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EMC's Murky Outlook

Slowdown in tech spending could impact data storage gear maker's third-quarter results.

SAN FRANCISCO -- Data storage gear maker



will offer another view of the market for tech goods when it reports third-quarter earnings before the markets open on Thursday.

The company's quarterly results will showcase how well EMC has managed the introduction of products for large enterprises and small- and medium-sized businesses.

More broadly, EMC's results -- and commentary of its management -- will add to the mixed signals investors have received about how well tailwinds like global growth have helped counterbalance a slowing U.S. economy and turmoil in the domestic credit and mortgage markets that is wracking its clients in the banking and financial sector.

Analysts' consensus forecast has pegged EMC's earnings at 17 cents a share on a 14% rise in sales to $3.2 billion.

Tech investors already appear skittish. On Wednesday, EMC shares were trading down 72 cents, over 3%, to $22.64, as renewed fears of a real estate market downturn caused a selloff in stocks. Shares of EMC's key rival,

Network Appliance


, were trading almost 4.5% lower.

Those economic fears surfaced last week when



blamed a 13% drop in hardware sales on reduced spending by financial services and banking firms, which typically make up Big Blue's largest customer base.

While IBM's problems stemmed mostly from sales of servers, investors and analysts have been somewhat more sanguine about data storage equipment. Surging Internet traffic -- especially for videos -- have combined with regulations like Sarbanes-Oxley to increase the need for storage. And the growth of countries around the world has buoyed demand for tech products, especially in emerging economies building Internet and computer networks for universities and businesses.

Last Thursday, chipmaker



Chief Executive Bob Bailey said "positive trends in our enterprise storage business" helped narrow the company's third-quarter loss.

"We're still bullish on the storage sector, and continue to hold shares of EMC," said Tony Trzcinka, a portfolio manager with Pax World funds. Pax also holds shares of hard-disk-drive maker



and Network Appliance.

Trzcinka is not alone in his assessment of the storage industry's prospects. EMC shares have risen 77% this year, in part because of the torrid growth of the company's virtualization software subsidiary



, whose stock has more than tripled since its initial public offering in August.

Pax's Trzcinka will keep a close eye on EMC's core storage revenue and profitability to see if a slowdown in tech spending is affecting the company as it phases in new products. This will also show whether EMC has had to discount products in order to keep up sales, says Trzcinka.

Discounting may help EMC gain market share in a weaker economy, says J. Hingorani, an analyst with Standard and Poor's. Because it can bundle storage gear with products from its RSA Security subsidiary, EMC can offer greater discounts across a range of products. That can keep the company in good graces with corporate IT managers who face budget freezes in a slowing economy.

Investors also hope that virtualization will help spur data storage sales by motivating companies to upgrade to so-called storage networks better suited to virtualized data centers.

As a result, VMware's third-quarter results, which come out after the markets close on Wednesday, will have a large influence on EMC's shares.

Tony Trzcinka says EMC's stock doesn't fully reflect the value of its 86% stake in VMware, leaving upside potential if VMware continues it skyward sales growth and stock price appreciation.