Earnings Labs

Dell Technologies Inc. (DELL)

Q3 2010 Earnings Call· Wed, Oct 20, 2010

$205.79

-0.01%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.
Transcript

Operator

Operator

Welcome and thank you for standing by. All participants will be on listen-only mode only until the question-and-answer session of today’s conference. As a reminder, the conference call is being recorded. If you have any objections please disconnect at this time. I would now like to turn the call over to our speaker, Mr. Tony Takazawa. Sir, you may begin.

Tony Takazawa

Management

With me, here at Hopkinton, we have David Goulden, EMC Executive Vice President and CFO. David will provide a few comments about the results that we released this morning to highlight some of EMC’s activities this quarter and discuss our updated outlook for the rest of 2010. Joe will then spend some time discussing his view of what is happening in the market, EMC’s execution of the strategy and how EMC is positioned to help customers on the journey to the Cloud. After the prepared remarks, we will then open up the lines to take your questions. I would like to point out that we will be referring to non-GAAP numbers in today’s presentation unless otherwise indicated. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure today in our press release, supplemental schedule and the slides that accompany our presentation. All of these are available for download within the investor relations section of EMC.com. As always, we have provided detailed financial tables in our news release and on our corporate website. These include a lot of financial detail so we do encourage you to take a look at them. The call this morning will contain forward-looking statements and information concerning factors that could cause actual results to differ can be found in the EMC filings with the US Securities and Exchange Commission. And lastly I will note that an archive of today’s presentation will be available following the call. With that, it is now my pleasure to introduce David Goulden. David?

David Goulden

Management

Thanks, Tony. Good morning, everyone and thanks for joining us today. I'm very pleased to report that EMC had another great quarter. We achieved record revenues of over $4.2 billion, up 20%. Record Q3 non-GAAP net income of $649 million, up 35%. Non-GAAP EPS of $0.30, up 30%. Record year-to-date free cash flow of $2.2 billion, up 22%; and non-GAAP operating margin of 21.5% up 80 basis points sequentially. We continue to execute on our triple play with strong double-digit growth in storage security and virtualization, it's clear we continue to gain share in these key areas of the market, areas where we're already the market leader. With the announcements of VMware View 4.5, storage efficiency technologies like FAST v2 and FAST Cache and the acquisition of Greenplum, it's clear we're investing for the future but more importantly these investments are bearing fruit. And with non-GAAP gross operating margins up 40 and 80 basis points respectively quarter on quarter we continue to improve profitability. We expect to continue this triple play over the long term because of how well we positioned ourselves to capitalize on the fundamental shift to Cloud computing. Now let me start by taking a few minutes to discuss what's driving our good results. The industry generally agrees that the shift to cloud architectures is no longer a question of if but of when. The answer is it's happening now albeit at different speeds for different companies but all companies go through the same three phases to transform their traditional physical infrastructures to true cloud architectures and to take full advantage of the ability to offer IT as a service. Phase I is the virtualization of IT owned applications which also requires simple, efficient VM integrated storage. Phase II is a virtualization of business critical applications. This…

Joseph Tucci

Management

Thanks, David, and a warm welcome to everyone attending today's conference call. As always, thank you for your interest in EMC. As Tony said, I am currently in Beijing and thus actively participating in today's earning call from approximately 6,000 miles away from my colleagues. But I trust the marvels of communication technology will make the mechanics of this call appear seamless. Overall, I was very pleased with our performance in Q3. In fact, our top line revenue was the best in EMC's history as we posted solid growth on both a year-on-year sequential basis. I am also proud to report that we continue to create leverage in our P&L while investing in the future. To this end in Q3 we added approximately 1700 professionals to consolidate at EMC in the areas of sales, emerging high growth markets, R&D and VMware. Our goal is to develop more innovative products and maintain strong growth. And most importantly we established EMC and VMware as clear thought leaders with substantial momentum in private, public and hybrid cloud computing. We firmly believe cloud computing which enables IT as a service is the next big transformational wave that is shaping the information technology landscape. Our success in Q3 would not have been possible without the hard work and dedication of the 47,000 people of EMC and VMware around the world. I want to thank them for their leadership and congratulate them on their accomplishments. I would now like to make a few comments on the global economy and more importantly our view on IT spending trends. On the economic front, on a consolidated global basis, we continue to see a slow recovery, albeit with a few bumps in the road. Pretty much in line with what we've been saying all year and looking forward we…

