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EMC > SEC Filings for EMC > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for EMC CORP


2-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements and should also be read in conjunction with the risk factors set forth in Item 1A of Part II. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof.

All dollar amounts expressed numerically in this MD&A are in millions.

Certain tables may not add due to rounding.
INTRODUCTION

We manage our business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure.
EMC Information Infrastructure
Our EMC Information Infrastructure business consists of three segments:
Information Storage, Information Intelligence and RSA Information Security. The objective for our EMC Information Infrastructure business is to simultaneously increase our market share, invest in the business and improve our financial returns. During the remainder of 2012, we will continue to innovate and invest in expanding our total addressable market through internal research and development ("R&D") and through acquisitions to capitalize on the continued expansion of enterprise data. We have developed a product portfolio with customers' current and future needs in mind; these needs will continue to evolve as the largest transformation in information technology ("IT") history creates enormous opportunities in three secular trends: Cloud Computing, Big Data and Trust.
Cloud Computing leverages an on-demand, self-managed, virtualized infrastructure to deliver IT-as-a-Service in a more efficient, flexible and cost-effective manner. While the fundamental transition to Cloud Computing architectures is gaining traction, customers are increasingly recognizing that their ability to compete is tied to the efficiency, flexibility and agility of their IT operations and that transitioning to a cloud-based architecture will be a key component to their success. We believe our offerings are well-suited to capitalize on this trend as it unfolds over the next several years. Big Data, which is a primary contributor to the pace of overall data growth, refers to the large repositories of corporate and external data, including unstructured information created by new applications (e.g. medical, entertainment, energy and geophysical), social media and other web repositories. With the continued growth of the investments we are making in Big Data, we believe we are well-positioned in this market to continue assisting our customers in storing, managing and unlocking the value contained within this information. The successful transition to a model that leverages Cloud Computing and Big Data is dependent upon both the right infrastructure and the ability to build Trust into that infrastructure. Having a holistic and data-centric approach to security threats is key to building Trust, and we have been at the forefront of this security trend. The new threat environment is transforming the way customers think about Trust, and we continue to build our data-centric approach to security to enable our customers to take full advantage of the benefits afforded by Cloud Computing and Big Data.
Our go to market model, where we continue to leverage our direct sales force and services organization, as well as our channel and services partners and service providers, positions us well to help customers transition to Cloud Computing and benefit from Big Data. We offer three alternatives to help our customers transition to Cloud architectures and leverage Big Data: our best of breed infrastructure components, proven infrastructure through VSPEX and converged infrastructure with Vblock from VCE Company LLC, our joint venture with Cisco, and other investors VMware and Intel. Our service provider program is another important part of our strategy to get our customers to the Public Cloud. VMware Virtual Infrastructure
VMware's financial focus is on long-term revenue growth to generate cash flows to fund its expansion of industry segment share and evolve its virtualization-based products for data centers, end-user devices and cloud computing through a combination of internal development and acquisitions. VMware expects to grow its business by broadening its virtualization infrastructure software solutions technology and product portfolio, increasing product awareness, promoting the adoption of virtualization and building long-term relationships with its customers through the adoption of enterprise license agreements ("ELAs"). Since the introduction of VMware vSphere in 2009, VMware has introduced more products that build on the vSphere foundation including VMware vSphere 5 and a comprehensive suite of cloud infrastructure technologies, as well as VMware View 5. Additionally, in the third quarter of 2012, VMware released VMware vCloud Suite 5.1, which integrates its virtualization, cloud infrastructure and management portfolio into a comprehensive solution consisting of cloud infrastructure


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)

and management products, expertise and ecosystem support. VMware vCloud Suite 5.1 is its first solution to deliver a software-defined data center ("SDDC"). The SDDC architecture abstracts all hardware resources and pools them into aggregate capacity, enabling automation to safely and efficiently parcel it out as needed for applications. VMware plans to continue to introduce additional products in the future that expand and promote the use of the vSphere foundation and the SDDC. In addition, VMware has made, and expects to continue to make, acquisitions that strengthen its product offerings or extend its strategy to deliver broader virtualized solutions.
We believe that on a consolidated basis, our comprehensive portfolio of best-of-breed highly integrated solutions, wealth of experience and proven track record will allow us to leverage our strengths and position us to capitalize on the evolving trends of Cloud Computing, Big Data and Trust, even if the economic landscape remains cautious. Going forward, we believe we will grow faster than our addressable markets and take share while simultaneously investing in the business and growing earnings per share at a rate faster than the rate at which we will grow our revenue.

