Q1 2013 Earnings Call Transcript
Transcript Call Date 04/24/2013

Operator: Good morning, and welcome to the EMC First Quarter 2013 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer portion of the call. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce your host, Mr. Tony Takazawa, Vice President, Global Investor Relations at EMC.

Tony Takazawa - VP, IR: Thank you. Good morning. Welcome to EMC's call to discuss our financial results for the first quarter of 2013. Today we are joined by EMC's Chairman and CEO, Joe Tucci and David Goulden, EMC President and COO.

To kick things off, David will comment on our results and how these tie with the execution of our strategy and business operations. He will also discuss our outlook for the year 2013. Joe will then spend some time discussing his view of what is happening in the economy and IT, EMC’s vision and strategy and how EMC is helping customers navigate the massive transformation happening in IT regarding cloud, big data, and trusted IT.

After the prepared remarks, we will then open up the lines to take your questions. Today, we are providing you with our projected financial model for 2013. This model lays out all of the key assumptions and discrete financial expectations that are the foundation of our outlook this year. We hope that you find this model helpful in understanding our assumptions in context and in ensuring that these expectations are correctly incorporated into your models. This model is available as background in today’s slides available for download in the Investor Relations section of emc.com.

Please note that we will be referring to non-GAAP numbers in today’s presentation unless otherwise indicated. The reconciliation of our non-GAAP comments to our GAAP results can be found in the disclosure in today’s press release, supplemental schedules, and the slides that accompany our presentation. As always, the call this morning will contain forward-looking statements and information concerning factors that could cause actual results to differ can be found in EMC’s filings with the U.S. Securities and Exchange Commission.

With that it's now my pleasure to introduce David Goulden. David?

David I. Goulden - President and COO: Thanks Tony, good morning everyone and thank you for joining us today. This morning we reported solid start to 2013 with revenue growth of 6% and non-GAAP EPS growth of 5%. While customer caution continued in the first quarter this year, we executed well on our mission to capture the opportunities presented by cloud, big data and trusted IT.

Our growth outlook for the year of 8% and 9% for revenue and EPS is unchanged and our Q1 results of 6% and 5% are consistent with the seasonal progression for revenue and EPS we discussed in January. We firmly believe our results attest that our strategy is the right one.

As demands on IT have intensified with the rising trends towards mobile, social and big data customers are finding great efficiency, agility and choice from cloud infrastructures. Whether private, public or hybrid cloud turns IT into a service that can be utilized on demand. This vision has guided our strategies since 2009 and we continue to hone our broad best-of-breed portfolio to enable IT-as-a-Service both on premises and off.

Adhering to this vision, while also continuing to address customers who have broadly varied needs as they transition to next generation infrastructures has enabled us to continue to gain market share. In Q1, we believe these share continue with growth across all our segments and all our geos, including solid 10% growth from our BRIC plus 13 markets.

Today's dynamic environment requires IT to be able to respond to a constant change, which is why flexibility and choice also is high priorities to the customers. Businesses require IT resources that can scale on demand. Can handle a variety of workloads and can be trusted at all times. Choice is a key value position of what EMC offers. The federated structure we introduced last month is instrumental to this.

At the Information Infrastructure, EMCs Information Storage, Information Protection, Information Security and Information Intelligence businesses are built to facilitate the agility, efficiency and choice that makes cloud so appealing.

Leading technology developed with a horizontal over approach ensures choice into future. Our best-of-breed product strategy, tight integration with VMware and support for Microsoft and OpenStack give customers' choice. At the virtual infrastructure layer, VMware continues to lead the market with a vision to rapidly simplify IT by expanding capabilities beyond serer virtualization to software defined data center, hybrid cloud and end-user experience. VMware's commitment to enabling choice is unparalleled.

At the application layer, Pivotal has the foundation initiative in place to offer best-in-class options for new application development leveraging big and fast data, so customers can leverage a next generation platform to develop and deploy new apps without having to choose or commit to any one specific infrastructure. This innovative framework leaves each business free to focus on its own mission, while leveraging the advantages of one common strategic vision and creating the greatest opportunity for customer choice.

While Pivotal was not officially formed until April 1, we wanted to give you a view of our revenue performance for Q1 along the lines of this new federated approach. With that in mind, throughout the rest of my prepared remarks, I will be talking about the various businesses as if Pivotal was in place in Q1, and the associated revenues were not included in the reported EMC and VMware businesses. We’re including a slide in our presentation today showing the as if revenue associated with the three elements of the federation just to give you an idea of how they are distributed.

With that said, let's look at each of the business in turn, starting with EMC Information Infrastructure comprising storage, security, and information intelligence. The biggest piece within our Information Infrastructure business, storage, grew 3% in Q1. Information growth continues, but the nature of it is changing. Different types of data grow at different rates, with large-scale file and object-based data sets growing faster than traditional transaction data sets. The types of workload to leverage this data are even more varied. Some workloads need very high performance, others need high capacity. Certain workloads need very high service levels, others need very little. What this means is different storage is needed for different workloads. From a deployment perspective, some of these workloads work well in public clouds, some are better off in private clouds.

We offer storage infrastructure for this broad variety of workloads for both private clouds and public clouds alike. Both private clouds and public clouds represent growth opportunities for us. We expect far more business workloads to run in private clouds than in public clouds in 2016, and therefore represent the larger opportunity. A recent report estimated that IT spending on private cloud will grow a 58% annual rate from 2012 to 2016. However, supporting workloads running in public clouds is also a very fast-growing opportunity, and the service provider vertical continues to be the fastest-growing vertical for our storage business.

