Dell Technologies Inc.
Q4 2005 Earnings Call Transcript

Published: 26 Jan 2006

[Operator:]

Welcome and thanking for standing by. Operator Instructions Now I would like to turn the meeting over to Tony Takazawa, Vice President of Investor Relations.

[Tony Takazawa:]

Thank you Sherry. Good morning, welcome to EMC’s call to discuss our financial results for the fourth quarter for full year 2005. We will be making references to our slides today so we encourage you to view them on EMC’s website at www.emc.com. And archive of the audio and slide presentation will also be available following the call. William J. Teuber, EMC’s Executive Vice-President and CFO will start things off and walk you through our Q4 financial performance and highlights. They will also discuss our outlooks for Q1 and the full year of 2006, who then will be joined by Mr.Joseph Tucci, EMC’s Chairman, President and CEO. Jo will comment on our strategy, some of our business results and his view of the economic climate in the IT marketplace. After the formal remarks, we will open up the line to take your questions; we will be joined at that time by Mr. Howard Elias, Executive Vice-President of Corporate Marketing and the Office of Technology. The call this morning will contain forward-looking statements and information’s concerning factors that could cause results to differ from those in our forward-looking statements can be found in EMC’s filings with the US Securities and Exchange Commission. In addition, our financial results contain a number of special items that were previously announced. For Q4 2005, these items include an IPRD charge of $14 million related to our acquisition of Captiva and $80 million charge associated with our announced workforce rebalancing and a tax expense impact of $180 million related to the repatriation of cash. For 3Q 2005, these items include a $105 million tax benefits. To help you with your analysis we’ve included financial details and commentary relating to non-GAAP measures in today’s press release reconciling our GAAP results to our results excluding these items. With that, it’s my now pleasure to introduce EMC’s CFO, Mr. William Tauber.

[William Tauber:]

Thanks Tony. We ended 2005 on a high note, as we achieved our annual goals for revenue growth in operating margin. Our solid performance and very positive momentum in 2005 make me confident about our position in the marketplace and our opportunities in 2006. We saw strong performance in a number of areas this quarter. We are pleased with the performance of the Symmetrix line, which was up 19% from Q3 driven by strong customer demand for our recently introduced DMX3. In fact, more than a third of our Symmetrix Systems revenues were from the DMX3 and we completely sold out of the product. Given customer reactions so far, I think we are set up nicely for 2006 in this part of the business. In addition, our midrange business reaccelerated this quarter based upon our new Switch backends for the Clarion, which we introduced in the second half of the year. We also achieved an exciting milestone in Q4 with our first billion-dollar quarter in software revenues. We had strong performance across all of our products and in particular Content Management finished the year with a bang. I’ll go through each of these areas in more details in a few minutes. As usual, I’ll spend sometime today discussing the following items

[Joseph Tucci:]

Thanks Bill. And welcome and thanks to all of you who have joined us for today’s conference call. Looking back on 2005, I believe EMC had a great year both operationally and strategically. Our information life-cycle management strategy, products and solutions sets hit directly on the areas of IT spend, they were of the highest priority, these areas include compliance, disaster recovery, storage software and SANs to name a few. Looking to 2006, you can see in the Morgan Stanley’s CIO survey of top IT priorities that our ILM strategy is positioned very well and it is on 7 of the Top 20 for this coming year. I will comment more on 2006 later but right now let us examine the various elements of the EMC’s ILM technology stack and our success in 2005. I’ll start with our storage platforms. In 2005 the anticipated Symmetrix DMX3 was incredibly well received and as you know we have only the largest number, we’ve only announced the largest members of the family up to now. That will change, I am pleased to preannounce that we will be in London this Thursday to launch both new lower end members of the DMX family as well as high end expansion. Our particular success in the Symmetrix DMX family was our replication technology, concurrent SRDF, SRDF/A and STAR all had banner year. The high-end DMX products with their massive consolidation capabilities really hit the mark. The average DMX 3 sold in 2005 shipped with over 60 terabytes of raw storage, far and away the largest as any high-end array. Clearly customers trust EMC, in our DMX 3 technology for the most demanding information needs. And as we continue to rollout new models and functionality, included a new high capacity, low cost fiber channel drives, we expect to grow this business in 2006. We believe that the total mid tier storage market grew around 15% in 2005 and an EMC’s mid tier offerings

[Tony Takazawa:]

Thanks Joe and before we open up the lines, as usual we ask your cooperation in limiting yourself to one question including clarifications and we’d all agree that its working pretty well, so we thank you for your help with this. Shirley, can we open up the lines up for questions please.

