EMC Corp.’s (EMC) fourth-quarter 2009 results exceeded the Zacks Consensus Estimate as well as the company’s own expectations.
 
EMC reported record revenues for the quarter, growing year over year after four consecutive quarters of year-over-year declines, driven by cost-cutting and a recovery in corporate IT spending. The improvement in results is mainly attributable to the continued focus on technology, increased execution efforts and operational efficiencies.
 
Revenues of $4.10 billion for the quarter were slightly above the Zacks Consensus Estimate of $4.05 billion and increased 2.1% year over year and 17% sequentially. The revenue increase was above management’s expectation of $4.00 billion. Moreover, VMware Inc. (VMW), which is majority-owned by EMC, contributed $607 million in total fourth-quarter revenues.
 
While Product sales (64.7% of total revenues) were down 4.5% year over year, Services revenues (35.3% of total revenues) was up 16.7% year over year, more than offsetting the decline in product revenues.
 
Revenue by Products
 
The company’s Information Infrastructure business revenues increased 15% sequentially driven by the Information Storage and Content Management and Archiving business segments, which achieved double-digit sequential revenue growth. EMC’s RSA Security business also achieved record quarterly revenues.  The current quarter witnessed strong customer demand and strong sequential revenue growth for EMC’s Data Domain and Avamar next-generation backup and recovery solutions, EMC’s Symmetrix and CLARiiON networked storage systems and its Celerra unified storage systems.
 
Revenue by Geography
 
From a geographic perspective, revenues from the U.S. was up 14% sequentially and represented 53% of total revenues. International revenues were up 20% sequentially and represented 47% of total revenues.
 
Earnings
 
Excluding stock-based compensation expenses, amortization of intangibles, restructuring and acquisition related charges and other special charges, pro forma earnings were $695.5 million, an increase of 45% sequentially and 11%, compared with the fourth quarter of 2008.  The sequential increase in profitability is attributable to lower cost of sales (42% in fourth quarter of 2009 versus 44.6% in the year-ago quarter). As a result, EMC expanded gross and operating margins.
 
Non-GAAP earnings per share was 33 cents for the fourth quarter, an increase of 43% sequentially and 6% year over year. Earnings beat the Zacks Consensus Estimate of 24 cents per share by 9 cents and the company’s own guidance of 30 cents a share by 3 cents.
 
Record Cash Flow
 
For the fourth quarter, EMC generated record operating cash flow of $1.0 billion and free cash flow of $793 million. The company continues to boast a very strong balance sheet, with net cash (cash less debt) per share of $1.71 at the end of December 2009 versus $1.51 at the end of September 2009.
 
Guidance for 2010
 
Consolidated revenue is expected to be $16 billion for 2010. Management expects 2010 non-GAAP R&D expense to increase 20% over 2009 levels.  Cost of transition to a more efficient cost structure is expected to be $50 million. Non-GAAP operating income is expected to be 20% of revenues for 2010.   Total non-operating expense is expected to be $90 million in 2010.
 
Non-GAAP diluted earnings per share are expected to be $1.12, much above the Zacks Consensus Estimate of 89 cents. The non-GAAP income tax rate is expected to be 20% for 2010.  EMC expects to repurchase up to $1 billion of the company’s common stock.
 
EMC benefited from the strategic alliance with Cisco Systems (CSCO), Microsoft Corp. (MSFT), Dell Inc. (DELL) and VMware in 2009. Further, new products and cloud computing initiatives drove revenue growth. Although EMC’s results are well ahead of analysts’ expectations, competition from International Business Machines (IBM) and Hewlett-Packard (HPQ) is intensifying, resulting in weaker pricing and feeble demand. We see limited upside in the near term and expect the year 2010 to be back-end loaded.
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