Dell Technologies Inc.
Q2 2012 Earnings Call Transcript

Published: 24 Jul 2012

[Operator:]

Good morning, and welcome to the EMC Second Quarter 2012 Earnings Conference Call. [Operator Instructions] 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 of EMC.

[Tony Takazawa:]

Thank you. Good morning. Welcome to EMC's call to discuss our financial results for the second quarter of 2012. Today, we are joined by EMC 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. He will also discuss our outlook for the rest of 2012. 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 trust. After their prepared remarks, we will then open up the lines to take your questions. 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 today in our press release, supplemental schedules and the slides that accompany our presentation. All of these are available for download within the investor relations section of emc.com. 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. We are also providing you with an update to our projected financial model for 2012. This model lays out all of the key assumptions and discrete financial expectations that are the foundation of our 2012 outlook. 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. With that, it is now my pleasure to introduce David Goulden. David?

[David I. Goulden:]

Thanks, Tony. Good morning, everyone, and thank you for joining us today. I'm pleased to report that we achieved our 10th consecutive quarter of double-digit revenue and EPS growth in Q2, with revenue up 10%, non-GAAP EPS up 11% and free cash flow up 36%. Our ability to deliver these strong results is linked in large part to our strategy, which is to help companies use cloud technologies and Big Data assets in their trust environments. In spite of what is clearly an unsettled macro-environment, our solid results this quarter are a testament to the soundness of our strategy, the flexibility of our business model and the ability of our team to execute. As usual, Joe will comment more on the environment and what we're hearing from our customers, but it's pretty clear that things have gotten a bit weaker over the last few months. We all read the same headlines about Europe, concerns about slowing in China and the U.S., tight government spending, et cetera, and these are having an effect. While not immune to economic pressures, we do believe that important customer priorities such as virtualization, storage and security will continue to grow faster than IT overall. Customers need to continue to drive their businesses forward, improve competitiveness and reduce costs, and these are the areas where they will continue to invest. This is evidenced in our Information Storage business where we grew 7%. Within this number, our reported storage product revenue growth was 3%. However, this product number includes other storage product revenue, some of which is outside of our strategic storage offerings. The biggest line in this other storage product bucket is third-party products that we resell, and another meaningful element is our consumer products business. In fact, the consumer products business was the biggest drag on this other storage bucket during the quarter due to the planned decline in revenues as we refocused the consumer business on lowering NAS and away from single-drive hardware. To make things clearer for you, this quarter we're adding a new metric, networked storage platforms, which includes our high-end and mid-tier, to measure progress across our full family of complementary storage products, including scale block, scale file, unified and backup. In today's rapidly changing environment, customers increasingly take advantage of our entire line-up of offerings to accommodate their storage requirements. And as a result, it's helpful to monitor how this product portfolio as a whole performs, and this quarter we continue to perform well. Our networked storage platforms grew 7% year-on-year compared with 9% growth in Q1. Within networked storage platforms, our mid-tier storage product revenue grew 10% in Q2, the result of year-on-year growth across all of our major mid-tier product lines. One of the hottest areas in storage right now is scale-out NAS. Companies seek solutions that can accommodate the explosive growth of unstructured data and do so simply and at scale. As a result, our scale-out file offering from Isilon continues to thrive as this is an excellent option for customers who are looking for a truly linear scale-out solution especially given the lack of compelling alternatives. Isilon remains well suited for extremely large-scale Big Data needs and, with continued technical innovation and the help of EMC's core sales force, is being deployed in mainstream data centers at some very large customers. Jaguar Land Rover has standardized upon Isilon to drive their most demanding HPC environments for modeling, simulation and design testing. Hyundai Heavy