EMC Q1 Earnings Call Transcript

123jump.com Staff
01 May, 2009
New York City

EMC first quarter revenue declined 9.2% to $3.15 billion and net income declined 22.8% to $194.1 million. Earnings per share were 10 cents as against 12 cents in the year ago quarter. The company generated record cash and investments were $9.8 billion.

EMC Corporation ((EMC))
Q1 2009 Earnings Call Transcript
April 23, 2009 8:30 a.m. ET

Executives

Tony Takazawa – Vice President, Global Investor Relations
Joseph M. Tucci – Chairman of the Board & Chief Executive Officer
David I. Goulden – Chief Financial Officer & Executive Vice President

Analysts

Amit Daryanani – RBC Capital Markets
Aaron Rakers – Stifel Nicolaus & Co
Mark Kelleher – Brigantine Advisors
Toni Sacconaghi – Sanford Bernstein
David Bailey – Goldman Sachs
Bill Shope – Credit Suisse
Kathryn Huberty – Morgan Stanley
Brian Freed – Morgan Keegan & Company
Keith Bachman – Bank of Montreal
Rajesh Ghai – ThinkEquity
William Fearnley – FTN Equity Capital
Kaushik Roy – Wedbush Morgan Securities
Jayson Noland – Robert W. Baird & Co.
Glenn Hanus – Needham & Company
Mark Moskowitz – JP Morgan

Presentation

Operator

Good morning and thank you for standing by. During the question-and-answer session please press “*1’” on your phone to ask a question. Today’s call is being recorded. If you have any questions you may ask at that time. Now I’ll like to introduce your host Tony Takazawa. Please begin.

Tony Takazawa – Vice President Global Investor Relations

Thank you, Audrey. Good morning. Welcome to EMC’s call to discuss our financial results for the first quarter of 2009. Today we are joined by Joe Tucci, EMC Chairman, President and CEO and David Goulden, EMC Executive Vice President and CFO. David will provide a few comments about the results that we released this morning. He will highlight some of EMC’s activities this quarter and discuss the modeling assumptions for 2009. Joe will then spend some time discussing his view on what is happening in the market, EMC’s execution of the strategy and how EMC is positioned. After the prepared remarks we will then open up the lines to take your questions. I would like to point out that we will be highlighting various non-GAAP numbers in today’s presentation. 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 presentations. All of these are available for download within the investor relations section of EMC.com.

As always we have provided detailed financial tables in our news release and on our corporate website. And with regard to details of the VMware’s results, we refer you their financial release from last night. The call this morning will contain forward-looking statements. Information concerning factors that could cause actual results to differ can be found in EMC’s filings with the US Securities & Exchange Commission.

And lastly, I will note that an archive of today’s presentation will be available following the call. With that, it is now my pleasure to introduce David Goulden. David?

David I. Goulden – Chief Financial Officer

Thanks Tony. Good morning and thank you for joining us today. In Q1 EMC achieved revenue of $3.15 billion, non-GAAP EPS of $0.16 and free cash flow of $681 million. Given the very tough economic environment and the transactional nature of our business we were encouraged by the resilience of our business model. We took a proactive approach adjusting our business to this challenging climate and we are very focused on managing the controllables in our business. I think we did a great job of that in Q1. We executed well on our cost reduction plans, maintained disciplined expense control, reduced inventories and held a strong DSO number, all of which resulted in decent profitability and excellent free cash flow this quarter. I would like to thank our global workforce for their efforts here.

In Q1 we also made good progress on our plans towards reducing our long-term cost structure and improving the future efficiencies of our global operations. Importantly, we also utilized our financial strength to continue our investments in industry leading products and services. This dual focus on efficiency and investments is key to reinforcing EMC’s strong position to weather this down turn, take share in our addressable markets and position EMC for even more success when the economy turns around. Now, let’s take a closer look at the financial results for the quarter. EMC information infrastructure revenues in Q1 were $2.7 billion and this includes approximately 400 basis points of negative impact from currency. Non-GAAP earnings per share were $0.11 and free cash flow was $494 million, more than $260 million higher than non-GAAP net income.

Looking at our geographic results for the information infrastructure business in Q1, non-US revenues were 48% of the revenue mix. We saw the effect of weak enterprise spending across the vast majority of our markets during the quarter. On a global basis compared with the average, government and healthcare were relatively stronger and financial services were relatively weaker. Our BRIC plus 13 markets were up 7% in constant currency. We continue to invest in these markets because we believe their important to EMC in the long-term. Looking at the results from our information infrastructure business units, in Q1 product revenues were $1.7 billion and services revenues were $1 billion. Within this information storage revenues were $2.4 billion and the high end Symmetrix revenues were down 25% but on a more positive note bookings were down 17%. In the mid tier, CLARiiON revenues were down 18% over Q1 of last year. These results from our two largest product lines reflect our exposure to weak enterprise spending especially in the enterprise. We are however encouraged that we maintained overall footprint in our existing accounts and actually added new enterprise customers during the quarter. It’s also good news that our channel related business that is less enterprise focused showed relatively better results. These factors lead us to believe the weakness is much more macro related than company specific.

