EMC Earnings Up

Buoyed by triple-digit income growth thanks to its new software divisions, EMC Corp. (NYSE: EMC) now braces for serious hardware challenges later this year.

EMC today announced income of $140 million, or $0.06 earnings per share, for its first quarter of 2004, in line with analyst expectations and up from $35 million, $0.02 EPS, in the same quarter last year. EMCs revenues grew to $1.87 billion in the quarter, up 34 percent from $1.38 billion a year ago (see EMC Reports $140M Income).

The company’s challenge appears to be keeping market share for its recently refreshed hardware platforms -- especially as IBM Corp. (NYSE: IBM) and Hitachi Data Systems (HDS) plan to roll out new storage systems in the second half of the year.

Three software companies EMC acquired last year -- Legato, Documentum, and VMware -- accounted for $203 million of EMC's $484 million in software revenues. EMC’s overall revenue growth was 21 percent, year to year, excluding these new software divisions. The rise in software revenues helped EMC increase gross margins to 50.1 percent, up from 49.7 percent last quarter.

EMC CEO Joe Tucci feels the results justify the $3.65 billion EMC spent on the three companies last year (see EMC Cops Documentum, EMC Gobbles Legato, and EMC Gobbles VMware). “I absolutely believe these were great moves for us,” Tucci said today on a conference call with analysts. “It's been a real boost for EMC's image, both internally and externally in the market.”Legato, Documentum, and VMware have apparently benefited from joining the EMC fold as well. Legato’s revenues of $83 million were up 12 percent from the previous year; Documentum grew 21 percent to $81 million; and VMware accounted for $39 million in revenue since the acquisition closed January 8. The three software divisions combined increased revenues 30 percent from a year ago.

Revenues from EMC’s hardware platforms grew across the board, with its Clariiion midrange SAN systems up 21 percent and high-end Symmetrix revenues up 17 percent.

But EMC’s hardware systems will come under fire when IBM enhances its Shark storage systems and Hitachi refreshes its Lightning high-end SAN systems late this summer.

“In truth,” Tucci concedes, "the last time they refreshed [in 2002] we lost market share."

According to Tucci, EMC lost out at the time because its technology was old, its pricing too high, and the company was focused on the wrong type of customer. “We are in a much different place now than we were then. Last time, when these products refreshed, we were one of the four horsemen of the Internet. As part of that plan we had moved a tremendous number of our resources off some of our enterprise accounts to the so-called 'new wave' dotcom-type accounts. I assure you, we have moved our sales force back.”Besides upgrades to the Symmetrix and Clariion, Celerra NAS, and Centera content addressed storage (CAS) systems announced in February, EMC will soon add a lower-end Clariion system, code-named “Piranha” (see EMC Hits Hardware Refresh and EMC Lets Clariion Out of the Bag). Tucci describes the new Clariion as targeting “the high end of the low end.” He expects the low-end SAN to also boost sales of EMC’s NetWin Windows-based NAS system, which lags far behind its higher-end NAS systems in revenues.

Still, one analyst warns EMC to look beyond its technology, pricing, and enterprise focus to avoid slipping as it did a few years back. “EMC is very well positioned for the near future, but at some point they could get arrogant again,” says Kaushik Roy of the Susquehanna Financial Group. “They might use their power to hurt partners and suppliers.”

Other highlights of the call:

— Dave Raffo, Senior Editor, Byte and Switch