EMC Corporation Q1 2008 Earnings Call Transcript

EMC Corporation (EMC) Q1 2008 Earnings Call April 23, 2008 8:30 AM ET

Executives

Tony Takazawa – Vice President, Investor Relations

David Goulden – Executive Vice President, Chief Financial Officer

Joe Tucci – Chairman, President, Chief Executive Officer

Analysts

Aaron Rakers - Wachovia Capital Markets, LLC

[Unidentified Analyst - Unidentified Company]

Shebly Seyrafi - Caris & Company

Keith Bachman - Bank of Montreal

Tony Sacconaghi - Sanford Bernstein

Chris Whitmore - Deutsche Bank Securities

Clay Sumner - Friedman, Billings, Ramsey & Co.

Paul Mansky - Citigroup

Brian Freed - Morgan, Keegan & Company, Inc.

Kaushik Roy - Pacific Growth Technologies

Thomas Curlin - RBC Capital Markets

William Fearnley - Ftn Midwest Securities Corp.

Ben [Writsis] - Lehman Brothers

Operator

Welcome, and thank you for standing by. (Operator Instructions) I would now like to turn the meeting over to Mr. Tony Takazawa. Sir, you may begin.

Tony Takazawa

Thank you, [Lori]. Good morning, everyone. Welcome to EMC's call to discuss our financial results for the first quarter of 2008. Today we are joined by Joe Tucci, EMC Chairman, President and CEO, and 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, EMC's execution of the strategy, and how EMC is positioned in the marketplace. After our prepared remarks we will then open up the lines to take your questions.

I would like to point out that we will be highlighting various non-GAAP numbers in today's presentation. A reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosures 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, so you can more easily compare our results with prior periods, we will discuss our GAAP and non-GAAP numbers and outlook excluding this quarter's IP R&D charge unless otherwise indicated.

As always, the call this morning will contain forward-looking statements, and information concerning factors that could cause actual results to differ can be found in EMC's filings with the U.S. Securities and Exchange Commission.

Lastly, I will note that an archive of today's presentation will be available following the call.

With that, it's 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 strong performance in the first quarter. We had a great start to the year with revenue growth of 17%, non-GAAP EPS growth of 28%, and free cash flow growth of 22%. We executed our business plan and we're on track to achieve the financial goals for 2008 we set ourselves in January.

Before we dive into the financial details of the quarter I'd like to make a few comments about what we're seeing out there in the marketplace. We know that IT spending will grow in 2008, driven by the need to manage the ever-growing volume of information. We also know that today customers are much more careful in how they spend their money as they struggle to make their IT infrastructures more efficient. Given today's uncertain economic environment, it's not surprising that we see customers increasingly focused on reducing operating costs, improving efficiencies, and maximizing ROI. Simply put, they want to get real bang for their IT buck.

They are also increasingly realizing that they need to implement new technologies and new approaches in order to really improve their IT efficiency, and therefore we're seeing lots of interest in things like storage tiering and consolidation, data de-duplication, virtual provisioning, server virtualization, content management and security. And while there are discrete benefits from each of these, a customer can only achieve maximum efficiency in ROI if they're implemented cohesively and seamlessly as part of an information infrastructure and not as one-off purchases.

This increased customer focus on the benefit of information infrastructure as a cost saver is playing right into EMC's strength. We have all these key products and technologies, and we have experience implementing these new approaches. This is the core of EMC's competitive advantage and no one has both focus on information infrastructure and the skill to do what we do.

Looking ahead, this is how EMC will continue to help customers and continue to gain share. Our efforts to continue to drive a consistently competitive position and diversified business model translates into EMC's solid financial structure and ability to achieve positive long-term results for our shareholders.

Now turning to the details of our Q1 performance, I'm going to start by highlighting the results from our EMC Information Infrastructure business. This business is comprised of our information storage, content management and RSA security businesses. I'll then make some comments about our consolidated results, which will also include VMware.

In Q1, EMC Information Infrastructure revenues were $3 billion, up 12%, with 250 basis points coming from currency. We had strong growth in each of our major geographies. North America was up 9%, EMEA was up 15%, Asia Pacific up 13%, and Latin America was up 36%. And we grew over 40% in our higher-growth countries that include the four traditional brick regions plus another 13 emerging markets in Southeast Asia, Latin America, Eastern Europe and the Middle East and Africa. The investments we're making in these important markets are definitely paying off.

Our solid global revenue growth results from the combined strength of our [inaudible] sales force and the increasing contributions from our growing network of channel, alliance and service partners.

