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EMC > SEC Filings for EMC > Form 10-Q on 1-Aug-2014All Recent SEC Filings

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Form 10-Q for EMC CORP


1-Aug-2014

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
We manage our business as three federated businesses, each of which plays a vital role in the delivery of IT-as-a-service ("ITaaS"): EMC Information Infrastructure, Pivotal and VMware Virtual Infrastructure. This approach allows each of the three businesses to individually build best-of-breed 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 manage information which is becoming central to their operations as data centers move to an ITaaS model. In 2014, we will continue investing in the best technology and building the most complete portfolio to transition customers from the second platform of IT to the emerging and rapidly growing third platform of IT. We are a leader in the second platform of IT, which continues to support the vast majority of enterprise workloads and customers contained at these environments, and we believe we will continue to gain share in 2014. At the same time, we believe we have more offerings in the third platform of IT than anyone else and are better equipped to help customers bridge the gap as they transition from the second to third platform of IT. The third platform of IT includes cloud computing, Big Data, mobile, and social networking, which to operate successfully requires Trusted IT to establish security, privacy and trust in IT solutions. By segmenting 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 to maximize control, efficiency and choice. 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. 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 through our strong and ever expanding portfolio of offerings while investing in the business. During 2014, we will continue to innovate and invest in expanding our total addressable market through increased internal research and development ("R&D"), with a focus on flash, Big Data storage, software-defined storage and converged infrastructure to facilitate the enablement of cloud infrastructures, both public and private. Our investment in new technologies and solutions is reflected in our roadmap for 2014, with numerous innovations, product refreshes and brand-new products as well as continued focus on 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 Trusted IT.
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 ITaaS function. We offer three alternatives to help our customers transition to cloud architectures, in private, hybrid and public clouds, and leverage Big Data to meet these needs: our best-of-breed infrastructure products, 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"), 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 integrated technology platform, Pivotal One, will continue to be a cornerstone offering in 2014 together with high-value strategic services. The foundation of Pivotal One, Cloud Foundry, continues to gain momentum as an open platform for developing and operating new cloud applications that can be run on multiple leading private and public clouds in addition to our own and not lock a customer into any one cloud in particular. On top of this platform, Pivotal will offer its own suite of big and fast data capabilities, featuring game


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

changing innovations that use Hadoop Distributed File System ("HDFS") and scalar processing technologies. Additionally, its development services business, Pivotal Labs, will help existing customers and digital era startups build industrial-strength applications with more agility, more speed, and better quality. With its renewed focus on driving a business model to support exclusively software and strategic services, we believe we are positioning the business for rapid growth in the future. VMware Virtual Infrastructure
VMware is the leader in virtualization infrastructure solutions utilized by organizations to help transform the way they build, deliver and consume IT resources. VMware develops and markets its product and service offerings within three main product groups, and it also seeks to leverage synergies across these three product areas: SDDC or Software-Defined Data Center, End-User Computing and Hybrid Cloud Computing.
VMware pioneered the development and application of virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. The benefits to VMware's customers include lower IT costs and a more automated and resilient systems infrastructure capable of responding dynamically to variable business demands. VMware expects to grow its business by building long-term relationships with its customers which includes selling its solutions through enterprise license agreements ("ELAs").
VMware has articulated a vision for the software-defined data center ("SDDC"), where increasingly infrastructure is virtualized and delivered as a service, enabling control of the data center to be entirely automated by software. The SDDC is designed to transform the data center into an on-demand service that addresses application requirements by abstracting, pooling and automating the services that are required from the underlying hardware. SDDC promises to dramatically simplify data center operations and lower costs. The VMware vCloud Suite, which is its first integrated solution toward realizing the SDDC vision and is based upon its VMware vSphere virtualization platform, was initially introduced in late 2012.
On a consolidated basis, given our position and strength, we are working with a very large installed base of loyal customers with leading-edge technology for every layer of the IT stack, products and services for the infrastructure layer that include best-of-breed storage arrays, software defined storage, converged infrastructure and information security. Solutions for the virtualization layer that enable the software defined data center, hybrid cloud and end-user computing and a cloud agnostic PaaS offering have become the PaaS offerings of choice for enterprises looking to build out next-gen apps to harness the power of Big Data. This combination provides a strong portfolio of offerings and solutions in the second platform which will continue to support the majority of workloads for several years to come as the market transitions to the third platform with leading technologies and product as a services offerings and a powerful capability to bridge the gap between the two. Our vision, strategy, market leading assets within our portfolio which continues to be expanded with our recent and upcoming product releases, as well as our go-to market capabilities positions us to continue to anticipate and capitalize on the mega trends of cloud computing and Big Data, while addressing the mobile and social networking trends, with the necessary Trusted IT needs in 2014 and beyond. As a result, we believe on a consolidated basis we will continue to grow faster than the markets we serve in 2014, as we simultaneously invest in the business and grow earnings per share.

