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EMC > SEC Filings for EMC > Form 10-Q on 7-Nov-2013All Recent SEC Filings

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Form 10-Q for EMC CORP


7-Nov-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 second quarter of 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 Computing, 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 third quarter ended September 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 products successfully launched during the third quarter of 2013, as well as our roadmap for the fourth quarter, 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


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

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-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, which continues to gather momentum in one of the fastest growing areas in IT. 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-a-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 the future.

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 to 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 which includes selling its solutions through enterprise license agreements ("ELAs") as well as through additional transactional business. 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 which include the software-defined data center ("SDDC"), the hybrid cloud and end-user computing. SDDC includes development and delivery of innovations in networking, security, storage and management as it continues to roll out and enhance the features of its vCloud Suite. For the hybrid cloud, VMware has introduced a public cloud infrastructure as a service offering designed to be completely interoperable with its customers' VMware virtualized infrastructure. For end-user computing, VMware has solutions designed to enable a user-centric approach to personal computing.

On a consolidated basis, our vision, strategy, market leading assets within our portfolio which continues to be expanded with our recent and upcoming product launches, as well as our continued steady execution positions us to continue to anticipate and capitalize on the mega trends of Cloud Computing, Big Data and Trust in 2013 and beyond. As a result, we believe our federated businesses will continue to grow faster than the markets we serve in 2013, while simultaneously investing in the business and growing earnings per share.

RESULTS OF OPERATIONS
Revenues
The following tables present total revenue by our segments (in millions):
                                            For the Three Months Ended
                                         September 30,            September 30,
                                             2013                     2012            $ Change         % Change
Information Storage               $       3,773                 $         3,726     $        47             1  %
Information Intelligence Group              149                             158              (9 )          (6 )%
RSA Information Security                    252                             227              25            11  %
Pivotal                                      80                              66              14            21  %
VMware Virtual Infrastructure             1,285                           1,101             184            17  %
Total revenues                    $       5,539                 $         5,278     $       261             5  %


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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,
                                        2013                2012            $ Change        % Change
Information Storage               $        11,463     $        11,177     $       286             3 %
Information Intelligence Group                458                 456               2             - %
RSA Information Security                      712                 654              58             9 %
Pivotal                                       218                 173              45            27 %
VMware Virtual Infrastructure               3,689               3,224             465            14 %
Total revenues                    $        16,540     $        15,684     $       856             5 %

Consolidated product revenues increased 3% and 2% to $3,165 million and $9,535 million for the three and nine months ended September 30, 2013, respectively. Although our revenues were negatively impacted by general economic and business conditions, including recent reductions in global IT spending and US federal government spending and higher than expected un-shipped orders during the three months ended September 30, 2013, we experienced growth in both the three- and nine-month periods. 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 were flat at $2,415 million for the three months ended September 30, 2013 and increased 1% to $7,444 million for the nine months ended September 30, 2013. Revenue from the High-end Storage business, which primarily includes revenues from EMC Symmetrix, decreased 8% and increased 2% for the three and nine months ended September 30, 2013, respectively. The decrease in the three month period is largely due to over a 40% decrease in storage product revenue from the US federal government resulting primarily from an unexpected re-prioritization of year-end budgets ahead of the US federal government shutdown. The increase in the nine month period is largely due to increased 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 despite a large volume of higher margin product orders which came in too late in the quarter to ship. Our Unified Storage business benefited from the very successful global launch in September of our next-generation VNX. Our Backup Recovery purpose-built appliance businesses continued to grow and gain market share, driven by a refresh of our mid-tier Data Domain products. 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 66% and 44% for the three and nine months ended September 30, 2013, respectively. EMC Isilon, with its scale-out file offering, added a record number of new customers in the third quarter and continues to deliver strong revenue growth in its traditional areas of strength as it expands its presence in enterprise environments. The EMC Atmos object-based cloud storage solution contributed to the growth as it is increasingly used by large web-scale providers and developers. VPLEX continued to grow at well over 50% for the three and nine months ended September 30, 2013.

