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Thomas StreetEvents
Conference Call Transscript
EMC - EMC Acquires RSA Security
Event Date/Time: June 29, 2006/5:30PM ET
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Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
CORPORATE PARTICIPANTS
Tony Takazawa
EMC - VP Global Investor Relations
Joe Tucci
EMC - Chairman, President, and CEO
Dennis Hoffman
EMC - VP Information Security
Art Coviello
RSA Security - President and CEO
Bill Teuber
EMC - Vice Chairman and CFO
CONFERENCE CALL PARTICIPANTS
Keith Bachman
Banc of America - Analyst
Aaron Rakers
A.G. Edwards - Analyst
Kevin Hunt
Thomas Weisel - Analyst
Brian Freed
Morgan Keegan - Analyst
Rebecca Runkle
Morgan Stanley - Analyst
Ben Reitzes
UBS - Analyst
Andrew Neff
Bear Stearns - Analyst
Frank Timms
Robert W. Baird - Analyst
Chris Whitmore
Deutsche Bank - Analyst
Erita Clemon
Lehman Brothers - Analyst
Brent Bracelin
Pacific Crest Securities - Analyst
PRESENTATION
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Operator
Welcome and thank you for standing by. At this time all participants are in a
listen-only mode until the question-and-answer period. [OPERATOR INSTRUCTIONS] I
would like to introduce the host for today's conference, Mr. Tony Takazawa, Vice
President of Global Investor Relations. Sir, you may begin.
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Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
Tony Takazawa - EMC - VP Global Investor Relations
Thank you, Jennifer, good afternoon. Welcome to today's call to discuss EMC's
recently announced acquisition of RSA Security. On today's call we have Joe
Tucci, EMC's Chairman, President, and CEO to discuss the strategic rationale
behind this transaction. Following Joe, Dennis Hoffman, EMC's Vice President of
Information Security will provide a bit more detail around EMC's view of
information security and the benefits this transaction will bring to customers.
We will then be joined by Art Coviello, President and CEO of RSA Security. Art
will discuss the strategic rationale from an RSA perspective. Finally, Bill
Teuber, EMC's Vice Chairman and CFO, will then provide you with the financial
details of the transaction. After the prepared remarks, we will open up the
lines to take your questions. We will be making references to our slides today,
so we encourage you to view them on EMC's website at www.emc.com/announcement.
An archive of the audio and slide presentation will also be available following
the call.
Finally, I do want to note that the call this morning will contain
forward-looking statements and information concerning factor 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 is now pleasure to introduce Joe Tucci. Joe?
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Joe Tucci - EMC - Chairman, President, and CEO
Thanks, Tony, and welcome and thank all of you for joining us on today's call.
It's an exciting day for us, and I'd like to first officially welcome RSA. We
are incredibly pleased to have announced this integration with RSA, and we think
it's going to be a tremendous asset to EMC, going forward.
Let me put this in a little perspective for you -- over the last several
meetings we've had with analysts and investors and, most notably, I'm pointing
to our Analyst Day this past June 7th in New York City, we talked about EMC's
evolution from a storage company to a storage and information management
company, to where we're classifying ourselves today as an information
infrastructure company. And, indeed, the vast majority of this transformation
from a storage company to an information infrastructure company actually
happened over the last three years.
We talked about EMC's stack of technology and focused on our information
lifecycle management offerings of hardware and software starting with our tiered
storage, our protection software that goes from backup and tape to more
efficient and effective disk backup and disk replication. We talked about how we
have data mobility storage and how storage virtualization, our Invista product
was going to revolutionize that layer of information software. We talked about
our leadership position in archiving software and how we're going to unify that
with a common archive and retrieval system.
We talked about how most of information, more than 70%, is unstructured and how
that's being managed with our content management software; putting this
information into repositories and then making sure we manage that properly with
checkin/checkout version control and digital rights management, et cetera.
And then, of course, we talked about the coming, which we'll have at the end of
this year, our intelligent information management software layer, which will
feature data classification; we'll build out a metadata engine and around that
we'll be able to set and automate management policies around this information.
We talked about how to manage the information lifecycle management stack in
conjunction with other assets in your infrastructure, what we were doing in
resource management; we talked about how virtualization was basically
game-changing and wrapping that around with services is how we have now
categorized our information infrastructure strategy.
We talked about how the EMC storage business is strong and growing; we talked
about our plan over the next several years to sustain double-digit growth, and
we talked about EMC's goal to grow five businesses -- five business areas into
the $1 billion mark over the next several years. I mentioned these business
areas were VMware infrastructure, which, obviously, would have VMware as a
foundation. I've talked about content management, which would actually have
Documentum and Captiva and several other acquisitions as the foundation. We
talked about resource management being one of those $1 billion goals, which
would have Smarts and the SRM Control Center family as a base foundation. We
talked about storage virtualization being another one of these $1 billion
opportunities for us with Invista and Rainfinity as the foundation. We also
talked about our goal for information security and, of course, at that time the
EMC, I was honest, had a small amount of revenue in that space and, of course,
now as we talk through this, you can see how with RSA Security joining the EMC
family, we will have the opportunity to grow that fact on a kind of a little bit
of a pro forma basis, so to speak. We would expect this business in 2007 to
start out at about a $500 million run rate, which would be the RSA business plus
growth plus some of the EMC pieces that we also have in the security area.
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Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
So you can see, we are well underway. All these businesses are at least $500
million in size, larger, they are growing at substantial double-digit rates and,
hopefully, you can see now, as the strategy is fleshed out, we have this
opportunity of building these five new $1 billion businesses more relevant than
ever.