These variations within storage are important to consider, and our new view of the storage business is designed so you can better track how each of the business lines within storage is progressing. This format captures the varied nature of growth across our broad portfolio, with the fastest-growing solutions captured in our emerging storage line and the more measured growth demonstrated by our unified and backup business and our high-end business.

Year-on-year growth of our high-end storage business accelerated from the second half of last year to 10% in Q1. This was driven by growth in the 10K and the 40K, which were over 60% of VMAX systems in the quarter. With unmatched scalability for the largest and most mission-critical environments on the 40K and has expanded to reach down market with a 10K, our VMAX customer base is growing. What all of VMAX customers have in common is a desire for the very best solution for performance, consolidation and automation in demanding virtual data center environments, many of which are evolving into private clouds or are powering public clouds.

We are hoping to drive the transition to cloud with the Q1 launch of the cloud edition. This self-service enterprise class storage delivery platform accelerates time to value for providers of public cloud services, as well as the enterprise and midmarket IT offering private cloud services. In Q1, we have customers buying cloud edition for the private and public cloud deployments.

Our unified and backup recovery revenue declined slightly in Q1, in what has been a choppy environment for this segment of the market, although there where areas of strength. Our portfolio in this space is strong, thanks to ongoing innovations that keep our offerings at the forefront of the market. In our unified portfolio, this means innovation to optimize storage for cloud environments, support levels of choice, and building trust.

The VNX family score in each of these areas in Q1 as one of the first unified solutions in the market with critical integration capabilities, with both VMware and with Microsoft's latest releases, Windows Server 2012 and Hyper-V 3.0. We also have security on the VNXe with the addition of Data-at-Rest encryption and FIPS 140 security certification.

One of the most distinct advantages of VNX is our fast software, which enables tiering over Flash and SAS drives to deliver improvements in efficiency and performance, and it's a key reason why customers select VNX over other unified storage arrays. We also had excellent traction with VSPEX in the quarter.

Our backup and recovery systems business continues to grow nicely in Q1, as it plays an important part in enabling trusted IT. Data Domain systems continue to be the gold standard in the purpose-built backup appliance space, with a market share of over 60%.

It is also a key component to the rest of our backup portfolio and important to portfolio effect with Data Domain plus Avamar and/or network wins in Q1 coming from just about every geo and every sector including a Scandinavian University and Asian Telecom and American Tax Authority. Additionally, revenue growth of our data protection software suite was very good. We have an exciting roadmap in place for both unified storage and our backup and recovery products and are very encouraged by the potential for this part of our business in the second half of 2013.

Our emerging storage businesses grew 24% in Q1. It is an exciting time for new storage technologies right now and we are committed to building our market leadership position in each of the areas, where we play. Our scale-out file offering Isilon continues to do well gaining ground in enterprise markets for used cases, such as large scale home directories and archives, while continuing to maintain its leadership position in traditional strongholds in verticals like media and life sciences.

Isilon's expansion in big name enterprise accounts has been aided by the significant uptake of the latest generation of Isilon scale-out operating system, OneFS 7.0 introduced last year. OneFS 7, which many of you may recall is codenamed, Mavericks, has seen the fastest adoption in iPhone's history with over 400 customers completing installations thus far.

Our scale-out NAS architecture is exceptionally well suited for extremely large scale big datasets, and Isilon continues to win in web companies as well. Complementing Isilon is our scale-out object platform, Atmos, the ability to store, archive, and access globally distributed unstructured content at scale that Atmos offers is a key capability for private, public, and hybrid cloud infrastructures. And customers are taking advantage of these capabilities on Atmos as evidenced by the continued sequential growth exhibited by Atmos of a strong Q4.

Our Xtrem Flash family was launched in March. The Xtrem Flash family includes XtremSF, PCIe cards, which accelerate performance on the server and include MLC as well as SLC. XtremSW suite, which includes our XtremSW Cache products, XtremSW Cache used with XtremSF cards accelerates application performance and leverages the data services of the storage array to protect data. And our extreme XtremIO all flash storage array which delivers unparalleled performance without sacrificing the rich data services customers value in our storage infrastructures.

Having different flavors of flash allows customers to leverage the latency and throughput advantages regardless of the workload. With server-side flash customers love the performance games flash brings and they are pleased to see how certain solution in the market with the addition of our XtremSF solution. The customers participating in the XtremIO direct availability program are very excited about this transformational technology. XtremIO is unmatched in its ability to be able to deliver sub millisecond response times without comprising rich data service functionality including in-line deduplication, thin provisioning, data section and (rival snaps) and being able to scale out on linear basis.

We’re excited about our new flash products contributing to the growth of our emerging storage business as we progress through 2013. We have not yet launched our software defined storage solutions but we expect them to become an increasingly important part of our emerging storage business. Software defined storage is part of a bigger focus across the federation on building out the software-defined data center and involve the same approach; abstracting the control plane and the data plane, pooling resources and automating management of these resources through policies. The result is simplified, scalable storage and expanded customer choice that can fully leverage existing storage investments.