RESULTS OF OPERATIONS
Revenues
The following tables present total revenue by our segments (in millions):
                                          For the Three Months Ended
                                           June 30,               June 30,
                                             2014                   2013          $ Change        % Change
Information Storage               $       3,976                 $     3,954     $        22             1 %
Information Intelligence Group              158                         152               6             4 %
RSA Information Security                    243                         228              15             6 %
Pivotal                                      54                          42              12            29 %
VMware Virtual Infrastructure             1,449                       1,238             211            17 %
Total revenues                    $       5,880                 $     5,614     $       266             5 %


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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,
                                        2014                2013       $ Change    % Change
Information Storage            $       7,656             $   7,752    $    (96 )     (1 )%
Information Intelligence Group           312                   308           4        1  %
RSA Information Security                 486                   460          26        6  %
Pivotal                                  104                    77          27       35  %
VMware Virtual Infrastructure          2,801                 2,404         397       16  %
Total revenues                 $      11,359             $  11,001    $    358        3  %

Consolidated product revenues increased 2% to $3,319 million and decreased 1% to $6,327 million for the three and six months ended June 30, 2014, respectively. The percentage increase for the three months ended June 30, 2104 was primarily driven by the VMware Virtual Infrastructure segment, partially offset by the Information Storage segment. The percentage decrease for the six months ended June 30, 2104 was primarily driven by the Information Storage segment, somewhat offset by the VMware Virtual Infrastructure segment.

The Information Storage segment's product revenues decreased 1% and 4% to $2,551 million and $4,853 million for the three and six months ended June 30, 2014, respectively. Revenue from the high-end storage business decreased 14% for the three months ended June 30, 2014 primarily driven by a customer pause in purchasing in anticipation of our upcoming refresh of our high end offerings and higher than typical revenues in the three months ended June 30, 2013, which negatively impacted the growth rate for the period. Additionally, the planned change in our order fulfillment processes and higher than normal revenues in the six months ended June 30, 2013 also negatively impacted our high-end growth rate. Partially offsetting this decrease, revenue from the Emerging Storage business increased 52% and 65% for the three and six months ended June 30, 2014, respectively, primarily due to increased demand for our portfolio of best-of-breed products that are thriving with the shift to the third platform, including flash from XtremIO, software defined storage with ViPR, object-based cloud storage with Atmos and scale-out file storage from Isilon. Additionally, revenue from the Unified and Backup Recovery business increased 6% and 5% during the three and six months ended June 30, 2014, respectively, with growth generated from both our VNX and Data Domain offerings.

The Pivotal segment's product revenues decreased 1% and 5% to $15 million and $26 million for the three and six months ended June 30, 2014, respectively. The decrease is primarily attributable to an increase in license orders which have subscription-based, ratable revenue recognition. As a result, Pivotal's product revenue decline for the quarter does not reflect the growth in demand which grew compared to the comparable periods in the prior year. Pivotal continues to have significant customer wins with its newer offerings of Pivotal One and Pivotal CF, which is based on Cloud Foundry. Cloud Foundry, a cloud-independent PaaS, continues gaining momentum to become the standard for PaaS, as Pivotal adds numerous sponsors who will utilize the platform to build out the next-generation applications.