Both our Symmetrix DMX and CLARiiON CX product families lead the market in terms of reliability, scale of performance and cost efficiency. In addition, we believe that the new highly differentiated and unique Symmetrix V-Max will strengthen our position even more in the high end and we look to extend our lead here. Our Celerra NS business continues to do well. We achieved our eighth consecutive quarter of double digit revenue growth and we continue to gain share. In February, we introduced our new Celerra NS unified storage systems with flash drive technology, management tools for VMware environments and primary deduplication. Customer response has been terrific. Our deduplication business continues to show excellent growth. We continue to be the leading provider of deduplication technology with multiple ways for customers to utilize deduplication to manage data growth and reduce costs. In conjunction with the introduction of VMware’s vSphere 4 cloud operating systems we invested early to ensure our information infrastructure portfolio works with vSphere deployments on day one. We also announced our new PowerPath/VE software specifically designed to unify the management of major server operating systems and virtual platforms across physical and virtual environments.

That represented about 10% of EMC’s total revenue in Q1. Within this there was approximately 26% of CLARiiON revenues representing a slightly higher percentage than in Q4. Overall, the storage result this quarter reflects the pressure on customer budgets and IT spending especially in the enterprise. While near-term economies are challenging we’re confident that over the long-term we will gain share in these markets as EMC continues to have the best and also broadest and most integrated storage product portfolio. Our storage platform spans across the consumer, mid tier and high end markets. We continue to lead the market with cost effective solutions. These solutions provide unique buys to customers and are key to our ongoing market leadership, ability to grow share and provides a very good return over time. Our technology and solution approach to integrate systems and software has been very successful. In fact, when you look at our storage business over the last few years we have consistently shown solid revenue growth and the profitability on both the gross margin and operating margins has been very good. As you can see on the chart, storage gross margins have consistently been around 50% over the last two years. As you would expect in Q1 our storage margins came under pressure, mainly due to volume declines in our largest products.

Despite this revenue decline we still achieved gross margins of 48% demonstrating the strength of our storage business model. Based on these factors we believe the information storage business has been and will continue to be a great business. We will continue to invest in our R&D programs to lead the market with new and unique information storage products and solutions. For example, in recent months we’ve integrated flash technology across our entire product line, opened our deduplication solutions and added NAS and home media products to the Iomega consumer family and as a leading IT provider for virtual datacenters and cloud infrastructures we continue to innovate. Our Atmos cloud infrastructure products recently announced Symmetrix V-Max and VMwares vSphere integration across our entire storage portfolio as examples of our efforts here and there’s much more to come.

In today’s economy we think the less focused traditional competitors and the small feature oriented companies will have a hard time keeping up the necessary investments. As a result we believe we’ve positioned ourselves to pull further ahead technology wise and gain share near-term and longer-term. Q1 RSA security revenues were up 6% year-on-year. We continue to see good demand for our security information and event management offerings. In March we announced the release of the new RSA EnVision 4.0 platform, that was designed to further simplify compliance and ensure efficiency and effectiveness of security operations and risk mitigation. Our identify protection and verification products also had another strong quarter. We’re starting to see demand for our offerings grow beyond consumer protection into healthcare, business-to-business and enterprise applications. And just last week we announced our new RSA data loss prevention suite that is integrated with our EnVision platform and offers new capabilities for discovery and remediation designed to reduce the total cost of ownership for DLP.

Revenues from our concept management and archiving business in Q1 were down 6%. Constrained IT spending continues to result in smaller deal sizes and longer approval cycles in this area of our business. Compliance continues to be important to customers and our SourceOne information government solution we announced earlier this month positions us well to capitalize upon opportunities here. In Q1 our global services organization performed relatively well. The challenging market conditions had an impact upon some customer’s projects. We’re confident that EMC service capabilities will continue to help customers meet their near-term cost containment requirements while supporting their long-term objectives such as consolidation and virtualization. Our focus on investments in our services business has given us a competitive edge as customers think about their information and virtual infrastructures and their virtual data center architectures.

Turning to other elements of the income statement, Q1 gross margins came in at 50% and operating margins were 11.3%. Given the environment we think these are pretty solid results. As you would expect, the sequential decline in gross margins is almost entirely due to volumes. In order to offset this impact, we are very focused upon controlling the controllables and have made great progress on our restructuring and cost savings initiatives. As of the end of March we completed approximately 50% of our headcount reductions. In addition, our cost saving efforts, are on target relative to our previous plan for $350 million of savings this year. Q1 actually saw a better than planned savings due to EMC employees doing a great job of controlling short-term spending, little more than expected help from favorable currency rates and a few one-time items. While these favorable factors won’t be as positive throughout the rest of 2009 we’ve identified some additional near-term cost reductions that will save EMC another $100 million predominately in the second half of 2009. Joe will provide you with more details on these initiatives in his comments. Based on our existing cost reduction plans and these additional actions, we now expect to reduce our 2009 information infrastructure costs by approximately $450 million from our 2008 spend.