Tony Takazawa

Management

Great. Thanks, Joe. Before we open up the lines for your questions as usual we ask you to try to limit yourself to one question including clarifications, which will enable us to take as many questions as possible. Thank you all for your cooperation in this matter. Operator, can we open up the lines for questions please?

Operator

Operator

Thank you. At this time we are ready for the question-and-answer session. (Operator Instructions) Our first question, Aaron Rakers of Stifel Nicolaus Investment Advisors. Sir, your line is open.

Aaron Rakers

Analyst

Yeah. Thanks, guys and congratulations on the good quarter. So my question is going to be around basically the cloud strategy as a whole, you guys lay out obviously a clear picture of where you’re going from a strategic perspective. Can you help me understand where clustered NAS fits into your thought process around cloud or the market that you look to address going forward?

David Goulden

Management

Sure, Aaron. Basically we have a very successful high end NAS product with Celera. There are a lot of developments that we are investing in there with products coming to market. Clustered NAS is really all about how you handle a global namespace. We have really solid plans in that area and I feel comfortable with our road map. As always, I would like to keep some surprises so we don’t -- I don’t want to tell you exactly when we’ll release new products but I will say we have a very robust product line for 2011.

Aaron Rakers

Analyst

Thank you.

David Goulden

Management

Thank you.

Tony Takazawa

Management

Thanks. Next question please?

Operator

Operator

Daniel Ives of FBR. Sir, your line is open.

Daniel Ives

Analyst

Yeah, thanks. Can you speak to the federal in the quarter relative to expectations?

David Goulden

Management

Yeah, Daniel. Sure. We, in federal we saw a good quarter-on-quarter growth in the quarter as expected but relative to the rest of the business it wasn’t quite as strong again as expected. So good sequential growth and pretty much in line with where we expected it to come out.

Daniel Ives

Analyst

Congrats, again. Good quarter. Thanks.

Tony Takazawa

Management

Thanks, Daniel. Next question please?

Operator

Operator

Our next question, Brian Marshall of Gleacher & Company. You may ask your question.

Brian Marshall

Analyst

Hi, thanks guys. I’d like to echo the nice quarter. Looking at, I mean it appears that most of your business plans are fully optimized at this point. I guess I’d like to focus on the one that doesn’t appear to be, the Information Intelligence Group, the old Documentum, I was wondering if we could get an update here, kind of what you see out there for this business unit and how strategic this is going forward relative to kind of the focus on the hybrid cloud? Thank you.

David Goulden

Management

Okay, Brian. Sure. A couple of things. First of all when we think of the hybrid cloud, one of the big phenomena today is big data and you know big data is going to come in a couple of different forms. It’s going to come in the structured form and that’s obviously where Greenplum and the DCA that we just announced are important and it’s all going to come in the unstructured form again which is why Documentum is still a very important part of the overall strategy. Now within the IIG business, there’s a couple of things happening underneath the surface. That business is transitioning from a large enterprise, license type business to a smaller application dependent business so we’re moving from the traditional PLA to the kind of smaller XEP application oriented rollout. So underneath the surface you’re seeing that churn occur, and that’s why you’re seeing the top line relatively flat, but strategically it still has a great role in the cloud strategy.

Brian Marshall

Analyst

Thank you.