We have built our decade of knowledge about storage to architect EMC's software-defined storage to solve the critical problems created by complex and varied storage architectures. The goal is to provide a policy-driven storage infrastructure capable of running all applications and managing that storage infrastructure in a consistent way. Designed for massive scale, geo distribution multiple data centers across the world, compatible with heterogeneous arrays and dovetailing with VMware's software-defined data center strategy and also supporting OpenStack and Hyper-V, we expect our software-defined storage to be very well received by customers, both SPs and Enterprises.

Our Professional Services and other storage revenue declined 3% year-on-year. These are lower margin businesses. Storage Professional Services, which includes implementation on consulting services, benefited in Q1 from continued data center consolations and rationalizations globally. We are also experiencing good demand for our newly launched Continuous Availability consulting service. Other storage revenue consists of third-party and other, less strategic products within storage.

When you look across our Storage business, we are pleased with growth of the High-End, encouraged by the potential in our unified and backup recovery businesses and our roadmaps that will boost growth here. And I am very excited about continued growth in our emerging products and the upcoming launch of EMC's software-defined storage solutions.

We are also encouraged by the adoption of new technologies like Flash across our entire storage portfolio. Flash capacity in Q1 grew 60% year-on-year with most of this in our hybrid storage arrays. With the right storage for the workload and an effective strategy to transition these workloads to the right cloud, we expect the storage shared gains that we have achieved over the past several years to continue into foreseeable future. Like storage, the right approach to security is also key to successful implementation of cloud and RSA is delivering with revenue up 12% in Q1 over the last year's first quarter with both identity and data protection and security management and compliance up year-on-year.

By leveraging big data to create intelligence driven security and integrated capabilities across the portfolio to provide truly contextual solutions, RSA is creating powerful and effective offerings. RSA's new Security Analytic suite and Authentication Manager 8.0 are being very well received by customers after their launch in Q1, as they utilize a big data approach to tackle today's dynamic threat environments.

It is this intensifying threat environment that keep security at the top of the IT priority list, as evidenced by record attendance of about 25,000 at the RSA Conference in February, record registrations for the (indiscernible) User Group Conference and registrations for upcoming security events in Europe and Singapore that have exceeded available capacity, clearly a tremendous positive response on both our strategy and our offerings.

Our Information Intelligence business performed well in Q1 and returned to year-on-year growth. IIG was up 7% in Q1 as more modular, vertical specific solutions for workflow processing resonate with customers. While IIG was held by a couple of large enterprise deals in Q1, we are pleased to note faster growth from several of our newer initiatives.

(Simplicity) performance was ahead of plan and we saw good traction for our new life sciences, healthcare, and energy solutions. VMware got off to a solid start for the year with revenue growth of 13%. VMware's areas of focus software defined datacenter, hybrid cloud and end-user computing all showed very good growth. Customers are obviously in for broader features beyond server virtualization with over 30% of VMware's license bookings coming from vCloud, management and automation and end user computing. VMware is a highly strategic and key component of our business, a market leader and aggressively pursuing software-defined datacenter, hybrid cloud and end-user computing.

On April 1, we formally created Pivotal. We are excited about its mission to build a platform that will accommodate cloud and big and fast data applications, all requirements for the next generation of IT, which involves millions of apps and billions of users. Revenues from products and services, transferred to Pivotal on April 1 was almost $70 million for the quarter and we expect 2013 revenue to be approximately $300 million. This morning, Pivotal announced that GE will become a significant strategic investor.

The same flexibility that characterizes our product portfolio exists in our go-to-market model as customers want the choice and flexibility to move to cloud in different ways. As a result, our go-to-market spends, our world-class direct sales force, deep and innovative partnerships with our reseller community, and new approaches such as VCE.

Our channel program continues to improve quarter-after-quarter and Q1 was no exception. Over 50% of our storage revenue goes through the channel. And this revenue continues to grow at a faster rate in storage overall. Our VSPEX program has been very helpful here, and in Q1 we were able to bring the total number of VSPEX sold to just under 2200. This rapid ramp in less than 12 months is remarkable and clearly much faster than any other reference architecture on the market.

VCE also perform well in the quarter and last year's investment to build out presence in new geographies has begun to pay off. VCE has established significant customer presence in targeted international markets and provided entry into numerous competitive strongholds with nearly half of Vblock demand in Q1 coming from new accounts. VCE continues to experience good success with service providers as many of the larger established service providers are using Vblocks for multi-tenancy and for a variety of IT-as-a-service offerings.

Our cloud service provider partner program continues to expand with revenue growth from this program of over 40% from Q1 of last year, much faster than storage overall. This growth is stemming from the addition of new partners, as well as from additional purchase from existing customers. Partners are using elements of our entire portfolio to stand up a number of value added on-demand offerings, including infrastructure-as-a-service, platform-as-a-service and software-as-a-service. Their service catalogs continue to expand with a number of unique offerings provided by these partners up 16% from Q4.

Our solid results in a continued cautious spending environment, speaks to soundness of our strategy and our execution. Consolidated revenue grew 6% in Q1 with the strongest growth in Latin America, up 27% followed by growth in North America of 8%, APJ grew 4% and EMEA was up 1%.

Revenue mix shifts to higher margin businesses, including VMware continued to benefit gross margin, which improved slightly on a consolidated basis. Operating expenses grew slightly faster revenue on a consolidated basis, due to greater mix of OpEx from VMware. Net-net operating margin was 23.2%, in line with last year's first quarter. Below the line items, all came in pretty much where we anticipated and non-GAAP EPS in Q1 was up 5% to $0.39.

