Good morning and welcome to the EMC Q4 2013 Earnings Conference Call. All parties are in a listen-only mode until the question-and-answer portion of today's call. As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce your host, Mr. Tony Takazawa, VP of Global Investor Relations of EMC. Thank you. You may begin.

Thank you. Good morning. Welcome to EMC's call to discuss our financial results for the fourth quarter and year 2013. Today, we are joined by EMC Chairman and CEO, Joe Tucci and David Goulden, EMC's CFO and CEO of the EMC Information Infrastructure business. Joe will begin our discussion with his view of the trends happening in IT, EMC's vision and strategy and how the EMC federation is managing the transition to the third platform. David will then make a few comments on our results and provide a bit more color and detail around the factors contributing to our results. He will also discuss our outlook for the year 2014. After the prepared remarks, we will then open up the lines to take your questions. We are providing you with our projected financial model for 2014. This model lays out the key assumptions and discrete financial expectations that are 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 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 press release, supplemental schedules and the slides that accompany our presentation. In addition, all financial comparisons will be on a year-over-year basis unless otherwise indicated. As always, the call this morning will contain forward-looking statements and information concerning factors that could cause actual results to differ can be found in EMC's filings with the U.S. Securities and Exchange Commission. With that, it's now my pleasure to introduce Joe Tucci. Joe?

Thank you, Tony. I would like to begin by welcoming everyone to today's call. Thank you all for joining us. Overall, I am pleased with our Q4 results as our year-over-year revenue and non-GAAP EPS, both grew at 11%. This acceleration of our topline growth was broad based the majority of our businesses, a clear sign that our strategy, products and business model is resonating well with our customers and their confidence in us is resulting in strong market share gains against our large competitors. Looking briefly at 2013 as a whole, we came in pretty much in line with what we told you at our last call in October. Revenue of $23.22 billion, up 7%, non-GAAP EPS of $1.80, up 6% and we produced slightly more than $5.5 billion in free cash flow. As I said last quarter, we are disappointed we didn't hit our original goals of $23.5 billion in revenue and $1.85 per share. We are, however, proud that we did hit our $5.5 billion free cash flow goal, grew revenue considerably faster in the markets we serve and substantially faster in the overall IP market. And we did this by investing heavily in our future. A future that focuses is on higher growth markets. I would like to thank the 63,000 plus people of EMC, VMware and Pivotal and our value-add partners all over the world for their hard work and dedication to the success of our customers. I would like to give you our view of what is happening in the IT market right now. To be clear, the IT market is going through the biggest, most disruptive and yet most opportunistic transition in its 60 plus year history. At this particular time, the pace of this transition is accelerating. As we have said before,…

Thanks, Joe. Good morning, everyone and thank you for joining us today. For the fourth quarter of 2013 EMC achieved revenue and non-GAAP EPS growth of 11% and in the year in which IT spending was less than expected and several of the largest tech peers declined we achieved relatively strong topline growth of 7%, non-GAAP EPS growth of 6% and free cash flow growth of 10%. This increase in revenue for the full year reflects growth across the federation, as Pivotal grew 15%, VMware grew 15% and EMC Information Infrastructure grew at 5%. Together this outperformance relative to the industry demonstrates the strength of our strategy. We are making the right bets, investing in the best technology and building the most complete portfolio to transition customers from the second the mobile, social, cloud and big data driven third platform of IT. As a result, we feel very good about where we are right now and where we go from here. The second platform of IT continues to support the vast majority of enterprise workloads and customers contained at these environments. We are a market leader here and we will continue to gain share in the second platform. At the same time, we have more plays in the third platform of IT than anyone else and establishing this beachhead helps ensure on market leadership will extend far into the future. And we are better equipped than anybody else to help customers bridge the gap as they transition from second to third platform with technologies that like converged infrastructure, where we are the market leader, ViPR where we are unique in our ability to provide such far-reaching and sophisticated software defined storage and the software defined data center capabilities of the vCloud Suite. While much of what we have been preparing…

Thanks, David. Before we open up the lines for your questions, as usual we ask you to try and limit yourself to one question, including clarification. This will enable us to take as many questions as possible. We thank you all for your cooperation in this matter. Sandy, can we take the first question please?