Now looking at profitability, non-GAAP earnings per share were $0.19, up 19%. Q1 operating cash flow was $812 million, up 21%, and free cash flow was $657 million, up 30% from Q1 last year. We are very pleased with these cash flow results, and you'll note that free cash flow was $250 million higher than our non-GAAP net income.

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 Q1, Storage revenues were up a very solid 12% over Q1 of last year. We saw strong demand for our Storage product portfolio across all of our major geographies, with particular strength in commercial and overseas.

In the high end, Symmetrix revenues in Q1 were strong, up 8% over Q1 last year. We continue to be pleased with the demand we're seeing for our DMX4 system, which is the highest performing, most cost-effective, secure, energy efficient and easy to use high-end array on the market today. In addition, customers are very excited about some of our newest DMX4 capabilities, including the integration of flash drive technology and virtual provisioning.

In the mid range, Clariion revenue were also very strong, up 19% over Q1 last year and clearly representing share gains. Our NAS business had a very solid quarter, with revenues up over 50%, driven by continued demand and adoption of our NS20 and NS40 products.

In Q1, Dell once again represented approximately 12.5% of EMC's total revenues. Within this, Dell was about a third of client revenues and the balance came from a mix of EMC's information storage, content management, security and VMware products.

Today EMC has the best storage products offering in the company's history and also the broadest and most integrated portfolio of information products and solutions in the marketplace. We believe the strong Q1 results in our Information Storage business reflect the strength of our product portfolio and continued share gains. We will continue to expand our storage portfolio this year, providing customers with the most reliable, cost-effective, easy to use and energy efficient storage solutions available as we continue to bring out new products faster than anyone else, moving strategically up and down markets.

Turning to our Content Management and Archiving business, revenues were up 8% over Q1 last year. During the quarter we saw good demand for our D6 platform, particularly internationally, and the business pipeline in strong. The lumpiness in our Content Management business this quarter was partly due to timing of some deals and partly due to some of our own execution challenges, which impacted the quarter's license growth. There continues to be an avalanche of unstructured data being created, and businesses are looking for scalable solutions to effectively manage their huge volumes of content while at the same time improving business efficiencies, increasing productivity, and meeting compliance and risk mitigation requirements.

Going forward, we remain confident in the competitiveness of our Content Management product offering and we're focused on improving our execution, and we believe we're well positioned to gain share.

Now let me turn to our RSA Information Security business. Revenues in Q1 were up 13% over Q1 last year. During the quarter we had strong growth in risk-based authentication, anti-fraud services, and security, information and event management.

However, we did see some deals across the business where decisions were delayed and experienced lower than expected growth in our Secure ID Enterprise Authentication business. The Secure ID business was impacted primarily by weakness in the financial services sector in the U.S. and Europe. This has also been noted by others in the marketplace. We remain confident in the competitiveness of our Secure ID Enterprise Authentication offerings, and recently announced our next generation RSA authentication manager software platform, which we believe will fuel continued share gains.

In early April we hosted the RSA Security Conference, which is the most prestigious information security event of the year and which attracted over 17,000 attendees. We announced several new products and services during the conference, including our new data loss prevention suite, which we believe will be a very important market for us, new information security consulting services, and new enterprise encryption and key management technology.

These advancements support our information risk management strategy to help customers align their business and IT security priorities and further extend our information security leadership in the marketplace. We also continue to integrate RSA technology into EMC's Information Storage products, and recently announced the addition of RSA's encryption and key management functionality to EMC's PowerPath software.

Looking ahead, we remain confident that our information-centric approach to the security market will continue to create opportunities to help customers in key growth areas, and we believe we're well positioned for continued share gains in the information security marketplace.

An important competitive differentiator for our EMC Information Infrastructure business is our Services organization, which spans across our Information Storage, Content Management and RSA Security businesses. 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.

In Q1, Professional Services grew over 30%, and we're very well positioned to continue to help customers with their technology solutions and services required to meet their performance, availability, functionality and economic efficiency objectives.

We're very proud of EMC's Services organization, and we'll continue to make investments in our own capabilities and in strengthening our relationships with our services and solutions alliance partners.

Now we're turning to margins. In Q1, the Information Infrastructure non-GAAP operating margin was 15.8%, up 30 basis points year-over-year. Within this, gross margins were up 150 basis points, with margin improvements from both products and services, and operating expenses were up 110 basis points, reflecting investments in our product portfolio and our go to market model, particularly in our commercial business and the international markets.

We continue to identify places where we can improve EMC's operating efficiencies by carefully managing headcount growth, driving productivity and finding new ways to optimize our nonpeople spend across the business. We will look to effectively use these savings to both fund innovation in our product development organizations and to fund growth in our go to market organizations.