The VMware Virtual Infrastructure segment's product revenues increased 16% and 15% to $612 million and $1,168 million for the three and six months ended June 30, 2014, respectively. VMware's license revenues increased during the three and six months ended June 30, 2014 primarily due to an increase in revenue from its integrated product suites, including VMware vCloud Suite. Its integrated product suites include various product offerings and are sold at a greater price than our products that are sold on an individual basis. ELAs comprised 37% of their overall sales during both the three months ended June 30, 2014 and 2013 and 32% and 33% of their overall sales during the six months ended June 30, 2014 and 2013, respectively, with the balance represented by non-ELA, or transactional business.

The RSA Information Security segment's product revenues increased 7% and 6% to $104 million and $208 million for the three and six months ended June 30, 2014, respectively. The increase in product revenue was driven by growth in both our Identity and Data Protection and Security Management and Compliance businesses. Security continues to become increasingly more important in IT decisions and RSA continues to benefit from this trend with its advanced, data driven security offerings.

The Information Intelligence Group segment's product revenues decreased 6% and 13% to $37 million and $72 million for the three and six months ended June 30, 2014, respectively. The year-over-year decrease in product revenues was primarily due to the timing of revenue recognition resulting from growth in the subscription business. This business continues to make progress as it continues to innovate to meet customers' demand for technologies that work seamlessly in mobile cloud environments, like xCP and Syncplicity.


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

Consolidated services revenues increased 9% to $2,561 million and $5,032 million for both the three and six months ended June 30, 2014, respectively. The consolidated services revenues increase was primarily driven by the Information Storage and VMware Virtual Infrastructure segments' services revenues resulting from increased revenue associated with maintenance services and increased demand for 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 3% and 4% to $1,425 million and $2,803 million for the three and six months ended June 30, 2014, respectively. The increase in services revenues was primarily attributable to higher revenue associated with maintenance services due to a larger installed base as well as increased professional services. We have experienced a growing demand for professional services as we assist with customers' transitions to cloud architectures, transforming IT infrastructures and virtualizing mission-critical applications.

The Pivotal segment's services revenues increased 46% and 57% to $39 million and $78 million for the three and six months ended June 30, 2014, respectively. The increase in services revenues was primarily attributable to higher professional services in the three and six months ended June 30, 2014 as Pivotal transitions to enterprise customers, with their renewed focus on agile development and services surrounding their Pivotal One and Pivotal CF platforms.

The VMware Virtual Infrastructure segment's services revenues increased 18% and 17% to $837 million and $1,633 million for the three and six months ended June 30, 2014, 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 6% to $139 million and $278 million for both the three and six months ended June 30, 2014, respectively. Services revenues increased due to an increase primarily in professional services, as well as an increase in maintenance revenues, resulting from continued demand for support from our installed base.

The Information Intelligence Group segment's services revenues increased 7% and 6% to $121 million and $240 million for the three and six months ended June 30, 2014, respectively. The increase in services revenues was due to increased customer demand for services related to new product offerings and strategic professional services.
Consolidated revenues by geography were as follows (in millions):

                                          For the Three Months Ended
                                            June 30,              June 30,
                                              2014                  2013       % Change
  United States                    $       3,056                 $    2,963       3  %
  Europe, Middle East and Africa           1,669                      1,486      12  %
  Asia Pacific and Japan                     802                        835      (4 )%
  Latin America, Mexico and Canada           353                        330       7  %
  Total revenues                   $       5,880                 $    5,614       5  %



                                         For the Six Months Ended
                                          June 30,            June 30,
                                            2014                2013      % Change
  United States                    $       5,890             $   5,795       2  %
  Europe, Middle East and Africa           3,261                 2,963      10  %
  Asia Pacific and Japan                   1,525                 1,573      (3 )%
  Latin America, Mexico and Canada           683                   670       2  %
  Total revenues                   $      11,359             $  11,001       3  %

Revenues increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 in the United States, Europe, Middle East and Africa and Latin America, Mexico and Canada. Revenues decreased in the three and six months ended June 30, 2014 in the Asia Pacific and Japan regions when compared to the same periods in 2013.