RESULTS OF OPERATIONS
Revenues
The following tables present revenue by our segments:
                                           For the Three Months Ended
                                       September 30,           September 30,
                                            2012                   2011            $ Change       % Change
Information Storage               $      3,762.8             $       3,662.9     $      99.9           2.7 %
Information Intelligence Group             158.0                       161.6            (3.6 )        (2.2 )
RSA Information Security                   226.9                       214.9            12.0           5.6
VMware Virtual Infrastructure            1,130.5                       940.8           189.7          20.2
Total revenues                    $      5,278.2             $       4,980.2     $     298.0           6.0 %


                                          For the Nine Months Ended
                                      September 30,          September 30,
                                           2012                  2011            $ Change      % Change
Information Storage               $      11,268.9          $      10,670.9     $    598.0           5.6 %
Information Intelligence Group              456.3                    472.6          (16.3 )        (3.4 )
RSA Information Security                    654.2                    585.3           68.9          11.8
VMware Virtual Infrastructure             3,304.5                  2,704.3          600.2          22.2
Total revenues                    $      15,683.9          $      14,433.2     $  1,250.7           8.7 %

Consolidated product revenues increased 0.3% and 3.1% to $3,084.4 and $9,332.0 for the three and nine months ended September 30, 2012, respectively. Consolidated product revenues increased slightly during the three month period due to increases in VMware Virtual Infrastructure product revenues, somewhat offset by decreases in Information Storage product revenues resulting from macro economic uncertainty leading to more deal scrutiny, which caused customers to delay procurement decisions and to channel orders coming in too late in the quarter to allow for third quarter shipments. The consolidated product revenues increase for the nine month period was primarily driven by the Information Storage and VMware Virtual Infrastructure segments' product revenues due to continued higher demand for our portfolio of offerings to address the storage, data analysis and virtualization needs for continued information growth, particularly as customers continue to build out their own data centers to develop and support their private or public cloud infrastructures and analyze and protect the data within their data centers.

The Information Storage segment's product revenues decreased 1.1% and increased 1.7% to $2,438.7 and $7,406.3 for the three and nine months ended September 30, 2012, respectively. Within the networked storage platforms portfolio, which includes our high-end and mid-tier storage platform products, product revenues increased 1.7% and 5.7% for the three and nine months ended September 30, 2012, respectively. Within the high-end of the Information Storage segment, product revenues increased 4.6% and decreased 1.1% for the three and nine months ended September 30, 2012, respectively. The increase in revenues for the three months ended September 30, 2012 was largely due to demand for our Symmetrix scale-out block solutions that had their first full quarter of availability for the refreshed family of VMAX systems. The decrease in revenues for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, was primarily driven by the strong growth in the nine months ended September 30, 2011 associated with the introduction of FAST VP in conjunction with VMAX in the first quarter of 2011. Within the mid-tier of the Information Storage segment, which includes the VNX


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)

family, Backup and Recovery Systems, EMC Isilon and EMC Atmos, product revenues decreased 0.2% and increased 10.9% for the three and nine months ended September 30, 2012, respectively. Demand for our VNX family continued despite a difficult market environment which led to later-than-expected timing of some channel orders which we could not fulfill in the third quarter resulting in an overall decrease in revenue. Our Data Domain and Avamar product revenue grew, however revenue from our purpose-built backup appliances in the third quarter of 2012 was negatively impacted by delayed procurement decisions by customers which delayed some deals beyond our third quarter. The scale-out file offering from EMC Isilon continues to deliver strong revenue growth in its traditional areas of strength and it expands its presence in enterprise environments. Finally, our EMC Greenplum Big Data analytics solutions portfolio continues to grow at strong double-digit rates resulting from demand from new customers as well as repeat customers adding on to their existing analytics implementations.

