EMC Cowboys Up in Q3

EMC Corp. (NYSE: EMC) turned in a solid third quarter -- increasing year-over-year revenues 20 percent -- and said its fourth quarter promises to be even better (see EMC Posts Q3 Results).

Continuing its third straight quarter of sales growth, the Hopkinton, Mass., company reported third-quarter revenue of $1.51 billion and net income of $159 million, or $0.07 per share. Included in that profit was about $45 million, or $0.02 per share, "from the favorable resolution of certain tax audits," the company said. Still, even without the tax break, that's a big turnaround from last year, when EMC posted a 9 percent sequential drop in sales (see EMC Stagnates).

"Q3 of 2001 and Q3 of 2002 were real disappointments," said EMC CEO Joe Tucci on a conference call with analysts this morning.

In an unexpected surprise, EMC said revenues from its partnership with Dell Computer Corp. (Nasdaq: DELL) represented slightly more than 10 percent of its total, or more than $150 million. EMC executives said it had an unusually high number of Symmetrix sales through Dell, with Dell's sales figures for Symmetrix and Clariion roughly equal.

Tucci, who noted that EMC sales reps participated in each Symmetrix deal, said there were a few "one-timers," a few unanticipated sales in the government sector, as well as a big Symmetrix sale to Dell as a customer.However, analysts pressed company executives on the extent to which there is channel conflict between Dell and EMC. Some believe that as Dell expands its storage business, it will start grabbing away customers. Tucci addressed the issue frankly: "Occasionally, Kevin [Rollins, Dell's president and COO] will have to step in when a guy gets out of line... but this is a very, very strong partnership."

With Dell's help, EMC says it sold every single Symmetrix DMX 3000 and 2000 system it had in stock, ending the quarter with some backlog. "Like the Yankees/Red Sox series, it was completely sold out," EMC CFO Bill Teuber said on the call.

And EMC's Symmetrix evidently stole some market share away from IBM Corp. (NYSE: IBM). In its earnings announcement yesterday, Big Blue said sales of its Shark storage system were down 12 percent sequentially after having lost share "against a key competitor in the high end."

But even as it's executing on its hardware strategy, EMC is also continuing to aggressively build out its software portfolio. Earlier this week, EMC announced plans to acquire content management vendor Documentum Inc. in a deal worth around $1.7 billion. That deal would vault EMC into becoming one of the largest software providers in the industry (see EMC Swings Into Software Big Leagues and EMC Cops Documentum).

Tucci touched on the Documentum deal, explaining that unstructured data is one of the biggest areas of growth. "Every leader in every market does two things -- increase the size of that market and make the pie bigger, and take a bigger slice of the pie," he said. "We're doing both... I've never gotten more excited about any opportunity in my 33-year career than I have about the opportunity we have with Documentum." [Ed. note: It seems like every quarter, Joe finds something new that he has never been more excited about.]Meanwhile, EMC said it expects its acquisition of Legato Systems Inc. (Nasdaq: LGTO) to close next Monday, Oct. 20. It will recognize a $30 million to $60 million charge for in-process R&D and integration costs associated with that deal, Teuber said.

EMC said it plans to merge its EMC Data Manager (EDM), EMC Replication Manager (ERM), and Avalon product lines with Legato's existing R&D. The company has appointed Mark Sorenson, who joined EMC from Hewlett-Packard Co. (NYSE: HPQ) earlier this summer, to head Legato's R&D unit.

Including revenues from Legato, EMC expects revenues for the fourth quarter to be between $1.74 billion and $1.78 billion. The company expects earnings of $0.07 per share, excluding charges associated with the Legato deal, and $0.05 per share including those charges.

EMC executives said the company is on track to generate 27 percent of revenues from software by the end of 2004. While Tucci did not rule out future acquisitions in the software arena, he told analysts: "Am I actively hunting for another software acquisition? The answer is no."

Todd Spangler, US Editor, Byte and Switch