Industries selected Isilon to support a significant virtualization initiative. And a large Japanese mobile phone service provider recently chose Isilon as the foundation of a mission-critical service for business smartphone users. And while Isilon is already very relevant to the enterprise data center, our OneFS Mavericks operating system, expected to launch later this year, will make it even more so. Mavericks will open new opportunities for large-scale home directory, and that's archiving workloads, and will tightly integrate with VMware, making it an outstanding choice for virtual environments. Our Backup Recovery Systems business also continued to be a growth engine for EMC in Q2. Demand for our newly launched Data Domain 990 exceeded our high expectations. As customers re-architect their IT infrastructures, they're looking across the entire backup landscape and thinking differently about how backup can be done most effectively, and this is where EMC comes in. Not only do our offerings cover the full range of backup requirements, they integrate it with other technologies in the data center in ways that make a difference to the user. Avamar is a good example of this. Its most recent addition, Avamar 6.1, expanded support for Hyper-V environments and now delivers 3x the backup performance and 30x the recovery performance of its nearest competitor in VMware environments. Our unified storage offerings, VNX and VNXe, also contributed to our growth in networked storage in Q2. The unified architecture of the VNX Family puts it at the top of the list for customers seeking a storage solution that is simple and efficient as our VNX Family boasts some of the broadest integration among EMC products as well as other vendors' technologies. The VNX5300 has been certified for Microsoft's FastTrack as well as SAP's HANA platform. VNX has points of integration with Avamar, RecoverPoint and VPLEX. Such integration made a big difference for Mecklenburg County, North Carolina, who use a combination of VNX, Avamar and our Cloud Tiering Appliance to reclaim terabytes of primary storage while avoiding the need for more capacity for file shares and decreasing backup times by 90%. We continue to enhance the features and functionality of VNX, as evidenced by a number of recent innovations. These include deeper integration with VMware's management suites to provide the most comprehensive performance analysis for VMware environments, as well as an upgrade to the VNX operating environment known as Inyo. Available today for download to existing systems and shipping on new systems soon, Inyo features more efficient storage utilization, automatic rebalancing of data when new drivers are added and added snapshot functionality, enhancing VNX for use cases such as test and dev, point-in-time backups and reporting or the re-purposing of data. Growth of our high-end storage products rebounded in Q2, with revenue up 3% year-on-year. Undoubtedly, some of this growth was a direct result of the VMAX refresh we announced in May which refreshed our VMAXe and VMAX with the VMAX 10K and VMAX 20K, respectively, and introduced a new ultra-high performance VMAX 40K. By making available several options for our scale-out block offering, customers can more closely match high-end features and functionalities with their specific requirements and resources. Common across all 3 additions is the new VMAX operating system which is available across all generations of the EMC VMAX family, including all VMAX and VMAXe arrays sold since 2009. We are pleased with how this transition is progressing. Approximately 1/3 of our new VMAX systems revenue in the quarter was from the 10K, 20K, 40K family. This new release illustrates the increasing importance of software to the storage infrastructure. While the underlying hardware offers different processing and capacity across the 10K, 20K and 40K, depending upon need, a lot of the value to the customer comes from the software. The new VMAX line utilizes Unisphere, the same user interface as VNX; integrates recover points across the entire VMAX family; offers the ability to extend fast capabilities to other vendors' arrays; and could now apply FAST VP to mainframe and IBM iSeries environments. To ensure customers can extract maximum value from their storage solutions, the VMAX family incorporates options for MLC Flash, as well as 2.5-inch SaaS drives. All in, we've assembled a best-of-breed portfolio of storage offerings that covers a wide range of customer needs with technology that truly requires no compromise on behalf of our customers. Some of these technologies were recently acquired, some were developed in our labs. Either way, a key value proposition we've developed over the past several years is bringing a wide array of offerings together via common hardware, leveraging generally available and industry standard components. The benefits of this strategy are many

[Joseph M. Tucci:]

