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

To: Clint E. who wrote (33293)	7/6/2001 10:55:24 PM
From: Clint E.	Read Replies (1) \| Respond to of 69854

EMC Corp====From Wit SoundView====Hold=== Author: Gary Helmig F01E: $0.45 F02E: $0.69 Price: $30 EMC Preannounces a Huge Miss For the second quarter in a row EMC preannounced disappointing revenues and earnings. This time the miss was truly huge! The miss was much larger than we would have expected as a downside case and signals that the recovery will take longer than previously expected. We have made a preliminary revision to our model to reflect 2Q's performance and it suggests a year-end target price in the low $20s. We are maintaining our Hold rating and are continuing to look for a positive catalyst but cannot find one at this time. We do not recommend jumping into the stock as it most likely has a major sell off today but rather continue to wait until there is some evidence of an upcoming positive catalyst, which we do not see at this time. The Competition Heats Up EMC continues to describe their problems as a stopping of storage demand across all geographies. We continue to believe that EMC's major problem is the final emergence of viable competition and that the economic slowdown is making the competitive problem more acute. We believe the company cannot maintain their guidance for 20% plus revenue growth for the year. In fact, after a couple of down quarters, it is possible that EMC will have no revenue growth this year. EMC has previously refused to talk about exchange rate impacts saying that they manage to make them negligible. This quarter for the first time EMC indicated that the strengthening dollar was a problem for tem this quarter. We do not believe that the dollar changed materially from when EMC reported in April and find it hard to understand their change in stance on this issue. After a significant gross margin decline in Q1 gross margins declined another 10 points in Q2. Part of this decline is attributable to lower volumes but we believe that the great part of the decline relates to EMC having to respond to competition with price incentives and price concessions. EMC told us that they had to take down prices to maintain share in a tough demand environment. We agree with that strategy but that strategy will take a year before the compares become normalized to allow for resumption of earnings growth albeit at lower growth rates. We have learned of one large financial institution that received a bid from EMC for storage at 9 cents per megabyte. This is significantly below typical market and is not an isolated data point. We understand that user turned down the offer under the assumption the he could get the storage ultimately at a lower price. The longer term issue with these aggressive bids is that it sets a ceiling for those customers that receive those bids that they won't accept higher prices going forward and as the word spreads this will only put more pressure on gross margins. We had previously highlighted that each percentage point of gross margin erosion would impact earnings by 1 cents per share a quarter. We were close to the mark on the issue but under estimated the magnitude of the price declines for EMC this quarter. Bringing in Our Numbers We have updated our model to reflect the preannounce for the quarter and have taken a quick pass as to how the issues this quarter could flow for the rest of this year and next. The company will not give revised guidance until their earnings release on July 18 so our estimate changes are preliminary at this time. The company has not commented on additional actions to rebalance their business model. We previously had expected that those will necessarily be forthcoming and have been anticipating another round of layoffs at least as large as the one announced this quarter. Take With a Grain of Salt One now has to take EMC's guidance with a grain of salt, which is a big change from the previous five years. We say this since in December they stated that they would achieve $12B (35% growth) this year and that storage was "recession proof." In the first quarter they backed off to saying they could grow as little as 25%, but were still going for 35%. When they preannounced in April they backed off again to outlooking more than 20% growth and reiterated that outlook last month. 2Q results suggest that unless something radically changes immediately, EMC could end up with no revenue growth this year and we see no evidence that any major change in market dynamics is forthcoming. We do not recommend jumping into the stock as it most likely has a major sell off today but rather continue to wait until there is some evidence of an upcoming positive catalyst, which we do not see at this time.