Dell Technologies Inc.
Q4 2012 Earnings Call Transcript

Published: 29 Jan 2013

[Operator:]

Good morning and welcome to the EMC fourth quarter 2012 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 of EMC.

[Tony Takazawa:]

Thank you. Good morning. Welcome to EMC’s call to discuss our financial results for the fourth quarter and full-year 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 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 and 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 US Securities and Exchange Commission. With that, it is now my pleasure to introduce David Goulden. David?

[David Goulden:]

Thanks, Tony. Good morning, everyone, and thank you for joining us today. This morning we reported accelerated growth in Q4 with revenue up a solid 8% and non-GAAP EPS up 10% from last year’s Q4. Our differentiated strategy and unique value proposition enabled us to deliver very good results in the quarter and achieved record results for full-year with revenue up 9%, to $21.7 billion, non-GAAP earnings per share up 13% to $1.70 and free cash flow up 14% to $5 billion. In addition, in 2012, we delivered once again on our triple play, gaining market share, investing in the business and delivering leverage. I want to extend my thanks and congratulations to the many thousands of EMC and VMware people around the world who produced these strong results. Our strategy was our strength throughout a challenging 2012. Our three strategic pillars of cloud, big data and trust resonate strongly with our customers and remain a top priority for IT departments. EMC’s broad, best of breed portfolio gives us rich, differentiated basic capabilities to draw from as we work with our customers to transform both their IT departments and the businesses that IT supports. And customers are responding. Compared with IT spending growth of approximately 2%, we are pleased to achieve revenue growth of 9% in 2012. The challenges of complex and expensive IT infrastructures, data growth and security are at the core of the architectural shifts to cloud, big data and trusted IT. Our approach to cloud computing offers IT departments great efficiency control and choice. Once implemented, IT infrastructure can be managed in a more agile way, allowing IT to be more responsive to business needs. Big data is triggering new approaches for deriving business insights and new opportunities to expand revenue. And as security concerns create challenges for IT on every side, the ability for customers to have and offer trusted IT is a valuable advantage. Underpinning all of these macro IT trends is information growth. For many years, information storage and management have been near the top of customer priorities and this continues to be true. The continued explosion of information is an obvious reason storage takes precedence. An equally important factor is that information growth always exceeds IT budget growth so that customers constantly need help in influencing more efficient and cost-effective approaches to managing information and this is where EMC has really been able to make our mark. From our early days, EMC has been at the forefront of helping customers better handle the ongoing conflict between information growth and IT budgets. Earlier examples of these efforts include new storage approaches, with the introduction of standalone shared arrays, protection technologies like RAID5, or architectures like fiber channel SAN. More recently, EMC innovations and solutions have included capabilities such as scale-out architectures, virtual provisioning, automated tiering, Flash storage, compression, and data deduplication. It is absolutely essential that we in the industry provide these technologies to help customers more efficiently and cost-effectively manage the growth of information. Otherwise, customers will quickly be overwhelmed. Much of EMC’s long term success in this market is due to our ability to innovate and adapt with new technologies and approaches. In 2012, as the economy experienced a slowdown, the storage industry did as well. Tighter budgets prompted the increased use of storage efficiency technologies, and also caused many customers to keep their storage systems in service longer than they normally would. We’ve previously experienced each of these effects in varying degrees, and in 2012 they were both quite meaningful. But network storage still grew faster than IT spending in 2012, and we’re confident it will again in 2013. In spite of these headwinds, we were able to grow our storage business 6% in the quarter. Within this number, our network storage product revenue growth accelerated from Q3, and was also up 6% year on year, with growth pretty balanced between the high end and the mid-tier. Our continued investment in new storage technologies has positioned us at the forefront of many of the trends toward the user solutions like