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EMC Shares Stabilize: Page 2 of 3

Goldman Sachs & Co. agrees with this sentiment and keeps EMC on its Recommended list of stocks. EMC has collapsed its pricing and is in a better competitive position now than it was two quarters ago," says Laura Conigliaro, senior storage analyst at Goldman. “We are not looking for a giant upside in this stock, but EMC is in a sector which is a high priority for IT managers... When spending grows, storage will get a disproportionate share, and EMC will do particularly well out of this.”

EMC blames the downturn in the economy for its falling profits and revenues, but the storage giant could also be feeling the pinch from increasing competition and the falling price of hardware.

“EMC is operating a razor-blade model of giving away its hardware to try and increase the sales of its software, where it can make the margins up,” says Paul Mansky, analyst with CIBC World Markets. “But clearly it couldn’t offset the falling hardware prices with software sales this quarter."

“In the past, hardware sales spurred software, which in turn generated more hardware demand, helping EMC build a powerful operating model that once earned 59 percent gross margin,” Merrill Lynch & Co. Inc. analyst Thomas Kraemer wrote in a note to investors on Friday. “The revenue shortfall did not startle us, but the EPS results surprised us. The EPS shortfall indicates that hardware pricing,
volume shipments, and software sales fell precipitously below expectations.”

As a result, Kraemer downgraded EMC from Buy to Neutral. On the back of the EMC news, Kraemer also downgraded McData Corp. (Nasdaq: MCDT) from Buy to Accumulate. EMC is McData’s largest customer, accounting for more than 70 percent of its revenue.