Demand Doubt Hits EMC

Shares fall as analysts prod the top line's showing.
Publish date:

Updated from 2:14 p.m. EDT



$7 billion, 21-company acquisition binge has swelled the storage giant's top line.

But now the bill is coming due, and Wall Street isn't happy.

In recent trading, shares of EMC, which

announced third-quarter results before Tuesday's opening bell, were off 77 cents, or 6%, to $12.06.

The Hopkinton, Mass., company made $284 million, or 13 cents a share, for the quarter ended Sept. 30. That's down from the year-ago profit of $422 million, or 18 cents a share. Revenue rose to $2.82 billion from $2.37 billion a year earlier.

The falloff in earnings is less severe than it might appear. The year-ago quarter was helped by a 4-cents-a-share tax-related gain while the just-reported quarter was hindered by a 3-cents-a-share charge for the cost of employee stock options, a charge not taken last year.

Analysts surveyed by Thomson First Call expected EMC to earn 12 cents a share (including the cost of options) on revenue of $2.67 billion.

Sushil Wagle, an analyst at J & W Seligmanm, called the market's reaction "overly harsh. I think people were looking for upside to the EPS guidance, which they didn't get."

EMC also announced a restructuring program. This is expected to result in a headcount reduction of 1,250 by the end of 2007 and a pretax charge of $150 million to $175 million, or about 6 cents a share in the fourth quarter of 2006.

The layoffs will be the first major workforce reduction since EMC began its aggressive acquisition activity three years ago. The cuts, said EMC Vice Chairman Bill Teuber, come as the company's workforce has grown to nearly 31,000 from 17,500, and should result in increased efficiencies and better integration of the company's numerous parts.

Speaking of the restructuring, Wagle, whose company holds shares of EMC, said the cost savings could lead to a modest upside in 2007, and he noted that the company's new CFO was likely taking a conservative stance on guidance.

The company's core storage business grew 14% year over year and by 10% year to date. Analysts noted that EMC's storage business was hurt earlier this year by inventory and forecasting problems, which the company says have been solved.

However, it isn't clear how much of the top-line rebound in the recent quarter was attributable to growth in underlying demand, and how much is the result of orders that could not be filled in the second quarter, said JP Morgan analyst Bill Shope. JP Morgan has an investment banking relationship with EMC.

In an interview, Teuber declined to answer that question directly, but said: "Demand was strong last quarter, and is at or about where we expected it to be."

VmWare, the company's most important software holding, grew revenue by 86% and is on a run rate of about $750 million.

Consolidated revenue for the fourth quarter is expected to be at or exceed $3.16 billion, which includes at least $110 million from the new security division.

The company expects fourth-quarter earnings of 9 cents a share, including a 6-cent-a share charge related to consolidation efforts, and a loss of a penny a share from the security division, primarily due to loan interest for the acquisition of RSA Security.

Excluding the consolidation efforts and the loss related to the security division, EMC expects to earn 16 cents a share in the fourth quarter.

Analysts were looking for a 16-cent profit on sales of $3.04 billion.