Updated from 7:50 a.m. EST

Shares of

EMC

(EMC)

surged 16% Thursday after the data storage giant delivered relatively strong quarterly results and said revenue should be better than expected in the first quarter.

"They had a very, very strong quarter, which surprised a lot of folks," noted Brent Bracelin, an analyst at Pacific Crest. "They definitely executed in the quarter and were able to lower costs and improve margins."

In a conference call, EMC said cost-cutting plans are proceeding well and that revenue should decline less than expected in the first quarter. Analysts had been looking for revenue to fall sequentially to around $1.3 billion but the firm said it expects a 5% drop "or slightly more" from the fourth quarter, which would put sales at roughly $1.4 billion.

Loss-Making

The computer storage titan said it lost $70 million, or 3 cents a share, in the fourth quarter on revenue of $1.51 billion, down from $2.62 billion a year ago. The loss, which partly reflects a price war among storage hardware makers, was the company's second in a row and compared miserably with last year's net income of $562.8 million, or 25 cents a share. Still, the company managed to beat analysts' estimates for a 7-cent loss on sales of $1.3 billion.

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"Granted, these results are sub-par from where they were a year ago, but things are difficult and we believe the company is on the road to recovery," Bracelin said.

EMC saw double-digit sequential growth in all its major product areas and major geographies, including 52% sequential revenue growth in networked information storage, 45% sequential revenue growth in information storage software and 15% sequential revenue growth in information storage services.

Still, the firm remained cautious in its outlook, noting that the environment is still too unclear to give guidance beyond the first quarter.

"They said the pricing environment is still tough and visibility is limited, but we did expect them to say that," noted analyst Glen Hanus at Needham & Co.

During the call, President and CEO Joe Tucci said he expects customers' information technology budgets to be flat to down slightly in 2002. Chief Financial Officer Bill Teuber added that spending probably will remain subdued in the first half of 2002, although he is expecting some improvement in the second half of the year.

Hack-Up

Meantime, the company seems to be doing everything in its power to reduce expenses. The firm already has cut its staff to 20,140 from a peak of 24,500 and said it expects to have 19,000 employees by midyear. Teuber expects to strip out some $800 million in costs by the end of the first quarter or the beginning of the second quarter rather than at the end of the June quarter, as was originally planned.

The company said it would take longer than expected to reach its gross margin target of 50% but said gross margins should move up to the mid 40's in six to eight quarters after IT budgets stabilize. Fourth-quarter gross margins fell to 36.9% from 59.2% a year ago, and were flat with the third quarter.

EMC is expected to post a loss of 6 cents in the first quarter and a loss of 5 cents for the whole of 2002. The stock rose 15%, or $2.20, to $16.76 Thursday.

"We upgraded the stock back in December and are very encouraged with these results. It's a big step toward turning around," said Bracelin.