EMC Corporation (EMC) reported strong third quarter 2010 results, with earnings up 47.1% year over year to 25 cents per share versus 17 cents in the third quarter of 2009. Earnings per share (including stock-based compensation but excluding restructuring charges) beat the Zacks Consensus Estimate of 24 cents by a penny. The year-over-year growth was primarily driven by strong revenue growth in the quarter.
Revenue
Revenues increased 19.7% year over year to $4.21 billion in the third quarter. This was well above the Zacks Consensus Estimate of $4.14 billion. This robust growth was primarily driven by a continued strong demand for EMC’s storage, data protection, virtualization and security products and services in the quarter.
On a segmental basis, product sales increased 21.6% year over year to $2.68 billion. Services benefited from the strong demand and increased 16.7% year over year to $1.54 billion in the third quarter.
EMC continued to gain significant market share in the quarter as compared with its peers. EMC continued to win significant new customers in the quarter primarily in the Information Intelligence segment. The company’s high end Symmetrix storage product portfolio increased 23.0% year over year, primarily driven by a strong customer demand in the quarter. EMC’s mid-tier storage product portfolio achieved a revenue growth of 22.0% in the quarter.
According to IDC, storage is the fastest growing cloud service, growing from 9.0% of all cloud service revenues in 2009, or $1.6 billion, to an estimated 14.0% in 2013 or over $6 billion of worldwide IT cloud services revenues. We expect EMC to benefit from this transition over the long term.
RSA information security business grew 22% year over year in the third quarter. VMware, where EMC owns majority of shares, posted an impressive revenue growth of 46.0% year over year.
On a geographical basis, domestic revenues climbed 21.0% year over year to $2.3 billion and contributed 54.0% of revenues in the third quarter. International operations revenues increased 19.0% year over year to $1.9 billion, with Asia-Pacific and Japan being the strongest region (28.0% year-over-year growth).
Gross profit (including stock-based compensation expense but excluding restructuring charges) escalated 26.8% year over year to $2.52 billion in the quarter. Gross margin expanded 330 basis points to 59.8%, primarily driven by a strong revenue growth.
Operating profit (including stock-based compensation expense but excluding restructuring charges) leaped 76.3% year over year to $733.8 million in the third quarter while margin expanded 560 basis points to 17.4%, reflecting stringent cost control and strong gross margin growth.
Balance Sheet
As of September 30, 2010, cash and cash equivalents including short-term investments were $6.65 billion as compared with $6.79 billion at the end of June 30, 2010. Long- term convertible debt increased to $3.19 billion at the end of quarter.
Cash flow from operations increased significantly to $3.04 billion in the third quarter of 2010 compared with $2.07 billion at the end of second quarter of 2010. Despite a strong increase in capital expenditure ($240.7 million sequentially), free cash flow increased to $2.22 billion as compared with $1.59 billion in the second quarter of 2010.
Guidance
EMC expects fiscal year 2010 revenues of $16.9 billion and raised GAAP earnings per share (EPS) guidance to 91 cents (six cents up from the previous guidance). Non-GAAP guidance increased 7 cents to $1.25 for fiscal year 2010. According to the Zacks Consensus, EPS is expected to grow 14.78% to 98 cents for fiscal year 2010.
EMC expects to repurchase up to $1.0 billion of common stock in fiscal 2010.
Our Take
We believe EMC is well positioned to grow over the long term based on its strong storage product portfolio and increasing market share in the security and intelligence segment. EMC’s higher 2010 outlook, based on a much healthier IT spending environment, encourages us to expect a strong market growth for the remaining of the fiscal year 2010.
Moreover, with an increasing transition to cloud computing technology, we believe cloud computing will drive growth for storage service providers and storage infrastructure suppliers such as EMC over the long term.
However, EMC continues to face tough competition from International Business Machines Corp. (IBM), Hewlett-Packard Co. (HPQ), Dell Inc. (DELL) and NetApp Inc. (NTAP) in the storage segment, which is its primary revenue growth segment (74.5% total revenue). This could hurt EMC’s top-line growth going forward.
We maintain a Neutral rating over the long term (6-12 months). EMC has a Zacks #3 Rank, which implies a short-term Neutral rating (for the next 3 months).
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