Profit Climbs at EMC

Updated from 10:07 a.m. EDT

Data storage company EMC(EMC Quote) on Tuesday beat second-quarter sales and profit estimates on double-digit gains in its core storage business.

The company's net income rose about 20% to $334 million, or 16 cents a share, from $279 million, or 12 cents a share a year earlier. This beat analysts' average earnings estimate by a penny.

Revenue jumped 21% to $3.12 billion, topping analysts' forecasts.

This was EMC's strongest quarterly gain since 2004, dispelling the notion -- at least for the moment -- that the company is dependent on its subsidiaries for growth.

In a statement, Chief Executive Joe Tucci said that EMC achieved "solid revenue growth that was well balanced across our systems, software and services businesses and all major geographies."

For the full-year, EMC says investors can expect earnings to exceed 64 cents a share and revenue to surpass $12.7 billion. Earlier, the company had said that it would at least meet these targets, but gave no indication that it would beat them.

Analysts' average forecast is for earnings of 68 cents a share and revenue of $12.7 billion.

Information storage revenue, EMC's core business, rose 12% to $2.5 billion, outpacing broader market growth of 8%. Purchases of midrange products aimed at small and medium-size businesses grew 34%, and proved to be the fuel behind EMC's quarterly growth in storage sales.

EMC expects its data storage business to continue growing faster than the overall market rate, suggesting that it will take market share from its primary competitors Network Appliance (NTAP Quote) and Hewlett-Packard (HPQ Quote).

Sales through Dell (DELL Quote), which packages EMC's Clariion storage technology with its servers, accounted for about 35% of this growth.

Sales of high-end storage technology for large commercial clients rose about 3%.

EMC says the commercial data storage market will continue growing in the low-single digits, but it expects sales to accelerate after the release of an updated version of its Symmetrix storage product for large enterprises.

VMware, EMC's fast-growing virtualization subsidiary, saw its sales leap almost 90% to $298 million. Virtualization is software that helps companies make the best use of hardware like data-storage appliances and computer servers.

"We're going into favorable prod cycle, and we expect to take share," said Tucci in a conference call.

EMC plans to spin off VMware in an initial public offering this summer, but it will retain about 90% of the common stock and nearly all voting rights.

Revenue from EMC's data security arm, RSA Information Security, jumped 21% to $125 million.

EMC has taken steps to integrate security features into its new data-storage products. Security is expected to be a key feature driving sales in the second half, along with demand for storage products with lower maintenance and power consumption requirements.

Security and virtualization fueled the company's 27% growth in software licensing and maintenance revenue.

Software's growing contribution to total revenue helped EMC's gross margin widen to 54.4%, an improvement of 1.7 percentage points.

Demand growth was strongest in the Asia-Pacific region, where revenue jumped 32%. EMC recently hired a former Fujitsu executive as its country manager for Japan, considered to be an important market in the second half.

EMC's primary market, North America, saw revenue grow 20% and accounted for 58% of total revenue.

EMC's growth came at a cost, however. Spending on research and development rose 28.5%, outpacing gains in total revenue and net income. This appears to be a lasting trend arising from greater investments in security and virtualization software.

Software licensing and service contracts, however, add an element of stability to the company's sales and cash generation because they provide recurring revenue streams.

In the quarter, EMC generated $622 million in cash from operations, a 59% increase. Free cash flow, which accounts for large expenditures such as acquisitions, surged 123% to $422 million.

Shares of EMC were off 22 cents, or 1.1%, to $19.29 in midday trading.