Thanks, David, and a warm welcome to all of you who have joined us for today's call. Thank you very much. I would like to take a moment to publicly congratulate David on his promotion to President and Chief Operating Officer of EMC. The board and I are extremely confident in David's abilities and the people of EMC are solidly behind him. We know he will do a great job. David, as always, it's a pleasure working with you. I would also like to sincerely and deeply thank Paul Maritz and Pat Gelsinger for the many, many contributions they have made towards the success of VMware and EMC, respectively, over the past several years and congratulate them as they take on their new roles. I look forward to continue to work closely with both of you also. Focusing back on our Q2 results and accomplishments, I am pleased with our performance and our execution. We maintained double-digit top line growth, produced leverage on the bottom line and focused on our customer's success and satisfaction. Given the choppy global economic environment, these accomplishments were quite noteworthy. I'd like to congratulate and thank the more than 55,000 people of EMC and VMware around the world who produced these financial results while remaining dedicated to our customers. Well done. I would now like to comment on what we are seeing in the global economy and its impact on IT spending. On the macro front, pretty much everywhere in the world we are seeing more caution and more scrutiny before any decisions to procure any IT product or service is made. There is an air of uncertainty that permeates the world stage right now. Customers want to ensure that they will get a good return on their investment in a shorter time frame. Despite this macro trend, customers do understand that they need to continue to better drive better productivity through the use of information technology. This helps to assure them a differentiation, a competitive advantage, and helps drive down their overall cost. Translating all of this into IT spending metrics, we now expect global IT spending growth to be around 3% this year, possibly a tick less. Previously, we believed that 2012 IT spending growth would be in the higher end of the 3% to 4% range. Net-net against this backdrop in Q2, we grew our revenues in the Americas and APJ by 14% year-over-year while our business in EMEA declined 1%. But to give you a little more color, we showed several points of growth in Northern Europe and several points of decline in Southern Europe. And again, we saw our highest growth rates in the rapid-growth economies. Across our BRIC plus 13 countries, we grew approximately 20% in Q2 versus the same period last year. Looking at our year-over-year growth from a vertical industry perspective. Our business with service providers, media, government and in financial services grew faster than our overall Q2 10% growth rate average while our growth in local government, education and to the service sector was considerably slower. Clearly, we at EMC and VMware are well positioned in markets such as virtualization, storage and security that are growing faster than the IT average and it is equally clear that we are gaining share. Undoubtedly, a key reason for our success is the well-placed strategy and focus we have in cloud computing, Big Data and trust. But a company cannot rest on its past successes in this extremely fast-paced IT world we live in. And the best strategies, winning strategies

[Tony Takazawa:]

Thanks, Joe. [Operator Instructions] We thank you all for your cooperation in this matter. Operator, can we open up the lines for the first question, please?

[Operator:]

[Operator Instructions] Our first question today comes from Ittai Kidron with from Oppenheimer.

[Ittai Kidron:]

Joe, maybe you can talk a little bit more about Europe. You mentioned north being a little bit better than the south, but could you talk about the evolution through the quarter, what have you seen? And in your assessment when you're looking at your customers in Southern Europe, how long do you think they can kind of hold out on spending before things kind of catch up to them and they have to, whether they like it or not, spend on storage, data still grows downturn or not?

[Joseph M. Tucci:]

Well, Ittai, first of all, the customers in Europe are spending, they're just not spending as much. If you -- and a lot of the difference in -- several points of the difference was currency, I think. It 6 points of difference, I think. At -- with -- at constant currency, we grew 5% in Europe, and of course in reported it was minus 1%. So a lot of it -- a lot of the headwinds in Europe is currency, and from the news today it looks like that's continuing. So there is a drive in Europe for sure, just like there is here, for productivity. And if we can help customers with their productivity, as I said, gain competitive advantage, help control costs, get more intimate with their customers, they are investing. What they're doing is they're taking longer to invest, that they're being like the good carpenter, they're measuring twice, cutting once. And obviously, they're being -- they're buying just exactly what they need and not buying in excess. So it's not that we're down on Europe by any means, but it is we are feeling the effect. And I think this will be with us for a while. I don't think this is a short-term phenomena. And that causes you to have things that are more back-end loaded because it just takes longer to get through all of the approval cycles. So I think all of those things kick in. But Europe is not just laying flat doing nothing, they are spending.

[Tony Takazawa:]

Thanks, Ittai.

[Operator:]

Our next question comes from Brian Marshall with ISI Group.