The VMware Virtual Infrastructure segment's product revenues increased 10.6% and 12.2% to $489.9 and $1,488.3 for the three and nine months ended September 30, 2012, respectively. VMware's license revenues increased primarily due to demand for product offerings. During the three months ended September 30, 2012 and 2011, respectively, ELAs comprised 24% and 22% of total sales and during the nine months ended September 30, 2012 and 2011, respectively, ELAs comprised 25% and 24% of total sales.

The RSA Information Security segment's product revenues decreased 8.4% and increased 0.3% to $106.0 and $306.0 for the three and nine months ended September 30, 2012, respectively. The decrease in product revenues during the three month period was primarily due to the slowdown of hiring and employment, especially in Europe and Asia, which negatively impacted our Identity and Data Protection business as well as the prior year remediation of tokens which disrupted the normal renewal cycles. The slight increase in product revenues during the nine month period was primarily attributable to increased demand for our Security Management and Compliance products.

The Information Intelligence Group segment's product revenues decreased 1.1% and 3.2% to $49.9 and $131.4 for the three and nine months ended September 30, 2012, respectively. The decrease in product revenues was largely due to changing customer demand, primarily in the first quarter of 2012. The Information Intelligence Group segment continues to innovate, creating solutions that we believe will be easier to deploy, easier to use and more aligned with customer needs.

Consolidated services revenues increased 15.1% and 18.0% to $2,193.7 and $6,351.9 for the three and nine months ended September 30, 2012, respectively. The consolidated services revenues increase was primarily driven by the Information Storage and VMware Virtual Infrastructure segments' services revenues resulting from increased demand for maintenance-related services. In addition, we continue to provide expertise to customers on effective ways to enable Cloud Computing and to leverage their Big Data assets.

The Information Storage segment's services revenues increased 10.6% and 14.0% to $1,324.1 and $3,862.6 for the three and nine months ended September 30, 2012, respectively. The increase in services revenues was primarily attributable to higher demand for maintenance-related services associated with a larger installed base as well as increased maintenance renewals. In addition, a growing demand for professional services as we assist with customers' transitions to cloud architectures, transforming IT infrastructures and virtualizing mission-critical applications also contributed to the increase in services revenues. The increase in services revenue growth for the three months ended September 30, 2012 was lower than the increase in growth in the nine month period due to macro economic conditions in the third quarter resulting in customers deferring some discretionary consulting projects and in fewer implementation services caused by lighter storage product revenue.

The VMware Virtual Infrastructure segment's services revenues increased 28.7% and 31.8% to $640.6 and $1,816.2 for the three and nine months ended September 30, 2012, respectively. The increase in services revenues was primarily attributable to growth in VMware's software maintenance revenues. Software maintenance revenues benefited from strong renewals, multi-year software maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with new software license sales. Additionally, VMware experienced increased demand in their professional services, driven by the growth in their license sales and installed base.

The RSA Information Security segment's services revenues increased 21.9% and 24.3% to $120.9 and $348.3 for the three and nine months ended September 30, 2012, respectively. Services revenues increased due to an increase in maintenance revenues and professional services resulting from continued demand for support from our installed base. The Information Intelligence Group segment's services revenues decreased 2.7% and 3.6% to $108.1 and $324.9 for the three and nine months ended September 30, 2012, respectively.