Given the shorter term nature of some of these newer initiatives, we still expect total cost reductions to be approximately $500 million in 2010. We remain very confident in our products, services and solutions and believe these near-term and long-term changes to our cost structure will help us to ride out this period of economic uncertainty and put us in a position of strength when things get better. This is a tough market but we continue to move forward, stay in front of our customers, roll out new products and invest in R&D and new markets in a time when other companies might not be. We continue to make investments that are necessary to support our future strategic plans for the virtual data center and cloud computing. As an example, this quarter we invested approximately $20 million in our cloud infrastructure business. We plan to play in this market from the infrastructure side and provide predominately software based product infrastructures. This will be a high growth, high margin business for us that will require significant investments but we firmly believe it is the right approach, right time and right market to invest in.

As we discussed last quarter we’re focused on improving our long-term cost structure and we expect to incur approximately $60 million in transition costs in 2009 to implement these changes. In Q1 we incurred approximately $10 million related to these efforts. Overall, I think we did a good job balancing opex reduction efforts with necessary technology and business investments in the quarter. Now, turning to our consolidated results, total Q1 consolidated revenues were approximately $3.15 billion down 9% over last year including a 3.5% negative impact from currency. Non-GAAP earnings per share were $0.16 and free cash flow was $681 million. I want to reiterate that even though this very tough economic environment caused some big declines in important parts of our business, our operating model held up well and we are encouraged by these results. VMware had a good quarter and contributed around $0.05 to our consolidated non-GAAP earnings. Relative to VMware’s comments last night, there are a few factors that will reduce VMware’s profit contribution to our second quarter consolidated earnings by approximately $0.02. Our non-GAAP tax rate for the quarter was 21% and our consolidated operating cash flow was $864 million.

A few balance sheet items that impact our Q1 operating cash flow include deferred revenues which were $3.3 billion and up 13% over Q1 last year, inventory turns which were 7.3% and DSOs which were 49 days, all very good given the current economic climate. We ended Q1 with a record $9.8 billion in cash and investments with $5.9 billion held overseas and at VMware. Financial flexibility is a critical strength and competitive advantage for EMC particularly in this unprecedented and unpredictable economy. Our financial strength allows us to continue to invest in our business even during challenging economic cycles. Now, let’s take a look at the rest of 2009. In Q1 we saw customers carefully scrutinizing everything they spent and only buying what they had to in conjunction with continued uncertainty around their budgets, a real, just in time, just enough environment. However, one positive sign is that the tone of the business improved during the quarter with March better than January and February.

While things are still pretty murky out there, the additional three months of experience does give us a better view of 2009. Based on what we are seeing and hearing out there, our best guess at this time is that global IT spending will likely be down very high single to very low double digits this year. In terms of linearity for the year, the good news is it looks like IT spending in Q2 will probably be flat with Q1 and we continue to expect the second half of 2009 to be stronger than the first half. This is not an economic prediction but more a belief that it looks like customers will end up spending more of their 2009 money in the second half than the first. Historically, this has been true but we think it should be somewhat more pronounced this year as customers will have better visibility to budgets and be further along with their own restructuring programs and broader stimulus packages should be underway. Looking more specifically at EMC we believe that volumes and to a lesser extent customer pricing programs are dual headwinds that will continue resulting in lower gross and operating margins in 2009 over 2008.

We believe that the expected cost savings of $450 million in 2009 from our cost reduction plans will offset some but not all of these combined headwinds. As we said last quarter about a third of the cost reductions will be from our COGS line and the remainder representing lower operating expenses. The savings will be weighted towards the latter half of the year. For your modeling purpose it is also important to keep in mind that we will continue to be impacted by the various factors we referenced last quarter with respect to transition costs as FAS 86 software capitalization, FSP 14-1 interest expense and lower interest income. So, as we think about 2009 the combination of market impact, cost cuttings, continued investments and the four factors I just mentioned will lead to some ebb and flow throughout the year. But, we think operating profitability should show signs of improvement from Q1 levels in the second half.

As a reminder, we believe our non-GAAP results which consistently always exclude stock-based compensation, intangibles and unusual items such as restructuring charges, allow for the most transparent and clean view of our operating performance. The non-GAAP financials better reflect how we run the business and are consistent with the way we discuss our results with you. As a result, we strongly encourage you to model EMC reflecting this non-GAAP view. Looking forward we like our position on both defense and offense for this year and beyond. We remain very confident that we have a very competitive product portfolio to help more customers meet their needs and we’ll continue to increase our market leadership this year with new products and solutions and we have a solid foundation and strong cash position.

