News Analysis: Despite record revenue growth in the second quarter, the storage giant sees its stock take a hit.
EMCthe world leader in several data storage hardware and software marketskeeps coming up with overall quarterly financial numbers that any business would be happy to report. But the company just cant seem to satisfy everybody.
On July 24, EMC reported record second-quarter revenue and double-digit revenue growth in its systems, software and services businesses. The company said second-quarter net income rose to $334 million, from $279 million a year earlier. Quarterly revenue rose a healthy 21 percent to $3.12 billion.
The company has now recorded double-digit top-line growth for 16 consecutive quarters. Still, it lost ground in its stock pricing after the numbers were announced: EMC shares fell 2.36 percent on July 24 to close at $19.05 per share.
The stock had risen by 44 percent over the last seven months on expectations for strong earnings growth and optimism about the outcome of the upcoming IPO (initial public offering)most likely this fallof 10 percent of EMCs VMware virtualization software business.
However, the second-quarter numbers barely beat the average analyst estimate, according to formulas run by analysts affiliated with Reuters Estimates. In addition, the company decided not to modify its forecast for full-year profit, and it now falls short of the average Wall Street forecast.
That probably wasnt a good idea, Brian Freed, an analyst with Morgan Keegan & Co., told eWEEK.
"Expectations were pretty high," Freed said. "People wanted a great quarter with upward revisions to estimates."
He said the stock price had risen from about $12 to about $19 since the beginning of 2007, which translates to about $14 billion in incremental market cap.
"So when the Street gives you $14 billion of incremental market cap, $50 to $60 million of upside record revenue is pretty much priced in," Freed said. "Its not so much a matter of Results were bad, its just that results were not good enough to support the incremental market cap the Street has already priced into the stock."
The other thing, he said, was that the numbers werent "necessarily all that good."
"I would point to three things," Freed said. "No. 1, the upside in revenue didnt drive very much upside in earnings. The second is with respect to guidance: The company beat Street expectations for both Q1 and Q2, and yet hasnt clearly increased full-year guidance. They have kind of changed tone a little bit, but they didnt raise the range of guidance."
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The third factor, he said, is that if one looks closely at the storage software piece of the business, and then back out at growth from VMware (virtualization), RSA (security) and Documentum (content management)offerings that essentially are separate entities from storage software that runs the companys storage arraysthen a different financial picture develops, Freed said.
"If you do the math, the storage software number they give you is $1.268 billion," he said. "And then you look at what they said VMware did [$298 million]. They didnt own RSA a year ago, so they reported $125 million of RSA revenue. And content management [the Documentum division] grew 5 percent [year over year] to $174 million. So when you subtract those numbers, [EMCs] storage softwareClariion and Legato, the stuff that sits on Symmetrixwent [down] from $703 million to $668 million, a 5 percent [year over year] decline."
At the end of the day, Freed said, EMC overall has "good numbers, dont get me wrong. But there was better than just good priced into the stock."
In October 2006, EMC posted similarly good overall numbers, but its stock also took a hit. Following the companys Q2 2006 report, Chairman, President and CEO Joe Tucci told the media that EMC had suffered a "self-induced execution failure" and hadnt organized its supply chain systems well enough to deliver a late spate of new orders. That production snag apparently has been rectified, the company said.
"EMC executed well in the second quarter," Tucci said July 24. "Customers continued to choose EMC for the depth and breadth of our information infrastructure technologies and solutions, which translated into solid revenue growth. Add to this the explosion of digital information and the positive 2007 IT spending outlook we see in all major geographies, and it is clear that we are in a sweet spot of the IT industry."
Small day-to-day setbacks dont necessarily mean that Wall Street is disappointed overall, Mike Gallant, a spokesperson for EMC, based in Hopkinton, Mass., told eWEEK.
"If you look at our stock at the beginning of the year, our stock appreciation [44 percent increase] matches our performance, right?" Gallant said. "Were delivering."
From a product and sales standpoint, EMC is performing very well, Forrester Research Analyst Stephanie Balaouras said.
"I think on the systems side [core storage and core storage software], they have always continued to do well; they regularly update the DMX, Clariion, Celerra and Centera lines," Balaouras said. "And their backup-to-disk offering, the EMC Disk Library, is a market leader. They seem to be leveraging the RSA acquisition well to add new security features to the core storage products."
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Chris Preimesberger was named Editor-in-Chief of Features & Analysis at eWEEK in November 2011. Previously he served eWEEK as Senior Writer, covering a range of IT sectors that include data center systems, cloud computing, storage, virtualization, green IT, e-discovery and IT governance. His blog, Storage Station, is considered a go-to information source. Chris won a national Folio Award for magazine writing in November 2011 for a cover story on Salesforce.com and CEO-founder Marc Benioff, and he has served as a judge for the SIIA Codie Awards since 2005. In previous IT journalism, Chris was a founding editor of both IT Manager's Journal and DevX.com and was managing editor of Software Development magazine. His diverse resume also includes: sportswriter for the Los Angeles Daily News, covering NCAA and NBA basketball, television critic for the Palo Alto Times Tribune, and Sports Information Director at Stanford University. He has served as a correspondent for The Associated Press, covering Stanford and NCAA tournament basketball, since 1983. He has covered a number of major events, including the 1984 Democratic National Convention, a Presidential press conference at the White House in 1993, the Emmy Awards (three times), two Rose Bowls, the Fiesta Bowl, several NCAA men's and women's basketball tournaments, a Formula One Grand Prix auto race, a heavyweight boxing championship bout (Ali vs. Spinks, 1978), and the 1985 Super Bowl. A 1975 graduate of Pepperdine University in Malibu, Calif., Chris has won more than a dozen regional and national awards for his work. He and his wife, Rebecca, have four children and reside in Redwood City, Calif.Follow on Twitter: editingwhiz