The Pivotal segment's product revenues increased 54% and 24% to $35 million and $82 million for the three and nine months ended September 30, 2013, respectively. Pivotal has made good progress since its formal launch on April 1st with its existing products such as Greenplum and GemFire continuing to have significant design wins. The Pivotal team is building a new application development platform, Pivotal One, comprising next-generation data fabrics, application fabrics and a cloud-independent PaaS, which is on track for availability before year end.

The VMware Virtual Infrastructure segment's product revenues increased 16% and 7% to $563 million and $1,577 million for the three and nine months ended September 30, 2013, respectively. VMware's license revenues increased primarily due to demand for product offerings including 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 September 30, 2013 and 2012, ELAs comprised 33% and 24%, respectively, and ELAs comprised 33% and 25%, respectively, of total sales during the nine months ended September 30, 2013 and 2012.

The RSA Information Security segment's product revenues increased 13% and 4% to $120 million and $317 million for the three and nine months ended September 30, 2013, respectively. Product revenues increased during the three- and nine-month periods for both our Identity and Protection businesses with SecurID returning to growth in the third quarter of 2013 and our Security Management and Compliance business where growth accelerated for Archer and our Security Analytics suite.


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

The Information Intelligence Group segment's product revenues decreased 35% and 13% to $32 million and $115 million for the three and nine months ended September 30, 2013, respectively. The decrease in product revenues during the three months ended September 30, 2013 was primarily due to delayed purchases due to customers' tight budgets. This business continues to make progress as it transitions to more cloud friendly offerings and vertical based solutions. In addition, we continued to see good growth from our new initiatives such as Syncplicity.

Consolidated services revenues increased 8% and 10% to $2,374 million and $7,005 million for the three and nine months ended September 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 and professional services as 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 4% and 5% to $1,358 million and $4,019 million for the three and nine months ended September 30, 2013, respectively. The increase in services revenue for the three and nine months ended September 30, 2013 was primarily attributable to higher demand for maintenance-related services associated with a larger installed base as well as increased professional services.

The Pivotal segment's services revenues increased 4% and 28% to $45 million and $136 million for the three and nine months ended September 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 17% and 20% to $722 million and $2,112 million for the three and nine months ended September 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 10% and 13% to $132 million and $395 million for the three and nine months ended September 30, 2013, respectively. Services revenues increased due to an increase in professional services and maintenance revenues resulting from continued demand for support from our installed base. The Information Intelligence Group segment's services revenues increased 8% and 5% to $117 million and $343 million for the three and nine months ended September 30, 2013, respectively. The increase in services revenues was due to increased customer demand for the new initiatives and strategic services.
Consolidated revenues by geography were as follows (in millions):

                                                For the Three Months Ended
                                             September 30,       September 30,
                                                 2013                2012             % Change
  United States                            $         2,956     $         2,886               2 %
  Europe, Middle East and Africa                     1,455               1,352               8 %
  Asia Pacific and Japan                               789                 733               8 %
  Latin America, Mexico and Canada                     339                 307              10 %
  Total revenues                           $         5,539     $         5,278               5 %


                                                 For the Nine Months Ended
                                             September 30,       September 30,
                                                 2013                2012             % Change
  United States                            $         8,752     $         8,376               4 %
  Europe, Middle East and Africa                     4,418               4,216               5 %
  Asia Pacific and Japan                             2,361               2,193               8 %
  Latin America, Mexico and Canada                   1,009                 899              12 %
  Total revenues                           $        16,540     $        15,684               5 %

Revenues increased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 in all of our geographic markets.