[Brian Marshall:]

Specifically with respect to cloud storage, public cloud storage business, small as that is, and as, well, there's more open APIs out there, obviously these -- a lot of these infrastructures are home-grown IT kind of taking an NFS, some in JBOD. Can you talk a little bit about, as this growth kind of ramps up pretty quickly here, what the impacts to EMC will be and other traditional enterprise storage vendors over time and how you might offset any migration of Tier 2 workloads that you might see there over time?

[Joseph M. Tucci:]

Well, as you saw, Brian, the first market I mentioned in terms of high growth for us was to service providers, so there's a concept out there that we're not selling -- they're all home growing their own, and that's simply not true. If you look across our line of -- we have a VMAX specifically for service providers. There's a lot of interest in Isilon, scale-out; tremendous interest in Atmos and in -- and also VNX. So we are -- and so it is a big market for us, and if you look at that market collectively, we're doing actually quite well in it. So we believe that our strategy of having a play both inside building cloud, inside customers' data centers, the private cloud, and working that in conjunction and building out a big ecosystem of public cloud providers is a winning strategy. And so far, that's working quite well. And we're going to keep pushing. And you see, the growth of some of these products, like Atmos, is pretty impressive.

[Tony Takazawa:]

Thanks, Brian.

[Operator:]

Our next question comes from Aaron Rakers with Stifel, Nicolaus.

[Aaron C. Rakers:]

I want to dive into the gross margin a little bit. David, you had mentioned several different times about the mix towards the VMAX, to the new high-end platforms, and referencing the software richness of that platform, Unisphere, as well as extending FAST functionality out to heterogeneous environments. Just curious, as that ramps, should -- does that new platform bring with it a richer mix from a gross margin relative to the prior platform? Any help on that would be greatly appreciated.

[David I. Goulden:]

Sure. And as I pointed out on my -- in my comments, the biggest driver both year-on-year and quarter-on-quarter in the improvement in gross margin is the mix shift towards higher-gross-margin products. And in that, obviously with us having a decent rebound in the Symmetrix product line, that helps a little bit in the gross margin particularly on the quarter-on-quarter basis. And yes, I mean, our approach is to -- as more of the value in the storage stack moves into software, obviously wraps into appliances in our storage platforms, we'll try and increase the overall software content. And on the newer products, the software attach rate is typically higher, and that's part of our strategies. So that is a part of our ongoing program to maintain forward movement in margins.

[Tony Takazawa:]

Thanks, Aaron.

[Operator:]

Our next question comes from Kulbinder Garcha with Credit Suisse.

[Kulbinder Garcha:]

And just on the mid-end business, I think we saw a deceleration in revenue growth after several quarters of above 20% growth. Could you -- was that just all macro, how we come up against more difficult comparisons? And then a question for Joe, just on the Nicira acquisition, how does that strain the VC relationship, do you think, if at all?

[David I. Goulden:]

All right, thank you. Let me start off with the mid-tier. So there are -- a few factors are going on in mid-tier growth this quarter. First of all, as we said last quarter, we did expect from Q1 to Q2 the growth in mid-tier to come down because of the stronger compare. If you recall, last year it was -- in Q2 was the first full quarter of VNX and there was a fair amount of pent-up demand for that, so that caused a little bit of a reduction in growth rates. Also, a couple of other factors. Europe is actually overweight from a mix point of view towards mid-tier. So a higher percentage of total revenues are in Europe for mid-tier given the nature of that market. And of course with euro -- with Europe being down because of the economy, of course, with the euro effect, that has a slightly bigger impacts on mid-tier than it did on the overall business. A couple of other comments

[Joseph M. Tucci:]

Yes, on the Nicira front. And obviously, I should say Nicira and the VX land front, which together are VMware's initiatives in the SDN arena. Paul Maritz made it very clear yesterday, and I'll second what he said, that our strategy with Cisco is very important and continue to play very much with Cisco. There's a tremendous amount of opportunity where Cisco can add their hardware layer, their software layer, their firmware layer and their ASIC layer, and we think this is not a one's -- a one versus the other. I think it -- we're -- doing these well both together can give the new experience that the software-defined data center in total demands. And as such, both John Chambers and I and our teams remain extremely committed to the VCE initiative and joint venture.