Thank you. Our first question is from Amit Daryanani of RBC Capital Markets.

Thanks a lot. Good morning, guys. I have a question just around the March quarter guide. I want to understand if that actually includes the $100 million to $120 million of restructuring initiative that you guys have talked about today. If so, what sort of payback are you expecting out of this initiative? When do you expect those savings and it is naturally the driver of the changes you talked to proven the backend loaded nature of the quarterly you have experienced in 2013.

Amit, this is David. Let me take that. Good morning. Think of the restructure as more of rebalancing activity, very similar to what we did last year within EMC information infrastructure. As we continue to move more of our people into the third platform R&D part of the business, we have had to go - reduced resources, some areas build the resources in other areas. Last year when we did this, we actually wound up with about 2,000 people more at the end of the year than we start off with. This year we expect to probably end the year flat or slightly up in EMC information infrastructure. Just think of it as rebalancing rather than a year restructuring. The impact of that is backed into the Q1 guide. That is not related to what I told about in terms of the quarter end business practices. The quarter end business practices, which has really impacted Q1 revenue guide is the fact that we are changing the way we want to run the factories at the quarter end, reduce our inventory levels, reduce the amount of overtime, expedite shipping costs et cetera, which will result as a byproduct in a higher volume of orders we cannot ship during the quarter will set a higher definitely backlog and that higher backlog is a results of the new business practices what is driving the Q1 revenue guide. To tie those two back together, there is probably a little bit of the year rebalancing charge that ties to that, but only a minor, minor part.

Got it. Thank you.

Next question please?

Thank you. Your next question is from Alex Kurtz of Sterne Agee.

Yes. Thanks for taking the question. David, just looking at the Q1 guide and thinking about the year here, you are trying to factor your new strategy on a month-three kind of practices versus the broader concept of a product refresh and VNX XtremIO and potentially a refresh of VMAX. I mean, historically those have been catalyst for product growth and I am trying to understand why Windows help the first half of the year balancing that against your guidance here?

Alex, that will help. What we have is this effect, so the new products are definitely going to help us from an order flow point of view going through the year. As I mentioned, we entered year this year with a really strong portfolio, I would say stronger than the same time last year. That's going to help in the absolute sense and also help with just taking share during the year, but again the factors that we are talking about are going to drive us with a higher percentage of orders that we cannot ship during the year. Particularly in Q1, you will see the impact of that. but I will point out this will not impact the full year because the business practices that I am talking about are actually the way that we end our fourth-quarter anyway. So said differently we are applying some of the ways that we close our fourth quarter where we do not try and ship everything that comes out in the last few days over the quarter and we are taking that practice and applying it to the other three quarters of the year. So that's why you see the seasonal impact occur in Q1 but not impacting the revenue guide for the full year. So back to Q1, the reason for difference in the revenue level from an average to the actual guiding numbers is related to with this change in business practices and you are right, we will see some benefit from order flow during the quarter that will be masked by business practices change in revenue.

Thanks.

Thanks, Alex. Next question, please.

Thank you. Your next question is from Keith Bachman of Bank of Montreal.

Hi, David. I wanted to see if you could revisit on the gross margins in Q4. I wasn't entirely clear about why gross margins were down and what we heard was it was a bit more aggressive than normal this quarter in terms of pricing. So if you could address the storage products. And within the context of answering it, again why gross margins are down, could you speak to against the backdrop of your operating margin target for calendar year '14 to being 25%? How should we think about gross margins in calendar year '14, both on a consolidated level and at the storage products level? Thank you.