[Operator:]

Operator Instructions Aaron Rakers of A.G. Edwards & Sons, Inc. you may ask your question.

[Aaron Rakers:]

Yes, thanks guys, nice quarter, I wonder if you give a little bit more clarity on the high-end business going forward, it sounds like you guys are set to do a refresh of some of the lower end solution and I just kind of want to get some sense of you know timing of those product shipments, how you guys manage the evaluation cycle initially in a quarter and if there is a little bit of a concern that we might see some hesitation at least for a quarter or so on those products? And then additionally if you can talk a little bit about you know the high-end business, I think last quarter you talk about a third of the DMX3 shipping with a full capacity, what was that metric this quarter, and what do you expect going forward?

[Joseph Tucci:]

Aaron this is Joe. I don’t anticipate any hesitation whatsoever and that’s because we now have the mass of big products in the market for quite a while now and you know costumer confidence that we can handle systems with 960 drives on them and certainly as we start putting less drives on them, they are going to be even more cost, so I expect to know kind of no hitch in the take up as we did a little bit in the early stages as would 13% in the first quarter that we had a 12% or so. In the first quarter we had the products out there, I think as we put systems out of that size customers really want to kick the tires but they’ve been out there a long time, have to hit in the lower end product of this line, if we taken up immediately from customers. We gave those figures once, I don’t want to talk about, the new figure I gave which is a real figure that’s across the entire line that we shipped in all 2005, the average churn price was – it was bit over 60, so that I could give you a degree and size, other than that I am not going to comment on which size we are shipping and not.

[Tony Takazawa:]

Thanks Aaron, next question please.

[Operator:]

Toni Sacconaghi of Sanford Bernstein, you may ask your question.

[Justin:]

Hi, its Justin for Toni, I just have a question about the your outlook and your EPS guidance sort of implies gross or operating margin expansion about 150 basis points year-on-year on 16% revenue growth, this year you did 300 basis points on 17% revenue growth, throwing the fact that you’ve recently announced a layoff and that there should be some benefit from that, just wondering if you could give us some more color around why you don’t expect a little bit more operating leverage?

[Joseph Tucci:]

First I would really like to answer that but first, I am not picking on you, but you know this is not a layoff, this is absolutely the rebalancing, we have given 100% of those record stack immediately to, as I’ve said the sales group which is sales and pre-sales and to our development organization to hire, so as we eliminate we will be hiring immediately. So this really isn’t any kind of reduction in force, this is truly getting some of the blow out at the middle management and this is truly getting some of the under achievers out of the company and we wanted to replace in areas to clearly drive integration, innovation and growth but that’s maybe a little sensitive.

[Justin:]

No. I understood but the question still stands that way.

[Joseph Tucci:]

Let me – I will turn it over to Will, I decided to say that. Sorry.

[William Tauber:]

Let me address this way Justin - first of all our focus is on operating margin and we said operating margins continue to increase our target its beginning to cross 20% I didn’t say who what and clearly that is something we are very focused on. If you look at the overall increase in revenues at the high end of the range we are looking at the 17% increase there, if you go down to EPS line we’re 25% so you know we still have you know quite a bit of leverage left in the model and you know how we do on that during the course of the year we will wait and see, we are obviously very sensitive to that as you are and we are very focused on it but you know we think it’s appropriate outlook for right now and as we get deeper into the year we will update you.

[Justin:]

Alright thanks.

[Tony Takazawa:]

Thanks Justin, next question please Shirley.

[Operator:]

Joel Wagonfeld of First Albany Corp.

[Joel Wagonfeld:]

Thank you, question on DMX-3, if you can give us any color around the volume of backlog you mentioned and also why mix would have had a negative impact sequentially on gross margin given the strength particularly at the high end of the DMX-3? Thanks.

[Joseph Tucci:]

Joe, on the backlog question we don’t really talk about what the number – numerical backlog is but we have just - we did have as I said we sold out of the DMX-3 and then we have a nice backlog there going into Q1. In terms of the mix, the mix really came out of you know some of the changes in the services business and so you know really wasn’t related to either changes in the product side or in the software side, we are really in 25 basis points in that.

[Tony Takazawa:]

Thanks, next question please.

[Operator:]

Shebly Seyrafi of Kaufman Brothers, you may ask your question.

