexity.

So it gets them into market quicker in terms of rolling out new systems and it takes a significant overhead away, so it is much about saving OpEx than is about CapEx. Now, to take advantage of it, they have to really change their IT partners. So if you keep the same number of people you had doing your IT admin and your storage, I mean your server with the Vblock, you won't say it much.

So it's really the four leading customers that are saying this is chance to actually change how I deploy my resources, so they'll have less infrastructure admins and they'll have converged infrastructure admins throughout all these different layers and those are the customers who are really making the big benefits out of VCE and Vblock.

Question-and-Answer Session

Ken Talanian - JPMorgan

And being mindful of time, I think it might be a good time to open up for questions. So if you have any questions, could you please go to the microphones in the center of the room, so that the people from the webcast could here?

So we can dig into another subject matter, and that's one that I think is interesting. It appears that one of the latest developments in storage is this idea of software-defined storage on commodity hardware. So when I think about it, it's removing storage intelligence from a pre-made box and allowing the software to define the resiliency of the storage rather than the hardware. When you think about it, what are EMC's prospects in that world? And with that context, do customers need a high-performance box like VMAX or VNX in the future?

David Goulden

It's not as black and white, Ken, the difference that we talked about because essentially if you take a VNX today, it is commodity hardware. You could go and buy all the parts from your favorite electronics distribution warehouse and build it yourself if want to. The value is in the software. We chose today not to let customers unbundle that, but we are actually in the future going to take things like our VNX to make available software-only and Isilon make available a software-only. So it's really a packaging more than is a difference between commodity hardware and proprietary hardware.

Today we sell storage arrays as appliances and we don't let you sell, we don't let you break them in part. By the way, we also have a virtual VMAX down the road, but here I want to make an important distinction, we wouldn't let customers do that because the performance levels you want from the VMAX and the reliability profile and the six or seven, nines, however, you want to configure that system, its dependent upon strong linkage in the factory and in the design process and in the support process between the hardware and the software.

So we'll have virtual versions of VMAX that customers can use in test and dev and our own developers will actually use down the road for same purpose. But we wouldn't let you break that apart.

Now, going forward to what people talk about software-defined storage. Most people define software-defined storage as a linkage or that breakage between basically unbundling the appliance. So we'll do with our traditional arrays, but also in terms of leveraging true commodity hardware, we have another great example in the portfolio right now called Atmos.

Atmos is the industry's leading commercial object-storage system, with a higher market share perhaps than any part of our portfolio. And Atmos runs on, industry-standards, off-the-shelf, white-box hardware today. And customers can basically go and build their own or they can go and buy from white-box vendor, they can load that with the software on. This is the example of choice.

Now, Atmos has been like that since the get-go. Atmos has been shipping for four or five years, and from the start we kind of gave customers the choice. The interesting thing is even though they have the choice, about 80% of the Atmos customers chose to buy the hardware and the software from us and have us around for maintenance contract around it. So they are out of the business having to integrate our system for themselves, but they do have the choice. Now there is the 20%.

Even the very largest Atmos customer, one customer in the Atmos world is now running close to 1 exabyte of storage, one customer, 1 exabyte, that largest customer chose to buy the whole thing from us rather than break it apart and do white box themselves. So having a choice doesn't always mean that you exercise the choice, particularly for web-scale systems. So the future here is to have the existing storage arrays available, either software or as an appliance. And those are often aimed at final block-based applications with a high performance characteristic.

But increasingly of these platform apps are going to be based upon things like object and HDFS. And that's where the ViPR Data Services will play in, which will think of it more in the Atmos model, where from the get-go, they'll run on commodity hardware. And the customer will have the ability to either go by white box themselves, by white box from a third-vendor or by white box from us, which is essentially what we've done with our Elastic Cloud Storage Appliance, it really is the ViPR software, running on a white box, supported and maintained through EMC. So a long answer, but there is various aspects as I think a lot misunderstood about software-defined storage.