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

Changes in exchange rates positively impacted revenue growth by 0.5% for the three months ended June 30, 2014 and had no impact to revenue growth for the six months ended June 30, 2014. The positive impact of the change in rates was most significant in Euro region and the United Kingdom, somewhat offset by negative impacts from the Asia Pacific markets, primarily Australia and Japan.

Costs and Expenses

The following tables present our costs and expenses, operating income and net
income attributable to EMC Corporation (in millions):
                                            For the Three Months Ended
                                            June 30,           June 30,
                                              2014               2013          $ Change       % Change
  Cost of revenue:
  Information Storage                    $      1,784       $      1,718     $       66            4  %
  Information Intelligence Group                   58                 56              2            4  %
  RSA Information Security                         81                 80              1            1  %
  Pivotal                                          28                 22              6           31  %
  VMware Virtual Infrastructure                   177                129             48           37  %
  Corporate reconciling items                      98                100             (2 )         (2 )%
  Total cost of revenue                         2,226              2,105            121            6  %
  Gross margins:
  Information Storage                           2,192              2,236            (44 )         (2 )%
  Information Intelligence Group                  100                 96              4            4  %
  RSA Information Security                        162                148             14            9  %
  Pivotal                                          26                 20              6           27  %
  VMware Virtual Infrastructure                 1,272              1,109            163           15  %
  Corporate reconciling items                     (98 )             (100 )            2           (2 )%
  Total gross margin                            3,654              3,509            145            4  %
  Operating expenses:
  Research and development(1)                     740                695             45            7  %
  Selling, general and administrative(2)        2,010              1,785            225           13  %
  Restructuring and acquisition and
  other related charges                            30                  7             23          328  %
  Total operating expenses                      2,780              2,487            293           12  %
  Operating income                                874              1,022           (148 )        (14 )%
  Investment income, interest expense
  and other expenses, net                         (65 )              (56 )           (9 )         16  %
  Income before income taxes                      809                966           (157 )        (16 )%
  Income tax provision                            187                216            (29 )        (14 )%
  Net income                                      622                750           (128 )        (17 )%
  Less: Net income attributable to the
  non-controlling interest in VMware,
  Inc.                                            (33 )              (49 )           16          (31 )%
  Net income attributable to EMC
  Corporation                            $        589       $        701     $     (112 )        (16 )%


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

                                            For the Six Months Ended
                                            June 30,         June 30,
                                              2014             2013          $ Change       % Change
  Cost of revenue:
  Information Storage                    $     3,488       $     3,428     $       60            2  %
  Information Intelligence Group                 113               113              -            -  %
  RSA Information Security                       163               159              4            2  %
  Pivotal                                         59                40             19           49  %
  VMware Virtual Infrastructure                  344               254             90           36  %
  Corporate reconciling items                    191               200             (9 )         (5 )%
  Total cost of revenue                        4,358             4,194            164            4  %
  Gross margins:
  Information Storage                          4,168             4,324           (156 )         (4 )%
  Information Intelligence Group                 199               195              4            2  %
  RSA Information Security                       323               301             22            8  %
  Pivotal                                         45                37              8           20  %
  VMware Virtual Infrastructure                2,457             2,150            307           14  %
  Corporate reconciling items                   (191 )            (200 )            9           (5 )%
  Total gross margin                           7,001             6,807            194            3  %
  Operating expenses:
  Research and development(3)                  1,472             1,370            102            7  %
  Selling, general and administrative(4)       3,861             3,499            362           10  %
  Restructuring and acquisition and
  other related charges                          149               155             (6 )         (4 )%
  Total operating expenses                     5,482             5,024            458            9  %
  Operating income                             1,519             1,783           (264 )        (15 )%
  Investment income, interest expense
  and other expenses, net                       (139 )            (126 )          (13 )         11  %
  Income before income taxes                   1,380             1,657           (277 )        (17 )%
  Income tax provision                           326               292             34           11  %
  Net income                                   1,054             1,365           (311 )        (23 )%
  Less: Net income attributable to the
  non-controlling interest in VMware,
  Inc.                                           (74 )             (84 )           10          (11 )%
. . .
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