scale-out NAS and all-Flash storage. And while these currently represent a relatively small portion of our storage business, they’re growing much more quickly and will become increasingly meaningful. Perhaps even more important is the fact that these new technologies and products are integral elements within our broad and the best-of-breed storage portfolio, particularly as the industry continues to transition to cloud. A good example of this is First National Technology Services, who provide advanced hosted and remote managed IT services to the financial industry. To stay competitive for customers with very demanding requirements, FNTS has to transition to a cloud infrastructure. By implementing VMAX with Flash and FAST, VNX for general purpose applications, VPLEX to eliminate downtime, and vSphere, FNTS was able to improve performance by a factor of three, improve disaster recovery, and completely eliminate migration-related downtime. FNTS deployed both our core VMAX and VNX product families so they could offer their customers the best capabilities depending upon the workloads. Our high-end scale-out block solution, VMAX, continues to set the standard for mission-critical data sets needing to scale with the best performance reliability and availability. This ongoing product leadership stems in part from our ability to take these attributes and deliver them in new and value-added ways. We did this by incorporating new media tiers, with Flash and high-capacity SATA drives, and then applying fully automated storage tiering to take full advantage of these tiers. By driving down the total cost, we can now accommodate data sets on VMAX that would never have been stored on a VMAX filled exclusively with fiber channel drives. Moreover, by extending the reach of VMAX to a lower price point, we’re now able to meet the needs of resource constrained customers or for use cases that don’t need all the capabilities of a high-end VMAX, but do need a powerful scale-out work performance that VMAX offers. Expanding our addressable market for VMAX has enabled us to add net new customers at an accelerated rate for several quarters in a row, and we’ll continue to expand our reach with VMAX cloud addition, which we plan to launch later this quarter. Growth in our VNX, and VNXE, products, also improved in Q4, as customers value the simplicity and efficiency of the VNX family. VNX plays an important role in our storage portfolio, because of its rich feature set on a unified platform. For instance, VNX boasts the tightest integration with VMware in the industry, and VMware integration can have a big impact on productivity. This was the case with Partena a social services organization in Europe, where integration between VNX and VMware cut administration time in half. Downtime was reduced from three hours per month to zero, thanks to the deployment of VNX with VPLEX to run active data centers over distance. In all, Partena reduced their operational and capital expenditures by 60% through rapid virtualization combined with the excellent performance and simplified management of VNX. The VNX product family won numerous awards in Q4 2012 with the most important ones coming from users themselves. Including, the Reader’s Choice award for best enterprise storage subsystem from Computerworld Asia, the Editor’s Choice Award with NYSE from HPC Wire and Best Enterprise NAS, according to an end-user survey by searchstorage.com. In a Search Storage survey, when users were asked would you buy this product again, EMC ranked number one for both enterprise NAS and for mid-range storage. Over the past several years, through R&D acquisitions, we’ve been enhancing our storage portfolio to better equip ourselves to address new growth opportunities. For instance, the majority of our VMAX and VNX arrays now ship with flash drive and fast software to leverage these drives by tiering the right data to the appropriate drives. Our backup and recovery business has been completely transformed by deduplication. Cloud environments and big data create new challenges for backup. Deduplication solutions, which streamline the process as much as possible, are in demand. Our purpose-built backup appliance, Data Domain, continued to grow in Q4. Avamar did very well sequentially but faced a tough year-on-year compare against Q4 ’11 growth of 50%. Not only have we enhanced our storage portfolio with efficiency technologies such as FAST and our backup portfolio with deduplication, we continue to expand our product line to fully address new and growing needs for next generation virtualized and cloud scale environment, products like VPLEX, Isilon, Atmos and VFCache. These are all technologies offering increased efficiencies and cost effectiveness. Energy from the acquisition of Isilon continues to contribute to our growth in storage. Isilon’s traditional strengths in life sciences and media and