Free cash flow was $1.4 billion in Q1, approximately flat with last year and $592 million higher than non-GAAP net income in the quarter. Contributing to this was continued strong growth in deferred revenue, up 19% to $8.1 billion at quarter-end. While cash taxes paid impacted year-on-year free cash flow growth in Q1, we still expect to achieve 2013 free cash flow growth of 10%. We finished Q1 with $12 million in cash and investments, $5.9 billion of this was in the U.S. excluding VMware, EMC has $4.3 billion of U.S. cash and investments.

Our cash deployment in Q1 balance returned to shareholders with investments for the longer term. We spent about $200 million on acquisitions and spent approximately $300 million on buybacks of EMC shares in Q1. We're on-track to repurchase $1 billion with VMC shares by year-end. As we look through the rest of the year, we will continue to focus on our strengths and take advantages of the many opportunities before us. Our approach, which values efficiency, agility, and choice across the three layers of IT, information infrastructure, virtual infrastructure, and next generation applications is differentiated. In fact, as customers evaluate their investments more carefully, in the context of how they will use next generation IT to their advantage, we think our vision incorporating all three layers is especially relevance. Customers trust us to help them take full advantage of the many business benefits offered by cloud, big data, and trusted IT.

We are reaffirming our expectations for 2013, namely that we expect EMC revenue will grow 8% to $23.5 billion. Non-GAAP EPS for the full year will grow faster than revenue to $1.85 per share. We also expect to grow free cash flow by 10% to $5.5 billion. As we said last quarter there are few other assumptions that should be considered and these assumptions have not changed from what we said in January. First we have modeled our revenue to follow a seasonally normal percentage of total for each quarter of the year. Second, because 2012 did not follow a seasonally normal progression first half revenue growth in 2013 will be lower than the full year average of 8% and 2nd half revenue growth will be higher than 8%.

Third, this revenue growth pattern means that while we will show operating and EPS leverage for the year in 2013 the leverage benefits will come in the second half of the year. This means of course that we won't see leverage in the first half of the year. We continue to expect operating leverage in 2013 to come from both gross margins and operating expenses. As we look out further into the future we’re confident that the industry trends driving our success in 2013 will continue and our strategy will continue to resonate.

With continued steady execution we expect to achieve the longer term growth potential we laid out for you last month. Over $30 billion in revenue in 2016 which represents a compound annual growth rate of 9% from 2012 and a non-GAAP EPS CAGR of 10% plus. This longer term view underscores our belief that we’re well positioned to continue to grow much faster than the IT market place to continue to produce leverage in the business and continue to innovate and evolve the capitalize on the opportunities created by cloud, big data and trust.

With that I will turn it over to Joe. Joe?

Joseph M. Tucci - Chairman and CEO: Thank you David. I would like to begin by adding my welcome and thanks to everyone attending today’s conference call. It's good to have you with us. Overall I was pleased with our results and our execution in Q1. As the quarter came in in-line with our expectations.

That said, we found the booking flow this quarter to be quite back-end loaded. In other words, we experienced a high-level of hardware and software bookings in March, especially in the last two weeks. The very good news is that our supply chain, our factories and our distribution teams executed flawlessly.

The main reason for the late bookings this quarter is that customers are still being very cautious with our IT spending. For sure, most orders are subject to greater scrutiny, and many enterprises are not requiring a higher level of executive signoff before they give final approval. Undoubtedly, this caution is being fueled by the continuing tied of political and economic uncertainties.

Additionally, when you look at the organic growth profile of other IT companies, I believe you will understand why we believe we executed well. I would like to publicly thank the approximately 59,000 talented people from EMC and VMware for their hard work and their dedication.

To add more color about the quarter, on a geographic basis, we experienced growth in North America, Latin America and in Asia Pacific, excluding Japan that was greater than our overall rate of 6%. In EMEA, we experienced very modest growth, while in Japan we declined slightly on a constant currency basis. From a vertical market point of view, we saw strength in high growth for our service providers, we saw a good growth in financial services and healthcare industries and we experienced weakness in public sector and U.S. Federal. Looking forward, we still believe that overall IT spending in 2013 will grow at a 3% range over last year. Against this backdrop, we continue to expect to grow our top line 8% this year, produce some leverage and grow our non-GAAP EPS by 9% and our free cash flow by 10%.

What underpins our confidence in 2013 is our winning strategy of cloud, Big Data and trusted IT. The way we have divided this strategy and executional focus between VMware, EMCii, and Pivotal; a unique business model that focuses each entity on a set of clearly distinct yet related missions giving each of them the chart to build the products, go-to-market capabilities, and ecosystem necessary to win.

Also what gives us confidence in our ability to achieve our goals in 2013 is the expectation of a strong roadmap and product cycle especially in the second half of this year. And most importantly what underpins our confidence is the fact that our customers are not only giving us permission to play in our chosen markets, they are downright encouraging us to play and play hard.

I would like to thank the hundreds of you that attended our Strategic Forum on March 13th either in person in New York City or virtually via our webcast. Your feedback was both very positive and indeed very helpful. As we stated that day we understand and appreciate the vast opportunities that the trusted cloud, big data, mobile and the social IT world of the future will avail to us.