When you think of security of information, we have mentioned many times that as
you look at IT surveys done by almost every single surveyor out there, security
always makes the top of the list. As a matter of fact, security and storage
usually dominate the top of this list and, again, being -- having a strong
position in both of those, we think will bode well for us in the future.
I want to talk about -- we talked about acquisitions in the past, and I've
always said we have a disciplined, focused, acquisition strategy. I've
categorized our strategy as a bit of a string of pearls. These are, as you see,
from a 2006 size, the expectation from the market is that RSA would be about
$375 million in size. It is a leader in what it does, and I think you can see
that's a continuation of my pledge that I'd rather do something larger, a merger
of equal is totally game-changing to continue to move our strategy forward with
a very disciplined string-of-pearls approach. You know that we're kind of famous
for detailed plans on exactly how we're going to bring whoever we acquire into
the EMC family and make sure we maintain the talent that we bring in and make
sure that we create the leverage to this.
I've also told you that EMC, if we pull off the two strategies I talked about
earlier -- one, of continuing to grow our core storage business in double digits
as well as build these five new $1 billion businesses over the next several
years -- that would mean over the next several years we'd have a growth rate in
the mid-teens. I also said it was my kind of druthers and certainly my drive to
buy a business that was growing faster than the mid-teens. And, if you look at
RSA as according to some of the analysts out there, even a stand-alone, the
expectation is to have a CAGR over the next three years of over 20%, and we
absolutely believe that inside the EMC family with the leverage we create and
talk to you about today, that will go up from there.
Obviously, any acquisition we do -- we need to have strategic to be core to our
storage and our information infrastructure focus, and here, to me, the mandate
is clear by our customers and the technology itself. We need to make sure that
the information itself is protected; we need to make sure it can be encrypted;
we need to be able to encrypt the rest in flight, online, on disk, on tape,
across networks -- in other words, wherever digital information lives. We need
to do that. We need centralized key management software, and we have to provide
identity management and control and authorize access to that information. These
are the things that RSA brings to EMC.
In short, we fundamentally and deeply believe that the technology company that
seamlessly integrates information storage with information management, with
information protection, with information security, and centrally manages and
orchestrates this information infrastructure will be a huge winner in the
technology marketplace, and the technology that's going to do that is EMC. EMC
is where information lives and tomorrow you will see that it will be where
information lives securely. With that, let me hand it over to Dennis Hoffman,
and he'll put a little more meat on the bones and then, of course, I hope Art
puts a little more meat on the bones after that, and then Bill will talk about
some of the financing aspects. Dennis?
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Dennis Hoffman - EMC - VP Information Security
Thanks, Joe. The simple truth of information security is that no one really
thinks their data is safe. The focus and the threat has clearly shifted, and the
financial legal implications of data loss and data theft are enormous.
The reasons are twofold. First, today's information security solutions are
insufficient to address this shifting threat. They protect resources like
networks, servers, and laptops. They protect proxies for information not the
information itself, and they attempt to establish perimeters.
Second, information lives, and it moves. It's in constant motion through its
lifecycle, whether that's in the form of an e-mail, a backup tape, or a laptop
walking out the door every night. In short, information leaves the perimeter,
and when it does it leaves its security behind.
So the approach to securing information needs to change fundamentally. It's
clear that information security is becoming an information management problem.
It's changing from network-focused and perimeter-centric to data-focused and
information-centric, and organizations of all sizes are realizing they simply
can't secure what they don't manage.
The strategy, which we've previously articulated, is aimed at addressing this
very challenge, comprised of four integrated elements. First, assessing the
security of information; second, securing the information infrastructure that
holds it; third, moving beyond the security of the infrastructure to actually,
more directly protecting the confidentiality and integrity of data itself.
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Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
And, finally, closing the loop on this process by assuring policy compliance in
a way that doesn't kill organizations with regulation compliance.
The foundation of this strategy is securing the information infrastructure and
protecting the data. To secure the information, you have to secure the data
itself, you must secure the user's access to it. That requires authentication,
authorization, and encryption seamlessly integrated with the infrastructure that
stores and manages the information.
Every interaction, transaction, or communication starts with a trusted identity
or all the rest of the security measures are wasted and all information is
ultimately stored and managed over its lifecycle, or its value is diminished
drastically. That's why EMC and RSA are coming together. To tell you more about
that, I'd like to introduce Art Coviello, President and CEO, RSA Security. Art?
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Art Coviello - RSA Security - President and CEO
Thanks, Dennis. First, I'd like to say on behalf of all RSA employees that
we're thrilled to become part of EMC. We'll be able to fulfill our vision of
protecting online identities and digital assets while leveraging the financial
strength of EMC but, more important, EMC's solution and expertise information
lifecycle management.
You know, security has evolved as an independent industry because security was
not designed in as IT infrastructure and the Internet were developed. It has
become increasingly clear to us due to the changing nature of security threats
as well as the evolution of the Web and ubiquitous access to information that
security has to be part of the information infrastructure. The combination of
EMC and RSA will be of tremendous value to our joint customers because,
together, we are the only company with the people, technology, and solutions to
be able to achieve this vision.
I'm enormously proud of our record of innovation and accomplishments over our
20-year history. Our record annual revenue of $310 million in '05 was followed
in Q1 of '06 with a 30% year-over-year growth in orders netting better than 20%
growth in revenue.
Picking up on Dennis's comments -- securing information is about managing the
relationship between people and data. Managing access to data, the people side,
requires that we authenticate users, establish and manage their identity,
authorize what they can and can't do, and maintain a record of what they have
done -- audit. In addition, we need to secure data wherever it resides as it
moves throughout its lifecycle. To do this, we need to encrypt the data and
manage the encryption keys used to encrypt that data. RSA provides the
technology to meet both of these needs and support the core parts of EMC's
information-centric security strategy.