Ken Talanian - JPMorgan

And I think there is also on the other side of that, there is the idea that people may not even use arrays in the future. And if you look at Amazon, AWS, their offerings and some of the way that people are consuming storage, I'm curious at where you see EMC's role if the storage in itself becomes somewhat commoditized.

David Goulden

Well, I think again, you have to be very careful when you define what is an array and what is not a storage array. A storage array is two or more industry-standard servers with a bunch of disk drives behind it. There is nothing particularly uniquely different about that, except it does have these two controls or more managing the data services, so that the drives have a little bit more a support around them. You can also take internal storage or directly attached storage and also manage that as software through things like VSAN or things like EMC ScaleIO.

You may not have the same level of resilience in the hardware, because you may not have a dual-controller architecture or multi-controller architecture in front of it. So all these lines are going to blur, which is fine, because essentially we have the software that will blur across those lines whether you want to basically have dedicated storage devices or else you want to new converged infrastructure type devices with computer storage on the same box. Our software will run across those worlds. And will give the customer the ability to buy the software from us or buy the appliance from us.

Ken Talanian - JPMorgan

There is an interesting point that was mentioned at EMC World that it was I think you only have one product left that has an ASIC in it.

David Goulden


Ken Talanian - JPMorgan

So from a controller evolution standpoint, it sounds like a lot of what was once considered sort of proprietary intelligence has now shifted to the software, is that correct?

David Goulden

That is exactly correct. So I'd say that we are, out of our 10,000 or so engineers in our software business, about 500 are on hardware design and all the rest are on software. And the hardware design people, has really to do with packaging, form factor density and serviceability of the hardware appliances themselves, we're not building proprietary hardware, and that one ASIC will disappear in the next rev of that particular platform.

Ken Talanian - JPMorgan

Just to pause here just for a second and see if anybody has any questions.

Unidentified Analyst

Two questions. One is can you give us an example of a leading cloud company who is using an EMC -- running an EMC environment? And then the follow-up question is, you did a great job describing the sort of pause that your customer base is in, in terms of storage spending. Can you maybe walk us through how EMC is trying to unbreak that logjam in whatever ways you are doing in seasonality or any linearity you can share with us about the current environment and how you're going to get from where you are today to where you want to be in the future?

David Goulden

On the first question, the cloud vendors are little sensitive to kind of breaking them out by a name. But I would tell you that if you pick five of the biggest Cloud/Third Platform, social type companies out there, you'll find at least a couple of them running very significant amounts of EMC storage as part of their infrastructure. Not so much the traditional file, block storage, but some of more the object-type storage, which I have talked in terms of all the scale-out file-type storage from Isilon.

One a little closer to home that is much more public, we have Service Provider Partner Program, but we have about a 100 gold, silver, bronze partners in our programs. For example, if you look at AT&T, their Synaptic Cloud Storage, for example, is powered by EMC. Looking at lot of what you see, coming from Rackspace, that's powered by EMC. There's a couple of people we can't mention the name.

So I think I also mentioned on the last call, for the last several calls, about last eight quarters, the service provider part of our business selling two SPs and then turning around and incorporating our technology in their offerings is the fastest growing vertical and has been and represents well over $2 billion on an annualized basis of revenue. So it's a big chunk of our business.

In terms of the logjam, as you know, us and the industry, right, so one vendor can only do a certain amount to kind of get customers through this knot hole of understanding more about Third Platform technologies, and obviously we're doing a lot through what happened with Pivotal as a key leading indicator for us in terms of the huge opportunities we have there.

Helping them get towards, because what we're trying to do with a lot of our customers who already take the technology uncertainty out of it. So the thing I mentioned at EMC World, getting customers to a well-around hybrid cloud, where they can really become a service broker and we show them how they can build those tools and build those solutions up from the EMC family toolkit in just a matter of days, we're trying to do everything we can to help our customers navigate through this journey.

And again to my earlier comments, at the times when others have been shrinking in this marketplace, we've not. We've continued to grow. So I feel quite good about our ability to leverage the portfolio and get customers confident enough, so the growth arrow is in the right direction with our company.