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        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                      RESULTS OF OPERATIONS - (Continued)

Consolidated revenues by geography were as follows:
                                           For the Three Months Ended
                                        September 30,          September 30,
                                             2012                   2011         % Change
  United States                    $      2,886.0             $       2,674.6        7.9 %
  Europe, Middle East and Africa          1,351.8                     1,355.5       (0.3 )
  Asia Pacific and Japan                    733.2                       695.4        5.4
  Latin America, Mexico and Canada          307.3                       254.7       20.7
  Total revenues                   $      5,278.2             $       4,980.2        6.0 %


                                          For the Nine Months Ended
                                       September 30,        September 30,
                                           2012                  2011         % Change
  United States                    $      8,376.3          $       7,552.8       10.9 %
  Europe, Middle East and Africa          4,216.4                  4,149.8        1.6
  Asia Pacific and Japan                  2,192.4                  1,944.8       12.7
  Latin America, Mexico and Canada          898.9                    785.7       14.4
  Total revenues                   $     15,683.9          $      14,433.2        8.7 %

Revenues increased for the three and nine months ended September 30, 2012 compared to the same periods in 2011 in all of our geographic markets, excluding Europe, Middle East and Africa.
Changes in exchange rates negatively impacted revenue growth by 1.5% and 1.4% for the three and nine months ended September 30, 2012, respectively. The impact of the change in rates was most significant in the Euro zone for the three and nine months ended September 30, 2012.


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        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                      RESULTS OF OPERATIONS - (Continued)

Costs and Expenses

The following tables present our costs and expenses, other income and net income
attributable to EMC Corporation:
                                              For the Three Months Ended
                                          September 30,       September 30,
                                               2012                2011           $ Change      % Change
  Cost of revenue:
  Information Storage                    $     1,625.9       $      1,583.7     $     42.2          2.7 %
  Information Intelligence Group                  50.5                 59.4           (8.9 )      (15.0 )
  RSA Information Security                        81.3                 69.7           11.6         16.6
  VMware Virtual Infrastructure                  135.6                130.7            4.9          3.7
  Corporate reconciling items                     97.3                 70.4           26.9         38.2
  Total cost of revenue                        1,990.6              1,913.9           76.7          4.0
  Gross margins:
  Information Storage                          2,136.9              2,079.2           57.7          2.8
  Information Intelligence Group                 107.5                102.2            5.3          5.2
  RSA Information Security                       145.6                145.2            0.4          0.3
  VMware Virtual Infrastructure                  994.9                810.1          184.8         22.8
  Corporate reconciling items                    (97.3 )              (70.4 )        (26.9 )       38.2
  Total gross margin                           3,287.5              3,066.3          221.2          7.2
  Operating expenses:
  Research and development(1)                    652.9                548.0          104.9         19.1
  Selling, general and administrative(2)       1,708.8              1,612.9           95.9          5.9
  Restructuring and acquisition-related
  charges                                         27.1                 20.3            6.8         33.5
  Total operating expenses                     2,388.8              2,181.2          207.6          9.5
  Operating income                               898.8                885.0           13.8          1.6
  Investment income, interest expense
  and other expenses, net                        (54.7 )              (71.8 )         17.1        (23.8 )
  Income before income taxes                     844.1                813.2           30.9          3.8
  Income tax provision                           185.4                171.1           14.3          8.4
  Net income                                     658.7                642.1           16.6          2.6
  Less: Net income attributable to the
  non-controlling interest in VMware,
  Inc.                                           (32.3 )              (36.5 )          4.2        (11.5 )
  Net income attributable to EMC
  Corporation                            $       626.3       $        605.6     $     20.7          3.4 %


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        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                      RESULTS OF OPERATIONS - (Continued)