Joe Tucci

Analyst

David’s right. There’s a lot of moving pieces there and we are in the transition with our XEP strategy, which will make Documentum platform a lot more lightweight, a lot more SAS enabled and as we get through that transition we expect we’ll see better growth.

Brian Marshall

Analyst

Thanks, Joe. Tony Takazawa Thanks, next question please?

Operator

Operator

Ittai Kidron of Oppenheimer. Sir, you may ask your question.

Ittai Kidron

Analyst

Thanks. A question for David and first of all again, congratulations on the numbers. With regards to the gross margin in your core EMC business, 55.5% this quarter. I can’t even remember the last time you got such high gross margins and with some of your larger competitors making a lot of acquisitions and trying to accumulate a lot of assets after years of non-activity in your area? How should we think about gross margins in your core business going into next year and also VMware provided some initial growth thoughts on 2011 last night, would you care to do the same with regards to your business?

David Goulden

Management

Well, first of all, no, we’re not going into 2011 at this point of time other than to reiterate my comments I said earlier that we’re looking to execute our triple play over the long term and certainly next year we’ll be looking at double-digit revenue growth and double-digit earnings growth and those are the only if you’d like stake I’m putting in the ground right now relative to 2011. Relative to gross margins, yes, we have seen nice expansion in the non VMware side business. As I mentioned during the quarter what we’ll be seeing is a mix shift towards higher gross margin products, so we’re doing very well with things like our NAS products, VMAX, like our DD Products and some of our storage software and that mix shift is helping the margins grow sequentially. I would point out to you that gross margins we equate that as an indicator of the value we’re providing to the customer and the more value we’re providing to the customer the better gross margins are going to be within the business, so that’s what’s happening beneath the surface there. Tony Takazawa Okay, Thanks. Next question please?

Operator

Operator

Rajesh Ghai of Thinkequity, LLC. Sir, your line is open.

Rajesh Ghai

Analyst

Yes, thanks. Thanks for the good question. So, a number of your large competitors have announced integrated appliances for the cloud. I want to understand what your views were on this competitive activity and whether you believe your Vblock strategy was an adequate response?

David Goulden

Management

Well, I don’t think Vblock strategy was a response. I think we started it. Kind of the first integration of taking the cloud OS, VMware, the connectivity and network, the server and the storage and putting it together was pioneered by us, so I don’t think we’re reacting at all. I think others are reacting to us. Us and Cisco, we’re not giving out numbers yet but what I told you is true. We set what I thought was a pretty aggressive plan for Vblock and I repeat what I said, we are well above our plan that we set for ourselves both last quarter and this quarter and for the year, so it’s going well.

Tony Takazawa

Management

Thank you. Next question please.

Operator

Operator

Amit Daryanani of RBC Capital Markets. Sir, your line is open. Amit Daryanani– RBC Capital Markets: Thanks. Good morning and thanks for taking my questions. Just a question around your, 3Par was acquired by HP amidst a bidding war. How do you guys think Par being at HP changes the landscape in high end storage, especially for VMAX I guess given HP’s sales and services? And secondly how to you think the EMC Dell relationship goes further given their keen interest on all the storage assets versus reselling CLARiiON?

David Goulden

Management

I don’t think the 3Par changes the landscape at all. We’ve been -- 3Par is 10 years old. We’ve been competing with it for quite a while. For HP, will they make 3Par more successful? I‘m sure they will. I think what you’re going to see there is in large substitution for their high end EVAs and for business that they previously funneled through Hitachi. So I really don’t see that changing the landscape at all. As far as the Dell relationship, obviously we took a setback as Dell went after 3Par and obviously cooled things off. We are again in discussions to see if we can do something more meaningful and lasting. Both companies would like to do that but the key is it’s got to be meaningful and it’s got to be the last thing for me to tell you that it’s back on track. So I can’t tell you that yet but I can tell you we’re in serious discussions and there is intent on both parties to do that but obviously 3Par move from Dell was a setback to the relationship.