How do we accomplish this? In short, we bring the industry's leading solutions
for enterprise security, consumer protection, and data protection. I am now
going to take you briefly through each of those solution groups beginning with
enterprise solutions. Our enterprise solutions focus on protecting and
leveraging trusted identities. In this day and age, as Dennis mentioned, a
digital identity is the starting point for communication, interaction, and
transactions that take place electronically. RSA's focus is in making sure that
all those digital identities can be trusted. RSA's Secure ID is the
industry-leading one-time password authentication in multiple form factors
including tokens, USB devices as well as capability on PDAs and cell phones
offering organizations and their users a wide range of options depending on the
level of convenience and security desired. Our RSA Secure ID solutions ensure
the authenticity of the users as they access data and take part in transactions.
On the back end, we offer truly differentiated authentication management that
can support large-scale deployments across organizations of any size.
But what value does a trust identity have in isolation? Absolutely none. It
needs to interact with the world around it. It needs to access corporate data;
it needs to get e-mail; it needs to transact online; it needs to be leveraged
or, better yet, the identity needs to be empowered to do useful things and here
we have a broad range of solutions for our customers including our access
manager to enable single sign-on and access management for Web apps, RSA sign-on
manager for single sign-on within the enterprise, and RSA federated identity
manager for across domain, single sign-on in the form of Identity Federation.
There are obvious synergies with EMC in this area. Quite simply, RSA is able to
offer EMC customers the ability to ensure that only authorized users gain access
to corporate information, and RSA solutions can make access to this information
even easier without compromising security.
In addition to our enterprise solutions, we offer the industry's leading
authentication solutions for consumer-facing companies to protect online
transactions and the identities of the people behind those transactions. These
RSA consumer solutions guard against identity fraud and theft, phishing, spam
attacks by online fraudsters, sophisticated pharming scams and malware, and
eroding consumer confidence that results from these online crimes. RSA offers
flexible, layered authentication solutions to address varying needs of the
consumer market including risk-based site-to-user and one-time password
authentication.
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Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
In addition, we have an extensive fraud-monitoring network. Our fraud network is
a single repository of fraud patterns that are identified during processing
online transactions at 50 of the world's largest financial institutions as well
as thousands of smaller ones worldwide. When we spot a fraud attempt, we share
the identity of the fraudster across the network thereby preventing cyber
criminals from launching the same attack against other businesses. Under EMC,
RSA will continue to build and invest in this business as both companies believe
that the protection of online consumer identity is a burgeoning business that is
just beginning to take off.
Finally, our RSA data protection solutions are designed to provide a robust
framework for protecting an organization's sensitive data anyplace where data
resides, whether it is at rest or in transit. Historically, our data protection
solutions have supported traditional commercial software providers as well as
embedded security for brand-name hardware providers, and this continues to be a
growing business. Additionally, we are increasingly supporting the enterprise
data protection needs of some of the largest companies in the world. According
to Gartner Group, protecting consumer data is much less expensive than dealing
with a security breach in which records are exposed and potentially misused.
In addition to protecting data through encryption, customers need to be able to
manage the keys, which is arguably the hardest part. At RSA we have the
industry's leading key management solutions. So EMC and RSA Security are a
natural team to lead the industry in data protection solutions as well.
Together, we can enable customers to take a more proactive stance on protecting
their information assets and, at the same time, provide them with what they need
to comply with the recent regional and vertical mandates such as the U.S.,
state, breach notification laws, the European Union's Data Privacy Directive;
Japan's Personal Information Protection Act, and the payment card industry
standard.
To summarize, it's time security becomes an integrated part of the information
infrastructure. EMC and RSA are the companies best-positioned to accomplish
this. Bill?
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Bill Teuber - EMC - Vice Chairman and CFO
Thanks, Art. I'll be walking through a brief summary of the transaction details,
our financial expectations, and the organizational structure of EMC's new
information security division.
First, the transaction summary. It will be an all cash transaction. The current
enterprise value of the deal, which is net of RSA's cash of $230 million is
slightly less than $2.1 billion, or $28 a share. Pending the appropriate
approvals, we expect this transaction to close late Q3 or early of Q4 2006.
Turning to our financial expectations, 2007, on a GAAP basis, we anticipate the
RSA acquisition to be dilutive to EMC's earnings per share by $0.03. This is
primarily due to the foregone interest income on EMC cash, which we'll use to
complete the acquisition. We are taking some of the cash we have on our balance
sheet and investing it in the business to drive much greater long-term returns
for EMC.
On a non-GAAP basis, excluding intangible amortization and stock option expense,
the RSA acquisition will be neutral to earnings. In 2008 we anticipate the
acquisition to be neutral to GAAP EPS and accretive by $0.03 per share on a
non-GAAP basis.
Once the acquisition is finalized, RSA will operate as EMC's new Information
Security Division. Art Coviello will become and Executive Vice President of EMC
and the President of the Information Security Division.
Going forward, any future security activities and acquisitions will become part
of this Information Security Division.
Now I'm going to turn the call over to Tony to answer Q&A.
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Tony Takazawa - EMC - VP Global Investor Relations
Thanks, Bill. Before we open up the lines for your questions, I'd ask you to
limit yourself to one question including clarification. There are a lot of
callers on the line including investors and analysts covering each of our
companies. We want to be able to answer as many questions as possible from as
many stakeholders as possible. Thank you all for your cooperation in this
matter. Jennifer, can we please open up the lines for questions?
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Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
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Operator
Thank you, sir. [OPERATOR INSTRUCTIONS] Keith Bachman, Banc of America.