With that, I’ll now turn the call over to Joe to comment on Q1 and the rest of 2009. Joe?

Joseph M. Tucci – Chief Executive Officer

Well, thanks David. I would also like to extend my welcome to everyone joining our conference call today. As always, thank you for your interest in EMC. Q1 was to say the least an interesting and extremely busy quarter for us. We had to get a handle on how this economic recession and tight capital spending environment would affect our customer spending. We had to execute on our own rightsizing and cost saving initiatives. We had to finalize preparation for our investor’s day strategic forum which we held on March 10th. We had to forge tighter and deeper strategic alliances with core partners for the future such as CISCO, Intel and SAP on the technology side, Accenture, Web Pro, TCS, ACS and EDS in services, with channel partners like CDW, Arrow, Avnet, Ingram, with systems partners like Fujitsu and yes, with Dell. Michael Dell and I with our collective teams have been spending considerable time ensuring our mutually important alliance is back on track.

But, it goes without saying that I am proud of the EMC and VMware teams across the globe. They fought hard every day. They exhibited a winning attitude, a relentless focus on our customers, they have a great belief in our innovative products and services and they are charged up about our future. Additionally, in Q1 we had to get ourselves ready for the most extensive set of product launches in our history including the very important transition plans that always accompany any major product introduction. And of course, in a very, very tough and uncertain quarter we had to book, ship and build the vast majority of our Q1 revenues to produce our top line of $3.15 billion. This result fell short of our internal goal of $3.2 billion plus. I do believe this result when compared to other large cap IT technology companies on an apples-to-apples basis, i.e. net of acquisition effects will compare well.

Now, don’t get me wrong, I am truly disappointed that we missed our top line goal and I offer no excuses. I have more to say about that in a minute. To refresh your memory, so far this month we launched the game changing Symmetrix V-Max featuring unmatched scale up, scale out capabilities, performance and functionalities. We launched a new compliant archiving suite called SourceOne which features a simply consistent way for our customers to archive their information across their many discreet applications. In security, RSA launched major new versions of our data loss prevention and security and event management suites. And this past Tuesday, VMware introduced vSphere, the world’s first datacenter OS. vSphere is a key, perhaps the key technology for tomorrow’s internal and external cloud computing environments. So, as you can see all of our businesses were quite busy the first 111 days of 2009. Let me now turn my comments to the economic and IT spending environment which we have operated in since the opening days of Q1 through today. The first half of Q1 was extremely slow as customers focused primarily on their own restructuring and cost cutting initiatives. A significant number of our customers did not have finalized 2009 IT budgets in place and many of our customers that did have finalized budgets had implemented new policies and procedures that required top executive management approval before any IT purchasing could take place.

These reviews and lack of firm budgets, elongated sales cycle delayed and downsized many orders that made the final outcome less predictable. As we got into March these top management approval processes were and still are in many cases in place but things improved. More budgets were set albeit at a somewhat lower level and a new approval process became more programmatic and business felt somewhat more predictable. I don’t want to mislead you, IT budgets are still tight and customers are buying only what they must have and need for today but they are proceeding with projects that have good ROIs, projects that help drive productivity and are truly strategic and help them save dollars. Customers are also very interested in technologies that will shape the future of IT. Technologies like flash drives and storage, technologies like fully virtualized data centers that are more automated, technologies like virtual desktops and clients and the efficiency control and choice that cloud computing technologies promise. Also worth noting was the fact that throughout Q1 our opportunity coverage was quite good. In other words, our sales organization continually had solid pipelines of business and coverage models that would in more normal times have produced a significantly higher level of bookings than we realized this past Q1. And I might add, our win/loss ratio were in line and actually quite good when compared to prior years and quarters. In fact, I believe we took share in the markets that we addressed.

The business shortfall was the result of two major factors. First, many orders were pushed out of the quarter, and secondly, the size of orders were cut back. Also, to be a long-term strategic partner to our customers we did in this time of need offer programs that gave customers additional financial benefit. As I look to the balance of 2009 I do believe we are at or very near the bottom from an IT spending point of view. I continue to believe that the second half of the year will show an improvement with Q4 holding the most promise but, I do believe that Q2 will continue to be sluggish, a little more predictable but sluggish. Why sluggish? I believe that customers will continue with their just enough, just in time IT spending patterns. They too are looking for signs of improvement and while there is some light at the end of the tunnel they will likely wait a bit and continue to be cautious. In addition, as we enter the second half of the year, our results will benefit from the strong product cycles I mentioned in customer adoption of these products V-max, vSphere, SourceOne and our security products.