I will now turn to a few highlights of EMC's consolidated results.

Total Q1 revenues were approximately $3.5 billion, up 17% from Q1 last year, and we had strong double-digit growth in each of our geographies.

Non-GAAP earnings per share were $0.23, up 28%.

Our Q1 GAAP earnings include $0.04 for stock-based compensation, $0.02 for intangible amortization, and $0.04 of IP R&D expense mainly associated with the acquisition of Pi Corporation. Adjusting for the IP R&D expense, Q1 earnings per share were $0.16, up from $0.15 in Q1 '07 and as expected.

So you can get some sense of VMware's contribution, I've broken out the VMware results as recognized in EMC on the slide as well. As you can see, VMware had another strong quarter and contributed $0.03 to our consolidated non-GAAP earnings results.

[inaudible] IT environments continue to expand across the globe, and in a recent survey of VMware customers, 85% said they were using VMware in production to run business-critical applications. And over 50% of these customers use VMware as a standard platform for delivering enterprise applications. To date, more than 100,000 customers including 100% of the Fortune 1000 - trust VMware as their server virtualization infrastructure platform. We continue to see this as a very positive driver of network storage deployments.

Earlier I talked about how EMC is well positioned to help customers with their spending priorities and data center efficiency needs. Bringing the right solutions to the right markets continues to be the driving force behind our successful and diversified business model. This also translates into the strength of our operation results as a company, and our business remains very healthy.

EMC consolidated cash flow from operating activities in Q1 was up 14% from Q1 last year.

A few balance sheet metrics that impacted our Q1 operating cash flow include deferred revenues, which were a record high of $3 billion and up 30% over Q1 last year, inventory churns were 6.6, and DSOs were 50 days.

I'm very happy to say we are also reporting excellent consolidated free cash flow results for the quarter. Consolidated Q1 free cash flow was $717 million, up 22% from Q1 last year.

Turning now to our cash position and cash use, we ended Q1 with a very strong cash and investments position of approximately $7.9 billion. $4.2 billion of this is held in our overseas operations and in VMware. We have no collateralized debt obligations, no collateralized loan obligations, and no structured investment vehicles in our investment portfolio. Within the $7.9 billion, only $274 million were in auction rate securities. The auction rate securities are issued by government agencies, educational institutions or municipalities, and we feel very comfortable with these holdings. Financial flexibility is an important strength and competitive advantage, and we believe our investment portfolio is in good shape and managed conservatively.

An important way we continue to return value to shareholders is through our use of cash for share repurchase and acquisitions. In Q1, as promised, we spent approximately $557 million to repurchase approximately 36 million shares. This completes the $2 billion share repurchase we embarked upon in January of last year. Recently our Board increased our share repurchase authorization by 250 million shares. For 2008, we expect to utilize between $1 to $1.5 billion towards share repurchases.

In Q1 we spent approximately $338 million on acquisitions. Acquisitions help EMC in several important and strategic ways. They extend the reach of our business with new products and services, improve the value of our technology platform for customers, strengthen our competitive edge, and expand our reach into new growth markets.

Companies we acquired this quarter put us into new markets, such as cloud computing infrastructure and services, IT service management, document output management, and extended VMware's desktop virtualization capabilities and services. We'll continue to use our strong cash position to invest in [inaudible] acquisitions that expand our technology and services portfolio and take us into new markets.

In closing, as one of the most trust technology partners in IT, we believe EMC is well positioned for continued success. EMC is aligned with key customer priorities and competitively advantaged with the strongest, most integrated product portfolio in the company's history. We'll continue to drive efficiencies across EMC's business and use these savings to continue to make focused investments in our future. And we'll continue to manage effectively our very strong financial position and return value to shareholders.

When you add all this together, you have a company with a unique, very strong and diversified business model that is not only sustaining but extending its market and technology leadership. Our operational game plan is very much in place and aligned with our goals to continue to take share and deliver solid financial results in 2008.

With that, I'll turn the call over to Joe.

Joe Tucci

Thanks, David. I would like to begin by welcoming everyone to today's call. As always, thank you very much for your interest in EMC.

I am very pleased with our overall performance in Q1. Despite a tough economic climate, EMC teams around the world produced solid results as demonstrated by the fact that we had strong double-digit growth rates in revenue, earnings per share and cash flow, by the fact that we took share throughout the vast majority of our product lines, by the fact that we took share in each of our major geographies, by the fact that we grew our services revenues by a very healthy 30%, and by the fact that we had our best overall customer satisfaction ratings ever.

My thanks to the 39,000 people of EMC and VMware around the world for their focus and dedication to our customers' success.

