Delivery, Inventory Problems Besmirch Otherwise-Positive EMC Q2 Report

News Analysis: The storage giant reports 10 percent improvement in revenue over 2005, but a late spate of orders and internal production issues cloud an otherwise positive 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.

/zimages/3/28571.gifClick 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.

Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor-in-Chief of eWEEK and responsible for all the publication's coverage. In his 13 years and more than 4,000 articles at eWEEK, he has distinguished himself in reporting...