                                               For the Nine Months Ended
                                           September 30,       September 30,
                                               2012                 2011           $ Change      % Change
Cost of revenue:
Information Storage                      $      4,893.1       $      4,733.5     $    159.6          3.4 %
Information Intelligence Group                    156.8                176.4          (19.6 )      (11.1 )
RSA Information Security                          196.1                277.8          (81.7 )      (29.4 )
VMware Virtual Infrastructure                     400.3                390.4            9.9          2.5
Corporate reconciling items                       289.4                209.4           80.0         38.2
Total cost of revenue                           5,935.8              5,787.6          148.2          2.6
Gross margins:
Information Storage                             6,375.8              5,937.4          438.4          7.4
Information Intelligence Group                    299.5                296.3            3.2          1.1
RSA Information Security                          458.1                307.5          150.6         49.0
VMware Virtual Infrastructure                   2,904.2              2,313.9          590.3         25.5
Corporate reconciling items                      (289.4 )             (209.4 )        (80.0 )       38.2
Total gross margin                              9,748.1              8,645.6        1,102.5         12.8
Operating expenses:
Research and development(3)                     1,896.7              1,589.0          307.7         19.4
Selling, general and administrative(4)          5,075.6              4,684.5          391.1          8.3
Restructuring and acquisition-related
charges                                            80.6                 68.4           12.2         17.8
Total operating expenses                        7,052.9              6,342.0          710.9         11.2
Operating income                                2,695.3              2,303.6          391.7         17.0
Investment income, interest expense and
other expenses, net                              (130.6 )             (101.9 )        (28.7 )       28.2
Income before income taxes                      2,564.7              2,201.8          362.9         16.5
Income tax provision                              590.6                465.5          125.1         26.9
Net income                                      1,974.1              1,736.3          237.8         13.7
Less: Net income attributable to the
non-controlling interest in VMware, Inc.         (111.4 )             (107.0 )         (4.4 )        4.1
Net income attributable to EMC
Corporation                              $      1,862.7       $      1,629.3     $    233.4         14.3 %


 ___________


(1) Amount includes corporate reconciling items of $88.2 and $83.1 for the three months ended September 30, 2012 and 2011, respectively.

(2) Amount includes corporate reconciling items of $170.5 and $145.4 for the three months ended September 30, 2012 and 2011, respectively.

(3) Amount includes corporate reconciling items of $244.5 and $243.9 for the nine months ended September 30, 2012 and 2011, respectively.

(4) Amount includes corporate reconciling items of $476.7 and $447.3 for the nine months ended September 30, 2012 and 2011, respectively.

Gross Margins
Overall our gross margin percentages were 62.3% and 61.6% for the three months ended September 30, 2012 and 2011, respectively. The increase in the gross margin percentage in the third quarter of 2012 compared to 2011 was attributable to the VMware Virtual Infrastructure segment, which increased overall gross margins by 132 basis points and the Information Intelligence Group segment, which increased overall gross margins by 15 basis points, partially offset by the RSA Information Security segment, which decreased overall gross margins by 14 basis points, and the Information Storage segment, which decreased overall gross margins by 8 basis points. The increase in corporate reconciling items, consisting of stock-based compensation, restructuring and acquisition-related charges, acquisition-related intangible asset amortization, amortization of VMware's capitalized software from prior periods and transition costs, decreased the consolidated gross margin percentage by 53 basis points. Transition costs represent the incremental costs incurred to streamline our current cost structure.


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)

Our gross margin percentages were 62.2% and 59.9% for the nine months ended September 30, 2012 and 2011, respectively. The increase in the gross margin percentage for the nine months ended September 30, 2012 compared to 2011 was attributable to the VMware Virtual Infrastructure segment, which increased overall gross margins by 150 basis points, the RSA Information Security segment, which increased overall gross margins by 73 basis points, the Information Storage segment, which increased overall gross margins by 47 basis points and the Information Intelligence Group segment, which increased overall gross margins by 9 basis points. Additionally, the increase in corporate reconciling items decreased the consolidated gross margin percentage by 54 basis points. For segment reporting purposes, stock-based compensation, restructuring and acquisition-related charges, acquisition-related intangible asset amortization, amortization of VMware's capitalized software from prior periods and transition costs are recognized as corporate expenses and are not allocated among our various operating segments. The increase of $26.9 in the corporate reconciling items for the three months ended September 30, 2012 compared to the same period in 2011 was attributable to a $12.7 increase in amortization of VMware's capitalized software from prior periods, a $10.7 increase in acquisition-related . . .

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