EMC Revenue Growing, but Margins Falling

Analysis: Three years of swallowing other companies has left the big storage vendor with indigestion and having to face laying off 1,250 employees worldwide.

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.

/zimages/2/28571.gifEMC addresses the issues of storage and business continuity in health care. Read more here.

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.

/zimages/2/28571.gifEMCs grip on storage is beginning to slip a bit. Click here to read more.

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.

Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor of Features & Analysis at eWEEK, responsible in large part for the publication's coverage areas. In his 12 years and more than 3,900 stories at eWEEK, he...