EMC Earnings Call Insights: Customer Analysis and Gross Margins

EMC Corporation (NYSE:EMC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Customer Analysis

Andrew Nowinski – Piper Jaffray: You guys are seeing a broad strength across here in clear portfolio including the high end, the midrange, and backup. Like, I was just wondering, are there any wins or color that you can provide that support the notion that EMC is displacing the competition in the large Enterprise and service provider customers leveraging the comprehensive nature of your portfolio? Thanks.

David I. Goulden – President and COO: Andrew, let me start and Joe will add some color. First of all, we absolutely believe that we are taking share. So you look at us against the industry we are doing very well, you mentioned all those segments. I gave you a little bit of color in my commentary about, for example, Web Scale customer that has purchased 85 terabytes of Isilon so far, this year obviously a very major investment on their behalf and a key customer for us. I walked across all major customers and we are in the middle of significant rollouts of all those key technologies. Obviously, as all the customers prefer to not go public with those statements but I can guarantee you that the number of big wins that we are seeing is definitely increasing as you’ve mentioned across the portfolio, no just Enterprises, but also SPs and also by geography we are in a pretty strong position right now.

Joseph M. Tucci – Chairman and CEO: I think you covered it well David. I mean you got to look at applications. There are applications that need tremendous functionality, high functionality. There are applications which need storage to have great performance. There are applications which need storage to have just great capacity and low cost. So basically if you look at that, you kind of come out with four quadrants and we are the only ones out there that I know that are building significant products for all four quadrants and building the ecosystem and the set of technologies out of ViPR, out of Flash, to pull those four quadrants of technologies together and that’s our winning formula.

Gross Margins

Kulbinder Garcha – Credit Suisse: A question for David and one for Joe. David, on the gross margins, if I look at the information storage business ex-Pivotal, it looks like year-on-year in the first half gross margins have been actually slightly down. I’m just wondering that I was previously of the view that you could gain share and expand gross margins in that segment given high-end, mid-end mix, higher software attach. Have we perhaps peaked at that point and maybe from here (indiscernible) much more ahead or can you speak about some of the dynamics around why that may continue. Then for Joe various times over the last year, you’ve mentioned that people are maybe under investing on the storage side given the level of data growth. Does the reacceleration in growth this quarter and maybe present an inflection and we’re going to see some of that on the spending come through in revenues for you guys over the next 12 months or so. How do you – how confident do you feel about that?

David I. Goulden – President and COO: Kulbinder, let me start, obviously, we’ve given you a fair amount of color on what’s been happening in gross margins. I think it’s important to actually look not just at inflation infrastructure, but with the detail we’ve given you in the software management schedules. You could actually now see by quarter what’s happening in information storage, information intelligence, and RSA security. So, the biggest factor, I think folks are going to be following what’s happening in information storage. And as we’ve mentioned in Q1, we saw some pressure on the product gross margins due to revenue growth and also the timing of quarter-end. The good news is as I mentioned in my prepared remarks, this quarter information storage product gross margins came back to what exactly where they were last year, which is a good thing because we have positive impact from mix, but we still have the pressures that we had in Q1 related to a late quarter. So I feel good about that trend. In this quarter within Information Storage we saw some buildup in service cost that brought that overall Information Storage segment down a little bit. So the good news that Information Storage product margins balanced back. We saw a positive mix and we still see the opportunity to make some improvements going forward. We do expect to see margins improve sequentially throughout the year both in total and in Information Infrastructure and in Information Storage. The other thing that happened this quarter that I mentioned in a couple of different places is if you look at the RSA segments you will see that this quarter year-on-year it looks like gross margins are down a fair amount and that’s due to the effect of last Q2 of a $9 million charge reversal as we closed out issues related to the bridge. So we are giving you a lot more information to dig into and we will give you more color on each segment as we go through the year.

Joseph M. Tucci – Chairman and CEO: Yes. I think Kulbinder you are asking me more of an industry general than EMC specific in storage and I’ll answer it that way. If that’s wrong, come on back. Or if we are escalating now, was that what you are after?

Kulbinder Garcha – Credit Suisse: Yes. Basically, I am trying to understand, Joe, that there is a perception out there and we have this as well that there is an under investment happening in storage just given the data growth. It has decelerated the entire industry and for you guys as well. I am wondering, do you get the sense that with the inflection growth you saw this quarter in your business and just the level of under investment that may have happened, maybe people have to do an element, let’s say catch-up spending as we saw in ’09 and ’10? Are we not at that stage in the industry in budgets that is going to remain tight for some time?

Joseph M. Tucci – Chairman and CEO: Sure. I think there’s two ways to look at it and I’ll give you both ways. First of all, I absolutely believe that the economy and the slow growth in IT spend overall is the biggest impact and especially when you look at what’s happening in portions of EMEA and Japan. For sure, we also see customers elongating their upgrades like, they are keeping their hardware longer and trying to get more value out of it that way. Also, the industry has produced a tremendous amount of technology for efficiency and optimization of storage, things like thin provisioning, the de-duplication, compression of data, our fast technology, fully automated storage sharing. All these things are helping get tremendous more value. The advent of flash helps a lot too because you can – again, as we take flash and fast that that really helps customers a lot get both efficiency and optimization of storage. So, there is a lot happening there and of course that will – the base information is going to grow over time. If you look at the environment itself, I think it will be similar to what we saw, but I do expect you’ll see a slight pickup in just aggregate storage. You also got easier year-on-year compares for the industry as we go into the second half. If you take IT growth in general, in the first half, I’ll just take easy numbers. Positive IT spending in ’12 and the first half of ’12 was over 3%. And I’m quite positive that IT spending overall in the second half of ’12 was under 2%. I’m sure, there’s people that gave you more precise number specific. So obviously we’re facing – the industry is facing easier compares, so is EMC. And then, of course, when we look at ourselves, I think it will help or propel some of our growth as our product cycle and exciting new announcements we have scheduled.

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