Additionally, we believe that there is still plenty of growth ahead in today's IT environments, environment which cover almost all enterprises today. And make no mistake about it, we are well placed to introduce disruptive technology into today's world and we will help our customers in their journey to private and hybrid cloud computing and to new and big, fast data technologies that will dramatically change every industry and business.

Also at our March Strategic Forum we used the opportunity to formally unveil the newest member of the EMC family, Pivotal under the leadership of CEO, Paul Maritz. Pivotal for those of you that might have missed it will focus on big data and predictive analytics, fast data as pervasive telemetry and the internet of things becomes reality. And a platform for enabling a new generation of applications that can exploit big and fast data, interact with legacy and do somewhat in cloud-independent way offering choice and affordability across the world's leading private and public clouds from the likes of VMware, Amazon and OpenStack.

Today, I am extremely pleased to announce that GE will become a strategic investor in and 10% owner of Pivotal. GE from the very top down is laser-focused on using third platform IT to transform its winning businesses and business models. The EMC family is thrilled that GE choose to participate in Pivotal, GE has our deep appreciation, thanks and commitment. To get more details please join Paul Maritz from Pivotal and Bill Ruh from GE for their webcast today at 1 PM Eastern Time, 10.00 AM Pacific time. The calling details are in Pivotal's press release that was issued this morning.

Again, thank you very much for being with us today. I would now like to turn it back to Tony to moderate the Q&A portion of today's call. Tony?

Tony Takazawa - VP, IR: Thanks, Joe. Before we open up the lines for your questions, as usual, we ask you to try and limit yourselves to one question including clarifications. This will enable us to take as many questions as possible. We thank you all for your cooperation in this matter. Evan, can we open up the lines for the first question please?

Transcript Call Date 04/24/2013

Operator: Shebly Seyrafi, FBN Securities.

Shebly Seyrafi - FBN Securities: Question is for you, Joe. It looks like the storage market has slowed down since the second quarter of 2012 and I am wondering you talk about political and other factors I am wondering what are your thoughts about the movement to the cloud slowing down storage spending secularly. What do you think needs to happen to accelerate growth in storage?

Joseph M. Tucci - Chairman and CEO: Shebly, remember – David, I think both today a little bit and in depth at the strategic forum we had in February. We talked about application workloads. And depending on where those application workloads are depending on when they are written, how they are written, really dictates how – what kind of storage it needs and where it could run. So, the truth of the matter is, I don’t really – the cloud today has been a net benefit to us so far. I don't know how many quarters in a row, like I haven't been counting but at least the last four. We've said that our highest growth business has been to service providers. So, we're selling a lot of business. First of all, cloud is not only public cloud; it's private cloud. We’re leading the journey to the private cloud and that is – and of course when you put, let's put it platform 2 type of applications into a cloud, you need storage which has a rich set of services, which favors us. Our market share within storage is going up. I do believe you'll see a tremendous of shadow IT go to public clouds, and that’s both good and bad. But good, in that new things are tried; bad, in that I think we lose – the enterprises lose some control of the information. But over time this will be I think net good, and we're going to play in both the private and public side, and it's all about what we’re doing in terms of adopting HDFS with native; Scale-out NAS; our object storage, the Atmos; software defined storage, stay tuned, we're going to do a lot of that at VMworld in a couple of weeks; our flash program. So, we have a great portfolio that plays both with the cloud and traditional data centers, and remember, the cloud is both private and public. So, we do not see this as a negative trend for us.

Operator: Brian Marshall, ISI Group.

Brian Marshall - ISI Group: Obviously, when you look at consolidated EMC gross margins on a year-over-year basis, the trajectory is nice in the sense that it's improving year-over-year. But when you break apart VMware as well as core EMC, it looks as though EMC actually declined from a core standpoint year-over-year in terms of margins. So, I think this is, obviously, atypical for you guys. I was wondering if you could talk about the key drivers of that year-over-year decline. Then, is this a trend that's going to continue throughout calendar '13, if you can give any color there.

Joseph M. Tucci - Chairman and CEO: I'll start out. David is fighting a little bit of a voice problems here, but the -- I mentioned how late Q1 came in. In anticipation of that, because obviously we also said we had a late -- not as late, but a late Q4, so that caused us to say, okay, if it is going to be late, we need to build up more inventory. In the end when you get orders late, you need to buy different kinds of inventory, which when you buy inventory late in the quarter tends to cost you a little bit more. We have more people and more cost in the factories, we have higher shipping costs. Also our fixed costs were up a bit this quarter. We had – our fixed cost grew faster than revenue due to software capitalization, amortization, warranty, cost and manufacturing overhead. So that's kind of what happened to us. We told you very clearly. David said it again today that we did not expect leverage in the first half of the year, we expect good leverage in the second half of the year, and this quarter came in very close to our expectations, and I think when you look at it on a proverbial curve, I really think we had a good quarter.

David I. Goulden - President and COO: I have very bad laryngitis this morning. So I would tell you my comment last night, no, I couldn't speak today probably, but just to pick up where Joe had left off. The fixed cost issues, we don't expect fixed cost to rise as much during the year. We expect our volumes in the storage to increase, so that factor is going to become less of an issue going forward. So we do expect the EMC II gross margins to increase sequentially during the year. We expect the consolidated company margin will be up year-over-year, and that with the OpEx is what's going to drive leverage in the business in 2013.

