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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Clint E. who wrote (33102)	6/27/2001 6:22:44 PM
From: Clint E.	Read Replies (1) \| Respond to of 70458

EMC Corp. ( EMC \| Profile \| Trade ) Hold From Wit SoundView's Trading Floor: Author: Gary Helmig F01E: $0.78 F02E: $0.98St Price: $28.30 Still Looking For a Reason to Upgrade We have been looking for a reason to upgrade our rating on EMC, however, we have found substantial near-term pressures. EMC has been taking a number of actions to make the quarter, but we believe that it will have difficulty in meeting expectations for fundamental earnings growth. Main Points The top concern from investors we have spoken to is whether EMC will need to preannounce this quarter. We cannot rule that possibility out, but it has become less likely as consensus moved down to $0.18. We would not expect EMC to preannounce unless it was unable to manage the delivery of at least $0.17. We expect EMC to attempt to take whatever actions are required to prevent another preannouncement and note that it reported an unexpected and unexplained increase in other income, which rounded the company to $0.18. We have not heard anything to suggest that EMC's business has reaccelerated this quarter to be on track to meet its revised guidance. EMC continues to take a number of actions to get its business rebalanced for slower growth and lower pricing (particularly on the hardware platforms). We continue to believe that most of EMC's issues are competition-related and that the economic slowdown primarily amplifies the competitive pressures, as users look to competitive solutions to fit budget limitations. Last quarter, prices came under significant pressure and EMC lost 150 basis points of gross margin year over year and 410 basis points sequentially. We see no reason for this situation to improve. Gartner tells us that storage pricing remains under much greater pressure than last year. In addition, multiple sources have told us that EMC has been slashing hardware prices to win "at all costs" with the plan to make up the gross margins on software. We find this a questionable strategy, since the competition is bidding solutions similar to EMC's. EMC apparently has modified its sales plan to reduce quotas to more achievable levels. This is a good thing. Nonetheless, we understand that EMC has been losing some of its key sales people and sales management. We have heard that there are particular issues on the West Coast and in Germany. On the Positive Side On the plus side, HDS, which had a spectacular first quarter performance growing revenues $280 million year over year to $480 million, has slowed in June. The company had gotten off to a strong start in April and May, but with no quotas for the June quarter (it has semiannual quotas) and with its sales recognition event currently taking place in Italy, June will be significantly down from March on a sequential basis, which ended its F01. Even so, we believe that HDS should still grow year over year more than 50%. IBM also continues to gain traction with its enterprise storage server, Shark, and we have seen no indication that IBM is about to let up on the price war it declared on EMC. The rumors about a possible reselling agreement between HDS and SUN persist. We believe that there is a high probability that something will happen here in the next couple of weeks. If it does happen it will be part of a larger technology exchange agreement and will probably be limited to the UE10000 servers, which today we estimate EMC has 90% of the storage. We believe that such an agreement would be a big loss for EMC. Therefore, not too surprisingly, we understand that EMC has made an attempt to ink a deal with SUN. It is hard for us to imagine SUN signing such a deal with EMC after HP's experience with EMC and with EMC last year going out of its way to bad mouth SUN's Unix business. Closure on this issue could be as soon as the next couple of weeks. As we have said, EMC is taking a number of actions to get its business model rebalanced for slower growth. We continue to believe that last month's announced layoff is only the first round and there will be another round announced in July. We estimate that EMC will shed a total of between 10% and 15% of its workforce when the company completes its rebalancing. Downside Already in the Stock At current levels, we believe that much of the downside is already in the stock. However, if there is another preannouncement and if SUN does sign up with HDS, we believe that the stock would likely see 20 before it sees 30. That said, we project that storage demand will remain strong and that EMC will eventually get through the transition to lower gross margins and probably lower than 35% sustainable growth. Once the difficult compares are behind EDC, which will not be until next year, the financial performance will likely improve. Where do we Go From Here? A key to the EMC story is how the company will do its next morph into a new key business. EMC management has repeatedly proven its ability to do this. The company remains steadfast in its policy of not discussing the future, other than market dynamics. We believe that the comments on development priorities reveal that the company plans to make a major thrust into server- vs. controller-based storage management software. We believe that the company is currently spending at an annualized rate of about $400 million in this area, which makes it the largest single investor in this space. The likely issue is whether this is going to be the virgin space like the one the company has morphed into in the past or whether this time the field is going to be crowded with IBM, Veritas, HDS, Compaq and several dozen others all having their sights on some part of this space. We clearly have a mixed view on the stock with lots of risks for the short term and yet, the potential for ultimately returning to being an attractive investment. For the moment we are reiterating our hold rating until some of the short-term risks become resolved.