[Tony Takazawa:]

Thanks, Kulbinder.

[Operator:]

Our next question comes from Alex Kurtz with Sterne Agee.

[Alex Kurtz:]

Joe, could you just take us through the dynamics with Symmetrix and V-Max over the next couple of years? I know you've always talked about that being a sort of a mid- to high-single-digit growth business. As VNX is growing capacity, has that kind seen a kind of cannibalization on VMAX? So sort of a refresh on your views on that growth rate for that business.

[Joseph M. Tucci:]

Well, I still remain -- and I'll let David comment too. I still remain convinced that this is -- this will be a growth business for us, albeit in the single digits, mid to lower, mid-6 single-digit range. It is -- I think it's the functionality, the performance, the way auto tier storage are just critical to today's environment, cloud environments, as well as yesterday's environments. So I think we're well positioned. We're going to keep investing in it. I know there was a lot of worry last quarter when we had a decline. We said that, that was the effect of a very tough compare. We said that was the result of being 3 years since we announced the new VMAX. And we said point blank that, as much candor as I could, that we were going to have a significant VMAX relaunch at EMC World, which we did. And we said on the back of that, we believe that we would return to the growth rates that we predicted. So here we are.

[Tony Takazawa:]

Thanks, Alex.

[Operator:]

Next in queue is Ben Reitzes with Barclays.

[Benjamin A. Reitzes:]

Could you talk a little more specifically about Isilon? What was that particular growth rate in the quarter? How's the momentum there? And what do you think will happen with demand once Mavericks is out?

[David I. Goulden:]

All right, Ben, thank you. Let me take that. Isilon was the fastest-growing of our major mid-tier families. I'm not going to break out the exact number, but it was a strong growth rate. As I mentioned in the call, we are seeing the traditional use case being strong. We're also seeing Isilon playing more in the data center and in more of the traditional file -- large file applications. I think that Mavericks is going to basically just expand the opportunity. The Isilon value proposition is really absolutely true scale-outs. And as we add more of those enterprise services, the TAM for Isilon is going to continue. So I think we're just going to kind of continue to keep that product moving forward. I think the growth rates are not going to slow down in the foreseeable future. It's doing very well.

[Tony Takazawa:]

Okay, thanks, Ben.

[Operator:]

Next in queue is Bill Shope with Goldman Sachs.

[Bill C. Shope:]

There's been a growing amount of confusion over storage market share trends, with some calling into question the third-party data firms. And I think investors are really struggling to parse that organic and inorganic share shifts amongst the players. Can you help us understand what your data is telling us in terms of your market share trends? And in particular, how do you benchmark your performance versus NetApp over the past several quarters?

[David I. Goulden:]

Bill, thanks. Ultimately, when it comes down to market share, it's all about math. I mean, you just need to get the math right. And I think there's been a little bit of confusion because of -- comparisons have included organic and inorganic growth, et cetera. The way to look -- the way we look at it is really very simple

[Bill C. Shope:]

Okay, it's very helpful. Quick follow-up, if I could. It looks like the new VMAX cycle's pretty much on track with historical cycles. But how should we think about that over the next few quarters, the ramp's impact on margins and revenues relative to prior SIM cycles? And how do you think the macro-environment may influence that adoption curve?

[David I. Goulden:]

Well, Bill, obviously, as I mentioned, we're actually very pleased with the adoption rate of the new family, which as you know is the 10K, the 20K and the 40K, with about 1/3 of the new systems revenue this quarter coming in from that new family. So we're getting out of the gate a little bit faster. I think that next quarter we'll probably get closer to 50%. So we've always said it takes between 2 and 3 quarters to get to a 50% transition on a new family. It looks like, in this case, we'll be there a little sooner. And relative to the macro, nothing really to add. As Joe said, it's impacting everybody, but we've been executing well against that so I don't think that particularly is a dynamic against the VMAX transition rate.