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Keith Bachman - Banc of America - Analyst
The words don't seem to match what is suggested by the economics, and I'm not
sure how investors can conclude this is a good deal for EMC. You're taking on
additional risk by buying a company and their assets. You're getting -- if I use
the higher level, it's neutral in '07 and accretive in '08 by a cumulative
$0.03. If you took that same [TAS] that you're using to buy back stock, you'd
add $0.06, roughly, per year. How is this a good deal for EMC shareholders? The
economic realities don't seem to match in any way the strategy that you've
outlined.
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Joe Tucci - EMC - Chairman, President, and CEO
Well, Keith, first of all, we're going to do both, right? We are still
committed, and I think when you see, as we announced the amount of buyback we've
done, to date, I think you'll be pleased. So we're going to definitely continue
to step up and very committed to buying back our shares.
Secondly, we are absolutely convinced that to propel our business into the
future and grow, and which would say that if we do this right, I absolutely,
positively believe there is upside. But the way information, as I said before,
is stored and to integrate protection around that, security around that, is
going to be a mandatory, and if you can't do this, your core business will fall
off, and to do it right and have a stock that's a lot more powerful, more
valuable than our competitors, it's us that will benefit, and their little
pieces or slices of technology that will fall off faster.
So all that is kind of upside. So the whole name of the game here how do you
build continued value for the long shot? So what we're basically saying at this
juncture, since, you know, there's still a lot of work to do is let's come in at
a what we believe is a conservative case, but as we operate, I think that's how
we're going to do it, and we still have plenty of cash flow, plenty of financing
capability, to make sure that the buybacks get stepped up. So it wasn't once or
no. This was a missing piece in an information infrastructure puzzle, and right
now we're focusing. I assure you, we're not in or out. We don't have anything
else of size in our sights. There will be, obviously, some little tuck-in
acquisitions, put a little bit of technology here and there, but this is
something, if we do right, we can distance ourselves. And individual competitive
products are not going to win. You need a stock of technology, and the companies
that filled out these solid technology stocks are going to be the big winner,
and that is the potential, and so the one answer would be and to your point --
all of that opportunity, if we do this correctly, is not built into the models
yet.
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Tony Takazawa - EMC - VP Global Investor Relations
Next question, please.
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Operator
Aaron Rakers, A.G. Edwards.
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Aaron Rakers - A.G. Edwards - Analyst
Just to build on Keith's comments there, you know, looking at the financials or
the valuation of the acquisition, I just want to get a better understanding of
the meaningful premium paid for RSA. It looks like about five times estimated
revenues, looking out into calendar 2007 -- definitely at the high end, if not
above the high end of the range that the company's traded at over the last year.
I just want to -- was there a bidding war here that, you know, why such a hefty
premium on this name and why at this point?
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Joe Tucci - EMC - Chairman, President, and CEO
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Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
This piece -- this company and this space is incredibly hot. I pointed out, and
those of you that could see the slides -- I showed you the pick list on CIO's
minds of where they're going to spend money. As you could see, this kind of
technology is at the top and I think, of course, this technology integrated
would be at the top top. So integrate into our information infrastructure stock.
So obviously there are other companies that noticed this, and to answer your
question directly, as I usually do, yes, this was a very competitive situation.
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Tony Takazawa - EMC - VP Global Investor Relations
Question please?
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Unidentified Participant
Yes, EMC is doing an acquisition.
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Joe Tucci - EMC - Chairman, President, and CEO
What?
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Operator
Kevin Hunt, Thomas Weisel.
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Kevin Hunt - Thomas Weisel - Analyst
I just want to clarify a couple of things that you had said at your Analyst Day
a few weeks ago. First of all, you said the main focus for the company would be
on smaller acquisitions. You said you wouldn't do anything above $300 million.
Now three weeks later you're doing something well over $300 million for a
seemingly very high price. So the first thing I want to have clarified is what's
changed, I guess, in three weeks on that.
Secondly, in terms of the strategy, the outline on security, you indicated it
would be security added in at the various layers of EMC's existing technology.
Maybe we just don't know about RSA, but it seems like most of what they do is
really in no way integrating with any of EMC's technology. So maybe you could
help clarify those two things.
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Joe Tucci - EMC - Chairman, President, and CEO
First of all, Kevin, I think that's not what I said, I mean, I know that's not
what I said. What I pointed out, as I said, I wasn't going to do something the
merger of equals, game-changing. I said that in the past, and I prefer "string
of pearls." I said that in the past the biggest acquisition that EMC did was --
in revenue terms, was Legato at $315 million in the year we bought it, that was
their revenue. So I said at that time we did that, our revenues were
approximately $6 billion. So at $6 billion we bought a $300 million company. I
said now as an $11 billion company, I said, I certainly believe that -- I still
want to do something that is not massive in size. I said certainly you could
expect this. I hardly think that 375 jumped from 315 when are revenues are up
80% from the time we did Legato is going -- changing my word or the reality or
the specificity of my word at all, okay?
The other thing is the answer here is some and some, right, in terms of this,
and I want to turn it over to Art in a second, but what we're doing on the
authentication side and the encryption side, for instance, are directly
integrations and, of course, the identity management is a bit of a tag on that
when you think of businesses we have in content management and e-room and
repository -- I mean -- there's a lot of connectivity right there, but, Art, you
can do this better than I can.
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Art Coviello - RSA Security - President and CEO
Yeah, no, I think there's a tremendous amount of value. The fact of the matter
is, the nature of threats on the Internet and against companies have evolved to
direct attacks on data, whether that's identity data, intellectual property, or
other information that is designed to achieve some type of
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Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
criminal gain. That means the market is headed our way, because we have the best
answer against those types of threats. And because these are attacks on data,
it's critically important that where the information lives is tied closely to
the security, and that's what this combination will do.