I'll begin my formal comments by discussing a topic which I know is first and foremost on your minds, namely, the economic landscape and, even more importantly, its impact on IT spending.

For sure, the global economic environment is tough, and I don't anticipate it will get easier anytime soon. Having said that, despite this backdrop, we believe there is enough opportunity for the products and services that EMC has in its portfolio for us to achieve our 2008 goals.

In Q1, the impact of the troubled economy showed up mostly in the U.S., resulting in a bit of a slowdown in IT spending. We saw that customer approval cycles were lengthening, particularly in financial services, U.S. autos, and in some retailers. Despite this economic tightening, our U.S. Information Infrastructure business grew 9% year-on-year as customers are investing in our Information Infrastructure products and services to help them save costs and gain competitive advantage.

The key reason for EMC's success is the focus we have on key areas of technology where we have strength and leadership. As we have said before, virtualization, storage, business continuity, information compliance, information security, and the consolidation of information infrastructure domains and data centers are top 2008 spending priorities as pointed out in CIO survey after CIO survey. And this priority list is being closely adhered to in these tighter economic spending environments.

Another key reason for our success is the process and programs we put in place aimed at expanding our growth in international markets, especially in countries with high-growth economies, our process and programs aimed at accelerating our growth in commercial and SME organizations around the world, and our process and programs aimed at building out and leveraging our world class partner ecosystem.

Interestingly, a number of our industry leading customers are telling us that they are planning to use their strength as a competitive weapon, and they're continuing to invest quite heavily in IT as a means to substantially increase their competitive position. In other words, as one of our customers put it, "We are strong now. We are investing to consolidate and save expenses for the future. We are investing to put in new infrastructure and systems to serve our customers even better. And when the economy turns up, we will even be further ahead than we are today."

How does this relate to EMC as we think how to approach the current economic environment? We will maintain our planned spending on research and development, and we will add salespeople at an even faster rate than our original 2008 plan anticipated. To fund this, we are driving an increased focus on our expenses, especially indirect expenses, which are over $2.5 billion annually. Our goals are to make our numbers and take share.

As I look at the major trends that will reshape the information technology industry over the next few years, I firmly believe EMC is incredibly well positioned, with leading, innovative technology as this rapid evolution unfolds.

What are these game-changing trends? We will see today's enterprise data centers evolve to socalled data centers of the future. We will see cloud computing paradigms grow in importance. We will see the dominant role of information-centric computing versus today's application and device-centric computing models. And we will see the vast importance of green IT.

The reason I believe EMC is incredibly well positioned is because of our technology asset base across information infrastructure, virtualization, and cloud computing which come from internal incubated and developed efforts as well as from strategic acquisitions we have made. These investments speak directly to the major challenges and opportunities of the future.

In short, I love our strategic position today and even more so for tomorrow. And, as always, we intend to run EMC to maximize the value for our shareholders over the long term.

I purposely kept my formal comments brief as I know you want to get to the Q&A portion of today's call, so without further ado, let me turn it back to Tony.

Tony Takazawa

Thanks, Joe. Before we open up the lines for your questions, as usual we ask that you please limit yourself to one question. That includes clarification. We thank you all for your cooperation in this matter.

Lori, can we open up the lines for questions, please?

Questions-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) Our first question comes from Aaron Rakers of Wachovia.

Aaron Rakers - Wachovia Capital Markets, LLC

Maybe you can help us understand what the currency impact was, and then also help us understand the economic backdrop. Joe, could you comment on how the trends looked through the course of the quarter from a linearity perspective?

[break in audio]

David Goulden

When we are working a customer, it's really the solution value and the solution margin which we're actually looking to achieve. And at a product level, we had nice growth in storage and product margins went up in the storage as well. So I know you can't look at those numbers. I wouldn't read too much into the mix inside of the Storage business.

Unidentified Analyst - Unidentified Company

And then just quickly, Joe, can you share your vision of EMC's participation in the consumer market given some of the recent acquisitions?

Joe Tucci

Sure. When you - I'm sure you're talking about our planned acquisition of Iomega and our introduction of our Lifeline software. Obviously we've been very influenced by a lot of the research that's been done which points out that if you think of information and its creation, 70% of information is created by individuals. And that number's been tested and tested, and it seems pretty solid. And then of course on the other side, 85% of the information that is created by individuals will be managed by bigger enterprises or in cloud computing topologies.

So what we really want to do, [Katie], is connect those two together. So obviously we think most middleclass people around the world will have a terabyte of storage in their home over the next couple of years, so there's opportunity to play there. And, of course, even more compelling to us is that we believe that home will be connected to big information centers around the world, and we certainly want to play there. As we play on both ends of that, we think it's going to be a great market for us.