Tony Takazawa

Management

Thanks, next question please.

Operator

Operator

Our next question, William Choi of Jefferies & Company. Sir, your line is open.

William Choi

Analyst

Okay, thanks. Need a quick clarification at first. Storage grew 16% . You said SIM up 23, mid tier up 22%, so what was in storage was below 16% and then the question is really if you could talk about the low end products you guys have talked about bringing that out in Q1? What would be kind of the margin and revenue ramp profile of this? I would imagine these things would certainly have higher software integration to them and related to that if you could update us on how you are doing with channel push there? How many partners you have been able to add and what kind of metrics we could talk about? Thanks.

Dave Goulden

Analyst

Okay, Bill. I’ll start and I’m going to pass it over to Joe for the second part. So, in terms of storage you are right. The total storage business was up 16%, SIM 23, mid tier 22. Remember that in the storage business, well first of all those numbers that I gave you for SIM and mid tier are product only numbers. In the storage business there’s also products and services and there’s maintenance and professional services. Also there are a number of others products in there including some of the third party products we sell through – like the Connectix switches and our Select line. So that’s the difference between the 16 and the 23 and the 22. And for updates on mid tier, I’m going to pass that over to Joe.

Joe Tucci

Analyst

Obviously, we’ve said and I’ll repeat it that we think we have a very, very competitive, very excited about it, a low end product coming in Q1. We’ll announce that in early Q1. It is on track. It is in beta now. It is doing very well and again I’m very excited, so stay tuned and we’ll announce that in Q1. It is the fastest growing market in storage and again we’re excited to be, we’re very excited about the prospects of entering that market in a big way, in a big, big way.

Tony Takazawa

Management

Thanks, David. Next question please?

Operator

Operator

Mark Moskowitz of JP Morgan Chase. Sir, your line is open.

Mark Moskowitz

Analyst

Yes, thank you. Good morning. I wondered if you could give us some update on the (inaudible) recovery business in terms of the revenue run rate previously (inaudible) just wonder if you can give me an update there? Can you also talk about the cross fund opportunities in the heritage data domain account?

David Goulden

Management

Mark, I got the first part of the question in terms of the run rate. Could you repeat the second part please?

Mark Moskowitz

Analyst

Yes, the other piece was if you could just talk about the cross selling opportunities within the data domain accounts in terms of heritage data domain. What type of pull through are you seeing there?

David Goulden

Management

Great. Mark, so on the run rate, we mentioned that in the first quarter data domain and Avamar lines combined had reached the billion-dollar run rate, which was ahead of plan. We said we’d get to that level in 2010. We got there in Q1 and that’s continued to increase sequentially into Q2 and again into Q3. So we’re not going to break that out again once we got beyond our billion dollar run rate but we are continuing to see sequential growth and obviously the run rate is now higher. In terms of cross selling some nice opportunities. I mentioned for example in my prepared comments where we cross sold into a data domain account, a large CLARiiON project that’s going to scale up to petabyte type scale and of course there’s good BRS opportunities to the EMC account. So the good news is when we will look at BRS, A, it’s opening new doors for us, and B, we’re also able to increase our footprint inside of the year, the EMC account. So it’s working both ways. It’s certainly a win-win from that point of view.

Tony Takazawa

Management

Thanks. Next question please?

Operator

Operator

Jason Ader of William Blair. Sir, your line is open.

Jason Ader

Analyst

Thank you very much. My question is on the implied sequential growth guidance for the top line for the core business for the information infrastructure. It’s around 14% if my math is right. That seems slightly stronger than seasonal so given your comments on the economy being sort of in a slow recovery I was wondering if you could add any color on why you think that’s going to be as strong as the implied guidance suggests?

Joe Tucci

Analyst

Actually Jason, are you talking Q3 to Q4 sequential growth?

Jason Ader

Analyst

Yes. 5-year average was something like 13%. This implies around 14% so I think it’s a little bit better than the historical?

