REPOST. Good point, Bob. EMC, however, has not diluted its stock as fast as other companies. I think they're leaning towards expensing options along with their Global 2000 customer base, but I don't think they want to get too far ahead of the other tech companies that are settling in for a long drag out war to maintain the status quo. I suspect they will rearrange their compensation plans -- e.g., sweetening salary packages and increasing discounted stock purchase programs (currently at 85%) -- as soon as FASB lays down the new rules for expensing options sometime next year. Cost recognized properly is cost managed properly.
Regarding cash burn, EMC has managed to increase its cash account by more than $600M since 3Q01 when its quarter operating expenses were more than $250M higher. Every 1,000 or so headcount reduction produces more than $50M in quarterly operating expense reductions in succeeding quarters so I think they can remain cash flow positive while they increase the networked hardware footprint that leads their networked software footprint. Right now they're still spending $200M a quarter in R&D and remaining cash flow positive so their product pipeline will remain strong for the forseeable future.
Most importantly, bonds may be approaching the overvalued level which means that stocks, in general, and EMC's stock, in particular, may be approaching the undervalued level. Here is a profile of EMC's short-term and long-term investments as of 12/31/2001. It's a fairly conservative fixed income portfolio that allowed EMC to accrue $57M in interest income last quarter.
EMC
SHORT-TERM/LONG-TERM INVESTMENTS
As of 12/31/2001
Asset & Mortgaged-backed securities $450M (15%)
US Government & Agency backed Obligations 1.1B (38%)
US Corporate Debt Securities 596M (20%)
Foreign debt securities 48M ( 2%)
Municipal Obligations 733M (25%)
Total (Amortized Cost) $2.9B (100%)
Overvaluation will probably hit EMc's US government bond account first so I think it's actually prudent that EMC starts moving money from this account towards reducing its share count. EMC's current share count is 2.2B so reducing the share count will turbo-charge its earnings as follows:
EMC
EFFECT OF STOCK BUYBACK
(net of option creep)
1- [2.1B/2.2B]= 4.5%
1- [2.0B/2.2B]= 9.1%
1- [1.9B/2.2B]= 13.6%
1- [1.7B/2.2B]= 22.7%
Put another way, with 2.2B shares outstanding EMC needs to produce $1.1B in earnings to generate an EPS of $0.50. With 1.9B shares outstanding, EMC only needs to produce $950M in earnings -- 13.6% less earnings -- to generate the same EPS of $0.50. |
