Software Gains Power EMC

The big network storage outfit says its acquisition spree is paying off.
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Updated from 11:13 a.m. EDT

EMC

(EMC)

gave tech investors a welcome break from weeks of depressing news, reporting a 93% jump in quarterly earnings and double-digit growth across its hardware, software and services businesses.

The Massachusetts-based storage giant earned $270 million, or 11 cents a share, in the first quarter, compared with $140 million, or 6 cents a share, last year. Profits last year were reduced by a $28 million charge for restructuring and other items.

Revenue in the March quarter rose 20% from a year ago to $2.24 billion, the company announced before the opening bell on Tuesday. Analysts surveyed by Thomson First Call had been forecasting earnings of 11 cents a share on sales of $2.24 billion.

In recent trading, shares of EMC were up $1.59, or 13.9%, to $13.06.

EMC, which has used a string of acquisitions to move into storage-related software and lessen its reliance on hardware sales, said that software license and maintenance revenue rose 26% to $832 million in the first quarter. Those sales now represent 37% of total revenue.

"Clearly, our acquisition strategy is bearing fruit, strengthening our core business and taking us into opportunity-rich adjacent markets," CEO Joe Tucci said in a prepared statement.

Goldman Sachs hardware analyst Laura Conigliaro sounded nearly as upbeat, saying that although "EMC's focus is more limited than its larger rivals', EMC is continuing to gradually expand beyond storage into other areas of systems management; and share gains in its core markets continue." Additionally, she says, "what is more important is that EMC may well be on track to establishing the best balance between a solutions-sale enterprise sales model and solid sustainable growth."

Conigliaro, whose firm has an investment banking relationship with EMC, also notes that "EMC's organic growth rate continues to run at roughly three times the

S&P 500

."

EMC's results were particularly encouraging in light of

IBM's

(IBM) - Get Report

announcement last week that it would miss its quarterly goals. "Contrary to IBM's assessment that IT spending slowed considerably during March, EMC management believes a relatively sluggish February was more than offset by a strong March, clearly implying IBM's woes are fairly IBM-specific and the overall storage market is healthy," said Daniel Renouard, who follows storage for Robert W. Baird & Co. His firm doesn't have an investment banking relationship with either EMC or IBM.

For the current second quarter, EMC expects to earn 12 cents a share on sales of $2.33 billion to $2.36 billion, which means revenue will grow by 18% to 19%, year over year, and by about 4% or 5% sequentially. Analysts were expecting earnings of 12 cents a share on sales of $2.33 billion. For the full year, the company sees earnings of 50 cents to 51 cents a share on sales growth of 16%. Analysts were expecting earnings of 51 cents a share on sales of $9.57 billion.

By segment, EMC said systems revenue rose 15% from a year ago to $1.03 billion, while license and maintenance revenue rose 26% from $832 million. Professional services revenue rose 26% to $375 million in the quarter.

EMC said revenue in its Clariion networked storage division rose 47% from a year ago, reflecting "solid growth across all major geographic regions, particularly Europe, and in each of EMC's direct and indirect channels."

Revenue from the company's high-end Symmetrix products was off 3%, but CFO William Teuber said in an interview that the comparison to the second-quarter of last year was somewhat distorted by a number of large deals. "I said at the time that the deals were not likely to repeat -- and they didn't," he said.

The company, Teuber said, is pushing hard in the midrange market, which is growing much faster than the high-end market.