entertainment are broadening EMC’s customer base and EMC’s traditional install base is adopting the scale out power solution Isilon offers. This is evident looking at how Isilon’s customer base has changed. Two years ago, more than half of Isilon’s revenue came from media and entertainment and life sciences. Today, these verticals are still rapidly growing but now account for little over one-third of Isilon’s revenue. At the same time, verticals that were practically brand new to Isilon upon acquisition such as financial services are rapidly becoming more meaningful markets. A key win in Q4 illustrates why more verticals are adopting Isilon. One of the world’s largest financial services organizations struggling with capacity and scalability limitations adopted Isilon to power their rapidly growing archive and general NAS needs. Aside from the OpEx advantages of Isilon’s ease of management, the customer’s total cost of ownership analysis demonstrated a 2X increase in storage utilization, a dramatic reduction in days in the footprint and a 40% reduction in power and cooling costs. This was a great competitive displacement. Complementing the used case for Isilon is our object storage solution, Atmos, which ended 2012 with great momentum. Purpose built for cloud, Atmos supports the next generation web scale applications that enterprise and search providers are increasingly relying on. A global investment bank recently leveraged their Atmos infrastructure to do just that, are now running 70 different custom web applications on the Atmos infrastructure. You expect to hear much more from us around Atmos and cloud object storage in 2013. I am pleased to report that Atmos and Isilon together exited the year essentially at the $1 billion revenue run rate goal we set for ourselves when we acquired Isilon. Another rapidly emerging opportunity is the use of flash and enterprise storage, both in storage arrays, which we pioneered five years ago, as well as in the server market, a market we joined last year with our SLC-based VFCache products. This is an exciting space and one where the bulk of our opportunity lies ahead. Later this quarter, we will expand our presence in the PCIE attach flash market with an MLC-based product line that we believe is absolutely best in class. This was a rapidly growing market in 2012 where point products have become the norm. We’re excited to be introducing our new server flash line as part of the overall EMC solution. Our all-flash array, code-named Project X, is on track. When we more formally introduce it later this year, we expect it to be the very best, all-Flash storage rate in the market. And the feedback from our beta customers is outstanding. What will set EMC apart from the Flash startups in the market today is the breadth of our Flash portfolio. Users can work with EMC to find a Flash solution that best maps their particular workloads, whether it’s a hybrid array, an all-Flash array, or Flash in the server. So when you step back and look across our storage business, we have a large presence in our core markets, and we have incremental opportunities in many other, faster-growing areas. To capture these, we have a very exciting product roadmap, with numerous innovations, refreshes, and brand-new products that we rolled out over the course of this year. When we think about our biggest incremental opportunities, big data analytics is at the top of the list, with perhaps the furthest-reaching implications. The agility and power that EMC Greenplum brings this market drove very strong year on year growth for Greenplum in Q4. The combination of Greenplum’s analytic database with Hadoop implementation enabled us to win against established data warehouse vendors as well as newer Hadoop-based software providers. The combination of technologies is becoming increasingly important, because no single method can effectively support and examine today’s variety and volume of data in a timely manner. This was true at a global auto manufacturer who wanted to lower the carrying costs of inventory by getting a better handle on warranty parts. The Greenplum database changed the way the analysts used the data by enabling them to work interactively, near real-time, and materially increase productivity and results. Pivoting on this success, the customer extended their interest in analytics from warrantees to their assembly lines, where their traditional BI/DW architecture limited them to reducing one brand analysis every two weeks. After implementing Greenplum’s Hadoop-based analytics solution, Greenplum HD, they were able to do a brand analysis in 20 minutes. We expect to extend our success even further here with Greenplum as part of the pivotal initiative, which you’ll hear much more about at our strategic forum in March. As with big data, developing new solutions for new use cases is important in the other areas in which we compete

