Earnings Preview: EMC Corp. - Analyst Blog

EMC Corp. (EMC) is slated to release its fourth quarter 2010 earnings before the market opens on January 25. EMC holds a leadership position in the storage hardware and software segment and is a leading provider of data storage systems.

Quarter Ahead

EMC did not provide any quarterly guidance during its third quarter earnings call, but provided an upbeat guidance for full fiscal 2010.

According to the Zacks Consensus, earnings per share (EPS) are expected to be 35 cents for the fourth quarter of 2010. This is an increase of 40% from the year-ago quarter. The projected EPS includes stock-based compensation but excludes one-time charges.

EMC expects fiscal 2010 revenues of $16.9 billion. Management does not expect any negative currency impact on 2010 revenues. EMC issued a non-GAAP EPS outlook of $1.25 for fiscal 2010.

For 2010, consolidated restructuring and acquisition-related charges, stock-based compensation expense, and intangible asset amortization are expected to be 2 cents, 23 cents and 9 cents per share, respectively.

For the full year, non-GAAP operating income is expected to be 21% to 22% of revenues. The non-GAAP income tax rate is expected to be 22%. Non-operating expense, which includes investment income, interest expense, and other expense, is expected to be $80 million.

According to the Zacks Consensus, EPS is expected to grow to $1.02 for fiscal 2010. This includes stock-based compensation but excludes one-time charges.

Out of the 14 analysts who provided estimates, 1 has raised the estimate for the fourth quarter over the last 30 days and made a positive revision over the last week.

Estimate revisions for full-year 2010 have been mixed with 2 of the 15 analysts providing estimates raising their forecasts in the last 30 days, 1 of which was raised in the last 7 days. 1 analyst lowered the estimate in the same period.

The revisions were made after management cut its GAAP earnings outlook in the first week of January for fiscal 2010 due to a restructuring charge of approximately $90 million incurred in the fourth quarter of 2010. The charge is a part of reorganization in EMC's international business, as pointed out by management.

EMC lowered its outlook for 2010 GAAP EPS from 91 cents to 87 cents. The company also revised its outlook for the GAAP income tax rate from 20% to 24% for 2010. However, revenue and non-GAAP EPS outlook remained unchanged.

Third Quarter Synopsis

EMC reported strong third quarter 2010 results, with earnings increasing 47.1% year over year to 25 cents per share versus 17 cents per share in the prior-year quarter. Earnings per share (including stock-based compensation but excluding restructuring charges) beat the Zacks Consensus Estimate by a penny. The year-over-year growth was primarily driven by strong revenue growth in the quarter.

Revenues increased 19.7% year over year to $4.21 billion in the third quarter surpassing the Zacks Consensus Estimate of $4.14 billion. The robust year-over-year growth was primarily driven by continued strong demand for EMC's storage, data protection, virtualization and security products, and services in the quarter.

Our Take

Through a combined focus on revenue growth, accelerated investment in research and development, and continued cost containment efforts, EMC expects to increase its 2011 earnings. The expense reductions are encouraging, and are likely to lower the spending base, with a corresponding positive impact on profitability. However, execution will be something to watch. Moreover, competition from International Business Machines Corp. (IBM), NetApp Inc. (NTAP), and Hewlett-Packard Company (HPQ) are intensifying.

The number of estimate revisions points to the fact that there could be some catalysts that could drive shares. EMC is currently rated as a Zacks #2 Rank (short-term Buy) stock. Over the long term, we maintain our Neutral rating on the stock.

 
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