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EMC > SEC Filings for EMC > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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Form 10-Q for EMC CORP


2-Aug-2013

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.

Certain tables may not add or recalculate due to rounding.
INTRODUCTION
In the quarter ended June 30, 2013, we began managing the Company as three federated businesses: EMC Information Infrastructure, Pivotal and VMware Virtual Infrastructure. This approach allows each of the three businesses to individually build products, go-to-market capabilities and ecosystems that they need to succeed in their respective markets while sharing the same ultimate goal of helping customers leverage Cloud, Big Data and Trusted Information Technology ("IT") to maximize control, efficiency and choice. By dividing our strategy and executional focus across these three businesses, we can focus on each of their respective missions and offer customers horizontal solutions and more choices than they get from our competitors. We believe this strategy provides us with the opportunity to take advantage of the solid growth opportunity of EMC Information Infrastructure and the faster growth opportunities of VMware Virtual Infrastructure and Pivotal.
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. With the rise of trends towards mobile, social and Big Data, customers are finding greater efficiency through the available choice from cloud infrastructures where the private, public or hybrid cloud turns IT into a service that can be utilized on-demand. Accordingly, 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, telemetry and geophysical), social media and other web repositories. It is triggering new approaches for our customers to derive business insight and create new opportunities to expand revenues.
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. Businesses require IT resources that can scale on demand, handle a variety of workloads and be trusted at all times. Accordingly, the ability for customers to have and offer Trusted IT is a valuable competitive advantage.
We believe we are well-positioned in these markets to continue assisting our customers in storing, managing and unlocking the value contained within their information and to enable them to leverage our data-centric approach to security to take full advantage of Cloud Computing and Big Data. 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 though our strong and ever expanding portfolio of offerings while investing in the business. In the second quarter ended June 30, 2013, we continued to innovate and invest in expanding our total addressable market through increased internal research and development ("R&D"). Our investment in new technologies and solutions is reflected in our roadmap for the second half of 2013, with numerous innovations, refreshes and brand-new products as well as business acquisitions. We have developed a product portfolio with customers' current and future needs in mind which will continue to evolve as the largest transformation in IT history is creating enormous opportunities in Cloud Computing, Big Data and Trust.
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 enable customers to transition to Cloud Computing and benefit from Big Data in the most advantageous manner for their businesses. As IT headcount grows at a fraction of the pace of data and the demands from the data center escalate, customers continue to look for simple and scalable ways to build out their IT-as-a-


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

service function. We offer three alternatives to help our customers transition to cloud architectures and leverage Big Data to meet these needs: 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 continues to be an important part of our strategy to lead our customers to the public cloud.
Pivotal
In April 2013, we, along with VMware and an investment from General Electric Company ("GE"), officially formed Pivotal, which is focused on building a platform comprising the next generation of data fabrics, application fabrics and a cloud independent platform-as-service ("PaaS") to support Cloud Computing and Big and Fast Data Applications. The first version of this platform, Pivotal One, will be launched before the end of the year. Additionally, Pivotal is actively engaging with other industry players with the intention of working together to expand the ecosystem. We expect 2013 to be a transition year for Pivotal, and we believe we are positioning the business for rapid growth in 2014 and beyond. VMware Virtual Infrastructure
VMware's financial focus is on long-term revenue growth to enable it 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 building long-term relationships with its customers through the adoption of enterprise license agreements ("ELAs"). Additionally, VMware has made, and expects to continue to consider, strategic business acquisitions in the future. In January 2013, VMware announced a realignment of its strategy to refocus its resources and investments in support of three growth priorities that focus on its core opportunities as a provider of virtualization technologies that simplify IT infrastructure: the software-defined data center, the hybrid cloud and end-user computing. The software-defined data center ("SDDC") is where increasingly infrastructure is virtualized and delivered as a service, and the control of this data center is entirely automated by software. For the SDDC, VMware plans to continue to invest in the development and delivery of innovations in networking, security, storage and management as they continue to roll out and enhance the features of their vCloud Suite. For the hybrid cloud, VMware is introducing a public cloud infrastructure as a service offering designed to be completely interoperable with its customers' VMware virtualized infrastructure. For end-user computing, VMware plans to enhance their offerings to enable a virtual workspace for both existing PC environments and emerging mobile devices in a secure enterprise environment.
On a consolidated basis, our vision, strategy, robust product roadmap with our upcoming product launches as well as our continued steady execution positions us to continue to anticipate and capitalize on the evolving trends of Cloud Computing, Big Data and Trust in 2013. As a result, we believe our federated businesses will grow faster than the markets we serve in the second half of the year, 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 total revenue by our segments (in millions):
                                          For the Three Months Ended
                                           June 30,               June 30,
                                             2013                   2012          $ Change        % Change
Information Storage               $       3,926                 $     3,787     $       139             4 %
Information Intelligence Group              152                         153               -             -
RSA Information Security                    228                         220               7             3
Pivotal                                      70                          63               7            11
VMware Virtual Infrastructure             1,238                       1,088             150            14
Total revenues                    $       5,614                 $     5,311     $       303             6 %