[Shebly Seyrafi:]

Yes, thank you very much. So you talked about after this recent headcount reduction actions, you are going to go back to hiring again, compared to the 16% revenue growth that you are basically forecasting for 2006, what kind of headcount growth do you expect to achieve this year?

[Joseph Tucci:]

Shebly, that’s not a figure that we really give out, it gets complicated with acquisitions and, where we put our people so in terms of a metric around headcount growth we will end up with more people at EMC at the end of 2006 than we have at the end of 2005 that I assure you independent of any acquisitions but I am not going to give you a headcount growth this time.

[Tony Takazawa:]

Thanks Shebly, next question please.

[Operator:]

Brian Freed, Morgan Keegan & Company, you may ask your question.

[Brian Freed:]

Thanks. I read your recent document on Goggle desktop relationship announcement did you comment on how this fits into your overall content management strategy and also how you guys there are looking to address the Microsoft’s share points product in light of this partnership?

[Howard Elias:]

This is Howard. So the announcement was really related to Federated Search and as you probably know our documents from products today allows search across its own repository but also across multiple repositories in a federated way. And what we have now just done is extended that to the Goggle platform and the Goggle desktop to include that so you can do now sort of a unified enterprise search across those multiple repositories so it really continues to extend and expand the RILM strategy in the enterprise space.

[Brian Freed:]

Then how do you look to address share points?

[Howard Elias:]

In share point we actually have the integration where we can again go import back and forth between office and share point and enterprise content management, as you know share point is a tool for sort of the workgroup space and documents in this really enterprise content management and we do have the integration capability with SharePoint today.

[Tony Takazawa:]

Thanks Brian, next question please.

[Operator:]

Ben Reitzes from UBS, you ask your question.

[Ben Reitzes:]

Yeah good morning, thanks. Joe and Bill, services were little below our expectations and that had deepened our view the past few quarters, can you just talk about what is happening there, it seems like you obviously made up in software in CLARiiON and other places but just your views for services and how we should look at maybe differs in the backlog going forward and what that does for growth?

[William Tauber:]

Ben it’s Will. You can see that from our deferred revenues they were up considerably year-on-year they are up about 20% year-on-year, up 100 million quarter-on-quarter so we had a very good quarter in the service side, just some of it dipped into deferred versus in the income statement, so bookings were strong as I said, defers were up, we continue to hire aggressively in that space, we are delivering a lot of value to our costumers to our services organization, we are going to continue to do that.

[Tony Takazawa:]

Thanks Ben, next question please.

[Operator:]

Laura Conigliaro of Goldman Sachs, you may ask your question.

[Q Laura Conigliaro:]

Yes thanks. Given the tail wins created by your upcoming product cycle which starts on Thursday and the fact that you seeing very optimistic about storage in general and the fact that you’ve made a few comments suggesting that some economic environments that have been dragging are picking up. And then of course you deferred revenue, which you just referred to. Either why shouldn’t you be able to grow at more than two times the industry level which I guess the last time you commented on you said was 7% on an organic basis or why shouldn’t you think that the industry level should be a little bit higher and you should be able to grow say two times that kind of level and also can you clarify how much of the revenue in your ’06 revenue number is from acquisition?

[Joseph Tucci:]

I now believe Laura that you know I said 7 or 8 and I believe and I said probably closer to seven and now I absolutely believe the eight number. So as you’ve seen our guidance we expect to grow twice as fast as the eight and of course you would like us to do more and we are going to attempt to do that. One of our ways of doing that I think if you looked at our productivity numbers for our sales. They are nothing short of excellent. And this was the way of getting more resources in the sales and hopefully if we file the resources and get them up to speed fast we can drive upside. So that’s certainly what we are going to do, obviously in our range of guidance we gave you some of that upside in through the year. So we are quite bullish and I do believe that the total mark we categorized now, as ILM will be probably north of what it was last year. So it came in pretty close to eight last year and we are seeing a solid eight right now, that’s despite the fact that we probably would loose the point concurrency. So as I was saying in real terms the market accelerated from 8 to 9, so we’re pretty bullish and we are going to go after some of that upside we gave you a little bit of it today. And that’s why I get a little bit touchy when people refer to it as a layoff, it really is rebalancing, I’m trying to get more people out there on the street and rather than only drive productivity which obviously, you always continue to drive the last distance by getting more of productive sales for example. Bill, do you want to handle that?