Additionally, EMC’s pipeline of new product introductions in the second year is also quite strong. Overall, as David mentioned, we expect IT spending to be down this year in the very high single digits to perhaps the very low double digits. To ensure EMC’s strength and fully capitalize on our strong product portfolio and cycle we intend not to reduce our headcount beyond the 2,400 people we announced this past January. We will continue to execute on our original 2009 R&D roadmaps. We will maintain our strength in sales support and services that touch our customers everyday and drive new business. But, in light of this weakened economic environment we will however, reduce our 2009 cost base further. To accomplish this objective we are reducing our cost base without further people reductions. We will take a number of actions that will help us save another $100 million in 2009. As a major part of this program, I have sent a letter today to all EMC exempt employees asking them to join management and our board of directors in taking temporary 5% salary pay reductions. I might mention that for the senior management on our board, this cut is on top of the 5% to more than 20% reductions that we already have implemented. This and other actions will keep us at maximum strength for today while ensuring a strong and motivated EMC for tomorrow.

In conclusion, I firmly believe that we have the vision and strategy in place for us to win and prosper. As you can see the business model and leadership that we put in place over the last several years passed the test and produced respectable results even in these unprecedented economic times. Thank you and now let me turn it back to Tony to moderate the Q&A portion of today’s call. Tony?

Tony Takazawa

Thanks Joe. Before we open up the call 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. Audrey, can we open up the lines.

Question-and-Answer Session

Operator

(Operator Instructions) Thank you. At this time if you’d like to ask a question please press * then 1 on your phone. You will be announced prior to asking your question. To withdraw your question, press “*2”. Then please select your one question, Amit Daryanani with RBC Capital Markets, you may ask your question.

Amit Daryanani – RBC Capital Markets

Thanks a lot. Just a question, I’m trying to understand in March at the analyst meeting you guys talked about IT spending being down mid to high single digits and now it looks like we’re talking about it being down almost low teens. It didn’t sound like demand patterns changed much for us so what’s really driving your expectation of a worse IT spending pattern?

Joseph M. Tucci

It’s just what we saw, this is Joe. It is just we saw in the market. Obviously when we talked to you in January we were giving you everything we believed, everything that we were seeing at that time. As we went in to January and February and we watched other results and the guidance of others, we clearly believed that this was going to be a little tougher than we originally thought which is again, why we’re taking the additional expense reduction and as always we’re telling you how we’re seeing it and this is how we see it right now.

David I. Goulden

To add to it, if you go back and think of what the global economic situation was in January, people were saying that it might be a global recession. Now, if you look at things in April there’s no doubt it’s going to be a pretty big global recession, the first one in the last 60 years so that’s a significant change just in the whole global environment. From an economic perspective that’s happened from January through to now and that difference is also driving our different view in IT spending.

Tony Takazawa

Thanks Amit. Next question please?

Operator

Aaron Rakers with Stifel Nicolaus, you may ask your question.

Aaron Rakers – Stifel Nicolaus & Co

Yes thanks for taking my question. I guess, if I look at the cost cuttings that you guys are implementing through 2009 now at $450 million on the core information infrastructure business, can you help me understand how to model that through this year? And, how much maybe with opex down $200 plus million non-GAAP, how much has already been kind of been floating into the model already?

David I. Goulden

Yeah sure, as we said, the $450 is still going to be about one third in COGS and two thirds in opex. The extra $100 that we spoke about is really all going to be aimed at the second half of the year. Most of it is related to the salary reductions that Joe mentioned that we’ll be implementing later in this quarter that will be in place for the rest of the year. So, that kind of leaves us with the original $360 which we spoke about and again, that will be more balanced towards the second half. As I mentioned, we did a little better than you would expect in Q1. Just to kind of give you a couple more numbers, if you basically take the original $350 and you say there will be two thirds sitting in opex, that would give you roughly $250 of savings. If you were expecting that in Q1 we would have probably saved in the $30 to $40 million range in opex in Q1. You saw the savings was much higher than that and the difference was mainly because we had that additional currency benefit, some additional one-time benefit like vacation accruals which we changed because of change in vacation policy and also because our employees really cut things down. Hopefully, that gives you a flavor of the moving parts.

Aaron Rakers – Stifel Nicolaus & Co

Thanks.

Operator

Mark Kelleher with Brigantine Advisors, you may ask your question.

[Mark Kelleher – Brigantine Advisors]

Thanks for taking my question. V-max is certainly a great new architecture. Can you comment on the product transition issues that may have affected the SIM sales in the quarter? Gross margin, sales cycle extensions, things like that? Thanks.

Joseph M. Tucci

Hi Mark it’s hard to say. We did hundreds and hundreds of NDA, non-disclosure agreements with customers telling them about V-max so obviously it was well known how much that affected the quarter versus the general economic environment is hard to say. For sure, most of it was the economic environment but clearly there was some stalling in the Symmetrix line as customers did wait for V-max and obviously we have a very carefully planned transition here. This is the biggest change as Dave Donatelli and his team pointed out in the announcement, this is the biggest change in the history of Symmetrix in terms of architecture and approach with the scale up and scale out architecture, the switching of underlying engines. So, I expect this transition could take a little longer than normal but, it’s going to be strong and it’s going to increase the addressable market for Symmetrix so we have a tremendous belief in the success of this product.