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

                                     For the Six Months Ended
                                      June 30,            June 30,
                                        2013                2012       $ Change     % Change
Information Storage            $       7,690             $   7,450    $     240         3 %
Information Intelligence Group           308                   299           10         3
RSA Information Security                 460                   427           33         8
Pivotal                                  139                   107           32        30
VMware Virtual Infrastructure          2,404                 2,123          281        13
Total revenues                 $      11,001             $  10,406    $     595         6 %

Consolidated product revenues increased 3% and 2% to $3,258 million and $6,369 million for the three and six months ended June 30, 2013, respectively. The growth was driven by the continued 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 increased 3% and 2% to $2,568 million and $5,028 million for the three and six months ended June 30, 2013, respectively. Revenue from the High-end Storage business, which primarily includes revenues from EMC Symmetrix, increased 5% and 7% for the three and six months ended June 30, 2013, respectively, due to increasing demand from existing and new customers for storage solutions with high performance, consolidation and automation in demanding virtual data center environments, many of which are evolving into private clouds or are powering public clouds. Revenue from the Unified and Backup Recovery business improved largely due to our backup recovery purpose-built appliance businesses, Data Domain and Avamar, which continued to grow and gain market share. Our Unified business was affected by broad customer anticipation of the next generation VNX launch which is expected in the third quarter of 2013. Revenue from the Emerging Storage business, which primarily includes product and maintenance revenues from EMC Isilon, EMC Atmos, EMC VPLEX, EMC RecoverPoint, ASD Suites and EMC Xtrem families, increased 39% and 32% for the three and six months ended June 30, 2013, respectively. The scale-out file offering from EMC Isilon continues to deliver strong revenue growth in its traditional areas of strength and as it expands its presence in enterprise environments. The EMC Atmos object-based cloud storage solution exhibited strong growth.

The Pivotal segment's product revenues increased 4% and 8% to $24 million and $48 million for the three and six months ended June 30, 2013, respectively. Pivotal has made good progress since its formal launch on April 1 with its existing products such as Greenplum and Gemfire continuing to have significant design wins. The Pivotal team is building a new platform, Pivotal One, comprising next-generation data fabrics, application fabrics and a cloud-independent PaaS.

The VMware Virtual Infrastructure segment's product revenues increased 4% and 3% to $529 million and $1,013 million for the three and six months ended June 30, 2013, respectively. VMware's license revenues increased primarily due to demand for product offerings like the vCloud and vSphere with operations management and automation as customers' needs related to developing the software-defined data center, hybrid cloud and end-user computing continue. During the three months ended June 30, 2013 and 2012, ELAs comprised 37% and 29%, respectively, and ELAs comprised 33% and 26%, respectively, of total sales during the six months ended June 30, 2013 and 2012.