[Joe Tucci:]

Thank you, David, and my thanks to everyone who has joined us for today’s call. As always, we appreciate your interest in EMC. Overall, I was pleased with our performance in Q4. In last quarter’s call, we indicated that we believed Q3 would be the low point of the year in regards to our year-on-year growth rate and, in fact, that was the case. In Q4, we accelerated our growth rate from Q3 by more than two percentage points and achieved our first $6 billion plus quarter. To add a little color about the quarter, we did see a moderate budget flush but customers continued to be cautious with their IT acquisitions, making sure they lead to acceptable ROIs, increased productivity and innovation. We also saw a quarter that was back-end loaded. We had a strong December. We saw Europe have more predictability and good growth. We experienced significant interest and adoption of private (carved) models. We realized a 17% year-over-year growth rate in our brick plus plus countries. And we had a very strong growth in Greenplum and our big data assets. From a vertical perspective, we saw high growth with service providers, good growth in financial services, telecomm and the media and entertainment industries and a lower growth in public sector and manufacturing. Additionally, and very importantly, we believe in closing out Q4 we positioned ourselves well for 2013. Looking at the full year of 2012 against our goals of $22 billion in revenue, $1.70 per share of non-GAAP EPS and $4.9 billion of free cash flow, we just slightly missed our revenue goal, we hit our EPS goal and exceeded our free cash flow goal. Given the uncertain macro environment, I truly believe we executed very well and took share across a vast majority of markets in which we compete. I want to thank the 60,000 EMC and VMWare people around the world along with our valued partners for their excellence in execution and for their dedication to our customers and their success. I am very proud of all of you. Without a doubt, what underpinned our success in Q4 and in 2012 was a crisp execution of our strategy and our business model. We are squarely focused on several of the hottest areas in IT

[Tony Takazawa:]

Thanks, Joe. Before we open up the lines for your questions, as usual, we ask you to try and limit yourself 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. Operator, can we open up the lines for questions please?

[Operator:]

Yes sir. [Operator instructions.] Our final question comes from Keith Bachman with Bank of Montreal. Your line is open.

[Keith Bachman:]

I wanted to ask Joe in particular, you, about confidence on the guidance, and to break that down. If I take away what was generally perceived to be very weak VMware guidance last night, for core EMC or EMC Infrastructure Group, it looks like you’re guiding to around 6% revenue growth for that division. And in the last two quarters, you’ve posted year over year growth of call it 3% and 5%. So it looks like, embedded within it, is improvement in growth rate for EMC Infrastructure Group. And I just wanted to try to get some understanding about why you think there’s some improvement in that growth rate. What are some of the factors contributing to that?

[Joseph Tucci:]

I’ll start, and then maybe David will add a little more. First of all, if you really think of any kind of given period of time, it is pretty easy to starve IT a bit for a while. But if you really truly believe, as most companies do, that IT is the root, inversely it’s impossible to get productivity gains or innovation these days without IT. You can’t starve it for too long. So IT I would classify as certainly 2012 was certainly a year of uncertainty and caution. I think there’s some lingering uncertainty in 2013 for sure, but I see more of a kind of cautious optimism out there, which is an improvement. And the companies and entities out there understand that cloud and big data are going to change the landscape and if one doesn’t invest in these technologies, their companies will be left hopelessly behind. So these are things that give us encouragement. The other thing is I always look at the product cycles and we have extremely exciting product cycles this year and a lot of refreshes. We have a huge base, so these things together give us a lot of confidence and our strategic reach I think, as I delineated, the six or seven priorities we have for the company. These are really well placed and if you look at the CIO priorities for their spending, the map extremely well, so we’re in a good space. Customers understand they need to invest and they are. They move from cautious to I think what I call a cautious optimism. David, do you want to add anything?

[David Goulden:]

Yes, Keith, let me just pick up on that. So yes, you’re right. We are expecting a 6% growth ex VMWare, up from 5%. This year, a couple of other factors, network storage marketplace grew faster than IT spending in ’12. We do expect it to grow faster than IT spending in ’13. As Joe said, we expect a small uptick in IT spending growth in total from 2% in ’12 up to 3% in ’13, so that’s going to help us. Last but not least, just to reiterate what Joe said about the strength of the product cycle and what that can do for us and consistent with the macro guidance, of course, expect higher growth in the second half than in the first half. But your math is exactly correct. Last but not least, I’d just point out that we do expect to get a decent continued increase in operating leverage as well for the year, ex VMWare and, of course, with VMWare in the consolidated numbers as well.