Also, as we get into that, it gives us a lot of ability to leverage our supply chain and bring down costs across the whole business. So it's quite strategic, and that's kind of behind our thinking.

Unidentified Analyst - Unidentified Company

Thanks. Good quarter, guys.

Tony Takazawa

Thanks, Katie. Just as a reminder, we ask that you limit yourself to one question, please. Lori, can we take the next one?

Operator

Yes. Shebly Seyrafi with Caris, your line is open.

Shebly Seyrafi - Caris & Company

Yes. Thank you very much. I'm trying to understand, you had a large inventory increase at the - in calendar Q1. Did that represent a pause that may be reflective of a potentially weaker than seasonal Q2 for you?

David Goulden

Shebly, I'll be quite open with you on that. We had a mid-week quarter end - our quarter ended on a Monday night this quarter and therefore we wanted to make sure, given the difficult economic environment, we had inventory to kind of buffer any mix changes at quarter end. So it's as simple as that.

Tony Takazawa

Thanks, Shebly. Next question, please.

Operator

Keith Bachman with Bank of Montreal, your line is open.

Keith Bachman - Bank of Montreal

Hi. Thank you. I want to go back to the software question, if I could. On the license side, on the software license side, if you took out VMware, software license growth was actually a negative 5% year-over-year for the balance of EMC. Yet doing the same exercise for the deferreds on the balance sheet, there was actually healthy growth on the deferreds, roughly 20% if you take out even VMware's deferreds from your balance sheet.

How do we reconcile this, and, more specifically, will we continue to see software license growth decline over the next couple of quarters please?

Joe Tucci

You know, the big - obviously, as David said, the big swinger here is, because it's so big, is our storage software.

Keith Bachman - Bank of Montreal

Right.

Joe Tucci

And unfortunately or fortunately - and I think fortunately - we got a pretty good model. It's working well for us. Why do I say that? Because if you look at product revenue, it's growing quite nicely, as you saw. And if you look at gross margin, gross margins are up year-on-year. And customers really don't buy as much in the tune of, say, well, I'll buy this much software and this much hardware. They're looking for kind of a bundled solution package price.

So what happens obviously is the underlyings of the business is good, so I want to go back to that, the underlying metrics of the business are good and we're quite happy with them. On the other side you can see that the support and the deferred are up, and that's because we're making sure that we do a good job on renewals because obviously the license is perpetual but every so many years the customers have to re-up and then they re-up their support charges. So that grows. And of course we make sure that we carve out of the license fee what we need to have adequately under good accounting practices to make sure that we do have that support.

Keith Bachman - Bank of Montreal

Joe, is there anything changing, though, more specifically in the nature of the relationships contractually, you're pushing more to the maintenance side versus the license side?

Joe Tucci

Not that we're pushing more there. I mean, it's kind of the way the business is breaking out. We've got such a huge base, especially with Symmetrix, and the base doesn't grow that much, but it expands. And of course as you expand you get into different tiers and as you go into higher tiers, you get better pricing per tier. So most of the way that we're going to make money on Symmetrix is through support. And we basically have a good rigor to make sure that we get that and customers do renew, and that gives us a good source. So when you really look at the business, you've got to almost put the license and the support together. They're both high-margin items, very high-margin items, and as you can see, on the support side across the businesses we're in the mid-20s, even higher than that in security in terms of our support, our maintenance growth on software.

Keith Bachman - Bank of Montreal

Okay. Thank you.

Tony Takazawa

Thanks, Keith. Next question, please.

Operator

Thank you. Our next question comes from Tony Sacconaghi of Sanford Bernstein.

Tony Sacconaghi - Sanford Bernstein

Yes. Thank you. Joe, you had mentioned that you had changed your plans somewhat to boost the amount of spending on salespeople and try and fund that from indirect spending. It sounds like that's a decision you've taken in the last 90 days. Can you comment on when that decision was made and is it in reaction to a spending environment that's actually a little bit different than you thought 90 days ago?

Joe Tucci

Tony, you're right. It was taken in the last 90 days because obviously we booked the plan with the Board, it's kind of quasi-booked in the very end of December and then it's confirmed in very early January. So at that time we're adding additional salespeople since that event, and primarily where we're going to add these salespeople is in the rapidly growing commercial and SME and in some of the really high-growth economies. And we're having just tremendous success in both of those, and then of course a little more focus on the DNS, which is our network attach. But it's actually not even network attach - it's our unified storage which has [inaudible] and [NAS] all together, and that's being incredibly well received.