[William Tauber:]

Yeah in terms of what’s patent to the plan Laura, is we closed on Captiva, last day of the year. So that’s a little bit right around $100 million of revenue that’s coming in, if you want bits of pieces but a hundred million dollars is good number to use.

[Tony Takazawa:]

Thanks Laura, next question please.

[Operator:]

Bill Shope of J P Morgan, you may ask your question

[Bill Shope:]

Ok great thanks. Can you give us some of the key reasons behind the supply shortage for DMX3 other than obviously strong demand where the component or manufacturing related and can you give us an idea when you sold out of the products, if we can understand how many weekend sales you might have left on the table?

[William Tauber:]

This is Will. You know we have a hockey stick, right. We sold out of the product late in the quarter. We forecasted how many we are going to sell, how many we are going to make and obviously the demand team went over there, there wasn’t any particular component supply as you, its just a question of, you’ve got to take stab when you don’t have a lot of history as to which you are going to sell in that product. We actually over achieved both on the manufacturing side our original plans but we super overachieved on the sales side so we are very pleased with the update.

[Bill Shope:]

Getting you back on track with demand and supply, so far?

[Joseph Tucci:]

Yeah. We do not see any constraints on the supply side right now in anything that we are touching so we are okay there.

[Bill Shope:]

Right, thanks a lot.

[A -Joseph Tucci:]

Thank you Bill. Next question please.

[Operator:]

Harry Blount of Lehman Brothers, you may ask your question.

[Harry Blount:]

Thanks guys. You mentioned that 12 acquisitions and obviously one of the impacts of that is that you tend to get a silent organization that takes a while for the sales force productivity to gel and perhaps the actions you took here recently is in move to knock down some of those silos but it’s focusing on software particular, can you give us a sense of what kind of productivity progression you guys have seen over the last year or so as the software portfolio has matured in terms of the sales force being able to either sell multiple products across multiple categories or the average deal size or some just general sense of how you are progressing on that front?

[A -Joseph Tucci:]

Well clearly if you look at the category, which we now lump BURA, which is backup, recovery and archives, you know that market is 7-8% growth from what I see in ITC and we did 27. That is happening absolutely because we are getting leverage from what would be the traditionally EMC sales force. And we are aligning these organizations and specializing in creating a great go to market model. I believe the same thing is true in Documentum, I think content management business is up Top 10, we were 21, more than twice as fast. So I think, we are absolutely doing the right things and Harry, you are absolutely right, one of the things we are doing is getting to this as we bring these things closer together and get better alignment and better go to market tactics and cooperation and plans and everything else that goes around these integrations we find that there are levels of management we could take out, and as you take out one manager you could put in three sales guys or two developers to drive growth and innovation and that’s what this whole move was about. So you hit it right on the head.

[Harry Blount:]

But Joe I was focusing more on kind of the cross category sales in terms of, are you able to see one organization starting to sell multiple products I am trying to get a sense of what kind of progression we are seeing there in terms of productivity either on a dollar basis or a product basis?

[A -Joseph Tucci:]

Well, if you take a look at the EMC traditional sales force, following content management is in the ILM stack but they need help. So right there David go, get their partners in Documentum, right and they would work together they found of course Documentum finds it, they could bring in the initiative to work both ways. When you talk about, say something as simple and closer as Networker, our guys obviously go, go a lot further before they have to call and help and our traditional guys. So, each of those areas of the technology stacks which we call ILM has different levels of specialization around it, it’s a complex model but its really working a while in getting a foothold and as the whole thing that we dedicated our kickoffs that was in what we call Segmentation, Specialization and Alignment. And I am sure you guys know a lot about how you go to market, those are the three key areas and that’s where we are really focused on and we think we got a great model and certainly its the best model we have had over the last couple of years in terms of getting Synergies across these companies.

[Tony Takazawa:]

Thanks Harry, next question please.

[Operator:]

Tom Curlin, RBC capital, you may ask your question.

[Tom Curlin:]

Good morning. Not that I am a proponent of this approach but I’ve had a few clients ask me about the potential of spinning out VMware, just given evaluation that that entity could command on an standalone basis. Can you just comment on any scenario where that would make sense for guys and just also on if not maybe run through again, how that keys into the long term Software strategy?

