EMC's Back in Black

On the back of its new Symmetrix DMX, EMC Corp. (NYSE: EMC) today posted a small profit for its first fiscal quarter and said that it expects to stay in the black for the rest of 2003 after struggling to make ends meet over the past two years (see EMC Posts Q1 Profit).

Crediting drastic cost-cutting and increased demand for new products, EMC reported a profit of $35 million, or 2 cents per share, for the quarter, compared with a net loss of $77 million, or 3 cents per share in the year-ago quarter. Revenue for the quarter rose 6 percent, jumping to $1.38 billion from the $1.30 billion the company reported in the first quarter of 2002. The results were in line with Wall Street expectations.

EMC's shares today jumped 7.6 percent, to $8.36 a share, in afternoon trading.

However, if EMC had treated stock options as expenses -- an accounting change that is currently being reviewed by the Financial Accounting Standards Board -- it would have recorded a loss of $58 million, or 3 cents a share, the company said. That's compared with a loss of $176 million, or 8 cents a share, for the same period last year.

In the first quarter, EMC was hit with $20 million in costs related to the company's restructuring efforts, including a 1,350 headcount reduction late last year. It now has about 17,300 employees. EMC said it expects to take smaller restructuring charges in coming quarters.EMC said its revenues for the quarter rose in large part due to the launch of its new high-end storage system, the Symmetrix DMX, which it claims made up more than half of the company's Symmetrix product line sales. The new product brought the company $575 million during the quarter (see EMC Soups Up Symm, EMC vs HDS: Bandwidth Brawl, Does EMC's DMX Measure Up?, and EMC's DMX a Slow Starter?).

"We promised that in 2003 we would have the best and broadest product portfolio," EMC president and CEO Joe Tucci said on an earnings call this morning. "We now have a very robust product line I believe we're poised for continued growth."

Interestingly, it wasn't the company's smallest version of the DMX, the 800, that accounted for the most growth, but the high-end DMX 1000 and 2000 arrays. "The bigger ones actually overshot what we expected, and the 800 slightly undershot expectations," Tucci said.

In addition to the DMX revenue boost, EMC says its storage service revenues also jumped 28 percent.

You could almost hear the analysts breathing a sigh of relief. "We're all pleasantly surprised that the higher-end models accounted for the most growth," says A.G. Edwards analyst Shebly Seyrafi, pointing out that this helped the company's impressive gross margin improvements during the quarter.EMC saw its gross margins jump to 43.2 percent from 39.4 percent last quarter. While EMC says it expects its gross margins to remain flat in the second quarter, Seyrafi says the company's margins are likely to improve during the quarter.

Laura Conigliaro, an analyst with Goldman Sachs & Co., also sees EMC's fundamentals improving.

"With the DMX launch, EMC has essentially completed its product line overhaul and is now poised to recapture some of the ground lost over the last couple of years to key competitors like Hitachi Data Systems (HDS) and IBM Corp.," she wrote in a research note today. "At the same time, EMC's increased use of the channel and its deepening relationship with Dell Computer Corp. will allow for further market share gains as EMC continues to exploit pockets of demand not previously targeted by the company." (See EMC, Dell Keep Dancing and Dell Sings EMC Song.)

The company said it expects earnings for the second quarter of 3 cents a share, a penny more than analyst estimates, on revenue between $1.425 billion and $1.475 billion.

EMC continues to round out its software offerings, with the acquisition yesterday of tiny storage resource management (SRM) startup Astrum Software Corp.. Meanwhile, EMC's rumored bid for Legato Systems Inc. (Nasdaq: LGTO) is still keeping the industry guessing about what Hopkinton is going to do next (see EMC Sucks Up Astrum and Legato Up for Sale?).— Eugénie Larson, Reporter, Byte and Switch