The RSA Information Security segment's product revenues decreased 5% and 1% to $98 million and $198 million for the three and six months ended June 30, 2013, respectively. The decrease in product revenues during the three and six month period was primarily attributable to our focus on customer migration to our new Authentication Manager 8.0 product release rather than customer acquisition as well as the timing of some large orders in our Identity and Protection business. This decrease was partially offset by growth in our Security Analytics Suite and Compliance offerings.

The Information Intelligence Group segment's product revenues decreased 14% and increased 1% to $39 million and $82 million for the three and six months ended June 30, 2013, respectively. This business continues to make progress as it transitions to more cloud friendly offerings and vertical based solutions. In addition, we saw good growth from our new initiatives such as Syncplicity.

Consolidated services revenues increased 10% and 11% to $2,356 million and $4,632 million for the three and six months ended June 30, 2013, 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.


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

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 5% and 6% to $1,358 million and $2,662 million for the three and six months ended June 30, 2013, respectively. The increase in services revenues was primarily attributable to higher demand for maintenance-related services associated with a larger installed base. 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 Pivotal segment's services revenues increased 15% and 45% to $46 million and $91 million for the three and six months ended June 30, 2013, respectively. The increase in services revenues was primarily attributable to higher demand for maintenance-related services associated with the growing installed base.

The VMware Virtual Infrastructure segment's services revenues increased 22% to $709 million and $1,391 million for the three and six months ended June 30, 2013, respectively. The increase in services revenues was primarily attributable to growth in VMware's software maintenance revenues which 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 11% and 16% to $130 million and $262 million for the three and six months ended June 30, 2013, 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 increased 6% and 4% to $113 million and $226 million for the three and six months ended June 30, 2013, respectively. The increase in services revenues was due to increased customer demand for the new initiatives and strategic services businesses.
Consolidated revenues by geography were as follows (in millions):

                                          For the Three Months Ended
                                            June 30,              June 30,
                                              2013                  2012        % Change
  United States                    $       2,963                 $    2,857         4 %
  Europe, Middle East and Africa           1,486                      1,400         6
  Asia Pacific and Japan                     835                        748        12
  Latin America, Mexico and Canada           330                        306         8
  Total revenues                   $       5,614                 $    5,311         6 %


                                         For the Six Months Ended
                                          June 30,            June 30,
                                            2013                2012       % Change
  United States                    $       5,795             $   5,490         6 %
  Europe, Middle East and Africa           2,963                 2,865         3
  Asia Pacific and Japan                   1,573                 1,459         8
  Latin America, Mexico and Canada           670                   592        13
  Total revenues                   $      11,001             $  10,406         6 %

Revenues increased for the three and six months ended June 30, 2013 compared to the same periods in 2012 in all of our geographic markets.
Changes in exchange rates negatively impacted revenue growth by 0.7% and 0.6% for the three and six months ended June 30, 2013, respectively. The impact of the change in rates was most significant in Japan and Brazil.


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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 (in millions):
                                            For the Three Months Ended
                                            June 30,           June 30,
                                              2013               2012          $ Change       % Change
  Cost of revenue:
  Information Storage                    $      1,696       $      1,623     $       73             4 %
  Information Intelligence Group                   56                 51              6            11
  RSA Information Security                         80                 41             38            91
  Pivotal                                          44                 30             14            49
  VMware Virtual Infrastructure                   129                124              5             4
  Corporate reconciling items                     100                 95              5             6
  Total cost of revenue                         2,105              1,964            141             7
  Gross margins:
  Information Storage                           2,230              2,164             66             3
  Information Intelligence Group                   96                102             (6 )          (6 )
  RSA Information Security                        148                179            (31 )         (17 )
  Pivotal                                          26                 33             (7 )         (22 )
  VMware Virtual Infrastructure                 1,109                964            145            15
  Corporate reconciling items                    (100 )              (95 )           (5 )           6
  Total gross margin                            3,509              3,347            162             5
  Operating expenses:
  Research and development(1)                     695                655             39             6
  Selling, general and administrative(2)        1,785              1,717             68             4
  Restructuring and acquisition-related
  charges                                           7                 28            (21 )         (75 )
  Total operating expenses                      2,487              2,400             87             4
  Operating income                              1,022                947             75             8
  Investment income, interest expense
  and other expenses, net                         (56 )              (43 )          (13 )          29
  Income before income taxes                      966                904             62             7
  Income tax provision                            216                214              2             1
  Net income                                      750                690             60             9
  Less: Net income attributable to the
  non-controlling interest in VMware,
  Inc.                                            (49 )              (40 )           (9 )          22
  Net income attributable to EMC
  Corporation                            $        701       $        650     $       51             8 %


