BTW: the reason EMC was down today is that there
is a rumor out there that they had the *exact same
problem* this January, a soft start due to the
budget freeze/release process.
Wait a minute. Before you drag EMC into this, keep
in mind that about 80% of EMC's revenues
(MRQ: $2.6B) come from existing customers with no
single customer accounting for more than 1% of
revenues, no single top 10 customer in one quarter
becoming a top 10 customer in the succeeding quarter,
and no single vertical accounting for more than 10%
of revenues.
As a result, EMC's order flow tend to be more
predictable than the rest of the storage
industry especially since enterprise storage prices generally go down at least 30% a year and customers
have learned to program their buys throughout their
budget year to take advantage of these steady price declines. You can actually track this through the
work-in-process component of the inventory item in
the 10Q.
Generally, EMC takes the customers orders and either
fills it from Finished Goods or by assembling it.
EMC's final assembly and testing process typically
takes 21 to 25 days. You can take a virtual tour of
the Franklin manufacturing facility and see for
yourself part of the reason EMC's boxes command a
premium.
emc.com
Consequently, because of the highly recurring nature
of its revenue streams and its final assembly and
testing process, the work in process item roughly approximates the future revenues that are booked as
soon as shipped in line with EMC's revenue
recognition policy (see tailend).
EMC ended the last quarter with $1.025B in
inventory. We won't know until the 10K the
percentage of work-in-proces (WIP) inventory
that was subsequently booked as revenues during
the first few weeks of January so let's examine
the last 5 quarters especially since EMC is
developing a new sales channel for Clariion.
Inventory
Raw Work in Finished Total
Materials Process Goods Inventory
(WIP) (TI)
4Q1999 $ 38.2 $379.7 $201.0 $ 619M
1Q2000 68.8 435.4 174.3 678M
2Q2000 55.4 493.1 209.4 758M
3Q2000 49.7 619.6 199.3 869M
4Q2000 ? ? ? 1,025M
Derivations
WIP As a
Percentage
Succeeding Of Succeding
Quarter's Quarter's
WIP/ Storage Hardware Storage Hardware
TI WIP Revenues Revenues
4Q1999 61% $379.7 $1,267M (1Q00) 30%
1Q2000 64% 435.4 1,516M (2Q00) 27%
2Q2000 65% 493.1 1,647M (3Q00) 30%
3Q2000 71% 619.6 1,816M (4Q00) 34%
4Q2000 65%* 666.2** 2,221M++ (1Q01) 30%+
* 61+64+65+71=261; 261/4=65%
** 65% x $1,025M = $666.2M
+ 30+27+30+34=121; 121/4=30%
++ 666.2M/30%=$2,221M
Let me reiterate that despite increasing sales, EMC's Finished Goods inventory has hovered around $200M at
the end of each of the last 5 quarters excluding
4Q2000 so it's fair to use Work-in-Process as one
gauge of how the quarter is going.
Since WIP as of the end of 4Q2000 was probably
booked as revenues during the first few weeks of
January and since the amount ($666.2M) suggest
another record revenue quarter ($2.2B in storage
hardware revenues alone) this rumor about a bad
January is probably false. Besides, even if true,
there are still two more months to go so why the
concern this early?
My guess is that shortsellers are again using the
grapevine to amplify jitters in a market still
recovering from the Cisco miss. In particular, how
well the sober dispatches from Compaq and Sun
about a slow January as well as the rampaging
price actions of IBM and Dell provide useful
backdrop to these rumors.
Gus
EMC's Revenue Recognition Policy
(from 1999 10K)
The Company generally recognizes revenue from
product sales upon shipment provided that no
significant post-delivery obligations remain and
collection of the resulting receivable is
reasonably assured. When significant post-delivery obligations exist, revenue is deferred until such obligations are fulfilled. The Company accrues for
warranty costs, sales returns, and other allowances
at the time of shipment based on its experience..... |