You need to secure information itself as well as secure access to the
information. You can only do that through authentication and access control and
encryption, and those are the technologies and solutions that we bring to EMC.
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Tony Takazawa - EMC - VP Global Investor Relations
Next question, please.
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Operator
Brian Freed, Morgan Keegan.
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Brian Freed - Morgan Keegan - Analyst
Your detractors are going to say that you made a big acquisition to very weak
underlying trends in your core business. Can you talk about trends in your core
business and what you see there? And also can you talk a little bit about the
DOJ options -- timing and how you've hedged that in your acquisition?
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Joe Tucci - EMC - Chairman, President, and CEO
Sure. I don't know, Brian, I mean, we've been very specific on what we wanted
to do with the information infrastructure. We've been very specific that tiered
storage is important and how strong we are there. We were very specific that
protection is and how we're the leader there and how important that is. Data
mobility software -- how storage virtualization would [unintelligible] and
Rainfinity is going to revolutionize that. What we're doing in archiving and
content management and what we will do by the end of the year in information
management software. We talked about how the management of resources, instead of
domain by domain but more collectively was powerful for us and, of course, what
we're doing in virtualization is unparalleled. Basically everything we do has to
embed in it a significant piece of information security.
We basically said, and I continue to say the core business will grow in double
digits for the long term. So there is nothing here that's trying to protect the
core business. What we're trying to do is create an information technology
stock, which is somewhat expensive but is much more deep and collective. I
really believe that, say, just take the storage part of your business -- if you
can't have these options for encrypting, so some companies are going to want to
encrypt only when it, say, goes to tape, and they're going to wheel it out to
Iron Mountain or something. Some companies are going to want encrypted data
itself right on the drives, and you can do that with appliances, you can do that
- -- we could do that with directors right on the storage, we could do that with
software -- all these techniques are going to happen, and all these techniques
are going to be necessary and doable and, again, you need technology, and we
think the best encryption technology in the industry is with RSA. To do that is
really difficult, really difficult to do centralized key management.
Again, we believe the best key management on the planet is us. So if we can do
that in combination and just pick our storage business, that should -- which is
the thing we don't have built in here, right, and that's the opportunity for the
future. If I'm right, and I believe I'm right, this will also not only give us
the growing RSA business, which we're showing you here, and how that impacts our
P&L but it should make our storage business, at the expense of others, grow
faster, and I could give you the same thing what's going to happen in protection
and data mobility and everything we're doing with content management and
resource management and other areas of our technology stock. So it's all about
getting stronger, grading your own technology stock and distancing yourself from
the competitors that play maybe stronger or only on one line.
Art, do you want to add to that?
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Art Coviello - RSA Security - President and CEO
I think that, again, if you're going to have the kind of value stack that
you're talking about, you're going to need to have a tremendous component not
just of encryption and key management but access control. Access control is
critical in our own key management solutions; it will be critical in things like
content management. So there's tremendous leverage not only from the encryption
side of our business but the access control. And at the front end of access
control is making sure that you identify whoever it is in the first place that's
getting access to the information.
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- -------------------------------------------------------------------------------
Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
- -------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
Tell me if I'm wrong -- you were asking about the last part, and you kind of
asked it nicely and in code, but let's talk prose here. You wanted to know about
the -- inquire about the stock option expensing on our side, was that what you
were getting at?
Hello? Let's assume that's right so maybe --
- --------------------------------------------------------------------------------
Art Coviello - RSA Security - President and CEO
I'll take that, Joe. So, first of all, we have an SEC inquiry and a DOJ
subpoena essentially looking for the same level of information. So right now
it's an inquiry and a request for information. I'm comfortable that we've always
had strong corporate governance practices. We've applied them consistently,
we've strengthened them over the years in conjunction with evolution of law and
standards, but I can also tell you that this has not been the least of a
management distraction to us, and we're complying fully with the investigation.
- --------------------------------------------------------------------------------
Bill Teuber - EMC - Vice Chairman and CFO
This is Bill. Obviously, we looked at this issue and feel comfortable with RSA's
response. Next question, please.
- --------------------------------------------------------------------------------
Operator
Rebecca Runkle, Morgan Stanley.
- --------------------------------------------------------------------------------
Rebecca Runkle - Morgan Stanley - Analyst
Joe, if you could address what you consider the biggest holes in the security
platform are, post the RSA acquisition, and then, secondly, just clarify whether
or not the deal requires shareholder approval.
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
It would obviously -- it's going to require shareholder approval on the RSA
side, for sure, and I don't believe --
- --------------------------------------------------------------------------------
Rebecca Runkle - Morgan Stanley - Analyst
But not EMC?
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
Not on the EMC side, on the RSA side.
- --------------------------------------------------------------------------------
Bill Teuber - EMC - Vice Chairman and CFO
The biggest holes post that -- I mean, I think we've got a pretty complete
story. There are elements of the strategy we have yet to execute on, but as I
mentioned in my comments that the foundation of the strategy was enhancing the
security of the information infrastructure that we sell today, and RSA helps us
dramatically across the board with their offering there. And in better
protecting data directly, and we've talked at some length about encryption and
key management, the one area that we didn't talk about was the EMC common
security platform. Underlying the business unit mandate here at EMC to build --
to maximize the inherent security, the products we sell in compliance with a
product security policy, we have built, underlying that, a common security
platform, which is a single, unified platform to deliver fundamentally a
consistent set of security services around authentication, authorization,
encryption, and so on.
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- -------------------------------------------------------------------------------
Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
RSA's identity management system, or IMS, effort to unify their products on a
common architecture will significantly accelerate our ability to do that, and
that's another area of integration for us. So with the exception, as Joe
mentioned, a couple of developments and possibly a tuck-in here or there, we
feel like our strategy is pretty well moving at this point.