Tony Takazawa

Thanks Mark. Next question please.

Operator

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

Toni Sacconaghi – Sanford Bernstein

Yes thank you. I just wanted to explore the gross margin question. David, I think you had said that it was almost entirely due to volume. Can you comment on what percentage of your COGS are fixed today? Is that 20% to 30%, how we should think about that? And then secondly, you said almost all of it was related to fixed cost but Joe said we provided additional financial benefit to customers, which to me sounds like a subtle way of saying that you were more flexible on pricing. So, can you comment on what impact you thought pricing had in the quarter and whether that was more pronounced on larger deals or in certain segments?

David I. Goulden

If you look sequentially gross margins for infrastructure were down about three points. Over 80% of that reduction can be attributed to volume. We did as Joe mentioned, offer customers some pricing programs so there was a little bit of what I call mix/pricing in there and by mix obviously you saw we had relatively better performance in some of our international markets. Some of those carry a lower gross margin, places like China, so that impacted things a little bit. So, despite the fact that we did offer customer pricing incentives, basically we were able to offset most of those through the continued reduction in costs through our supply chain and there was very little net impact over and above volume and mix from a geographic point of view in the quarter.

Tony Takazawa

Thanks Toni. Next question please.

Operator

David Bailey with Goldman Sachs, you may ask your question.

David Bailey – Goldman Sachs

Yes good morning thank you. I’m just trying to parse through your comments about 2009. You say the profitability should improve in the second half of the year compared to Q1. Does that imply that profitability in Q2 will be flat or down?

David I. Goulden

We actually don’t make any specific comments about Q2 but I did mention a couple of factors that will impact that. I mentioned that VMware will cost us a couple of cents of EPS in Q2 basically $0.01 roughly from their operating performance EBIT, $0.01 from the impact of FAS 86 software capitalization so those are headwinds we have to push against in Q2. They’re not insignificant headwinds. Obviously offsetting that we’ve got some additional cost reductions as I mentioned to you we did have some things in Q1. The cost side that won’t recur in Q2 so there will be a bunch of puts and takes so we’re not calling a number for Q2 specifically but you can see how some of those moving parts might impact Q2.

Joseph M. Tucci

To give you just a little bit of color, I’m not going to repeat what you just said. I do not see an improvement in Q2 over Q1 for the industry. I basically believe that I don’t believe that the IT spending is going to get – that will be pretty close to the bottom, I just believe that. I’m not saying you’re going to see a significant pickup in Q3 but I do think as we get into Q4 you’ll see some and then I think obviously the recovery will be slower than normal coming out of there. So, that’s what I believe and that’s the environment EMC is operating in. You saw our Q1 results, so you have to make your own judgments.

Tony Takazawa

Thanks David. Next question please.

Operator

Bill Shope with Credit Suisse, you may ask your question.

Bill Shope – Credit Suisse

Okay thanks guys. I just want to get a little more clarification on the opex savings based on your previous commentary. Are you guys saying that a large portion of the 1Q opex savings were outside of the official restructuring program? And, would that imply that we should be thinking about pulling the savings off of a run rate from 1Q opex or am I misunderstanding that?

David I. Goulden

Bill, just to help you quantify it, roughly half of the opex savings in Q1 were kind of things that were over and above the official cost savings program. So, when you look at the $90 million we saved on a non-GAAP basis opex year-on-year I think in terms of kind of half of that came from our published cost reduction program and the other half came from the three other factors I mentioned that add up to again roughly half the total savings.

Tony Takazawa

Thanks Bill. Next question please.

Operator

Katie Huberty with Morgan Stanley, you may ask your question.

Kathryn Huberty – Morgan Stanley

Thanks good morning. David, you mentioned linearity was skewed towards the month of March and the quarter. Was that the case for both enterprise and the channel business or were the stories different in the two segments?

David I. Goulden

Katie, it was certainly March was better in both. It was more pronounced in the enterprise but we did see improvements in March relative to January and February from a tone in the other segments of the business as well, but, mainly in the enterprise.

Tony Takazawa

Thanks Katie. Next question please.

Operator

Brian Freed with Morgan Keegan, you may ask your question.

Brian Freed – Morgan Keegan & Company

Hey you guys spoke to the broader IT market in your view but with respect to the storage market specifically how do you think that’s going to fare from a forecast perspective in ’09? And secondly, can you speak briefly as to trends April to date?