Ken Talanian - JPMorgan

Any other questions? So EMC clearly has a close relationship with VMware and I don't think that changing time soon. One of the things I noticed at EMC World was that storage virtualization is offered through VMware with VSAN. And EMC has talked a lot about ViPR. As like from a customer standpoint, how do you differentiate between the two?

David Goulden

It's actually much easier than people think. I mean I think people will kind of say, well, they're both called software-defined storage therefore they must both be same thing. It couldn't be kind of further from the truth. Let's talk about what VSAN is.

VSAN is basically an extension of vSphere, very simply, it is not a standalone software product. It's basically storage extensions to a vSphere, own-accessible via vSphere, tightly-linked, which is great for those environments where customers want to be exclusively in a vSphere World with storage capacities limited to the size of the vSphere cost is, so walking around that its fine for test/dev and VSAN environment is fine for lower-end VDI applications in a vSphere World. And it takes advantage of internal storage, which really was never accessible to EMC in the first place anyway, because we were focused upon external storage.

Now, ViPR is a software platform. VSAN is a software product. ViPR is a software-defined storage platform, which includes a control plane, which can cloak all of your existing storage systems from any vendor you want to as well as cloak your software-defined storage systems and the data plane of ViPR let's you build these new software-defined storage systems.

So with ViPR you can work in a heterogeneous world of VMware multi-hypervisor in physical. You can make all of your storage look the same to the applications through facility of virtual storage arrays. And it gives you a framework for building out new storage systems, block, file, object, ACFS. So it really couldn't be more dissimilar. The only thing that makes them common is that both are in this broad category of software-defined storage.

Ken Talanian - JPMorgan

It sounds a lot like network virtualization with a control plane and data plane in some ways. So it's a good way to think about it. So you made some changes in the first quarter, which included moving the data computing appliance out of Pivotal and into your EMC storage business. And I think I assume you did that to give investors a better sense of Pivotal's growth.

Thinking about Pivotal, it seems like it is a huge opportunity for you. And you even spoke about it earlier being almost similar to what you did with VMware. So do you think Pivotal will have as much of an impact on EMC as VMware did and how large is the opportunity for that business?

David Goulden

The opportunity is huge. First of all relative to the moves you talked about, we actually took the data computer appliance, we also took some of the low level implementation services and kind of moved them into EMC Information Infrastructure to give you kind of a pure play view of Pivotal.

So I'll say Pivotal is obviously the software, the platform-as-a-service leg, Cloud Foundry, and the advance consulting and the Pivotal Lab software development skills. I think that the opportunity for Pivotal is huge. We are certainly, anything other than opportunity constrained. We are resourced constrained in terms of many customers we can deal with, with the resource we have within Pivotal, which we're trying to grow as fast as we possibly can in a controlled and managed way.

So I think that Pivotal has potential to be profound. Customers who are working with Pivotal are talking about leveraging IT in the Third Platform to change the business. It couldn't be much more dynamic than that. And we have won leading industrial names in almost every single sector of the industry, whether it would be financial services, government, airlines, retail, et cetera, starting to work with us in a meaningful way with Pivotal.

So we don't have a capital on how big it is. I mean the Third Platform is still being defined. The Third Platform, Big Data, Fast Data platform-as-a-service opportunity is a huge. The market is certainly billions, could the market even be tens of billions, it could be. It's one of those markets that's evolving so quickly, it's hard to put a number on it. But it could be very significant for us and that's why we don't want to expose the underlying growth rates without some of those more traditional pieces of the business in Pivotal.

Ken Talanian - JPMorgan

And so you mentioned that you saw Pivotal across multiple verticals. Do the customers use Pivotal in the similar way? I mean obviously, the data is different at each company, but I'd be curious if the used cases are pretty consistent.

David Goulden

It's actually interesting, Ken, because I think one of the real distinctions between the second platform and the Third Platform is that second platform as it matured, the applications became standardized and packaged. So what I mean by that they have kind of the big applications, second platform where ERP or your e-mail system, your web servers, and it started off with a fairly fragmented industry and they all got down to a handful of those, and automating essentially the back office or maybe the middle office for most companies. The interesting thing in the Third Platform is you automating your front-office order your equipment is with front office. And in some cases, you kind of reinvent your entire business.