[Operator:]

Your next question comes from the line of Amit Daryanani – RBC Capital Markets.

[Amit Daryanani:]

David, I think you touched on the success of Isilon and verticals outside the core areas they play and you talked about financials being a big success area. I’m curious when you look at these new verticals, is Isilon actually winning against some of the traditional competitors that they've had – I think in the past I talked about 80% displacement of NetApp-centric solutions. In the newer verticals, do you see it cannibalizing more of your traditional VNX product line?

[David Goulden:]

No, I think that definitely when we look at the newer verticals where Isilon is having success is against the more traditional NAS players and the example that I referenced in my prepared remarks was against an existing NAS incumbent and I gave you all the facts and figures around that. I think what’s really exciting is that with the mavericks release that shipped on schedule right at the end of the fourth quarter, which obviously didn’t have much of an impact on Q4 numbers directly, but the potential is now there for 2013 for the aperture that we can focus on in Isilon to be that much wider. Just to recap what we did with mavericks, we certainly performed. We improved the year performance drastically, about 50% reduction in latency but then we added a lot of features around data protection, security and integration backup to VMWare and all of those together represent a quantum leap in terms of the size of the market that we can address. So yes, the new verticals will be a high part of the growth and it really is incremental market opportunity compared to where EMC’s traditional storage platforms play.

[Operator:]

Your next question comes from the line of Aaron Rakers – Stifel Nicolaus.

[Aaron Rakers:]

Question building off of Keith’s prior comments. When you look at your two big storage buckets, you look at the high-end business growing 6%, the mid-tier business growing 5%. The high end in the past had been talked about being a lower-single digit growth rate. I guess my question is when you look at your guidance for 2013 and layering in some of these product cycles, do we expect the mid-tier segment to get back to a double-digit growth rate? And also within that, where do you guys recognize the Greenplum revenue and is there some point in 2013 a time that we break that out?

[David Goulden:]

So the Greenplum revenue is in our storage revenue segment but it’s not in either high end or the mid-tier. It’s in the other bucket. If you added high-end to mid-tier and subtracted it from total storage product, you’ll see that there are a few other things in there. Greenplum is one of those things. In terms of breaking it out, we’ll tell you more about all the things that are going to go into the pivotal program and initiative when we get together in March. So whether we break it out specifically or not, we’ll certainly be breaking out more of the things that are part of that new program. So relative to your question on high-end to mid-tier, first of all, you’re right that mid-tier growth in the quarter was 5%. But if you look at the year, it was 9% and, as Joe and I both mentioned, we have a great roadmap coming up. I mentioned how excited we are about the mavericks release for Isilon but there’s great things happening in the VNX world, there’s great things happening in the backup/recovery world this year, so those are going to give us boosts as well. And we do expect the high end to continue to grow. So we feel good about the balance of both. And as we mentioned, we think the net result is going to be a higher revenue growth in ’13 than it was in ’12.

[Operator:]

Next we have Shelby Seyrafi with FBN Securities. Your line is open.

[Shelby Seyrafi:]

Related to the other questions, building on the product cycles, last year around May you had a new EMC VMAX cycle. So you had a pretty good product cycle last year, and this year you’re talking about, I think, a refresh of the mid-tier VNX. You’re going to ramp with Isilon, Mavericks, maybe a backup recovery. But altogether, would you say that the strength of the product cycle this year is better than last year? And if you can, which of the product categories do you think will have a bigger impact in terms of swinging the needle for the product cycles. You know, VNX, Security, Greenplum, Isilon, BRS, etc.?

[David Goulden:]

I think to answer your middle question, when you aggregate it all together, I think the impact of the product cycle in ’13 is more powerful than it was in ’12. Obviously in ’12 we had a big help in the VMAX line, but that help continues into ’13. And then as we mentioned, we basically have either new software or new refreshes across all of our major mid-tier platforms. So the power of that into ’13 is actually quite strong with VMAX continuing, and then the new cycles in Isilon, VNX, and BRS. So we do expect the mid-tier to perhaps show the bigger improvement on a year on year basis, because of the product cycle, but also expect VMAX to continue to be positive.