Dave Goulden

Analyst

Yeah, Joe. Jason’s talking excluding the VMware just to clarify his comments.

Joe Tucci

Analyst

You know, it’s close, Jason. Basically what we’re doing is like we do all the time. We get bottoms up forecasts, so we then put a little bit of management wisdom hopefully on those forecasts, and we’ve been pretty accurate through the year and this is where we’re coming up and so we’re – obviously we see it. So we don’t see the market falling down. We think there’s good opportunity out there for IT and especially in the areas we are, virtualization, storage, information protection, information securities. Those areas are hot and I suspect they will remain hot for the foreseeable future.

Tony Takazawa

Management

Thanks. Next question please?

Operator

Operator

Maynard Um of UBS. You may ask your question.

Maynard Um

Analyst

Hi, thanks. In terms of the three phases to get true cloud, can you talk about what inning we’re in Phase I rollouts and as we move from Phase I to Phase II do you think we get a pause because of either a hesitancy to move to mission critical apps or maybe because we have to digest before we start consuming again or do you think this is a seamless transition between the two phases? Thanks.

Joe Tucci

Analyst

I think it’s pretty seamless. Customers are seeing phenomenal reliability. The VMware OS continues to get the highest marks in the industry for stability and high quality in their platform and of course with the advent of Nehalem servers we’ve given you that six to eight cores and tremendous power. Customers have seen the reliability, the capability and they’re definitely, definitely moving to Phase II without a pause and I think Phase II will be very successful.

David Goulden

Management

And Jason just to pick up on it. As I mentioned, the requirements and the benefits if the change from the phase is, phase I is really about consolidation cost reduction. Phase II customers are looking for costs but they’re actually looking to increases their SLAs as they virtualize which requires a whole set of technology to drive optimization around those SLAs. So it really changes the game very much from a VMware point of view but also from a storage point of view, the requirements of Phase II are very, very different. That’s why I gave you some examples in my script because the ability to seamlessly reach Phases I and Phases II really sets us apart.

Joe Tucci

Analyst

By the way, speaking from first hand experience, our own IT shop. We had moved a substantial number of our mission critical apps, as a matter of fact all of our CRM apps from, to this world and we’re seeing great opportunities. So we’re clearly drinking the kool-aid and getting a very good taste.

Operator

Operator

Ben Reitzes of Barclays Capital. Sir, you may ask your question.

Ben Reitzes

Analyst

Yes. I want to focus a little bit more on the fourth quarter guidance. Clearly, the guide up versus the street expectation for the fourth quarter end earnings, I just was wondering, Joe, you said you did a bottoms up forecast but what is going better than expected and included in that guidance? Does Symmetrix number look pretty strong vis-à-vis expectations? Maybe what are we missing potentially that had you raise guidance that’s better than expected? It seems like a pretty strong outlook? Thanks.

Joe Tucci

Analyst

Well, you know clearly on the storage side, the stars of the show would be VMAX and our BRS data domain and Avamar products. And the other star to show is our NAS business, our Celera NAS business is also growing tremendously fast, faster than our major competitors. So those would be the stars of the show. Obviously information security is incredibly important and you see the growth in our RSA division’s business. So those are going great and our new entry into Greenplum is showing a lot of progress and a good pipeline. That’s not going to be a major impact in Q4 obviously because of it’s size but still got great growth. So we have several areas that I would call hot and of course you mentioned that you wanted the II side but of course VMware continues to – they raised their guidance also. So pretty good strength across major product lines and then of course we’ve got some -- in Q1, we’re going to enter a new phase with our low end products, so we’re in pretty good shape going forward, in very good shape going forward.

Tony Takazawa

Management

Thanks. Next question please?

Operator

Operator

Kaushik Roy of Wedbush Morgan Securities. Sir, your line is open.