Hi, Keith, always you have multiple thoughts there. But let me provide some type of aspect because I am sure that will come out at some point in time during the conversation this morning. So let me recap. The reason why gross margins were down in Q4 was related to the storage business. There were two factors that impacted the storage business. The first is storage product margins. Very important to understand, that the booking margins, so the margin we got on the orders that we took it was essentially flat year-on-year in the fourth quarter. So we did see some pricing pressure but relatively offset of that out with positive mix towards our software and higher margin products. So our booking margins was flat. This is the most important point. The reason why the revenue margin was down is, of those bookings the revenue that we took, of those booking that we had revenue this quarter, the mix of those was lower margin than the bookings we took to revenue last quarter. So you saw essentially flat bookings turning to lower revenue margin because of the mix. Ergo, we obviously had higher margins in backlog exiting this year, last year we did exiting 2012. That's what was the really major driver. Now the other driver of margins is what's been happening all year in the services business. We mentioned to you on a few occasions that in our maintenance business, we had a high-level of field service activity due to components out there in our products which just brought margin down on services. So that's the storage issue. Now fast forward into next year, n what we expect at the EMC II and therefore at the storage level is approximately flat gross margins for a couple reason. One is that year-on-year those service activities are expected to normalize out. And then, if you think of the things that impacted us this year on the product side, it's the higher quarter in closing costs and we have taken steps to impact those. Then of course, we got the issue that impact us in Q4 doesn't really drive a huge amount of change for the full year in 2014. So were expecting going forward in 2014, at the II level, relatively flat gross margins, relatively flat operating margins and at the consolidated level, due to the mix shift towards VMware, expecting both gross margins and OpEx to be up slightly and giving us a slight boost in operating margins.

Thank you, David.

Thanks, Keith. Next question, please.

Thank you. Your next question is Shebly Seyrafi of FBN Securities.

Yes, thank you. So your guidance for the year, $24.5 billion, I it is below the consensus of $25 billion. You seem to indicate that you are going to be below your prior plan because of these core inventory balances in Q1, but, make up for it in Q4. But it seems to be that if you look at or if you take VMware's guidance last night and make reasonable assumptions on II and Pivotal and security, it seems like the storage revenue growth which was about 5% per year in 2012 and 2013, is going to decelerate to like 2%. So it seems like fiscal Q4 won't make up for the below expected result in fiscal Q1. I am wondering if there are other factors explaining this. Are you seeing the storage market slowing down because of the movement to the cloud and other factors? Are you in fact saying or believe that your storage segment will decelerate to roughly 1% to 2% from 5%?

Let me talk about that. The historic numbers for the storage segment are correct was in 2012. It's actually 4% in 2013, and the guidance is based upon a 3% number in 2014, not the 2% number which you mentioned. You have to make some adjustments from VMware down low into VMware and EMC et cetera to get to the numbers together.\ Relative to what's happening, we are as I said, expecting IT spend growth and storage spend grow to be relatively similar to what they were this year, so market conditions relatively are the same. The reason for a slight deceleration in the storage business growth in 2014 is really here to rebalancing of the revenue growth rates between product and services. The last couple years we have been really maximizing the potential of our installed base from a maintenance point of view. You have seen services revenue grow a lot faster than product revenue, so for example in 2012 you saw a wide discrepancy between those two. As we go forward into 2014, we have really capture the opportunity. We expect those rates to up to normalize, so the product revenue growth across those for years actually relatively consistent and that's really the biggest reason why you are seeing a slight deceleration in 2014 versus 2013 in the storage business.

Next question please?

Thank you. Your next question is from Brian Marshall of ISI Group.

Great. Thanks, guys. It seems like the last couple of quarters we have had a little bit difficulty kind of forecasting sort of intra-quarter metrics. I mean, in September, it was obviously mix related and some push outs into the December quarter. Then this quarter obviously the margins with respect to what was shipped and actually what was booked seem to be half by decent amount. Can you talk about any action that's possible with respect to quarter end business practices at accompany that alleviate some of these anomalies that we have seen over the past six months? Thanks.