Operator: Alex Kurtz, Sterne Agee.

Alex Kurtz - Sterne Agee: Just following up with the earlier question about the cloud, Joe. It seems like there is an opportunity to take Symmetrix into some of these public clouds that you’re not in today. We get a lot of questions around AWS. Why couldn’t Symmetrix be stripped down and reconfigured in a format that could allow a provider like AWS to provide a Tier 1, high end kind of service. Have you guys thought about that as a strategic direction for Symmetrix longer term?

Joseph M. Tucci - Chairman and CEO: One of things David alluded to – I don’t think he alluded to it, he actually said it in his remarks – was the cloud edition of Symmetrix coming out, and so many attributes that you mentioned will be front and center. So, obviously, it’s a very – Symmetrix has the richest set by far of functionality and software capability. And it’s doing well in the private side of the cloud, doing okay in the public side of the cloud, and we think there is a lot more we can do with that platform. So, stay tuned.

Operator: Keith Bachman, Bank of Montreal.

Keith Bachman - Bank of Montreal: Joe, I wanted to ask you about the strategy of having a company of companies and that is to say you have announced that Pivotal has taken some money from GE and will ultimately look to go public, VMware is a public company and I am confused on why you are doing that. Originally VMware, I think was done at least partially to give currency for employee retention purposes, but in effect you are adding to G&A and you are also deleveraging a consolidated global sales force. So I'm unclear about the strategy about why you have these assets. As a matter of fact I could make an argument, the spinoff of VMware really has an added value to the EMC shareholders and indeed today is detracting from the upside potential of EMC, given the volatility in that stock. So, maybe you could just speak to why you continue to head down this path?

Joseph M. Tucci - Chairman and CEO: I think the major reason is you nailed it. When you see an opportunity as massive as big and fast data, the opportunity to build – you have to be free to build an ecosystem that not only includes EMC and VMware in that case and I think you'll see that come to fruition. There's a lot of – I don't want to go further than I'm going, but there's a lot of interest in what we're doing in Pivotal. On the other side, having a family stack also gives us a lot of clout and credibility. Also, when you get a Company like Pivotal and you're going to make a huge bet on it having the EMC, let's say, good housekeeping seal of approval on it and our balance sheet and working together with our sales force and our capabilities gives customers a lot of confidence to try something newer, if you will. So, I think there's great benefits, but the biggest benefit is that you have this ability to attract an incredible talent pool under the Pivotal stock if you will, having a leader like Paul Maritz, having a company with the prestige and the trust they have for the investor and that as a core owner and partner, and so it's – I think it's a great way to go. You are right, there is sometimes when VMware was adding a lot of value, now it's got a little more volatility. But I think when this all plays out and the software-defined data center and the hybrid cloud, and what we are doing in storage and what we are doing in security, and what's happening on big and fast data and the platform for the next, I mean these are assets that most companies kill for. So, when you look at our strategic play and you look at the opportunities of the third platform, the third grade platform of IT is going to present, that's what we are aligning for. Over time, there will be a lot of different ways we can get – you can look to monetize things, but I think we are on a great track right now, because we are building up a great set of assets and tremendous leadership capability. And people are excited as heck, in any of those companies including EMC, including Pivotal, including VMware.

Operator: Andrew Nowinski, Piper Jaffray.

Andrew Nowinski - Piper Jaffray: Just had a question on the VNX, the mid-range, I know you are calling it unified now, but it's been over two years since you launched the VNX, which I believe is near the end of your typical refresh lifecycle. So, regarding the 2% year-over-year decline, given all the chatter in the channel regarding a pending refresh, did that have any impact on your unified revenue this quarter? And then could you also talk about the impact to sales cycles when you introduce new platforms? Thanks.

Joseph M. Tucci - Chairman and CEO: I think we have done everything, but say it's – I'll probably say more than I'm supposed to say, and David is cringing here because he wish he could talk. You are exactly right, there is – and I'm not going to give the date, but in the second half of the year, okay. There is a considerable refresh and cycled – really positive product cycle for the VNX and I think that's what product cycles are all about. There wouldn't be cycles if that didn't happen. We are near the end of the life. Things do slowdown in anticipation of the new one. So, are we experiencing some of that now? Yeah, of course, we are.

Operator: Maynard Um, Wells Fargo.

Maynard Um - Wells Fargo: Can you just talk about the channel it seems like with – you've got a broadening portfolio, more workload specific needs, you got more competition. The complexity just seems to be rising. So, can you just talk about how you get the channel to commit and do you feel like you need to be more aggressive from an incentive perspective because of that or do you kind of feel like the direct sales force becomes more important in this industry landscape?

Joseph M. Tucci - Chairman and CEO: I think it's not an or you asked the question it is as an or I think it's an and. I think the companies that will fair best which is certainly what we are committed to do, focused to do are doing is to have a strong direct sales force that works in harmony that is comp neutral to work with a growing and vibrant channel. You are right about one point you have to worry about your channel because it's in fact an extension of your selling capability and you have to worry about their profitability. You have to worry about how – are they trained properly, are they providing value to customers. So, all those things go into the mix, but we are incredibly committed. I couldn't be more committed to channels than I am and I think that channels and direct sales force is if you had your comp plans right and we spend a lot of time on our comp plans are best friends.