Joseph M. Tucci

When you think of the infrastructure Brian and you think of the three major elements: network; storage; and servers, clearly of those three I believe storage while you’ve seen the declines for Q1 in the companies, I think if you add that all up I think you’re going to be someplace in the mid teens and I think you’re going to be probably 20 or north of 20 in the server market and based on some of the guidance we’re seeing in the networking space that will probably be a little bit north of where the storage is also. I think this is one of those times when all infrastructure elements are going to be affected. I do think compared to the two other major elements it will be a little bit better but still going to be affected.

Tony Takazawa

Thanks Brian. Next question please.

Operator

Keith Bachman with Bank of Montreal, you may ask your question.

Keith Bachman – Bank of Montreal

Hi thank you, David for you, I wanted to follow up and ask about gross margins, specifically it sounds like we should be thinking about having gross margins being flattish in the June quarter, question number one. And then secondly, my understanding of the cost cuts that would layer into the gross margins, those would likely be eaten up in the second half of the year in such that we should be thinking about volume variances potentially helping gross margins in the second half of the year. But, I just wanted to see if you could offer any color on gross margins generally. Thanks.

David I. Goulden

Sure Keith. Again, trying to keep off being specific around the June quarter because we’re not giving guidance but basically we expect the environment that drove margin to the Q1 levels to kind of continue to persist in Q2 so other than a little bit of cost savings, which could be offset by customer pricing programs, not a lot of moving parts relative to Q1 and Q2 in the gross margin side. And yes, volume as I mentioned was the biggest driver of the margin reduction from Q4 to Q1 so assuming our predictions are correct and we see more spending in the second half with volumes picking up that will be a positive impact for gross margins in the second half.

Tony Takazawa

Thanks Keith. Next question please.

Operator

Rajesh Ghai with ThinkEquity, you may ask your question.

Rajesh Ghai – ThinkEquity

Good morning. I had a question following up on product margin. I understand that a component of that was related to volume, a component of that was related to pricing pressure. Now given that we’ve been in a recession for about a year and a half now and pricing has been a little weak, do you see pricing returning when demand picks up? Just kind of if you can give some color on that going forward, how does the pricing trend?

Joseph M. Tucci

Dave will give you more details but if I understand your question, I mean you’ve got three factors here the decrease in volume is causing most of the pain. We are giving some better pricing so that’s causing some pain. On the other side as part of our kind of austerity program and cost control we are getting some good gains in the COGS area in terms of savings and of course that goes the other way. I don’t know David if you want to add to that. That’s definitely a decrease in volume, definitely a decrease from discounting and definitely a pickup because we’re doing a better job on COGS.

David I. Goulden

I think your question was when things return, where does pricing power sit? I think as Joe said, it’s going to be a slow pull out when the pull out occurs. So, we don’t see a lot changing on the pricing side. Many customers are still looking for a great value. We mentioned that we’re doing a number of things to kind of help them through customer programs. We’ve been able to offset most of that through our cost reductions in our supply chain and we don’t see that environment changing in the foreseeable future.

Joseph M. Tucci

Obviously, the whole game for us is to also take share. This is why we’re continuing our significant level of investment, more than double anybody else for sure in R&D and storage and that’s why we’re keeping our sales organization, support organization strong to make sure that we can capture those opportunities. That’s a very important part of how the volume starts going the other way in the future.

Tony Takazawa

Thank you. Next question please.

Operator

Bill Fearnley with FTN Equity Capital, you may ask your question.

William Fearnley – FTN Equity Capital

Yeah thanks guys. I wanted to ask some more questions on the CLARiiON if I could. Could you give us some more color on the direct, indirect and Dell mix for CLARiiON? And, given the performance in the first quarter, what are your expectations here for the CLARiiON line in the mid range here in the near-term?

David I. Goulden

Well I mentioned Bill, first of all we told you that Dell sequentially compared to Q4 represented just a little bit higher percentage of the CLARiiON mix and that’s indication that Joe mentioned that we’ll be working on the Dell EMC alliance. We gave you a view that overall IT spending won’t be significantly different in Q2. On the other hand, CLARiiON and our mid tier products in total, particularly on that are very, very strong. You see how well unified storage was doing. When you look at our three C’s together, CLARiiON, Celerra and Centera, it’s still very competitive mid range offering and you saw that despite the fact that the market was down enormously we saw continued growth in our NAS range and the unified storage aspect of our NAS box which use a lot of the same components, as a client was actually very, very strong. I’d also mention relative to the Dell alliance that Dell now is also starting to resell the NX4 so they’re taking advantage of some of the NAS technology from us as well.

Tony Takazawa

Thank you. Next question please.

Operator

Kaushik Roy with Wedbush Morgan, you may ask your question.

Kaushik Roy – Wedbush Morgan Securities

Thank you. During the quarter did you do any share buyback and if not, why not?

David I. Goulden

We did not do any buybacks during the quarter. As we mentioned before we’re going to be opportunistic during 2009. We want to make sure that we see how the market plays out and keep all of our options open moving throughout the year.

Tony Takazawa

Thanks Kaushik. Next question please.

