EMC Revenue Growing, but Margins Falling

 
 
By Chris Preimesberger  |  Posted 2006-10-17
 
 
 

EMC Revenue Growing, but Margins Falling


EMC, the world leader in several data storage markets and the worlds sixth-largest software company, is being forced to tighten its belt and lose some weight—in the form of extra employees—after 36 months of digesting other companies in order to fill out its product offerings.

The Hopkinton, Mass., company reported its third-quarter financials Oct. 17, and although the company posted revenue growth of 19 percent from the third quarter of 2005—giving it a 13th consecutive quarter of double-digit growth—its overall profit margin wasnt as robust as expected, and a number of investors and analysts were not impressed enough to give the company a positive grade.

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Operating profit declined by 9 percent year-to-year, and operating margin declined to 12.2 percent from about 15 percent a year ago.

EMC also announced plans to begin consolidation efforts involving most of the 21 acquisitions made over the past three years and by improving efficiencies across the companys business.

The actions are expected to result in the layoff of some 1,250 employees worldwide by the end of 2007, a company spokesperson said.

As a result, EMC estimates that it will record a pretax charge of between $150 million and $175 million, or $0.06 per diluted share, in the fourth quarter of 2006 to cover the cost of these consolidation efforts. VMware, acquired in 2004, will continue to operate as an independent subsidiary of EMC and is not part of these actions.

Total consolidated revenue for the third quarter of 2006 was a record $2.82 billion, 19 percent above the $2.37 billion reported for the third quarter of 2005. The September 2006 acquisitions of RSA Security and Network Intelligence, which form the nucleus of EMCs new security division, contributed $37.8 million to EMCs third-quarter 2006 revenue.

Excluding revenue related to these acquisitions, revenue for the quarter was $2.78 billion, also a record for EMC and 17 percent higher than the third quarter of 2005.

Net income for the third quarter of 2006 was $283.7 million, or $0.13 per diluted share.

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An EMC spokesperson said that strong demand continues for new EMC Symmetrix DMX-3 and EMC CLARiiON CX3 networked storage systems and VMware Infrastructure software.

"EMC had a very solid quarter," said Joe Tucci, EMC chairman, president and CEO. "We delivered the highest quarterly revenues in our 27-year history, even before including revenues from the newly acquired RSA Security and Network Intelligence businesses."

While the numbers on the surface look good, not everyone agrees that the company is performing at its maximum best.

"After missing its revenue expectation in the prior quarter ... EMC set the bar low and over-delivered during Q3 06," said Allan Krans, principal analyst with Technology Business Research in Hampton, N.H.

"EMC reported revenue of $2.82 billion, beating analyst estimates of $2.67 billion, and exceeding its own guidance of $2.66 billion," Krans said. "As uncertainty and doubt swirls around the companys recent acquisition strategy, TBR believes that exceeding analyst revenue expectations during Q3 06 was important for EMC to demonstrate that its current operations are in good order."

Next Page: Headcount redundancies weigh down EMC.

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Despite the improvement at the top line during this years third quarter, EMCs headcount redundancies created by the companys acquisitions over the past 12 months weighed down operating profit during the quarter, Krans said.

"While EMCs overall revenue increased by 19 percent year-to-year, the highest growth rate in more than a year, operating profit declined by 9 percent year-to-year, and operating margin declined to 12.2 percent," Krans said.

"Much of the decline in EMCs operating profit over the past year is due to the companys acquisition strategy, which focuses on retaining the current operations of its targets. To address the headcount redundancy and inefficiencies resulting from EMCs recent acquisitions, the company announced plans to reduce headcount."

Krans said he views these reductions in a positive light and believes that EMC will need to hone its acquisition integration strategy planning to more quickly identify and capitalize on areas of overlap with future purchases.

"Other software vendors, particularly IBM and Oracle, are able to efficiently purchase and integrate software vendors in a manner that minimizes the impact to cost structure, and EMC should follow suit," Krans said.

EMC systems revenue in the third quarter was $1.3 billion, a 19 percent increase over the year-ago quarter. Software license and maintenance revenue grew 25 percent to $1.1 billion, and professional services, systems maintenance and other services revenue grew 7 percent year-over-year to $432 million.

EMC completed the third quarter with $5.5 billion in cash and investments.

EMC information storage revenues increased 14 percent compared with the year-ago quarter. EMC Symmetrix sales grew 21 percent.

In the midtier, EMC CLARiiON revenues grew 18 percent over the year-ago quarter, driven by widespread customer and partner adoption of the new CLARiiON CX3 UltraScale systems.

Security revenues for the full quarter, including the period in which EMC did not own RSA Security or Network Intelligence, grew 30 percent compared with the year-ago period, with both companies having record revenue during the quarter.

VMware, an independent EMC subsidiary, had another record quarter and grew total revenues 86 percent year-over-year to $188.5 million.

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