EMC's Juggling Act

EMC Corp. (NYSE: EMC) issued its third consecutive profit warning after the markets closed last night. And it announced plans to cut an additional 10 percent of its workforce, roughly 2,400 jobs, citing worsening global economic conditions.

But just a few hours before news of the guidance reduction broke, the storage giant quietly snapped up Luminate Software Corp. for $50 million in cash (see EMC Acquires Luminate).

So what's it playing at?

Let's take it from the top. EMC says it's attempting to make the best of a dim economic situation. "The business world is simply covered in a blanket of hesitation," said Joe Tucci, CEO of EMC, in a prepared statement. He added that it is "highly unlikely" that EMC will break even in its fiscal third quarter.

That means EMC's revenues will be substantially lower than the $2.3 billion reported at this time last year. They will also be lower than the $1.8 billion in revenue that would have been required to meet First Call consensus quarterly profit of $0.01 a share.Analysts say part of EMC's problem is that it's facing declining hardware margins, as excess capacity and aggressive pricing plague the sector. As a result, sources say EMC is increasingly relying on its software business to make up the shortfall (see EMC Hammered)."The acquisition of Luminate Software is a deliberate move [by EMC] at this time to show where its focus is," said Mark Kelleher, storage analyst with First Albany Corp.

EMC's words and actions bear this out. Earlier this year, company officials stated that they expected software revenues to account for at least a fifth of EMCs total revenues for 2001. In the months since passed, EMC's acquisition of software companies has totaled more than $400 million:

Table 1: Latest EMC Software Acquisitions

* Note: Figures do not include the acquisition of FilePool NV in April 2001 for "under $50 million," nor the purchase of Digital Bitcasting in July 2000 for an undisclosed sum.

EMC acknowledges the strategy. "It's a balancing act right now," said a spokesperson.Still, none of EMC's news has hit the market favorably. The company's stock spiraled down 11.7 percent in mid-morning trading today, and indications are that most of the other companies in the storage sector are being pulled down with it.

Brocade Communications Systems Inc. (Nasdaq: BRCD)dropped 8.13 percent to $17.63; Network Appliance Inc. (Nasdaq: NTAP)slipped 7 percent to $8.48; and McData Corp. (Nasdaq: MCDT) fell 7.55 percent to $10.18 a share.

These figures echo a rash of downgrades amongst storage analysts. Friedman Billings lowered it rating for EMC from “accumulate” to “market perform.” Bear Stearns maintains a “Buy” rating on EMC, but it has lowered its price target from $45 to the "low to mid-twenties," with analysts there saying they expect many more pre-announcements across the storage sector.

Credit Suisse First Boston has lowered estimates on Brocade (BRCD 19.19), Emulex (EMLX 11.49), McData (MCDT 11.10).

Meanwhile, EMC is looking to its new acquisition as part of the solution to its present woes. Based in Redwood City, California, Luminate is a privately held company specializing in software programs that track the status and performance of database applications from Oracle Corp. (Nasdaq: ORCL) and SAP Corp. (NYSE: SAP).While Luminate has been selling software for several years, it recently adopted a new business model and was attempting to sell application monitoring services to corporate customers.

EMC has commandeered Luminate's web site and refuses to divulge any further details about the company until it has a better idea of how it plans to integrate the software.

"The results of the acquisition will become more obvious over time, as the product strategy develops," says Dave Farmer, communications spokesperson at EMC.

According to experts, EMC will likely integrate Luminate's toolset into its overall ECC (EMC Control Center) software management framework to add more value.

Luminate has about 50 employees who will remain at the company’s Redwood City office under the leadership of their current CEO, Bruce Fram.— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com