Maynard Um - Wells Fargo: Have you changed the way though, you've incentivized the channel at all kind of given all the changes that's been happening.

Joseph M. Tucci - Chairman and CEO: Yes, we continually change.

Maynard Um - Wells Fargo: I am just wondering if I guess there is more pressure related to those gross margins where there is more pressure because of the incentivization of the channel.

Joseph M. Tucci - Chairman and CEO: I don't think that because we find if we can get a channel to invest, invest in inside sales, invest in around knowing our technology, investment in field sales and support. The margins through the channel are quite good, because when you look at operating margins, you get maybe a little less gross margin, but again you don't have as much selling cost because our sales force says, hey, I have a trusted partner, I'll turn it over to them and I'll go do something else. And when you get a channel that can take -- they can do the lifting, it turns out positive and it's actually net-net margin neutral.

Operator: Amit Daryanani, RBC Capital Markets.

Amit Daryanani - RBC Capital Markets: Just want to touch on the flash solution that you guys launched. I believe, it’s supposed to (be GA) sometime late Q2, early Q3. But broadly when you look at the intake so far that you have had for XIO and the PCIe SSD solutions, can you maybe talk about are these products helping you gain new customer relationships or new channel relationships, or is it more about selling these solutions to existing customers, so they don't look at other vendors? Then longer term, how big do you see flash become as a percent of EMC storage portfolio?

Joseph M. Tucci - Chairman and CEO: David says he wants to try again.

David I. Goulden - President and COO: I will try, and if I can't get it out, then I'll give you.

Amit Daryanani - RBC Capital Markets: I feel bad.

David I. Goulden - President and COO: But thanks for asking me a question. So, XIO is in what we're calling right now directed availability, which means it's available for sale to select customers where we have kind of defined plan we both agree too. I'd say that's a combination of existing and new. Obviously, there are lot of customers looking at flash generally and we want to make sure we've got our flash solutions in front of our existing customers, so they can really look at their strengths, because we do believe XIO is something that’s very different and very new. In terms of becoming a major piece of revenue, the flash products we introduced –are all brand new. They are not really contributing anything now. They're going to start contributing to the emerging product segment in the second half. I think you will see them contributing to the storage business more broadly in 2014.

Operator: Kulbinder Garcha, Credit Suisse.

Kulbinder Garcha - Credit Suisse: I have a question, just going back to the gross margin, I guess, one of the thing, it’s first time that we have seen in the information storage side gross margins decline year-on-year in sometime, and I take your point, Joe, that there was some…

Joseph M. Tucci - Chairman and CEO: You're really fading, can…

Kulbinder Garcha - Credit Suisse: So my question is on the information gross margins. I take the point that the quarter was late and there were some costs that also came in as a result impacting that. But it’s the first time they’re down year-on-year. I'm just wondering, Joe, is there anything that you're seeing really changing the competitive environment over the last few months, and specifically are you seeing any impact from not necessarily the NetApps of the world, but from the newer startups being more aggressive? I think Nimble, for example, are seeing some really good traction in the market, and they often talk about targeting both yourselves and NetApp. I am wondering has anything changed there that could be explaining this as well, or is it simply just the cost basis you mentioned?

Joseph M. Tucci - Chairman and CEO: There is a tremendous amount of noise out there, but I could tell you point blank, most of our competition is coming from our traditional sources, whether it would be one of the server vendors that also sell storage, whether it would be from the big – traditional, the established storage players, whether it be Hitachi, NetApps, et cetera. There is lot of noise being made by these new startup crews, but in realty that's just not what we are facing. You keep coming back to how much of the business is like an Amazon stealing. I still think it's basically customers being cautious. The customers are for sure sweating their assets more; it’s a term we use. They are keeping them longer. We see that in terms of how long – we have a very good genealogy on all our products. We know how long they have been out and every customer’s what drives are in them, et cetera. For sure, customers are keeping their assets longer. For sure, the industry, right, us leading the industry is giving them better tools, compression, deduplication, better ways to do copies or snaps or clones more efficient, thin provisioning, and I could go on and on. And then software defined storage have given another set of capabilities. So, I really think that’s more of what you are seeing is the caution in customers, to use our term, sweating their assets longer and the fact that we have given the industry and others – our industry has given tremendous benefits in terms of utilization tools and productivity tools within storage. And that’s – and I think that’s what you are seeing right now, combination of those two things.

Operator: Abhey Lamba, Mizuho Securities.

Abhey Lamba - Mizuho Securities: Joe, I just wanted a question on flash products. Well, can you talk a little bit about what do you expect sales cycles for those products should be versus what we have seen for the other storage solutions? Also, where are we in terms of customer demand and channel readiness and the sales force readiness from you in terms of pushing those products?

Joseph M. Tucci - Chairman and CEO: Well, obviously, a lot of anticipation both us and the market on XtremIO. And, of course, again, that’s second half product. As David said, it’s in directed distribution now. I can tell you the customers that have the beta versions are not only high on it, they are wild about it. This does more than advertised, so we expect that to be a significant hit. Obviously, there are certain applications, this is very application-specific where customers with the application like high frequency trading where they want the storage right in – right on a PCI slot in the server, and of course we're getting growth there. But I don't think the cycles for selling are materially different. They might be longer for a new product, because customers want to kick the tires longer, but in terms of – we are not anticipating any change in selling cycles. We are looking forward to these new lines of products hitting, let's call it, maturity so that they will be readily adopted, whether it would be in the server side flash or storage side flash.