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

                                            For the Six Months Ended
                                            June 30,         June 30,
                                              2013             2012          $ Change       % Change
  Cost of revenue:
  Information Storage                    $     3,381       $     3,241     $       141            4 %
  Information Intelligence Group                 113               106               7            6
  RSA Information Security                       160               115              45           39
  Pivotal                                         86                54              32           60
  VMware Virtual Infrastructure                  254               241              13            5
  Corporate reconciling items                    200               188              12            6
  Total cost of revenue                        4,194             3,945             249            6
  Gross margins:
  Information Storage                          4,309             4,210              99            2
  Information Intelligence Group                 195               192               3            2
  RSA Information Security                       301               312             (12 )         (4 )
  Pivotal                                         52                53              (1 )         (1 )
  VMware Virtual Infrastructure                2,150             1,882             269           14
  Corporate reconciling items                   (200 )            (188 )           (12 )          6
  Total gross margin                           6,807             6,461             346            5
  Operating expenses:
  Research and development(3)                  1,370             1,244             126           10
  Selling, general and administrative(4)       3,499             3,367             133            4
  Restructuring and acquisition-related
  charges                                        155                53             101          189
  Total operating expenses                     5,024             4,664             360            8
  Operating income                             1,783             1,797             (14 )         (1 )
  Investment income, interest expense
  and other expenses, net                       (126 )             (77 )           (49 )         65
  Income before income taxes                   1,657             1,720             (63 )         (4 )
  Income tax provision                           292               405            (113 )        (28 )
  Net income                                   1,365             1,315              50            4
  Less: Net income attributable to the
  non-controlling interest in VMware,
  Inc.                                           (84 )             (79 )            (5 )          6
  Net income attributable to EMC
  Corporation                            $     1,281       $     1,236     $        45            4 %


___________


(1) Amount includes corporate reconciling items of $85 million and $81 million for the three months ended June 30, 2013 and 2012, respectively.

(2) Amount includes corporate reconciling items of $142 million and $149 million for the three months ended June 30, 2013 and 2012, respectively.

(3) Amount includes corporate reconciling items of $178 million and $153 million for the six months ended June 30, 2013 and 2012, respectively.

(4) Amount includes corporate reconciling items of $292 million and $292 million for the six months ended June 30, 2013 and 2012, respectively.

Gross Margins
Overall our gross margin percentages were 62.5% and 63.0% for the three months ended June 30, 2013 and 2012, respectively. The slight decrease in the gross margin percentage in the second quarter of 2013 compared to 2012 was attributable to the RSA Information Security segment, which decreased overall gross margins by 65 basis points, the Information Storage segment, which decreased overall gross margins by 38 basis points, the Pivotal segment, which decreased overall gross margins by 22 basis points and the Information Intelligence Group segment, which decreased overall gross margins by 11 basis points. These decreases were partially offset by the VMware Virtual Infrastructure segment, which increased overall gross margins by 94 basis points. The increase in corporate reconciling items, consisting of stock-based compensation, acquisition-related intangible asset amortization


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

and amortization of VMware's capitalized software from prior periods decreased the consolidated gross margin percentage by 10 basis points. . . .

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