Delivery, Inventory Problems Besmirch Otherwise-Positive EMC Q2 Report

By Chris Preimesberger  |  Posted 2006-07-14

Delivery, Inventory Problems Besmirch Otherwise-Positive EMC Q2 Report

Data storage giant EMC on July 14 reported its financials for the second quarter of 2006, and, although total revenue was 10 percent higher than a year ago, demand for EMC products continues to be strong, and company morale is said be good, all was still not well.

During the conference call, CEO, President and Chairman Joe Tucci said he was "deeply disappointed in our self-induced execution failure" to have enough inventory to meet the demand of a last-minute order deluge in the last week of June.

"We let our investor base down, but we did not let our customers down," Tucci said. "We made several production missteps, and we are offering no excuses. We can and will do better."

In a nutshell, Tucci said, EMC did not have enough units of its front-line DMX-3 enterprise storage system available for delivery late in the month of June and was overstocked with its older DMX-2 systems.

"As most of you know, our Q2 was very backend-loaded," Tucci said. "We had $500 million in orders in just the last week of June. We didnt have enough DMX-3 inventory on hand to meet demand, and we played it too close with our supply chain. On the other hand, we had too many DMX-2s in stock. This was a self-induced execution failure on our part, and there is no excuse."

While EMCs execution was not up to "our own high standards, our business and customer demand for our products and solutions remain strong," Tucci said.

"The compelling evidence is the 14 percent year-over-year growth in new bookings, which speaks to the broad customer endorsement of EMCs information lifecycle management strategy and the great value customers see in our unique technology.

"We know what we need to do to sharpen our execution going forward and will focus our efforts on both EMCs short-term performance and our companys long-term growth and opportunity."

The Hopkinton, Mass.-based companys 12th consecutive quarter of double-digit revenue growth was highlighted by increased demand for VMware virtual infrastructure software (revenue up 73 percent) and EMC Documentum content management software (up about 30 percent).

Total consolidated revenue for the second quarter of 2006 was $2.57 billion, 10 percent higher than the $2.34 billion reported for the second quarter of 2005, the company reported.

Net income for the second quarter of 2006 was $279 million or 12 cents per diluted share on a GAAP (generally accepted accounting principles) basis, which includes a charge of 2 cents per share for stock option expense, an additional 2-cent expense related to amortization of intangible assets and other equity compensation, and a 1-cent tax benefit, net of an in-process research and development charge.

Click here to read more about EMCs forecast adjustment.

Excluding these items, non-GAAP earnings per share for the second quarter grew 15 percent to 15 cents per diluted share, compared with non-GAAP second quarter 2005 earnings per diluted share of 13 cents.

Systems revenue in the second quarter was $1.15 billion, an 8 percent increase over the year-ago quarter.

Software license and maintenance revenue grew 14 percent to $997 million. Professional services, systems maintenance and other services revenue grew 9 percent year-over-year to $424 million.

EMC completed the second quarter with $6.3 billion in cash and investments.

Next Page: Nervousness.


So why is EMC beating itself up over what is ostensibly a stellar report card?

"Some Wall Streeters got nervous when EMC reported weaker expected demand for previous-generation DMX arrays in the second quarter (which they apparently expected to sell more of) versus stronger-than-expected demand for current-generation DMX late in the second quarter, which they couldnt deliver because they didnt have enough inventory," said John Webster, founder and senior analyst of Data Mobility Group in Nashua, N.H.

"Wall Street hates surprises of this kind and punish those who surprise them negatively."

EMCs results also had a knock-on effect for NetApp July 13, Webster said.

"NetApp stock got hammered when news of a minor accounting inquiry surfaced. Normally, this kind of news would not have resulted in the beating NetApp stock has taken recently. But with the nervousness generated by EMCs results, NetApp also gets hit. Call it collateral damage," Webster said.

EMC finally succumbed to a business model that has been an asset for so long: a direct sales force that waits until the end of the quarter to close business and long product refreshes, said Brian Babineau, a Palo Alto, Calif.-based analyst with Enterprise Strategy Group.

"Clearly, EMC could not continue to run its business this way because of increased competition and additional customer scrutiny in making purchasing decisions," Babineau told eWEEK.

"I think EMCs humbleness on its call actually proved that the company can execute with appropriate planning inclusive of setting appropriate expectations with Wall Street.

"Kudos for Tucci leading the call, disclosing purchase prices and revenue ramp of recent acquisitions, and falling on the sword for EMCs missteps that are a direct result of having backend-loaded quarters.

"We do not believe that there is a weakening of end-user demand for EMC products; EMC just needs to improve its product cycles to reduce sales cycles with the intent of capturing spend at the end of a quarter."

Its recent performance is a reminder that EMC is still highly dependent on its hardware business, said Allan Krans, analyst with Technology Business Research, in Hampton, N.H.

"Although most of the press and strategic discussions focus on software, EMCs hardware business is a key enabler of its software and services businesses. Put in simple terms: Without hardware, EMC would not be a strong player in the storage software market," Krans told eWEEK.

"Despite the disappointment in its hardware division, EMCs results this quarter did reflect positively on the companys overall strategy. At a time when analysts are widely questioning EMCs recent [June 29] purchase of RSA, software sales contributed strongly to EMCs overall revenue and profitability during the quarter," Krans said.

Wall Street refuses to see EMC as a diversified information management company, Webster said.

"It still focuses in on hardware sales. Im not sure what else Joe Tucci has to do to change that image. Someday, maybe theyll get it," Webster said.

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