EMC Bombs Big-Time

Loses almost a billion dollars in one brutal quarter

October 17, 2001

3 Min Read
Network Computing logo

Like the heavyweight boxer still standing after repeated blows to thehead, EMC Corp. (NYSE: EMC) has recently absorbed countless jabs from competitors and analysts. Thestorage giants stock is apparently so numb from a constant barrage of badnews that the latest broadsides failed to rattle it much. In fact,the share price had been rising, closing Tuesday at $13.45, up 34 percentfrom its Sept. 21 low of $10.01.

But let’s see how EMC bounces back from today’s trouncing. EMCofficials confirmed in their third-quarter earnings call that business hasbeen worse than anyone had imagined following the company’s pre-announcement amonth ago. And the near-term outlook doesn’t appear much brighter. EMC had a prorated loss of $270 million, or 12 cents a share, worse than the worst ofdownwardly revised analysts' estimates (see EMC Posts Q3 Loss). Before the market opening, EMC wastrading down 76 cents (5.65%) to 12.69

The predictions of the 31 analysts polled by First Callranged from a loss of 11 cents a share to a 1 cent profit. EMC revenues camein at $1.21 billion, at the bottom of the analysts' range of $1.2 billion to$1.8 billion.

The situation was so bad that EMC announced an increase in planned jobcuts to 4,000, up from the 2,400 announced last month. That’s in addition to1,600 cuts earlier this year. The company is slashing marketing by one thirdfrom its peak and cutting manufacturing significantly.

EMC is also eliminating redundancies. For instance, it is merging researchand development for its two network attached storage (NAS) units. Officialssay that as part of the reorganization, they are increasing the direct salesforce for enterprise systems while cutting the number of channelpartners.EMC’s actual quarterly loss, based on generally accepted accountingprinciples, was $945 million, or 43 cents a share, down 305 percent from a

profit a year ago of $458 million, or 21 cents a share. The quarter’s $1.21billion in revenues were down 47 percent.

Pro forma gross margins tanked to 30 percent, down from 47 percent in thesecond quarter. Actual gross margins, after factoring in restructuringcharges, were a paltry 3.6 percent. Officials say their objective is to returnto margins of more than 50 percent. And they expect a return to profitability by the middle of next year.

But one must wonder if and when margins will recover to that level. Robertson Stephens analyst Dane Lewis in a recent report compares the declining margins instorage hardware to those of the PC and server hardware industry, notingthat Compaq Computer Corp.'s(NYSE: CPQ)margins dropped from 46 percent in 1993 to 23 percent in 1999 and haveremained at that level. “We expect EMC and other storage hardware vendors toexperience a similar fate, as the nature of aging technologies is lowermargins,” he notes.

Over the last few days, EMC has had several bouts of bad news, each followed byan uptick in share price. Reuters reported Tuesday that Kenneth Gresham,former vice president of EMC’s global systems alliance, accused the companyin a court deposition of improper revenue recognition practices. EMC deniesthe allegations, which came out in a trade secrets lawsuit that EMC filedagainst Gresham. EMC’s stock price took the news in stride, trading higherin the aftermarket.

IBM Corp. (NYSE: IBM) bragged before Monday’s market open that it had edged out EMC on amainframe and storage equipment sale to Wal-Mart. Analysts estimated thevalue of the contract at around $40 million, although much of that is forthe mainframes. The gear will be used for the retailer’s inventory and supplysystem. EMC’s stock rose 29 cents (2.3%) on the news, to close at 13.10.And last Friday, Robertson Stephens became the most recent brokerage firmto lower estimates on the stock. In the above-mentioned note, analyst DaneLewis stated that the stock, trading at 13.34 at the time, was overvaluedand cut his price target to 9.00. The stock dipped to a 12.81 close butby Tuesday had fully recovered.

After today’s news, however, the stock should have a much tougher timebouncing back. The on-hold music preceding this morning’s conference callsaid it all: The Beatles’ Paul McCartney lamenting, “Now I long foryesterday.”

— Tom Davey, special to Byte and Switch, http://www.byteandswitch.com

Stay informed! Sign up to get expert advice and insight delivered direct to your inbox

You May Also Like

More Insights