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EMC Earnings & Revenues Fall Short of Estimates in Q1

EMC Corporation’s EMC first quarter 2016 adjusted earnings (including stock-based compensation expense but excluding other items) of 20 cents and revenues of $5.475 billion missed the Zacks Consensus Estimate of 21 cents and $5.603 billion, respectively. On a year-over-year basis, the metrics declined 9.1% and 2.5%, respectively. Sluggish demand for traditional data storage products marred quarterly results.

However, management said that it was on track to complete the merger with Dell “on the original terms and within the originally announced timeframe.” The acquisition is expected to be closed between May and Oct 2016. Share price surged over 2% in the pre market trading.

Back to numbers, Product sales decreased 7.7% year over year to $2.682 billion, while Services increased 3.1% to $2.793 billion from the year-ago quarter.

EMC Information Infrastructure segment revenues fell 6% year over year to $3.809 billion. RSA dropped 8.1% and Information Storage revenues fell 5.9% year over year. The Enterprise Content Division decreased 2.9% year over year.

VMware Virtual Infrastructure registered growth of 4.8% year over year to over $1.583 billion. Pivotal reported revenues of $83 million, up 53.7% year over year.

On a geographical basis, revenues from North America, Europe, Middle East and Africa and Latin America region were down 3%, 1%, and 14%, respectively, year over year. Only Asia Pacific and Japan showed some resilience where revenues were up 2%.

Non GAAP gross margin increased 10 basis points (bps) to 61.4%. Non GAAP operating margin was down 40bps to 16%.

Balance Sheet and Cash Flow

As of Mar 31, 2016, cash and cash equivalents including short-term investments were $9.8 billion compared with $9.3 billion at the end of Dec 31, 2015.

In the quarter, EMC generated $932 million in cash flow from operations and $588 million in free cash flow. It paid $227 million towards dividends.

Our Take

The last few months have been a roller coaster ride for EMC following its definitive agreement to be acquired by Dell for about $67 billion. Per the deal, EMC shareholders will receive $24.05 per share in cash along with tracking stock related to a portion of EMC’s economic interest in VMware VMW.

However, the company has faced a lot of issues regarding VMware (its most important division). This loss led management to take some measures to regain investors’ confidence as declining valuation of VMware would mean lower per share sale price for EMC investors at the time of the deal. This prompted EMC to back out from its earlier proposition of forming Virtustream Cloud Services Business with VMware as announced in its last earnings.

With the acquisition on track for timely completion, we believe it to be a positive for EMC as its core data storage business has been struggling due to growing competition from flash storage providers. Though the company has been increasing its presence in the flash storage market, it hasn’t been enough to offset weakness in the traditional data storage business.

Meanwhile, the company is focused on streamlining its operations to minimize costs. EMC announced that EMC Information Infrastructure expenses fell 8% in the quarter and itremains on track to achieve the targeted savings of about $850 million in the current year.

Currently, EMC has a Zacks Rank #2 (Buy).

Other Stocks to Consider

Other stocks worth consideration in the same sector include Qumu Corporation QUMU and NetApp, Inc. NTAP. While Qumu Corp sports a Zacks Rank #1 (Strong Buy), NetApp carries the same Zacks Rank as EMC.

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EMC CORP -MASS (EMC): Free Stock Analysis Report
NETAPP INC (NTAP): Free Stock Analysis Report
QUMU CORP (QUMU): Free Stock Analysis Report
VMWARE INC-A (VMW): Free Stock Analysis Report
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