Earnings Preview: EMC Corp.

EMC Corp. (EMC) is scheduled to announce its second quarter 2011 results before the opening bell on July 20, 2011.

Prior Quarter Recap

EMC Corp. reported first quarter 2011 adjusted earnings per share (EPS) of 24 cents, up 20.0% from 20 cents posted in the first quarter of 2010.

However, earnings per share (including stock-based compensation but excluding restructuring charges and intangible asset amortization) fell shy of the Zacks Consensus Estimate by a penny.

Revenues increased 18.4% year over year to $4.61 billion in the first quarter, surpassing the Zacks Consensus Estimate of $4.51 billion. This growth was primarily attributable to the ensuing strong demand for EMC’s storage, data protection, virtualization and security products and services during the quarter.

For further details please read: EMC Reports Mixed 1Q

Second Quarter Expectations

For the second quarter, the Zacks Consensus Estimate for EMC’s earnings is pegged at 27 cents, a 12.5% increase from the previous quarter. Total revenue as per the Zacks Consensus Estimate is $4.73 million, which equals to a 2.6% upside from the revenues earned in the prior quarter.

We note that the average earnings surprise in the preceding four quarters is a positive 1.90%. Except for the last quarter, EMC has surpassed the estimates in the three preceding quarters, and therefore we do not rule out the possibility of yet another earnings beat.

EMC expects fiscal year 2011 revenues of $19.6 billion, which is below the Zacks Consensus Estimate of $19.84 billion.

GAAP net income is expected to be $2.5 billion, while non-GAAP net income is expected to be $3.3 billion. The estimated GAAP EPS is $1.09 for 2011 and non-GAAP EPS is $1.46.

Currently, the Zacks Consensus non-GAAP EPS estimate is pegged at $1.21 per share for fiscal 2011.

EMC expects to repurchase up to $1.5 billion of common stock in fiscal 2011.

GAAP operating income is projected at between 16.5% and 17.5% of revenues, while non-GAAP operating income is likely to be in the range of 23.0% to 24.0% of revenues. Non-GAAP income tax rate is expected to be 22%, while non-operating expense, which includes investment income, interest expense, and other expenses, is likely to be $175 million in fiscal 2011.

Estimate Revision Trend

For the current quarter, out of the 15 analysts covering the stock, two upward revisions were made and none of the analysts made downward revisions in the last thirty days.

For fiscal 2011, out of the 16 analysts covering the stock, four upward revisions were noticed while none provided downward revisions in the last thirty days. The Zacks Consensus Estimate for fiscal 2011 is pegged at $1.21 per share.

Analysts expect growth trends in the IT sector to benefit EMC in the long run. A strategic shift in focus toward cloud computing is also seen as a strong catalyst for EMC. EMC remains focused on key areas of IT spending including virtualized data centers; cloud computing; virtualized desktops and clients; and next-generation backup, recovery and archive solutions. The company is addressing these growth opportunities through an expanding portfolio of products/services within its business groups, which include information storage, security and intelligence.


In the spate of the recent cyber attacks on major corporations, we believe that companies will spend a large portion of their information technology (IT) budgets on cyber security going forward. This is expected to encourage all the major industry players to build new and innovative products that will increase competition for EMC over the long term.

Moreover, with increased spending from government and large enterprises, we believe companies such as EMC will be encouraged to develop new and innovative products. EMC is also looking to prioritize security along with storage and recently announced its intention to spend $3.0 billion for the acquisitions of storage and security firms. We believe this policy will boost EMC’s dominant position (70.0%) in the cyber security market over the long term.

However, the security lapse at EMC’s RSA Security can temporarily impact its results, as clients press for more sophisticated solutions. This would put pressure on EMC to come up with efficient and innovative products that could address the issue. This would increase its research and development expenses, with a corresponding negative impact on profitability.

Additionally, competition from Hewlett-Packard Co. (HPQ) and International Business Machines Corp. (IBM) may act as a headwind going forward.

We are Neutral on EMC over the long term (6-12 months). Currently, EMC has a Zacks #2 Rank, which implies a Buy rating on a short-term basis.

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