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EMC Hits False Note

EMC (EMC - Get Report), a company that doesn't make too many mistakes, made a big one in the second quarter -- badly underestimating customer demand for a new product line -- and will not meet its revenue or earnings goals.

EMC said second-quarter revenue was about $2.575 billion, an increase of about 10% from a year earlier but below its previous projection of at least $2.66 billion.

In addition, the company now expects to earn 12 cents a share, which includes a 2-cent-a-share charge for option expense, a 2-cent amortization expense and a 1-cent tax benefit. EMC had previously expected it would earn 13 cents a share, including items.

Analysts polled by Thomson First Call were looking for a profit of 13 cents a share on revenue of $2.67 billion.

EMC released the bad news before Monday's opening bell, and in recent trading shares were off 48 cents, or 4.3%, to $10.70 on heavy volume.

The company blamed much of the miss on a poorly executed transition to a new line of high-end storage hardware -- the Symmetrix DMX-3, which replaced the DMX-2. EMC CEO Joe Tucci said customer demand for the new product was so high that the company could not fill some orders and that demand for the older product was lower than expected.

"We ended the quarter with healthy margins on our bookings and a backlog that was approximately $100 million larger than planned," Tucci said. "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."

Analyst reaction to the miss was not terribly harsh; there were no immediate downgrades, though Deutsche Bank analyst Chris Whitmore said the company is facing increasing competition from Hitachi's (HIT) Data Systems unit at the high end, and checks indicate the Clarion [a midrange offering] refresh has received lukewarm customer feedback."

Whitmore and other analysts said they will not revise estimates until the company reports final results for the quarter and holds a conference call before the opening bell on Friday. Deutsche Bank does not have an investment-banking relationship with EMC.

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