Brian, that really comes back to the first thing I talked about in terms of changing our quarter end practice, particularly relative to quarters one, two and three. Basically, having a more measured quarter end process, where we are not carrying as much inventory, we are not having as much factory overtime, we are not as dependent upon shipping its high percentage of orders coming into the last week as we used to be. That should help, cost should help with predictability. That really is the change that we are making. Now as I mentioned and you said this being a factor in Q4, we are not changing our Q4 end of quarter, because we carry more meaningful backlog at Q4 end, but we do believe that as we implement these new processes, we are going to actually take a lot of stress out of the system and make the results in the quarter much more predictable.

Let me just add a little color. This is Joe. If you looked at this time of the year and going back to 2012, the analyst expectation for growth for macro IT was 3% to 4% and it ends up doing a tick below 3%. If you go back a year, the analyst expectation for 2013 was 3%, we did about 2%. Now this year, it's the analyst expectations of 3% to 4% and we are still staying at 2%. We are going to stay at 2% until we see the lights in the market. Why? Because, there's little bit off the last two years. That said, I personally see more upside to that 2% that we are calling than downside, which I probably would have said the last two years. What David said is - and exactly to the point you are making, we just have to get - it's going to be very good for business with David's leading it to build bigger backlogs, so our bookings rate and our revenue rate will not be the same as it's been pretty much in the last few years. We are going to try to keep more bookings which basically let us have more efficiency and I think more predictability in the business and I think you as investors and people that watch us will be happier as we get into that trend. Obviously you are going to take some medicine and that's what we are telling you we are taking and I gave you my view on the market growth and forecast and we are viewing it the fact that I see more upside to that 2% than downside.

Thanks, Joe.

Thanks for the question, Brian. Next question please?

Thank you. The next question is from Kulbinder Garcha of Credit Suisse.

Thanks. I want to just kind of go back to that previous point. This question is for Joe and David, I guess. Going back to the issue of just the product revenue growth being around 3% this year, David. I guess you said at various points that you are very confident about your product portfolio. If I think about 2014, VNX2 was slightly delayed. It sounded like it will have full year impact this year. You have got the impact of XtremIO which seems to be going quite well. On top of that you are going to probably have a refresh, I imagine, in the middle of the year, to several of your product lines. So why can't you gain more share than that revenue growth implies? Are you being very conservative? Or have you thought about he the capacity to gain shares? And I am thinking about that in the context of the comments you made about pricing environment. It sounds like it's a bit more challenging than it maybe have been for a few quarters. Many thanks.

Yes, Kulbinder. We are taking a conservative view of what we think the market growth will be and we expect to gain share against that market. Obviously there are a number of things in our favor. Our product cycle is very strong. We also recognize that CIOs right now are being very cautious in their spend. Joe talked about the real challenges that CIOs are facing in terms of trying to figure out how they are going to play in the third platform which is still in the early innings, how they really get cost out of the second platform while drive efficiency in the second platform infrastructure. So what we are seeing is a little bit of a pause in the market as people work through how this transition impacts a lot of their spending and more people are spending just enough and being a little bit cautious about rolling out quite as many big projects as they used to. So we really are factoring what we are seeing in the market and the dilemma that the CIOs are facing into our thoughts about how the year might in fact play out. So we are taking a conservative view of IT spending. We are taking a conservative view of how rapidly people spend in both existing areas and new areas. Of course, we have a got a lot of things going for us. It's not by accident we gained a lot of share in 2013 in storage. We gained share because we built the strongest portfolio, the most complete portfolio with a market-leading converged infrastructure and those are the reasons why we gained share. The best go to market team out there is our services team. And those things are all factors for us in 2014. So we are confident. We are just being a little bit cautious about the spending environment.