[A -Joseph Tucci:]

Well two sides, first of all, without a doubt, one of the hardest areas in all of IT, both in the data centers and as far as that’s concerned, you need to distribute it, architectures has been going to virtualization of that typical resource. And that happens in multiple layers, right, I mean, so as you saw from the InfoWorld awards, I mean what we are doing in existence importantly, what we are doing right synergies and forth so EMC is going to have a collection of virtualization that is, I think is more powerful together than it has suffered. We run VMware at a highest standards of openness. Even our competitors, even our most staunch competitors are giving us great accolades and we are doing exactly as we said do, we give absolutely free and open access even to our major competitors that use VMware software which makes it a little bit different but we talk about business continuance and other areas that are very important to the ILM stack, I mean, this is a phenomenal asset and I think, overtime it will be, it’s in great hands and we don’t have plans of divesting it.

[Tom Curlin:]

Thank you very much

[Tony Takazawa:]

Thanks Tom, next question please.

[Operator:]

Kevin Hunt with Thomas Weisel Partners, you may ask you the question.

[Kevin Hunt:]

Hi thank you, I wonder if you can comment on the competitive environment and specifically IBM on its call, it was talking about aggressive pricing in the storage market which based on the MRs and the Nero’s doesn’t seem like it’s really should be the case, and then also maybe you can touch on the ability to sort of, go back to regaining shares with this new product launch upcoming here?

[A -Joseph Tucci:]

Hi Kevin, I don’t know, I mean, lets us face it, I mean, the market out there, I think, in a whole lot of segments by the way, its competitive, it always has and always will be and, let me give you my basic underline fear I have, and that’s that any big organization, whether its HP or whether its IBM whether its EMC or anybody else has the greatest asset of probably their installed base. And I will submit to you that any company as an install base is a section of that install base, alright a piece of that installed base and it is a sizeable piece of that install base, but it really ends up being very loyal and they don’t even wait for your product cycle, so what happens is you know as you have a product cycle that royal base that’s been waiting awhile, this was especially true if you refreshes are slow, now we have been refreshing so fast that we see this happening continuously so when an HP refreshes and gets a pickup you know you get to do these market shares over the long-term, they have a piece of very loyal base that sitting there waiting for them, and when they come out with a better product they buy it, and it is the same thing with IBM, and we also have a loyal base too and of course it is 50s figure base that’s that is not as loyal, right which is more a progress, a more competitive so you play this game at overtime, we’ve got a great product plan family, we’ve fixed everything that the customers have wanted for years, they wanted cash, they now have it, they wanted the ability to move from one system to the other as you know in the old DMX line, we had a forecast to make X number 1000s and X number 2000s X number 3000s now it’s a new line up as you will see, it’s a little bit away but as you see you start with one model and you grow, we don’t have to if the inventory, any particular model of the DMX3 line, it is just adding components seamlessly so you can go from a smaller system all the way up to the system which you have over 2000 drives as we said before, so they are 100% so it’s a very competitive line, it’s the only truly scalable line like that and I think we are going to do just great with it and of course as you get multiple tiers of storage inside that line we think we are going to actually get some significant growth so we are very comfortable and I hear these market share things but when I think when you look at the high end storage, there is three companies I don’t think you are going to see a lot of market things over big period of time and we still are clearly the leader and I do believe we will be the key grower in 2006. Sorry for the long answer.

[Tony Takazawa:]

Thanks Kevin, we have time for one more question.

[Operator:]

Our last question comes from Clay Sumner of Friedman, Billings, Ramsey & Co.

[Clay Sumner:]

Thanks very much. Gentlemen it looks like the software drag rate for CLARiiON if you will sell substantially this quarter and hardware maintenance growth also seemed to slowdown, can you just help us understand why and is that somehow related to the new CLARiiON products that people expect to come soon?

[William Tauber:]

Not so much, Clay, as I mentioned in my comments, we saw sort of strongest performance in CLARiiON at the lowest end which has the least amount of software content so you know that’s one of the factors there, in terms of the mean, the mean it comes around a little bit sort of every quarter so I wouldn’t derive any conclusions from that.

[Clay Sumner:]

Good to hear from you again.

[Tony Takazawa:]

Thanks Clay and we’ll turn the call over to Joe for few last comments.

[Joseph Tucci:]

I just wanted to thank everybody for joining us today. I think the messages are clear, I think we are very well positioned with ILM strategy, we are on two new exciting strategies which complement and augment our ILM strategy with virtualization capabilities and our model based management capabilities, we see a robust economy for 2006 we have a larger and best trained sales forces we ever had and we will – I am expecting to have a good year and we will chase upside all year, I assure you. Thank you very much.