- -------------------------------------------------------------------------------
Tony Takazawa - EMC - VP Global Investor Relations
Next question, please.
- -------------------------------------------------------------------------------
Operator
Ben Reitzes, UBS.
- -------------------------------------------------------------------------------
Ben Reitzes - UBS - Analyst
I want to expand on a question asked earlier. There's obviously significant
concerns in the marketplace about Legato execution in Asia Pacific, even the
strength of your new Clarion cycle, and decelerating revenue growth. So now,
tomorrow, we are going to be talking about a new deal, a whole new direction,
really, even though you've talked about it before. I just want to hear again
that you feel confident in your underlying core business, Joe, that we're not
going to be surprised by anything short term and long term, and that we should
assume that you have the ability to make this deal -- integrate this deal,
another deal, seamlessly and go in this direction, create another direction for
EMC with everything -- you feel good about where you are?
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
Let me just take one part of your question, which is near term. It sounds like
you're asking us to talk about the quarter. I'm not going to talk about the
quarter. As a matter of fact, policy, during the quiet period, not to talk about
the quarter, but please join us on July 20th, and we'll fill you in.
I do feel that our business is on a good track. We said that last time we got
together for our earnings call that we had a couple of areas --
uncharacteristically, we didn't execute well on. We told you the fixes. Some of
those fixes are short term; none of those fixes are long term. Some of those
fixes might take us beyond one quarter, but we have all those actions in place,
and I do believe that we can very seamlessly and quickly do what we want to do
and integrate the RSA family into EMC products, and I really don't -- again,
I've got to take exception to this -- this is not a totally new [indiscernible]
direction. This is -- the vast majority of this is going to be right down the
line of what we do, and I think this whole thing is about leverage.
The access to the corporate customers in banking and telcos, other financial
services, institutions like life and property and casualty insurance companies
- -- I mean, these are places where we have great footprints. All these are going
to be big, big opportunities for the ID management businesses. And creating this
leverage, I mean, I think there is a ton, a ton, of opportunity here for us to
create even more upside leverage. So, obviously, we're going to go after the
cost side of this with a vengeance, and most of our cost side is in what you
might call infrastructure and back office functions, you know, on the sales
development. Those are all opportunities for us to create top-line leverage, and
that's exactly what we want to do.
The most important one -- most important point is customers are going beyond
asking us, they are demanding we do this. And they want the security built in
not continually bolted on. It's driving them crazy, and that's what's motivating
us to do this. You can't take this year or two months' view of this business. I
mean, point blank, I mean, I've got to tell you, you will be very pleased, I'm
sure, as we report the level of stock purchases, EMC stock purchases that we've
done this quarter. I think you'll be pleased with how we're going to continue
that in the future and, I've got to tell you, I love our stock at this place,
and you're going to see we have enough capital bandwidth and cash flow
generation in this company to do both things -- to set ourselves up for the
future and make sure that we cut back those numbers of shares outstanding and
drive those EPS points back up. And Bill and I and others have, as you know,
have based our future compensation on being able to do that, and we will do
that.
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FINAL TRANSCRIPT
- -------------------------------------------------------------------------------
Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
- --------------------------------------------------------------------------------
Art Coviello - RSA Security - President and CEO
I can confirm what Joe said about the leverage. You know, we've always done a
good job at the chief security officer level, but increasingly, again because of
the nature of the threats and because of our expanding product and solutions
portfolio, we've been becoming more and more strategic to enterprises.
As a result of that, we have a requirement more and more to call at the CIO
level, to be able to have our sales team leverage the EMC major accounts team is
an opportunity that I know our field is going to relish, and we're really
looking forward to that.
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
Without trying to be defensive, you picked out a few points that were less than
robust last quarter. We have a broad portfolio of products, okay? And we show
you basically how we do in that portfolio. As you know, with a portfolio, you
have ups and downs, but people get way too focused on some of the downs and not
focused at all in the areas that we really had core strength. You didn't mention
SIM, you didn't mention content management, you didn't mention VMware, you
didn't mention how did in Smarts. We have a great deal of things going well for
us. At the same time, you run into bumps in the road every once in a while, and
that's not unusual in any business. We just happened to show you where the bumps
in the road are, and we're working hard to fix them.
- --------------------------------------------------------------------------------
Tony Takazawa - EMC - VP Global Investor Relations
Next question, please.
- --------------------------------------------------------------------------------
Operator
Andrew Neff, Bear Stearns.
- --------------------------------------------------------------------------------
Andrew Neff - Bear Stearns - Analyst
I would just like to understand the approach you take in terms of all cash. I
mean, just for RSA, you know, doing an all cash deal, I guess the concern is how
do you tie these people into the success of EMC?
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
Obviously, we have to make sure that we have incentives in place for the good
people. Part of the deal that we did is we think -- and I'll let Art comment in
a second -- that -- I can tell you that Art and his team is incredibly excited
about being with us. I'll let Art comment on -- I think we've put enough and
appropriate, and we're working on this together, to make sure that we create
excitement for the future for, a, individuals like to be part of a successful
organization. Together, we can create more success. They want to see their
products succeed in the marketplace. We think we can accelerate that and I
personally think EMC is not getting recognized for what we can do. I mean, we're
saying publicly, and I said it again today, that over the next several years we
will and can grow this company in the mid-teens, and we can and will have
significant leverage between that growth and the bottom-line growth.
So whenever we get believers there, and that will happen as we perform, there
will be at some point a great pop in the stock, and that will make everybody
thrilled.
Why don't you comment, Art?