Operator: Scott Craig, Bank of America Merrill Lynch.

Scott Craig - Bank of America - Merrill Lynch: Just on the free cash flow as you think about the usage going forward, and this kind of relates to Keith Bachman's question a little bit, but how do you think about strategically buybacks and distributing that between EMC, VMware and then you are going to have Pivotal out there as well, because clearly some analysts would rather see buying back more EMC stock as opposed to other entities. So, I'm just curious how you strategize that use of free cash flow amongst the entities you are building out and just in general? Thanks

Joseph M. Tucci - Chairman and CEO: Let me make just a couple of comments on that, but I'll make them very hard and very succinct. I want to assure you that this area is – and I had very active discussion with our Board, very active. I also assure you, we are committed to increasing, I'll repeat the word increasing, our return of capital to our shareholders going forward. And I want to leave it there for now. But that is our commitment – it's very active and we are going to increase, our commitment.

Operator: Steve Milunovich, UBS.

Steven Milunovich - UBS: Could you talk about the cloud a bit more specifically storage as a service? In private cloud, you doing managed services. Could you explain kind of what is, how that works, if at some point in the future you might actually have to take assets out of your balance sheet or you will just basically kind of run storage for your enterprise customers? And then in the cloud obviously you're having some success selling to service providers but some of the ones we talked to do indicate that having branded EMC type equipment is a little less important than it used to be. Some of them are investing in their own storage technologies potentially, and I'm not talking about a Google or an Amazon, but more of the Terremarks of the world. What are you running into in that part of the world as well?

Joseph M. Tucci - Chairman and CEO: It's kind of related to two different questions. On the managed storage services side, our method is, we let the customer make the call. So, in other words we will basically go into a customer site and manage their state on their premise that they bought. Number two, we'll basically say we will manage it on your site. It will be our asset, and there are cases where we have bought back some equipment and put that in the equation also. There are places where the customer wants to manage it, but they want to – they want us right by their side. So the customer basically can dial it in any place there. The difference is we don't take it off-site, we leave it on their site or one of their service provider sites. There are service providers we also run that service for. Then of course, what you're talking about is our service providers that run dual strategies, several of them where they will offer enterprise storage and maybe to compete with Amazon on their higher end elastic cloud and elastic storage services or whatever they’ve got, they call it, but they have the higher end services and they will build more of their own or use our Atmos, we see both of those happen, to compete more with Amazon S3. So all those things are happening, Steven, and we basically as part of what we are doing with software defined storage is part of what we are doing with Atmos is part of what we are doing with scale-out Isilon, are very focused on convincing a lot of the service providers and we had some pretty good success that with our expertise we can do that for them or with them very economically and very efficiently, and they can use their fire power in other areas.

Operator: Ben Reitzes, Barclays.

Ben Reitzes - Barclays: Wanted to ask about the second half and just a little more about your confidence. You have new products coming and there might be another quarter of pause in the second quarter. So we have to have quite a bit of acceleration in the second half. If you could just talk a little bit more about maybe specifics and also may be throwing some geographic color maybe does Europe get better as well because I noticed that was pretty slow in the quarter?

Joseph M. Tucci - Chairman and CEO: 6% growth, I think, if you look at the curve there is hardly a pause, but I understand your point, we have to accelerate in the second half of the year. As far as your comment on Europe I don't think anybody is smart enough to call what Europe might or might not do so. So, certainly, I'd say we are not counting on getting a whole lot worse, but we are not counting on it getting a whole lot better either. It will be what it will be, I hope it gets better. What we are really counting on is very much a product cycle. We know good things happen when we put good products out. We will delay products rather than put anything that's not ready for prime time. So, we have a very good handle on this second half math and we think it's gone. And remember when you think about last year, we grew 11% -- this is from memory, we grew – but David is feigning that he can't talk, so he wants me do all the work, see if I still notice though. We grew 11% in Q1. We grew 10% in Q2 last year. We grew 6% and then 8%. So, obviously the comparison to second half are easier because we were comparing to 10 and 11 – 11 to 10. We got to compare to 6 and 8, so that helps you too. So, it's a combination of that product cycle and every day the team gets more confident and I'm really pleased with our progress. So, thanks for asking that, Tim. Let me just do it a little close here and Tony has given me the signal. Am I supposed to say, Tony, you supposed to ask me to close…?

Tony Takazawa - VP, IR: Why don’t you do so?

Joseph M. Tucci - Chairman and CEO: But anyway I thank all of you for being with us. David has not putting us on. He really right after he taped yesterday for hardly talk and he does a great job and I am just thrilled to have him as a partner. But in summary, we truly believe that our cloud, our big data and trusted IT strategies are really well placed and they are more importantly to being well received by our customers and our partners. I think we beat this over ahead too many times, but we are very excited about our 2013 product roadmap being mostly that roadmap does fall into the second half of the year. So, we are particularly excited about the second half of the year. I am just proud and privileged to work with a great team. I believe we have momentum and we are excited about our prospects to grow and take share in 2013 and beyond. Hopefully many of you will join us either virtually or in person at EMC World, which is in Las Vegas on May 6 and 9. Again, thank you very much for being with us. We really appreciate your interest in EMC. Have a good day.

Operator: This concludes today's conference. You may disconnect at this time. Thank you.