[Operator:]

Next in queue we have Kulbinder Garcha with Credit Suisse. Your line is open.

[Kulbinder Garcha:]

I have a question for David and Joe. You both have been saying now, I think for six months, that your customers are potentially delaying spend, and using various technologies not to actually spend on storage. I’m just wondering, can you compare and contrast where we are now, let’s say versus late 2009? Do you have any measured or practical metrics and utilization, for example, that would imply there’s a significant level of pent-up demand out there, and we could see a snap-back, maybe not inside of ’13, but at some point as we go forward? I guess what I’m getting at, what confidence do you have that this isn’t a structural level of step-down in terms of how people buy storage systems going forward?

[David Goulden:]

Let me take that. We’ve been looking at this quite carefully, because obviously we’ve all been looking at the same trends. And let’s start with the macro. Obviously the economy slowed in 2012, and that’s impacted all of IT spending. And of course what CIOs have looked to do in times of slowing economy and tightening budgets is to look at ways to get more out of their assets. So there are two ways to do that. The first is they can take more advantage of efficiency technologies. You think of all the technologies the storage industry has developed the last two or three years, whether it be tiering, thin provisioning, automated software tiering, compression, and de-dupe, there’s a lot of new capabilities that the storage industry, particularly ourselves, has brought to our customers over the last few years. So what customers have done this year is they’ve really ratcheted up the use of those technologies. And we’ve done some of our own surveys, we’ve seen some third party surveys, that say that people have saved anywhere from 10-15% of their anticipated spend or certainly their anticipated capacity growth in 2012 by the use of these technologies. So it’s certainly meaningful. The other thing we’ve seen is people have kept their assets longer, as well. So people slow down refresh cycles. So the combination of using these efficiency technologies more and slowing down refresh cycles does mean that the fleet - if I can use that term - of storage systems out there is better utilized and a little bit older than it certainly was 18 months or two years ago. So we don’t think that the flow of bits is changing. There’s just as much of a growth in bits going into network storage systems as there has been before. Just those bits have been used more efficiently. So that gives us confidence that we do expect to see network storage spend grow faster than IT in 2013, as, by the way, it did in 2012, despite the fact that these efficiency technologies and aging factors were playing into the portfolio.

[Operator:]

Next in queue we have Andrew Nowinski with Piper Jaffray. Your line is open.

[Andrew Nowinski:]

You mentioned [unintelligible] will be out later this year. What use cases are your beta test customers deploying? And what competitive products are they comparing it against or, better said, what products do you expect it to compete against when it comes out?

[David Goulden:]

Andrew, there’s a couple of use cases that seems to be resonating particularly well for extreme IO. First, and obviously – let’s step back and talk about what extreme IO is. First of all, it’s a storage array and, secondly, it’s a storage array with rich data services and inbuilt dedup and the ability to do lots of snapshots. So when you think of the – and of course, very high performance. So you think of all those things together and the sweet spot are going to be data sets or work loads that really take maximum (inaudible). And a couple of areas come to mind and a couple of areas off (beta) that customers are using. First one is (VDI) where obviously there’s a lot of ability to do dedup across all the different work station images and need extreme performance, particularly when you’re booting up, potentially thousands of work stations in peak periods. Another big area is data base test and (def) where the ability to do all the snapshots and keep multiple copies are very important and efficient for those customers. So those are a couple of major use cases. In terms of the competitive environment, we’ll talk more about that. We are going to have a big flash launch in early March just before our analyst day but I think you know how all the all-flash array vendors are out there. Our customers have been using the extreme IO systems against all the popular candidates, so I won’t mention any by name. But as I said in my prepared remarks, we are very excited of the feedback from our beta customers and we generally do believe this is going to be the best all-flash array in the marketplace.

[Operator:]

Your next question comes from the line of Ittai Kidron – Oppenheimer.

