Monday, January 24, 2011

EMC Corp. (NYSE: EMC): Q4 Earnings Preview

EMC Corporation (NYSE: EMC) is scheduled to release its fourth-quarter financial results after the closing bell on Monday, January 24, 2011. Analysts, on average, expect the company to report earnings of 63 cents per share on revenue of $3.50 billion. In the year ago quarter, the company reported earnings of 52 cents per share on revenue of $3.00 billion.

EMC Corporation develops, delivers, and supports information infrastructure and virtual infrastructure technologies and solutions. EMC is at the forefront of cloud-computing- a web-based storage option that is exploding worldwide. By 2013, this niche market is expected to reach $16.7 billion. The entire industry was worth only $6.6 billion just two years ago. EMC also owns a majority interest in VMware (VMW) and recently acquired Greenplum, a data warehousing and analytics company.

In the preceding third quarter, the Hopkins, Massachusetts-based company's net income was $472.52 million, or 22 cents per share, from $298.18 million, or 14 cents per share, in the prior-year quarter. On an adjusted basis, the company earned 30 cents per share in the latest quarter. Revenues increased to $4.21 billion from $3.52 billion.  Analysts, on average, expect the company to report earnings of 30 cents per share on revenue of $4.15 billion. 

Early in January, EMC slashed its GAAP earnings outlook for fiscal 2010 due to a restructuring charge of approximately $90 million to be incurred in the fourth quarter of 2010. The charge will be incurred as part of reorganization in EMC's international business. EMC lowered its outlook for 2010 GAAP earnings per share from 91 cents to 87 cents. The company also revised its outlook for its GAAP income tax rate from 20% to 24% for 2010. However, revenues are expected to be $16.9 billion for 2010, unchanged from the previous forecast. Management does not expect any negative currency impact on 2010 revenues. EMC also reaffirmed its previously issued non-GAAP EPS outlook of $1.25 for fiscal 2010.

The company plans to restructure its international operations by transferring the newly acquired Isilon Systems and Bus-Tech businesses to its international holding company. EMC acquired storage systems vendor Isilon Systems to tap the surging demand for data storage technology. It is one of the largest deals in the storage space. The acquisition will enable EMC to gain a stronger foothold in the computer storage devices. EMC expects the acquisition to be accretive to its bottom line in 2011. Management also expects combined revenues to reach $1 billion by the second half of 2012.

This initiative will facilitate EMC’s international expansion, reduce administrative costs, improve the company’s organizational structure and strengthen operations, management added. EMC expects the restructuring to be completed in 2010. Ongoing initiatives to reduce the cost structure are making strong headway for EMC, driving margins and bottom-line growth. EMC has cut about 2,400 jobs till date under its restructuring initiatives. Operating expenses have been reduced 4.9% year over year in 2009. Operating expense reduction of more than $450 million in 2009 and $500 million expected in 2010 will provide strong earnings growth in 2011 and beyond. Also, in 2009, the company announced restructuring and consolidation of facilities and subsidiaries along with the termination of contracts to streamline operations. These actions are expected to be completed by 2015.

Through a combined focus on revenue growth, accelerated investment in research and development, and continued cost containment efforts, EMC expects to increase 2011 earnings. The expense reductions are encouraging, and are likely to lower the spending base, with a corresponding positive impact on profitability.

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. 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. However, the company contnues to face intense competition from International Business Machines Corp. (NYSE: IBM), Hewlett-Packard Co. (NYSE: HPQ), Dell Inc. (NASDAQ: DELL) and NetApp Inc. (NASDAQ: NTAP) in the storage segment, which is its primary revenue growth segment.

Recently, EMC unveiled 41 new, lower-priced data-storage products, expanding into fast-growing areas of the market where it previously has been weak. The new offerings, unveiled Tuesday, mark the company's expansion into the low end of the storage market, where it has long relied on a partnership with Dell Inc. (NASDAQ: DELL). Dell resells EMC's equipment but has made some storage acquisitions and increased its own offerings in this space, changing EMC's approach.

In terms of stock performance, EMC shares have gained nearly 37 percent since the beginning of the year.

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