Earnings Preview: EMC Corp.

EMC Corp. (EMC) is slated to release its first quarter 2011 earnings before the market opens on April 20, 2011. EMC holds a leadership position in the storage hardware and software segment and is also a leading provider of data storage systems.

EMC did not provide any quarterly guidance during its fourth quarter earnings call.

The current Zacks Consensus Estimate for the first quarter is currently 25 cents per share, reflecting an increase of 25% from the year-ago quarter. The projected EPS includes stock-based compensation but excludes one-time charges.

EMC posted an average earnings surprise of 5.67% in the trailing four quarters, implying that it has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

We believe EMC will benefit from its leadership position in the storage market in the first quarter. According to research group IDC, Worldwide external disk storage systems factory revenues increased 16.2% to $6.1 billion, in the fourth quarter of 2010. Total disk storage systems market grew 14.3% year over year to $8.3 billion.

EMC was the overall external disk storage software market leader with a 26.0% market share in the fourth quarter of 2010, beating the likes of International Business Machines Corp. (IBM), Hewlett Packard Co. (HPQ), NetApp Inc. (NTAP), Hitachi Data Systems and Dell Inc. (DELL).

EMC’s recent market share gains were attributable to global customer acceptance of its wide range of storage technologies. EMC boasts the most comprehensive and current storage product line available.

In January 2011, EMC further extended its technology leadership by unveiling a record high of more than 40 new products and technologies addressing the fastest growing areas of the industry, including big data (tools, processes and procedures allowing an organization to create, manipulate, and manage very large data sets and storage facilities) and cloud computing.

EMC unveiled the EMC VNX family of products that scales from entry-level to datacenter-class systems. We believe the new VNX family will provide EMC a safe cushion to maintain its leadership position in worldwide external disk storage systems, particularly in the SMB sector where it faces significant competition from NetApp.

Fourth Quarter Recap

EMC Corp. reported fourth quarter 2010 results, with adjusted earnings increasing 33.3% to 36 cents per share versus 27 cents in the fourth quarter of 2009. Earnings per share (including stock-based compensation but excluding restructuring charges) inched past the Zacks Consensus Estimate by a penny. The year-over-year growth was primarily driven by stronger revenues in the quarter.

Revenue climbed 19.2% year over year to $4.89 billion in the fourth quarter, surpassing the Zacks Consensus Estimate of $4.79 billion. This growth was primarily attributed to continued strong demand for EMC’s storage, data protection, virtualization and security products and services in the quarter.

During the quarter, EMC’s gross and operating margins improved substantially on a year-over-year basis. Gross margin expanded 230 basis points to 61.9%, primarily driven by strong revenue growth. Non-GAAP operating profit margin increased 300 basis points to 25.4%, reflecting stringent cost control.

As of December 2010, cash and cash equivalents including short-term investments were $5.37 billion compared with $6.65 billion at the end of September, 2010. The company paid its long-term convertible debt at the end of the quarter.

2011 Guidance

Through its combined focus on revenue growth, accelerated investment in research and development and continued cost containment efforts, EMC expects to increase its 2011 earnings. The company is also expected to benefit from improved IT spending going forward.

EMC expects fiscal 2011 revenues of $19.6 billion. GAAP net income is expected to be $2.4 billion, while non-GAAP net income is expected to be $3.25 billion. The estimated GAAP earnings for 2011 are $1.07 a share, while non-GAAP earnings are $1.46 a share.

Currently, the Zacks Consensus estimate is pegged at $1.23 per share for fiscal 2011.

No Movement in Estimates

We maintain our Neutral rating on EMC Corp. over the long term (6-12 months).

Given no change in the Zacks Consensus Estimate for the first quarter of 2011 in the last 60 days, analysts appear to be confident about their expectations.

EMC has a Zacks #2 Rank, which implies a Buy rating in the near term (1-3 months).

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