Kaushik Roy

Analyst

Congratulations on the quarter. One of the concerns during Q3 was if customers are waiting for the unified CLARiiON and Celera anticipated next year, can you comment on what you saw in the CLARiiON product line or what you expect there? Thanks.

Joe Tucci

Analyst

Well, obviously I didn’t mention CLARiiON as a star but it’s holding it’s own. What we did do which customers are loving, as I said we’re -- as we did with our VMAX platform and before, we have released a lot of the key software on the older platforms ahead of the new announcements. So Unisphere, FAST Cache, FAST v2, new compression technology are being very well received by customers and that’s having an effect. Obviously, CLARiiON is also affected by Dell moving onto EqualLogic, so CLARiiON has a lot to overcome. Our new hope this year, strategy, we think is back on track and we’re looking very forward to the future. So I think it will continue to not be a star in Q4 but it’ll plod along and do okay.

Tony Takazawa

Management

Great. Thanks. Next question please?

Operator

Operator

Louis Miscioscia of Collin Stewart, sir, you may ask your question.

Louis Miscioscia

Analyst

Okay, I was going to ask about Europe as to why it has grown less than some of the other geographies but also since you mentioned it that your largest, that your competitor in the NAS area that you’re growing faster than them? I think in their hardware area last quarter they grew 50% year-over-year last quarter. Maybe you could give us some comparable numbers to also take a look at your numbers within the mid tier storage space area for you?

Joe Tucci

Analyst

Well, think of it like this. I’m not going to give you new numbers but I understand their growth rate and I said that our, if you looked at our Celera alone it grew faster and I say that again. So obviously our Celera is aimed at -- NAS is aimed at the higher end, and that’s a good space to be and we’re going to do a lot of expansion there as I answered to the first question. However where they’re growing extremely fast is an area we’re not in, which is the low end, which I told you we started addressing in early Q1. So that’s kind of how I would -- that’s kind of the macro statement around that.

David Goulden

Management

And then Louis, just to pick up on your question about Europe. As Joe mentioned in his comments, if you look at Europe in constant currency you’ve actually got 19%. So where we did have a currency headwind, I mentioned in my script it’s about 60 basis points for the quarter. Basically all our headwind was in Europe but 19% constant currency is pretty good growth.

Tony Takazawa

Management

All right. We have time for one more question and then Joe will have a few closing comments.

Operator

Operator

Our last question, Keith Bachman of BMO Capital Markets. Sir, your line is open.

Keith Bachman

Analyst

Hi, thank you. A couple for you David, if I could? Could you talk about a little bit about cash flow, free cash flow? As you think about Q4 specifically what are the objectives that you have and you mentioned 11 double-digit revenue and earnings growth? How should we be thinking about free cash flow, particularly since it’s, on a consolidated basis, it slowed down a little bit this quarter in terms of the growth rate?

David Goulden

Management

Yes, Keith a few comments on free cash flow. First of all, I think it’s, the one metric that’s least helpful to look at on a quarter by quarter basis because of the ebbs and flows and timings and working capital investments, even some CapEx buildup, so I comment that free cash flow for the year so far is up 22%. Year-to-date it’s over $400 million higher than our non-GAAP net income. We’re looking forward to Q4 in the year and looking forward to 2011 and we continue to strive to have our free cash flow be higher than our non-GAAP net income.

Joe Tucci

Analyst

So again, thank you for joining us. We very much appreciate it. And in closing I want to reiterate that we are executing well. Our strategy for the private, public and hybrid cloud is solid and gaining traction. We have a product rollback that is well aimed and again very exciting and we have the go-to-market and the last part is necessary to bring these innovative products to market. But most importantly we have 47,000 plus great people in EMC and VMware who believe in our vision and our future. So, once again thank you for joining us and we look forward to seeing you in the future, seeing you soon. Thank you very much. Bye, Bye.

Operator

Operator

That concludes today’s teleconference. All lines may disconnect. Once again that concludes today’s teleconference. All lines may disconnect.