[Ittai Kidron:]

First of all, guys, can you give some color on your views on the federal government vertical through 2013? And second, David, you’ve talked about 2012 having IT spend growth 2%, EMC 9%. ’13 we’re looking at IT accelerating actually to 3% and EMC declining to 8%. So clearly VMWare is part of the equation but I’m trying to understand if you can also benchmark what storage spending is going to be in 2013 versus ’12 and is there perhaps smaller and fewer opportunities for share regains for you in ’13 versus what you had in the past?

[David Goulden:]

So first of all, you’re right that in 2012 we grew 9% in total against IT spend of 2% but let’s also put that into context of VMC x VMWare or EMC II that was 5% against IT spending of 2%. And in 2013, we’re forecasting to grow at 6% versus IT spending of 3%. So and as Joe said, we strive to meet or beat our goals. We’ve talked about our product cycle. So the fact that we’re still gaining share, we do plan to grow at twice the market in 2013, x VMWare. We grew at 2.5 times x VMWare in 2012, so I wouldn’t read too much into that. We look at potential – I don’t think it’s an issue of relative growth. We think we’ll be gaining a lot of share in both years. And as we said, we aim to meet and potentially exceed our goals.

[Joe Tucci:]

On the federal landscape, Ittai, I’m just not sure. Let me give you two sides of it. I think we all agree and federal budgets will be tight this year for sure, tighter than last year. On the other side, what we all know intuitively and the federal government knows, that to really get the productivity they need you’ve got to invest in IT and you’ve got to do in some of the newer ways and there are tremendous opportunities for the federal government to utilize cloud and get real value out of big data. So the question is how will that materialize itself in an area that’s obviously more political, more bureaucratic by definition. So eventually they’re going to have to do what I said. How much they get done in 2013, how good a year it’ll be, I think it needs to be watched but I don’t think it’ll be a terrible year. I think it’ll take probably a while for them to through the political process make sure that they use IT to gain these productivity gains that they need.

[Operator:]

Your next question comes from the line of Brian Alexander – Raymond James.

[Brian Alexander:]

So in terms of the growth that you guys are seeing – just wanted to clarify – you talked about customers delaying purchases and focusing on utilization of existing infrastructure. So would you expect to see EMC’s growth premium versus the IT market to reaccelerate at some point or do you think a 300 basis point premium which is what you’re looking for this year, and I think what you accomplished in 2012. Is that the right way to think about your relative growth going forward?

[Joseph Tucci:]

We look at it in terms of multiples of the IT market itself. So obviously at 8% we’re 2.5x what we believe the IT market will grow. Could it be a little more than that? Could it be a little less than that? That’s where you’re trying to kind of probe. But I think we’re pretty reasonable in our forecast. We’ve got a really good track record of doing what we said we’d do. We have a really good track record of doing a little better than we said we’d do. This year is almost perfectly on what we said we’d do. So our best guess, right now - it’s not a guess, it’s really a lot of scientific work that we do - is that we’ll do 8%, and do I believe we have the ability to beat it? Yes I do. Do I believe there’s risk? Sure I do. So this is the best estimate we can come up with.

[Operator:]

Next we have Steve Milunovich with UBS. Your line is open.

[Steve Milunovich:]

I wondered if you could give us an update on how you see customers using Flash. You’ve talked in the past about it being maybe 3-5% of their storage needs. What if that turns out to be 10% or 20%? On the one hand, people want to buy through EMC, on the other hand, some of these small companies argue that there’s a significant architectural change occurring, much like you brought to the industry in the late 80s, and kind of question whether you’ve got the right file system, etc. So are you prepared to say that if Flash is much bigger than you currently think, that you’re still agnostic about it?