So those are the three areas where we're going to put significant firepower because we think the growth is there in those opportunities, and we see nothing on the economic landscape that's going to slow those three or so areas I mentioned down for us. So we want, obviously, to make a plan, so we've got to carve out money to make that. And that's going to hopefully fuel some growth, and we'll see how the economy shakes out.

Right now, we're sticking with our overall benchmark goals that we set for ourselves and the Board and shared with you guys.

Tony Sacconaghi - Sanford Bernstein

That is the implication that you felt that in order to make your goals, you had to do this? Because there was some talk of doing this at the beginning of the fiscal year. It sounds like you've said given the environment, maybe because you think U.S. will be weaker, we've got to step on the gas even stronger in some of these high-growth areas to meet our target. Is that a fair interpretation and, if not, why, again, why the change in plan specifically over the last 90 days.

Joe Tucci

Well, Tony, it's a little bit different than that. I mean, in the beginning of the year, if you looked at the plan, we did have a substantial step up in those exact same areas, so in commercial, in SME, in international, in high-growth countries in international around our network, excuse me, around our unified storage products. We knew these were going to be like red-hot areas, and we did put a substantial increase.

And then as we saw the demand and the take up, you know, David talked to you about our unified storage grew 50% year-on-year, our high-growth - what they used to be called, emerging economies, how can you call them emerging economies; these economies have emerged, they're rapidly growing economies - and the take up is so good we're putting more resource there.

So it's really truly not to protect what we see as, you know, the U.S. being way off. I mean, the U.S. grew 9%, and commercial within the U.S. is doing very nicely and that's going to get some of these resources.

On the other side, I think it's fair to say, Tony, there's uncertainty that I'm certainly not going to increase the $15 billion goal, right? So that'd be another way to look at it or the way to look at it.

Tony Sacconaghi - Sanford Bernstein

Thanks, Tony.

Tony Takazawa

Thank you. Next question, please.

Operator

Thank you. Our next question comes from Chris Whitmore of Deutsche Bank.

Chris Whitmore - Deutsche Bank Securities

Thanks. My question was around thin provisioning. It sounds like it's starting to ramp at the high end and perhaps in the mid-range this summer. Some of the storage buyers I've talked to suggested this is a game changing technology that allowed them to drastically reduce storage spend and still get the same utilization out of that disk. Can you comment on the timing of thin provision, and how you expect it to impact overall demand for your boxes? Thanks.

Joe Tucci

Well, I do think - you know, we've mentioned it, David mentioned it in his probably pretty comprehensive comments - that we think, you know, we call it virtual provisioning because we think we're taking a little bit different and more innovative approach than some of the others that have thin provisioning. But that's going to be kind of a mandatory in the storage landscape, and we have had it out on our unified storage product family now for a couple of years. It's shipping now on Symmetrix and it'll be kind of - you need the newest version and you need a Sym4 so it's not a huge ramp at the time, but it is starting to ship and it'll be shipping in volume probably by the end of - big volume by the very end of the quarter.

In effect, though, you can almost look at it as a one-time gain because if your information is going to grow X percent, you can get better utilization but then as your information grows from there on out, you're still going to have to add the storage. And I think information growth is picking up, and then of course things like thin provisioning, things like [de-dup], data de-duplication and other very redundant - data de-duplication, another very important technology - help bring that back down. But I think even putting those down, we're going to have plenty of growth with our customers. So I think this is a great technology for us and our customers, and I'm not worried about it at all impacting our performance.

Chris Whitmore - Deutsche Bank Securities

What kind of utilization benefits do you expect your customers to achieve once they install your version of thin provisioning, and why wouldn't that impact future demand for storage boxes?

Joe Tucci

Well, let's just say your utilization rate today - I'll make it up - is 50%, and you can put in thin provisioning and bring it to 85%, right? But after you brought it to 85% and you need more storage, you're going to have to add more storage, right?

Your true information growth is going to show up so if you're under provisioning, you know, it doesn't compound forever, is what I'm telling you.

Chris Whitmore - Deutsche Bank Securities

Okay, thanks.

Tony Takazawa

Next question, please.

Operator

Thank you. Our next question comes from Clay Sumner with - I'm sorry - FBR.

Clay Sumner - Friedman, Billings, Ramsey & Co.

Thanks very much. You guys have, well, you've talked about and there's been a lot of speculation about you spinning off VMware some time next year when it becomes more tax efficient. I'm sure you haven't decided that yet, but can you give us an indication of how you think about the need to maintain a controlling interest in VMware for strategic reasons? In the past you've described VMware as a key piece of your info-centric computing strategy, so do you feel you need to at least own a majority stake in it?