[Operator:]

Next in queue is Keith Bachman with Bank of Montreal.

[Keith F. Bachman:]

I had a question on September. And David, specifically for you, if you could talk about within the context of the overall guidance for the year of $22 billion, is it your anticipation that September relative to June, any comments there on the sequential patterns? And then as part of that, for the overall operating margin guidance within -- the guidance was 24%. It would appear that you're anticipating that operating margins will be down sequentially in the September quarter, assuming a normal December bump. Is there anything that you want to call out? I would think that margins would actually increase with the VMAX ramping, but anything that you would want to call out for the operating margins in the September quarter or otherwise?

[David I. Goulden:]

Keith, we're really going to try and not get into talking around individual quarters, obviously with we've done for the first half and what we guide to for the second half. The math for the second half is relatively clear. Europe is in an environment that is typically, as you know, being more impacted. September is typically the weakest quarter for Europe, so that's one of the factors to bear in mind. But beyond that, we're not really going to get into the dynamics between Q3 and Q4. We are clearly expecting a stronger Q4. And we're expecting a degree of budget flush in Q4 consistent with prior years to get to the overall number.

[Keith F. Bachman:]

Okay. Well, then, perhaps I'll just get a follow-up in there on the -- Joe, for you, on the server side, if you could talk a little bit about the impact of specifically when you anticipate getting some revenues on VCache (sic) [VFCache] and/or the V Thunder side. In the corollary, if you could also talk about your views on the impact to storage spending as a consequence of more Flash on the server side.

[Joseph M. Tucci:]

First of all, we are getting revenue from VFCache. You've got to remember, what is important? There's 4 things that are important when you consider storage. One is, what performance do you need for that information? And again, that's going to change over time, so the performance you need for an -- for that particular piece of information today might be less than the future usually is

[Tony Takazawa:]

Thank you, Keith.

[Operator:]

Next in queue is Amit Daryanani with RBC Capital Markets.

[Amit Daryanani:]

I just have a question. If I look at the reiteration of the 2012 revenue guide, this implies you've got about 53% of the total revenues in the back half of the year, which is about what you've done for the last few years. And so I'm just trying to connect the dots between an essential reiteration of the guidance seasonality in the back half versus your commentary that demanded that you down-ticked on a macro basis in the last few months. Is there a delta? Is there a market share shift that you expect to be extremely in your favor? What's driving seasonal expectations still for the back half?

[David I. Goulden:]

Actually, one of the key things we talked about is that we really saw these increased economic pressures in Q2 and we looked at the growth rate we achieved in Q2 and we kind of look at what customers are telling us about the rest of the year in light of these current economic headwinds, and that's how we get to $22 billion. If you do the math against the seasonal average, you'd actually get to slightly above $22 billion. The way we looked at it, if you just apply the seasonal math, you might get nearer to $22.3 billion. But to your point, Amit, things are a little tougher than they were in Q1 so that's why we feel the number, $22 billion, is kind of where the -- our expectations come out.

[Tony Takazawa:]

Thanks, Amit.

[Operator:]

Next in queue is Maynard Um with Wells Fargo.

[Maynard Joseph Um:]

I wonder if you can talk a little bit more about the competitive environment. You talked about Isilon presumably taking share from NetApp. But any other detail where and from whom you're taking share, or is it primarily NetApp? And just related to that, how to -- how do you think about pricing environment going forward, particularly if you continue to take share from your competitors?

[David I. Goulden:]

Maynard, let me take that. When we look at market share, there are really a couple of major buckets. There are the server vendors that collectively still have, depending upon how you want to count the math, between 30% and 40% of the network storage market. And then there are the more specialized people like NetApps, Hitachi, et cetera. And we kind of look at share in total, as opposed to focus upon one or the other of those. We mentioned how we do against NetApp because that question has come in recent times. We still think the right opportunity is to continue to take share collectively from the server vendors, and that's one of our biggest areas of focus for them. While storage is important, it's just not as important as it is for us. And as you know, this is again where technology and investment and dedication is important and that's where we tend to win and focus. So that's the bigger pool. And then from a pricing environment, it's tough out there, it has been all year. But as you see, because of the innovation, the quality, the differentiation of our products, we've been able to maintain our gross margin despite what continues to be a tough marketplace. So we feel good about our position there as well.