I think you look at it, you know, that we are just cautious but prudent also. If you just look at Q4, we just grew topline and EPS at 11% and you look at our peers across the industry. There is just nobody doing that and then basically we told you in the revenue, we took a richer, there was a richer mix of margin that was taken into Q1 in 2014. You look at our new businesses, right. The stuff we do sell totally in, what we term as platform three, that has a $2 billion run rate that had 70% growth, right. Look at the value that those kind of companies are getting in the marketplace today. We are in a great position. It's basically, we are just going to get a more rational operating model which I think will pick up profit and make us more predictable going forward, which I think the investors are going to like. We just have to transition to that but I am very optimistic about 2014 and our opportunities. We are much more relevant. The conversation we are having with customers are much more relevant and strategically relevant than it has ever been in the past. So we are positioned very well.

Thanks, Kulbinder. Next question, please.

Thank you. The next question is Ben Reitzes of Barclays.

Yes, thanks. Joe, obviously you can't really talk about before you do it, but in terms of what you laid out in the beginning, what does that say about EMCs acquisition strategy? And as you balance the cash returned to shareholders versus the gaps in your portfolio. Sometimes in the past, you have actually been pretty forthright saying that you need some things in security or some other areas and I was just wondering if you could give us some color on what EMC's acquisition strategy might be as you attack those opportunities and try to revive growth, obviously outside of AirWatch with VMware which we already know about and how you think about that? Thanks.

Look, we are in a market where the vast majority, probably 90%, of the growth going forward is going to be VMware we term it platform three. And I went through all the assets, I won't do it again, I will spare you, that we have that's relevant to platform three inside EMC II, inside our security business, inside VMware, inside Pivotal and the way we are playing that together and the way we are giving customers choice. That's where we are gong to make investments. I am not a big believer in defensive investments We are also making a really - make sure we return cash to shareholders and continue those programs and we got a good balance and that's where I am spending a lot of my time, you know, spending a lot of my time on strategy and strategic alignment across the businesses, on talent acquisition, on capital allocation, on M&A and obviously a lot of times I always do with customers and I really can't as you as you predicted answer your question directly, but I would kind of give you a feel for kind of the way I am thinking a little bit and which is the company is thinking.

Okay. Thanks a lot.

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

All right. Thank you. Our final question is from Scott Craig of Bank of America Merrill Lynch.

Thanks. Good morning. Can you just talk about the restructuring and how you think about dropping the savings to the bottom line and maybe sort of quantify the savings as opposed to reinvesting in a business for growth and how that sort of plays out on a linearity basis as you look through the calendar year? Thanks.

Yes, Scott. Thank you. As I mentioned a little earlier, really think out rebalancing activity. We talked about the two transitions from second platform to the third platform and it's basically part of helping to fund the investments we are making in the third platform, so it is rebalancing all activities. It's not a of restructuring for just sake of getting cost out. We are going to reinvest those savings back in the business to support many of the third platform initiatives that we talked about. It's very similar to what we did last year, making clear for our EMC II, what we are doing this year is almost a mirror image of what we did last year in terms of the size of the rebalancing charge we are going to take in the first quarter, the amount of our rebalancing we expected to do during the year, so it really is a wait to fund. The reinvestments we are making in the business in the new areas and as we talked about before, the areas are either growing exceptionally quickly or have great potential, so we think it's a very prudent thing to do again it's rebalancing and both restructuring.

Okay. Thanks for the clarification.

Thank you all again for joining us. I truly believe across our family of companies, we had a really solid close to 2013. As I said, our strategic relevance with customers is very high and never been higher when customers take their kind of (Inaudible) what companies they want to look and we are on those lists consistently now. We have technologies and the people will help customers balance to help our CIOs the customers balance that basically make sure they optimize what they have today and build the bridge in a journey to the future in the third platform. We have that all important momentum and we have a great team to execute on it, so I really appreciate you being with us today and thank you for your confidence in us and we will be talking to you. Thank you.

Thank you for your participation. That does conclude today's conference. You may disconnect at this time.