Joe Tucci

Right now we have absolutely, positively no plans of spinning off VMware. As we look to the future, we like the assets we have across our information infrastructure, virtualization and cloud computing pieces of our business, as I talked about. I think the most important is that, when you look at it - and I think without a doubt - both EMC and VMware are performing very well. This is obviously the most important aspect because it builds long-term shareholder value.

So that's the statement, and I also make a statement that management and the Board are very focused on what will create the maximum shareholder value for both sets of shareholders over the long term. And that's where I'm going to leave it.

Tony Takazawa

Thanks. Next question, please.

Operator

Thank you. Our next question comes from Paul Mansky of Citigroup.

Paul Mansky - Citigroup

Thanks. Joe, as I look at your statements around maintaining full year guidance, some obviously, I think, justifiable concerns around the macro economic environment, the impact of virtual provisioning, can you help us contextualize a bit linearity with respect to the year? I know VMware provided top-line guidance at least last night. I certainly wouldn't ask for that specifically, although we'll take it, I'm sure. But can you talk to us about how you see the year unfolding?

Joe Tucci

I mean, obviously, Paul, there's a lot of unknowns so we've got to play it out. I really do think the virtual provisioning aspect is way overplayed. On one side, yes, you get better utilization of your disk drives. On the other side as they always say in life, there's no free lunch - and it does take processing cycles and software, both of which we charge for, to get thin provisioning accomplished. So it's not all gain for totally free, right? I mean, there is a balance the customers will strike.

Obviously, we will have this across our whole line. As I said, it's in our unified storage products now. It's basically coming to Symmetrix as we speak, and it'll be in Clariion in the middle of the year. So I think that's all goodness. But for always, you always bought things like bigger disk drives, de-duplication, compression, I mean, there's always been technologies to help get utilization rates up there, and there will continue to be. And fortunately customers continue to build information, so we've got to continue to - we've got a lot of opportunities around our information infrastructure, which is why we're taking a broader approach than just storage.

And I believe that's not going to really impact our year. I think the biggest impact to the year will be how this economy works out, and, as I said, where customers are prioritizing their dollars right now or their yens or their Euros or whatever, we are in the best places. And we will continue to focus, and I think this is absolutely a case whether you're going to see the strong get strong and the weak get weaker. And we absolutely believe we're on the strong side, and I think you're going to see big have and have-nots as results go on throughout the year.

Paul Mansky - Citigroup

Thank you very much.

Tony Takazawa

Thanks, Paul. Next question, please.

Operator

Thank you. Our next question comes from Brian Freed of Morgan, Keegan.

Brian Freed - Morgan, Keegan & Company, Inc.

Good morning. Good quarter, and thanks for taking my call. Could you real quick talk about what kind of trends you're seeing within the financial services segment specifically given your outsized exposure to that segment?

Joe Tucci

I missed that one word.

Brian Freed - Morgan, Keegan & Company, Inc.

Given your exposure to financial services, can you talk about what you're seeing trend-wise there, if you've seen any stability off of what looks like a lower trend line or if you see continued weakness in the segment?

Joe Tucci

Well, it's really interesting. When you talk to financial services companies - I'm talking more of the big ones now, but I'm sure that's probably what you're talking about, too - is they'll tell you that parts of their business are doing just fine, and then one or two parts they're having some issues in. So you can't just paint the whole industry where they're going to just start cutting back. And then, as I said, some of the - actually that example I gave of what one customer told me was from the financial services industry - so there's companies that think they are in a relatively good position relative to their competitors and they're going to, like I said, be one of the strong that takes share and comes out of this even stronger.

So if you looked at it on a percentage basis, while we're not seeing any growth to write home about, we're not seeing this huge decline in financial services IT spending. But obviously to do that we're having to take share from others.

Brian Freed - Morgan, Keegan & Company, Inc.

Thanks.

Tony Takazawa

Thank you, Brian. Next question, please.

Operator

Our next question comes from Kaushik Roy of Pacific Growth Technologies.

Kaushik Roy - Pacific Growth Technologies

Thanks. Congratulations on the gross margin improvement. Now is it primarily because of the increasing software mix or you're actually getting better margins on the hardware side as well? And then, Joe, I think in the January call you mentioned that gross margins will tick down, but do you expect for 2008 gross margins to be up over 2007 or lower than 2007?

David Goulden

Kaushik, let me take the first - I'll take both parts of the question. For the first quarter, as we talked, the actual software-hardware mix was actually, in theory, on paper, unfavorable towards gross margin, so to answer your point, our solution margins are up, which means if you mathematically calculate a Storage margin, then the Storage margins are in fact higher on the hardware side. But again, the important thing to focus upon is the overall solution content.