[David Goulden:]

We’ll play Flash at multiple layers, and I think customers want to see that. So let’s talk about what we do with Flash today. As I mentioned, over 50% - so this is very important to understand - over half of our what you might call traditional storage arrays, VMAX and VNX, go out with some amount of Flash and also with the fast software that automatically tier. So our customers are taking advantage of that in the hybrid array. And typically it’s a few percentage of the total capacity, but we have customers, for example, with maybe 5% of the storage array in Flash who are basically delivering close to 80% of the IOPS of the entire system through that 5% Flash tier, and the rest is used for retention requirements. Then we’ve got to play in the all-Flash marketplace, and we mentioned Project X, which we’ll be talking about more in March, and more later on as we bring that to market. That was designed from the ground up to leverage all-Flash. But understand, those all-Flash array systems are not designed to recognize the benefit of storage. So if you want to keep all these data in an all-Flash, that’s great, but that’s going to be a pretty expensive way to go. And then of course you’ve got Flash in the server tier, and we talked to you about we’re going to be introducing a new line there as well. So we do see Flash playing a major role, but we don’t see it taking over the requirements for disk storage in any time soon, and we think it’s going to be a combination of both. And the ability to work with somebody to get the right Flash solution, best-of-breed, for all the different workloads, we think that’s a really important criteria. So we’re happy for Flash to continue to increase in percentage, but we’ll talk to you about a few data points when we get together in March. Basically the total Flash capacity in the industry is a small subsegment of the total disk capacity in the industry, and if you want to replace that anytime soon, you’d have to spend trillions of dollars on a thousand plants, and customers’ IT budgets would go crazy. So you’ve got to put it into context in terms of what customers are really trying to do.

[Joseph Tucci:]

We’ll update that, but the last time I looked, what you said can’t happen. Replacing 10% of disk with Flash, there’s not enough capacity to do that at all. And remember, a lot of that capacity’s got to go into the consumer market that Flash makes. So statistically, last time I looked, that can’t happen. But that being said, just to reiterate what David said, you will see multiple announcements we have where we’re playing on the all-Flash server side. You’ll see multiple products that play on the all-Flash storage side, and you’ll see multiple products playing in the hybrid. So we’re going to play across that market, and the key is technology and [software] we’ll have that links that all together to cover areas of persistence and changing of data value. So that’s going to be the way we’re going to play this, and I think it’s much more pervasive and a larger play than anybody else is making, and it’s going to suit us well.

[Tony Takazawa:]

We have time for one more question, and then Joe will have a few concluding comments.

[Operator:]

Your next question comes from the line of Abhey Lamba – Mizuho Securities.

[Abhey Lamba:]

Speaking on the discussion about flash, Joe and David, how are the products that we are going to see later this year? When should we think about their ability to contribute meaningful revenues? Can it happen this year as customers are likely going to test and pilot them initially? So should we see an impact this year? And also, David, if you can touch upon the impact on your margins. Should we see a step up based on those.

[David Goulden:]

So let me put that all into context with how – doing everything we’re going to do in March. Now, the first thing we’re going to bring to market from a customer, from a GA, general availability point of view, is going to be our new line of MLC-based PCIE flash cards for the server and those will start to revenue later this quarter into early next quarter and then the Project X will have a revenue impact more in the second half of this year, so both ramping up. But again, so they’ll be growing rapidly but obviously compared to a $23.5 billion business it’s not going to have a huge impact. The bigger impact is flash and the hybrid arrays, where, as I mentioned, over 50% include flash and that’s a big piece of the growth of our VNX and VMAX marketplace, so flash is having an impact on our growth rate. All flash products will be ramping this year and, in terms of bring able to move the needle against a $23.5 billion revenue line, that will be more something for 2014.

[Joe Tucci:]

Well, again, thank you all for joining us and it goes without saying. We are really excited about our strategies and our strategic position around cloud, big data and trust. We know they’re well placed. We know they’re being extremely well received by our customers and our partners and we really look forward to sharing in depth with you on March 13th. So again, we – I think the strongest thing that I take a lot of solace in is we just have a great team here in EMC and VMWare. We have momentum and we’re extremely excited about our prospects to grow and take share. So again, thank you for being with us today and we’ll see you real soon.

[Operator:]

Thanks for joining today’s conference. You may disconnect at this time.