Investors breathed a sigh of relief when storage giant

EMC

(EMC)

reported first-quarter earnings Thursday, as the company's numbers showed storage demand didn't completely evaporate in the first part of the year.

Storage business picked up in the fourth quarter of last year, but early this quarter, IT managers became more cautious about the economic recovery and began putting off major purchases, analysts said.

That careful spending is largely what led

McData

(MCDTA)

, an EMC spinoff, to issue two warnings in the first quarter, including

one earlier this month.

Some observers worried that EMC, in turn, would also have to lower its guidance, but it never happened. Many analysts cut their earnings and revenue estimates for EMC, but the company posted a narrower-than-expected loss and met revenue forecasts for the first quarter.

"People were concerned about how deep the downturn has been, or would be," said Gerard Klauer Mattison analyst David Bailey. "But the earnings and revenue numbers did not come in as badly as some people thought. Demand remains listless, but it doesn't appear that it will get considerably worse."

EMC lost

4 cents a share in the first quarter, a penny wider than the 3 cents it lost in the fourth quarter, but the company beat analysts' estimates for a loss of 5 cents a share. Revenue for the quarter totaled $1.3 billion, on par with estimates, and down from $1.5 billion in the fourth quarter. In the first quarter of 2001, EMC earned 18 cents a share on revenue of $2.3 billion.

Penny-Pinching

The majority of the business EMC and McData do is concentrated on pricey high-end products. During the economic slowdown and into what many believe is a budding recovery, IT managers have had more of an appetite for cheaper products like switches.

"EMC is at a disadvantage," Bailey said. "Traditionally their emphasis has been on the high end. The mid-range focus favors

Brocade

(BRCD)

and

Network Appliance

(NTAP) - Get Report

. EMC sold more switch ports than director ports in the first quarter. Even

Oracle

(ORCL) - Get Report

said it was selling a lot of developer licenses. That shows that IT managers are still going for the lower price points."

Some observers also worry that EMC propped up its top line by aggressively lowering prices at the end of the quarter to book last-minute sales, a move that could undermine its pricing power in the long run. Bailey said he's not convinced that will become a problem.

All told, storage stocks were having a good session, even as the

Dow Jones Industrial Average and the

Nasdaq lost ground. EMC shares, which have lost more than one-third of their value since late January, were lately climbing 4.9% to $10.91. McData, which has dropped almost 75% since early this year, was adding 3% to $8.07. Brocade was gaining 1.8% to $25.78, and Network Appliance was up 3.9% to $18.46.

Emulex

(EMLX)

was rising 2.7% to $29.68.

QLogic

(QLGC)

was up 1.2% to $49.70, and

JNI

(JNIC)

was ticking higher by 0.3% to $6.60.

Second-Half Recoveries

Analysts are expecting EMC to return to profitability by the fourth quarter of this year. Major cost-cutting over the past nine months has dropped the company's break-even point by $200 million, EMC said in a press release detailing the quarterly earnings. To protect against sluggish demand for higher-end products, EMC plans to increase its mid-range product offerings, executives said on a conference call. An outsourcing deal with

Dell

(DELL) - Get Report

for its Clarion products should also lower costs and boost sales.

The Dell-Clarion deal "will clearly help," says Bailey. "It reduces costs. Dell is extremely efficient at selling products in volume." Dell currently sells the Clarion line, but the company is in negotiations with EMC to manufacture them as well.

On average, analysts are expecting EMC to bring in revenue of about $6 billion in 2002. By comparison, the company had revenue of $7.1 billion in 2001 and a top line of $8.9 billion in 2000. Analysts are also looking for EMC to again lose money in the second quarter, before breaking even in the third quarter and turning a profit in the last quarter of the year.