Operator

Jayson Noland with Robert W. Baird, you may ask your question.

Jayson Noland – Robert W. Baird & Co

Yes thank you. David, a question on annual revenue linearity, if you look at ’07, the back half contributed about 54% and then in ’08 about 52%. It sounds like we should expect this year to be more exaggerated to the second half?

David I. Goulden

Jayson, I think we’ve given you a couple of hints in terms of what we expect Q2 to be like given our view on the markets and then we said there will be some up-tick from that. The reason we’re not giving you anything more than that is because we really don’t have a good handle on how big the up-tick could be or how fast it will happen. But obviously if it does occur that would give us a relatively stronger second half.

Tony Takazawa

Thanks Jayson. Next question please.

Operator

Glenn Hanus with Needham & Company, you may ask your question.

Glenn Hanus – Needham & Company

Good morning guys. I wonder if you could comment a little bit on the ORACLE Sun development and how you work with ORACLE in the field and on an R&D level today and obviously, there’s a new competitive element introduced and how that all changes the dynamics for you with ORACLE going forward?

Joseph M. Tucci

Obviously, it will change the game to some degree. The name of the game has always been competition. A significant number of ORACLE’s big customers rely on EMC’s infrastructures and ORACLE is going to continue to work with us as an important partner. We’re going to continue to work with that, that’s clear. That commitment is there both ways. Obviously, what’s happening here in the market is ORACLE is building a vertical stack and that they’d like you to use more and more that vertical stack. And then of course, others are doing the same and the problem that that gives CIOs and IT professionals is that each of these stacks looks different, gets managed different, has different processes and procedures. What we do is we have a stack also but our stack is horizontal. So, if you look at our storage, it supports the ORACLE stack, it will support the Microsoft stack and IBM stack, etc. If you look at VMware for instance, it’s the same thing, if you look at security the same thing. So, we’re building the stack horizontally and that has a lot of appeal. So obviously, there’s a battle on which should win the multiple vertical stacks or basically managing your information and your virtualization horizontally which is obviously the way we think will win. So, if a customer chooses a way, ORACLE will work with us but obviously they’ll push their way and we’ll push our way and that’s the way its been for a while and ORACLE has obviously raised the stakes in that game and obviously as we did vSphere and V-max, we’re raising the stakes in the game too. I’m not saying business is exactly the usual but it’s the same battle that we’ve been fighting for a while and the horizontal stacks that we’re building have great applicability and great interest in IT professionals.

Tony Takazawa

Thanks Glenn. We have time for one more question please.

Operator

Mark Moskowitz with JP Morgan, you may ask your question.

Mark Moskowitz – JP Morgan

Yes good morning, thank you. I want to see if you can give us a little more color around the market displacement that you’re benefiting from in terms of Celerra? Are you winning from NAS vendors historically or are these more standard installations historically? And then secondly, on the supplemental revenue analysis can you give us a little bit more background in terms of why we don’t see the software maintenance and license breakdown anymore?

Joseph M. Tucci

I’ll take the first part and let David do the second part. Clearly, we are winning these from NAS vendors and these are winning in the iSCSI. In other words if you say you want to use a SAN and you say you want to do iSCSI you’re also probably going to have an opportunity and a need to do file and print for file sharing and then you need a NAS engine too. So, what we do is basically say, “Hey we’ll give you both in one.” That is really appealing to customers. So, this share is clearly being taken from the iSCSI world and it’s clearly being taken from the NAS world. The fact that we do them so well out of a single, and we can also do by the way for fiber channel, so, we go all three ways and that is incredibly appealing so we’re absolutely taking share from iSCSI and absolutely taking this share that we get from NAS. David?

David I. Goulden

So Mark, on the supplementary schedule you are correct, we’ve moved the reporting. We’ve actually simplified it to just the looking at the product lines and the services line combined. We think that’s a more consistent way that people look and report externally. Specifically, one of the major reasons is there was a lot of confusion around our storage business about hardware software mix and we said that’s not really the way we go to market. We sell solutions. So look how our product revenues are doing and look at how our gross margins are doing and we’ll make it very clear to everybody going forward exactly what the puts and takes are around product revenues and gross margins in storage. So, we think that’s just the right way to go to create a clearer and more consistent view of our financial statements.

Joseph M. Tucci

The closing message I’d like to leave you with today is this, I believe that we have the vision and strategy in place for us to win and prosper. I believe we are balancing the realities of today with the opportunities for tomorrow. We are reducing costs. We are investing in innovative products and services. We are investing in our sales and support engines to bring us more customers and maximize our revenues both this year and beyond. I believe we are doing what we need to do for this environment. Most important is that the EMC troops are up and they’re motivated and we will be successful. Thank you very much for joining us today and I’m sure we’ll be talking. Bye-bye.

Operator

Okay this call has concluded. Please disconnect at this time.