- --------------------------------------------------------------------------------
Art Coviello - RSA Security - President and CEO
I certainly will. I said at the outset that we're very excited and thrilled
about the opportunity, and part of it is the way EMC goes about their
acquisitions, the ability to continue to pursue our vision with not only the
financial leverage but also the information lifecycle management capability and
the strategic entrA(C)e that gives us into the enterprise. That's just going to
be a tremendous boon to our sales organization.
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FINAL TRANSCRIPT
- -------------------------------------------------------------------------------
Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
So there's significant retention in terms of the stock options that will be
assumed. I do have an excited management team. We're on a roll. We've had a hell
of a last six months. We know the market's turning our way, and now we get to
take full advantage of it.
And let me be so bold as to suggest, and I think Joe is alluding to it -- I
think, over time, not just with RSA but the collection of all of the
technologies and solutions that EMC has been accumulating, you create more
value, you create more strategic value to all of your customers and, as a
result, each and every product is strengthened, and I think that's the leverage,
over time, the string-of-pearl strategy is going to deliver to EMC. I think it
makes absolute sense.
- -------------------------------------------------------------------------------
Tony Takazawa - EMC - VP Global Investor Relations
Next question, please.
- -------------------------------------------------------------------------------
Operator
Dan Renouard, Robert W. Baird.
- -------------------------------------------------------------------------------
Frank Timms - Robert W. Baird - Analyst
Actually, this is [Frank Timms] for Dan. Just curious, and you can look at the
VMware acquisition and by keeping it kind of a separate entity, you've seen the
success there. I'm just curious whether or not you'd consider doing something
like that with the RSA acquisition and your thoughts around bringing it in house
versus making it a little bit more separate.
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
What we're going to do here is not what we did with VMware. You've got to
remember, with VMware, as I keep saying, some of our largest and most fierce
competitors are some of VMware's biggest partners. We had the opportunity with
VMware to create a new layer of technology in the Hypervisor and advanced
storage services around that -- software services around that Hypervisor, and,
you know, to do that we're doing something very special, which is working
exceedingly well. But all I say, like Documentum, first of all, I would say
security is probably the best brand in security. So we're definitely not going
to throw away that brand. It will be EMC's dedicated, if you will, security
business unit. It certainly will have sales capability. It will have a
tremendous amount of presales capability. It will have some support capability
and, obviously, obviously, development capability. But we're going to make sure
that we leverage aggressively the EMC sales force. We're going to make sure that
we leverage our infrastructure, whether it's real estate, whether it's IT,
whether it's back office functions, finance, et cetera, et cetera.
So we are absolutely going to go after -- and Art is as passionate about this as
I am -- we're going to go after every dime of cost savings there are, and we've
got some targets on the wall, which we will meet, indeed, and then we have what
I think are not as aggressive as we need, and we will fix that over time, but I
have long learned that it is better to under-promise and over-deliver, and as we
get more comfortable, we will give you, hopefully, those revenue synergies which
I think are huge, because we will leverage our massive 7,000-person-plus sales
force out there, which are calling on exactly the same customers, because these
are banks, which need to buy, say, identity management for customers that use
online banking. These are medical companies, which need to secure medical
information, and so these sales are going to go together. These are two
disparately different people. Even in all our sales now, the chief security
officer is getting involved. There's mandates that we getting for our -- so by
putting -- so this is going to be much more -- much, much, much more integrated
and really an integral part of our stock, and VMware is going to be -- you know,
continue to run very arm's length like we're doing it. Why? Because it's working
fantastic, but that's not the plan here. Art, you got --
- --------------------------------------------------------------------------------
Art Coviello - RSA Security - President and CEO
It would be crazy not to take advantage of the leverage. And at the risk of
being a little bit repetitious, we're saying that the security protection for
the information infrastructure is getting to be a strategic and critical item at
the CIO level. And EMC's strength in similar verticals to ours, whether it's the
telco industry, financial services industry, go on and on, will give us
tremendous leverage points and, again, at the risk of repeating a little bit,
you know, you don't win in technology spending all of your money buying back
shares. It can be a great thing to do opportunistically if you think your shares
are undervalued, but you only win in technology by growing, and I think we'll be
able to add to that growth rate and, again, create more synergy in conjunction
with some of the acquisitions that EMC has done.
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FINAL TRANSCRIPT
- -------------------------------------------------------------------------------
Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
- --------------------------------------------------------------------------------
Tony Takazawa - EMC - VP Global Investor Relations
Can we move to the next question, please?
- --------------------------------------------------------------------------------
Operator
Chris Whitmore, Deutsche Bank.
- -------------------------------------------------------------------------------
Chris Whitmore - Deutsche Bank - Analyst
Two brief questions -- first, can you quantify any of the synergy benefits you
see from either a top-line standpoint or a cost structure standpoint. And,
secondly, can you remind us what your internal IRR or ROI target is for
acquisitions, and tell us what needs to happen for this deal to meet that
criteria? Thanks.
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
Chris, from a synergy standpoint we have, obviously, baked in both top line and
expense synergies. I'm not going to say what is which but clearly we expect more
top-line synergies, and we think we'll get out of the overall cost base, and we
think that there is tremendous top-line synergies here for EMC.
We haven't disclosed our internal IRR metrics in the past, and we're not going
to do that right now, but we think this is incredibly important and a good
acquisition for EMC.
- --------------------------------------------------------------------------------
Tony Takazawa - EMC - VP Global Investor Relations
Next question, please.
- --------------------------------------------------------------------------------
Operator
Harry Blount, Lehman Brothers.
- --------------------------------------------------------------------------------
Erita Clemon - Lehman Brothers - Analyst
Hi, this is [Erita Clemon] for Harry. I just wanted to ask if you could talk a
little bit about what you'll be getting from the acquisition that you wouldn't
from just partnering with RSA.
