Weakness in Europe. We are lowering our EPS estimates and price target on EMC to reflect weakness in Europe (29% of revenue). For 2Q, we now expect EMC to grow revenue 3% sequentially (vs. 4% guided) and to post EPS (w/o ESO) of $0.16 (vs. guidance of $0.17 and consensus of $.16).
April very bad for EMC in Europe, modest improvement since. Our checks suggest that April was a very bad month for EMC in Europe, May improved and June is seasonally better but will likely not be enough to meet expectations from the EMC channel. One supplier of EMC product said that April was the worst EMC-related month in 18 months. Large resellers noted similar weakness. Our checks in the United States have not noted the same weakness that was noted in Europe.
Recent EMC comments suggest lowering of the bar. These end-of-quarter checks follow the comment made by EMC CEO Joe Tucci at its analyst day on June 7 that "IT managers are underspending their budgets." We believe that EMC is experiencing weakness worldwide – in Europe, the U.S. and Asia.
New CX3 not a "wow" product. The new 4Gbps CLARiiON midrange array from EMC, the CX3, apparently is not ramping as strongly as some had hoped. It is regarded as a "small" improvement. Our U.S. checks are noting that there are increased CLARiiON-to-Symmetrix conversions taking place.
Competition still tough. Competition with Hitachi and NTAP continues to be fierce, with recent momentum by Hitachi continuing to hurt EMC.
Derivative calls: More negative for BRCD, MCDTA; Slight negative for ELX. Weakness at EMC is a negative for Emulex (20% revenue from EMC), Brocade (20%-30% revenue from EMC, we estimate), and McDATA (29% revenue from EMC). These stocks have all pulled back this quarter, so much of our concern is already embedded in these stocks. BUY-rated Emulex derives only 14% of its revenue from Europe, so it may be less negatively impacted. Brocade and McDATA derive 37% and 41% of revenue, respectively, outside of "Domestic," so Europe perhaps accounts for around 30% of revenue for each of them.
NTAP also showing signs of weakness. We are getting checks suggesting that NTAP's sales in Europe are also showing some weakness beyond just normal seasonality. The July quarter for NTAP is now half over, so we will be monitoring the situation very carefully. We hear that NTAP has been price aggressive in the U.S. since the beginning of the year (which may partly explain why its gross margin has declined from 62.5% two quarters ago to 60.3% in the April quarter). |
