As a non-techie who bought some EMC this January, despite valuations that made my stomach churn, I should like to ask what you folks think about the questions raised in this Morningstar analysis:
Data General Acquisition Cools
EMC's Red-Hot Growth
by Joseph Beaulieu | 12:00 PM | 04-18-00
EMC EMC reported a solid March quarter as the result of
a red-hot core business, but the company must address
serious problems with recently acquired Data General to
justify its premium stock price.
EMC, an enterprise-storage hardware and software
vendor, reported March-quarter earnings per share of
$0.30, just topping the Wall Street consensus estimate of
$0.29. This small, positive earnings surprise is the result
of a combination of impressive margin improvements and
lukewarm top-line growth.
Total revenue growth came in at a relatively tepid figure,
23%. That might be impressive for a company the size of
EMC, but it's not for a stock trading at 85 times the
consensus estimate for 2000. EMC's base revenue growth
(excluding Data General) of 38% was much more robust.
Revenue for Clariion, Data General's midrange storage
business, declined almost 8%, however. Data
General's server business, which EMC is de-emphasizing,
dropped more than 30%. The decline in the server
business was expected, because the company seems to be
biding its time until it can sell off that business. The drop
in Clariion revenue, however, is a big problem.
EMC's solid cost controls have gained the company some
breathing room to resolve the problem of Clariion's
declining revenue. Gross margins expanded an
impressive 8% year over year. Operating margins,
although still impressive, expanded a more modest 2%.
While research and development expenditures held steady
as a percentage of revenue, EMC has been aggressively
plowing more money into sales and marketing efforts. It
seems unlikely that this rate of margin expansion is
sustainable, and it cannot make up for sluggish top-line
growth forever.
EMC is the dominant enterprise-storage vendor, but
investors expect the company to leverage that market
dominance into accelerating top-line growth. EMC's core
high-end storage business is already running full-bore, so
the key to its top-line growth probably will be Clariion.
Data indicate that the market for Clariion's midrange
storage is as large as the market for high-end storage, so
the opportunity is there.
EMC's competition has been unable to lay a glove on its
enterprise-storage dominance. IBM's IBM Shark, while
promising, has run into roadblocks and isn't a direct
threat to EMC yet. Sun Microsystems SUN
could encroach on EMC but has yet to lay out any
specific plans. Hewlett-Packard HP is in a so-called
rebuilding year and unlikely to pose any threat to EMC
in the near term.
EMC's projected decline in software-revenue growth,
from an impressive rate of 75% to something more like
50%, could simply be the effect of the law of large
numbers--big companies' high growth rates must
eventually decline. However, it could be a sign that
pure-play storage vendors such as Veritas VRTS are
finally making a serious play for some of EMC's business.
Investors are already paying a substantial premium for
EMC shares because of the company's perceived market
dominance. Simply put, EMC owns high-end storage. If
the company cannot make good with its Data General
acquisition and begin building a similar franchise in the
midrange storage market, investors may begin
questioning whether the company deserves its premium
price.
Joseph Beaulieu is an analyst with Morningstar.com.
He can be reached at
joseph.beaulieu@morningstar.com.
news.morningstar.com
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