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
RSA wasn't going to be around, that's what we're getting.
- --------------------------------------------------------------------------------
Tony Takazawa - EMC - VP Global Investor Relations
Okay, next question please.
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
I'm not being facetious. I mean, if there's anything that I do wrong that some
of you tell me in private is that I'm kind of too blunt and too straight, but
that's kind of the way I was built. And, I'm telling you, this is critical
technology, critical, and if you think we're the only ones that
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FINAL TRANSCRIPT
- -------------------------------------------------------------------------------
Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
saw that, you're not listening to me, okay? This was very competitive, and this
is not -- and then there's a limited number of places you can get this kind of
technology, and not having it would put us at a severe disadvantage and, I
assure you, others that might have bought this would not want to share it with
us.
- --------------------------------------------------------------------------------
Operator
Brent Bracelin, Pacific Crest Securities.
- --------------------------------------------------------------------------------
Brent Bracelin - Pacific Crest Securities - Analyst
Hi, Joe, I certainly appreciate you being straightforward here. I know you
touched on this before, but I kind of wanted to follow-up and dig a little
deeper on the product overlap and then the sales coverage overlap today. More
specifically, how often is RSA directly sold or bundled with storage today, if
at all? And then, if not bundled, how long do you think it will take to
integrate these technologies and sell this through your sales force as an
integrated solution?
- -------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
Let me give that to Art. He's been getting -- from the other side, he sees this
better, plus he sees others besides us. And I'll add a little color after that.
- --------------------------------------------------------------------------------
Art Coviello - RSA Security - President and CEO
I think Dennis touched on the common security platform from a technology
standpoint. We've been developing our identity management system, IMS, now, for
two or three years. So we give EMC a substantial leg up. The first iteration of
that product should be out the latter part of this year, and that will be our
authentication manager. Essentially what the platform does is it enables us to
incorporate all of our server products onto one platform with a common user
interface, common GUI, common administrative services, and we can leverage that
throughout EMC's product line.
So we've got obvious development work to get all of our own products on that. By
the way, that will include the key management product as well as our access
manager and sign-on manager products. So, certainly, that technology integration
that will go on over the next couple of years internally with RSA and then
across with EMC's products. Again, I think there's more and more of a demand
from CIOs to combine technologies to buy from a single vendor, and as the
attacks, as I mentioned earlier, continue to evolve to ones that are
specifically against data, then the synergy between the two companies will
become increasingly apparent.
- -------------------------------------------------------------------------------
Brent Bracelin - Pacific Crest Securities - Analyst
Can you just be clear? It sounds like today do you actually bundle the
technology with storage or this authentication management product is something
that you would, in the future, bundle with storage?
- --------------------------------------------------------------------------------
Art Coviello - RSA Security - President and CEO
Well, the initial discussion we had were about potentially OEMing the
technology, and I think EMC's basically just in tune with their own strategy
would look at this as the technology they need to own.
- --------------------------------------------------------------------------------
Joe Tucci - EMC - Chairman, President, and CEO
If we don't have centralized key management, if we don't have strong
encryption, if we don't, you know, a number of our businesses get much closer
and provide identity management to the information directly. We will put
ourselves in a [troubled] position. Having the best technology, we can put
ourselves in a market advantage, because we don't believe anybody is going to
beat us to the punch here, if we do this properly. And this is what you need to
monitor -- how are we doing on this? If we do this properly, which is what our
challenge is, and integrate this quickly and properly and get the leverage out
of our sales force, it's going to be a phenomenal story, and that's the upside
leverage that's not built in.
15
FINAL TRANSCRIPT
- -------------------------------------------------------------------------------
Jun. 29, 2006/5:50PM, ET, EMC - EMC Acquires RSA Security
You know, remember, and it was kind of touched on before, and we talked about it
at Analyst Day, those of you that were there, and I think most everybody on the
phone here was, you know, that we -- and there's pluses and minuses thrown
around about it, and we said from the stage that we put -- our board put a
three-year EPS goal in front of us for our compensation, and there was debate
whether that was -- EPS was good or not. Obviously, when we do something like
this on the short term we're hurting ourselves, right? The best thing I could
have done is just do a bunch of buybacks and really play it. But what we're
doing is, we're putting this company in the right spot for the long haul,
obviously doing this right, there is opportunity to make these results
significantly better and have a much longer and much more powerful, competitive
company out there.
So, again, we are acting in the best -- I believe, since I am a big shareholder,
and I have a lot at stake, I am acting in the best interest of the shareholders
in doing this because we think this is going to really make us competitive. And,
if you think about it, right, we started out this year with 7.4 billion in cash,
no debt. They used 2 billion of cash for this. That leaves us with 7.4, but
we're going to generate about 2 billion this year. So we're kind of back where
we were in the beginning, very committed to being a buyback. It gives us a lot
more firepower to do additional buybacks, and we haven't even touched -- haven't
even touched the financing opportunities to do more.
So basically we're going to play all these things together to continue to drive
EPS because I want to make sure that we do both. So I want to position the
company properly and drive EPS, and I've got two shots on goal here with RSA --
one is to get that leverage on the top line, make sure those we get those
synergies quickly, get that leverage on the top line, and I've achieved what
we're showing you here today and, number two, is obviously if we continue to
have non-believers, you know, they just continue to go -- buy the hell back out
of this stock because -- and we've got plenty of financial leverage to do it. So
I didn't see, like, this is a trade-off. And, again, I'm exactly where you want
me to be for my motives. I am doing the best thing for this company's
shareholders.
Great. I think we've said enough. I really appreciate it. I'm sure there's going
to be a lot of interest, and we'll be around talking to you in groups, and thank
you for your interest, and we will not let you down.
- --------------------------------------------------------------------------------
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