And as we talked about, if you kind of look at our 2008 guidance and we guided for a little bit of positive leverage in EMC infrastructure non-GAAP operating margins, then you would expect to see some improvement there coming from gross margins.

Kaushik Roy - Pacific Growth Technologies

Okay. Thank you.

Tony Takazawa

Thanks. Next question, please.

Operator

Thank you. Our next question comes from Thomas Curlin of RBC.

Thomas Curlin - RBC Capital Markets

Hi. Good morning. Can you just maybe update us on your thoughts for linearity during the year? I think previously you've at least commented on what you thought about the distribution of revenue in a given year, and I think that probably included this year. Just given what's happening with macro, do you think it's appropriate to look at a distribution that's maybe a little more backend loaded than the historical average? If you look at it sequentially just into June, you've done everything from flat to up 5% sequentially over the last three years. Should we be closer to the lower end of that range just given macro or maybe stick with what you did last year at 5% up sequentially.

Joe Tucci

Tom, I mean, there's a lot of uncertainty. But right now we, as you know, we give guidance once a year. If we fall off of that, we'll certainly tell you. But I really hesitate to comment.

Thomas Curlin - RBC Capital Markets

Maybe said a different way.

Joe Tucci

Right now we don't think it's going to look vastly different than other years have looked.

Thomas Curlin - RBC Capital Markets

Okay. Thank you very much.

Tony Takazawa

Thanks, Tom. Next question, please.

Operator

Thank you. Our next question comes from Bill Fearnley of Ftn Midwest.

William Fearnley - Ftn Midwest Securities Corp.

Yeah, good morning. Quick question for you, Joe, here on Symmetrix. How should we be thinking about Sym growth here for the rest of FY '08, and what trends are you seeing in the corporate data center space there? And then just a quick granular thing on Sym - how much of the growth here is from new customers and how much of it is upgrades from existing customers? Thanks.

Joe Tucci

Bill, we don't break out that kind of data. We have said that we expect Sym to be a low to mid single-digit growth, and I think that's about right. And we just don't - obviously, we have the data but we just don't break that out. I think we're very generous with the data we do give out, so I think we'll stay right here.

William Fearnley - Ftn Midwest Securities Corp.

So you're comfortable still with the low mid to single digit here on Sym for the remainder of the year as well?

Joe Tucci

Yeah. And on a total year basis, I think, low to mid single digits is where Sym will come out.

William Fearnley - Ftn Midwest Securities Corp.

Okay. Thanks.

Tony Takazawa

Thanks. We'll take one more question and then have a few concluding comments from Joe.

Operator

Thank you. Our final question will come from Ben [Writsis] of Lehman Brothers.

Ben Writsis - Lehman Brothers

Yeah. Thanks for getting me in there. Joe, just a little bit more on the color around the environment in a different way. I mean, obviously you saw the market get tougher and you decided to keep your outlook. Is there anything specific as you go through the segments that give you confidence to wake up today and keep your guidance, maybe something like maybe software sales were pushed out into the quarter and you have visibility, maybe a little more on Sym or Clariion momentum? Just a little more to point to that maybe are company specific that allowed you to keep the outlook. You've already been through the economy quite a bit, but more on the company specific stuff that allows you to buck the trend.

Joe Tucci

You know, Ben, I'm not sure how to answer that. On the plus side, we didn't do any kind of heroic diving catches, so to speak, so the business flow was the business flow.

On the other side, as I said, I don't see the economy getting better anytime soon. Certainly, I was in Europe last week, you see some of the same evidence in, say, the U.K. I was also in Germany. You don't see it much there. So I just don't know how far some of this is going to spread or how much it will be contained, but I do know that we have strong products. I do know that our investments are to take share. I'm convinced that to make our numbers we have to take more share than normal. I'm convinced we have the product line and the people to do that, so that's where I'll leave it.

Ben Writsis - Lehman Brothers

All right. Thanks a lot.

Joe Tucci

Well, thanks, everybody. Actually I gave a little bit of the - what I was going to say in the closing to the question that Ben asked. But I really am very pleased with the position of the company from both a product point of view and our go to market point of view. The attitude around EMC is a can do, winning attitude. Nobody is down here and saying wow, this is so touch, I can't make tomorrow. So the attitude is great, which I think is most important. I do think we are - besides that, we are also very, very well positioned in some of the real fundamental game changing moves that'll happen in the IT landscape, and that'll be exciting. And we'll be sharing a lot more of that with you as the year goes on and perhaps do it even at a formal session. And I do want to thank everybody for being on the call today, and all the best to you.

Operator

Thank you for participating on today's conference. The conference has concluded. You may disconnect at this time.