[Tony Takazawa:]

Thanks, Maynard.

[Operator:]

The next question comes from Toni Sacconaghi with Stanford (sic) [Sanford] Bernstein.

[A.M. Sacconaghi:]

Perhaps this is for Joe. But I was wondering again if you could comment on the macro. If I look at VMware's results, they did equally well outside of the U.S., as they did inside the U.S. If I look at EMC, I think your growth rate in the U.S. was 14%. Outside the U.S., you were about 6% or 7%, so very wide differential. Perhaps you can comment on why that might be. And then related to that, at what level of IT spend or at what level of the euro do you begin to get uncomfortable with your current forecast? And how should we be thinking about that?

[Joseph M. Tucci:]

Want to take the euro part?

[David I. Goulden:]

Yes. Toni, let me take the second part of that. As Joe said, we now expect IT spend about 3 or a tick less. And we're comfortable with that level. At the euro, when we put our numbers together -- first of all, let's just talk about the euro for a second and the impact that's having upon our business. If we look at Q2 quarter, Q2 year-end growth rates, it's about $250 million headwind year-on-year. And about $0.03 is the impact of the euro this year versus last year. Current spot rates, that includes -- then it goes up to like $280 million, $290 million on year-on-year impact and still about $0.03. And euro, at the level of where it was at quarter end and where it is now in that range, is consistent with our thinking about guidance. So those are the 2 parameters

[Joseph M. Tucci:]

Yes. I mean, Toni, if you look at our results and if you look at the Americas and you look at APJ, we grew 14%. If you looked at the BRIC plus-plus countries that we focused on, we grew 20%. So obviously, we're pointing to the problem in Europe. While we don't break out Europe per se, EMEA itself, Europe, Africa, Middle East, was down 1%. And if you look at the constant currency, it was up 5%. And we also said, Toni, that we did much better in the north than we did in the south. So where is it? So if you'll bring that down, where is the real problem? The real problem's in Southern Europe. And why is that a little bit different than VMware? I'd say you can always, on something like storage, push it off a bit. And there was a good question

[Tony Takazawa:]

Thanks, Toni. We have time for one more question, and then we'll have a few concluding comments from Joe..

[Operator:]

Final question comes from Steve Milunovich with UBS.

[Steven Milunovich:]

Regarding the cost and expenses, could you talk a bit about what you expect in second half component cost and particularly what's going on with disk drives? And do you expect R&D to continue to grow at about a 25% year-over-year rate?

[David I. Goulden:]

Steve, on drives, good news is that the supply shortages are completely behind us at this point in time. We do start to expect price reductions in drives to start appearing in the second half, but it'll be a while before they get back to what I'll call pre-flood levels. But the good news is that we're beyond the availability shortages certainly when we look at our TAM and our needs. Relative to OpEx, we do expect that the R&D growth will continue to outpace revenue growth, but probably a little lower rate than we saw in the second quarter. But investment there is still critical for us. And as we said, this is a technology game, so that's what we're focusing our investment dollars this year versus the SG&A.

[Tony Takazawa:]

Thanks, Steve. Joe?

[Joseph M. Tucci:]

Well, thanks, everybody, for attending. We really do appreciate it. In summary, we've been very open. We said the economic headwinds in Europe are going to remain choppy at best and we expect this to continue for a while. But globally and on the IT front, we think we're strategically very well positioned and we have momentum. The customers are -- all importantly, are giving us permission to play in our extended strategic areas that we've talked about today. We are really blessed to have a great and dedicated leadership team with us with a really solid depth. And the people of EMC and VMware very much believe in the opportunity and in our future. So I thank you very much for being with us again, and I'll be -- we'll be talking to you soon.

[Operator:]

This concludes today's conference. You may disconnect at this time.