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

Changes in exchange rates negatively impacted revenue growth by 1% for both the
three and nine months ended September 30, 2013. The impact of the change in
rates was most significant in Japan and Brazil.
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
                                          September 30,      September 30,
                                              2013               2012           $ Change       % Change
  Cost of revenue:
  Information Storage                    $      1,672       $       1,607     $       65            4  %
  Information Intelligence Group                   55                  50              5            9  %
  RSA Information Security                         82                  81              1            -  %
  Pivotal                                          46                  29             17           57  %
  VMware Virtual Infrastructure                   144                 126             18           14  %
  Corporate reconciling items                      98                  97              1            -  %
  Total cost of revenue                         2,097               1,990            107            5  %
  Gross margins:
  Information Storage                           2,101               2,119            (18 )         (1 )%
  Information Intelligence Group                   94                 108            (14 )        (12 )%
  RSA Information Security                        170                 146             24           17  %
  Pivotal                                          34                  37             (3 )         (7 )%
  VMware Virtual Infrastructure                 1,141                 975            166           17  %
  Corporate reconciling items                     (98 )               (97 )           (1 )          -  %
  Total gross margin                            3,442               3,288            154            5  %
  Operating expenses:
  Research and development(1)                     686                 653             33            5  %
  Selling, general and administrative(2)        1,809               1,709            100            6  %
  Restructuring and acquisition-related
  charges                                          40                  27             13           48  %
  Total operating expenses                      2,535               2,389            146            6  %
  Operating income                                907                 899              8            1  %
  Investment income, interest expense
  and other expenses, net                         (87 )               (55 )          (32 )         59  %
  Income before income taxes                      820                 844            (24 )         (3 )%
  Income tax provision                            181                 185             (4 )         (2 )%
  Net income                                      639                 659            (20 )         (3 )%
  Less: Net income attributable to the
  non-controlling interest in VMware,
  Inc.                                            (53 )               (33 )          (20 )         63  %
  Net income attributable to EMC
  Corporation                            $        586       $         626     $      (40 )         (7 )%


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

                                              For the Nine Months Ended
                                          September 30,       September 30,
                                               2013                2012           $ Change       % Change
  Cost of revenue:
  Information Storage                    $       5,055       $        4,847     $      208            4  %
  Information Intelligence Group                   168                  157             11            7  %
  RSA Information Security                         241                  196             45           23  %
  Pivotal                                          132                   84             48           59  %
  VMware Virtual Infrastructure                    397                  367             30            8  %
  Corporate reconciling items                      298                  285             13           (4 )%
  Total cost of revenue                          6,291                5,936            355            6  %
  Gross margins:
  Information Storage                            6,408                6,330             78            1  %
  Information Intelligence Group                   290                  299             (9 )         (3 )%
  RSA Information Security                         471                  458             13            3  %
  Pivotal                                           86                   89             (3 )         (4 )%
  VMware Virtual Infrastructure                  3,292                2,857            435           15  %
  Corporate reconciling items                     (298 )               (285 )          (13 )          4  %
  Total gross margin                            10,249                9,748            501            5  %
  Operating expenses:
  Research and development(3)                    2,056                1,896            160            8  %
  Selling, general and administrative(4)         5,308                5,076            232            5  %
  Restructuring and acquisition-related
  charges                                          195                   81            114          142  %
  Total operating expenses                       7,559                7,053            506            7  %
  Operating income                               2,690                2,695             (5 )          -  %
  Investment income, interest expense
  and other expenses, net                         (213 )               (131 )          (82 )         63  %
  Income before income taxes                     2,477                2,564            (87 )         (3 )%
  Income tax provision                             474                  590           (116 )        (20 )%
  Net income                                     2,003                1,974             29            2  %
  Less: Net income attributable to the
  non-controlling interest in VMware,
  Inc.                                            (136 )               (111 )          (25 )         22  %
  Net income attributable to EMC
  Corporation                            $       1,867       $        1,863     $        4            -  %


___________


(1) Amount includes corporate reconciling items of $92 million and $88 million for the three months ended September 30, 2013 and 2012, respectively.

(2) Amount includes corporate reconciling items of $159 million and $171 million for the three months ended September 30, 2013 and 2012, respectively.

(3) Amount includes corporate reconciling items of $269 million and $241 million for the nine months ended September 30, 2013 and 2012, respectively.

. . .

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