So the answer is that what the technology is being used for is very different. If you're a retailer, for example, you probably want to get real-time information about customer behaviors move through a store. If you're a Telco, you may want to get information about dropped calls and which of those dropped calls, where with your highest valued customers and how do you want to get back to them and kind of give them a credit or give them a ping to say, hey, I just dropped your call, here is something back in return. What's common about them is Fast Data, is Big Data, it's real-time. It's giving you analytics at real-time, that the technology common, but however used is even more uniquely customized to the industry in the Third Platform if it wasn't second platform.

Ken Talanian - JPMorgan

I'm curious, because it seems like a very different use case than pure storage. Is your go-to-market changing as a result of adding that to the portfolio?

David Goulden

What we've done with the go-to-market is that's one of the benefit of having the Federation. We can segment the go-to-market. So there is clear go-to-market for the Information Infrastructure team, obviously specialization within it. VMware has its go-to-market capability. And we have a go-to-market team within Pivotal.

And obviously, the specializations to your point and the expertise you're building those teams are actually quite different. Now, we leverage them across, so obviously we have many more people on the Infrastructure side of business from a go-to-market point of view than we have on Pivotal side. So we cross train the Infrastructure's folks and make sure they're trained to qualifying spot and opportunity before they bring in, the category from Pivotal. But the go-to-markets are being built out in the swim lanes.

Ken Talanian - JPMorgan

We're running down the minutes here. But I think there is a couple of questions I'd like to ask that are more purely on the financial side. Could you maybe discuss some of the drivers of your gross margin erosion over time? And what we can start to think about as a normalized gross margin?

David Goulden

There has been a number of complexities in the gross margin, particularly in the storage business recently, as we've gone through some of these changes. And I think the important thing to recognize is what we said is, we expect this year 2014, the gross margins in the storage business reach the biggest part of the overall business, to be very similar than what they were in 2013.

They have actually been quite similar from a bookings or order basis over the last couple of years, with these other things inside the business have basically made the external gross margins look a little bit more volatile. Most of those things are kind of are either normalized out or are impacted by our change in business practices this year. So those booking gross margins will be more reflected in the revenue gross margin you see in our financial statements.

And obviously, within that it's been some pricing pressures. The industry has slowed down, but we've been able to offset that through positive mix shift toward some of our new products and a higher software content, et cetera. So that is our baseline and you'll see that hopefully more standardized and more normalized story playing out for the course of this year.

And that essentially is the biggest driver of gross margin for the Federation because the gross driver is just a mix shift between the businesses. And with the higher growing businesses, VMware and Pivotal having higher gross margins, obviously become a bigger piece of the business that also helps within the overall Federation margin mixed profile.

Ken Talanian - JPMorgan

And the other thing is I was wondering if you could just talk about your thoughts around cash use, capital allocation? One of the things, you do a lot of buybacks, and I was curious as to when we might expect a more meaningful reduction in share count?

David Goulden

We've always done a lot over the last 12 months. It was almost exactly a year ago we announced our new capital allocation policy, announced our first dividend, which we just increased by 15% on the 1st, and we will increase by 15% on July 1 or 2 on the first year of that dividend. And we've become much more aggressive and much more transparent in terms of our commitments to return 50% of our x VMware free cash flow via buybacks and dividends to shareholders on average over time.

Right now, we're doing more than that. We announced basically a $6 billion buyback over the three years. This is year two or three-year period, we did three last year. And then on top of the dividend means more, we're actually right now doing much more than that 50% on average. And as a result of that and if you look at our guidance, you'll see 100 million share count reduction in our shares this year versus last year. So you are seeing a meaningful reduction coming out of the buyback program.

Ken Talanian - JPMorgan

Great. Thank you. I think that does it for today. Thank you for joining us. And good luck.

David Goulden

Ken, thank you. I appreciate it. Thanks.

Ken Talanian - JPMorgan


Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!