EMC Slips on Symmetrix Transition
Preliminary earnings numbers fall short of previous forecast
July 11, 2006
EMC today confirmed analysts' suspicions that sales last quarter failed to measure up to the company's previous forecast. (See EMC Misses Guidance.)
Four days ahead of its official earnings release Friday, EMC issued preliminary results of $2.575 billion in revenue for the quarter that ended in June. That falls below the revenue guidance of at least $2.66 billion EMC gave in April. (See EMC Hiccups, Waits for Clariion.)
While not a huge miss, the news comes after EMC missed its guidance for the previous quarter, and it follows the $2.1 billion acquisition of RSA Security that resulted in a steep drop in EMC's share price. (See Did EMC Overpay? and EMC Secures RSA for $2.1B.) While RSA will bring much sought-after security products to EMC, analysts have questioned the acquisition price.
CEO Joe Tucci blamed the revenue miss on a product transition to a new generation of Symmatrix high-end SAN systems. (See EMC Makes Good on DMX-3.)
"We received more customer orders than we anticipated very late in June for our new Symmetrix DMX-3 systems, and fewer than anticipated customer orders for our prior-generation Symmetrix DMX-2 systems, and we therefore did not have the right inventory mix to fulfill demand as we closed the quarter," Tucci said in a statement. "If we had been able to fulfill the strong Symmetrix DMX-3 demand and some of the other customer orders had come in a bit earlier, we certainly would have been able to meet our financial targets."Tucci said EMC software sales were strong last quarter. VMware revenue grew more than 70 percent year over year, Smarts management software revenue nearly doubled, content management revenue increased around 30 percent, and backup and recovery software grew around 10 percent, he said.
Today's announcement was no big surprise. There have been whispers for weeks that EMC had another tough quarter, and executives refused to confirm guidance on the call announcing the RSA deal. (See Signs Point to Storage Slump.)
"Although the increased demand for the new Symmetrix is encouraging, we believe EMC needed to work hard to close Symmetrix and CLARiiON deals during the quarter," R.W. & Baird Co. analyst Dan Renouard wrote in a note to clients today.
Still, Renouard expects EMC to bounce back in the second half of the year "due to a likely rebound from transitory execution issues, healthy core market, [and] growth opportunities" from VMware and content management software.
EMC's shares dropped 6.89 percent or 41 cents to $10.41 today for its second steep fall in little over a week. EMC shares dropped 7 percent on June 30 -- the day following the RSA deal."Although shares could come under pressure, we believe weaker-than-expected results had been widely anticipated," A.G. Edwards analyst Aaron Rakers wrote today in a note to clients.
Rakers wasn't completely convinced by EMC's explanation for the miss, though. Addressing the claim EMC would have made its guidance if it had the correct Symmetrix inventory mix, he wrote, "We partially subscribe to this, but believe a weak middle of the quarter, potential weakness in Europe, and a slower [midrange] Clariion CX3 ramp may have also affected the results."
While the results could be good news for EMC's enterprise SAN rivals Hitachi Data Systems and IBM, they could have a negative effect on its partners. Rakers' notes that HBA vendor Emulex and switch vendor McData gain big chunks of their sales through EMC Symmetrix systems.
Dave Raffo, News Editor, Byte and Switch
A.G. Edwards
EMC Corp. (NYSE: EMC)
Hitachi Data Systems (HDS)
Emulex Corp. (NYSE: ELX)
McData Corp. (Nasdaq: MCDTA)
IBM Corp. (NYSE: IBM)
Robert W. Baird & Co. Inc.
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