EMC's Woes May Involve More Than IT Spending
By K.C. Swanson
Staff Reporter
10/17/2002 11:49 AM EDT
thestreet.com
In its latest, underwhelming earnings report, EMC (EMC:NYSE) heaped blame on a torpid tech-spending environment. But a skeptical Wall Street seems to think many of the problems lie with the company itself, given that at least one rival looks on track for a strong fourth quarter.
This morning the data-storage giant reported earnings in line with expectations, but that's not likely to be of much comfort to investors: EMC also said gross margins slid from last quarter on weaker-than-expected sales volumes, and management's outlook on IT spending lands it firmly in the sourpuss camp.
Thomas Weisel analyst Kevin Hunt said EMC's flat growth outlook was a surprise, tough market notwithstanding. "That's pretty much unheard of in this business. That's by far the most cautious outlook of anybody," he said, adding that he estimates IBM's server and storage business will grow 30% in the quarter underway. "It's not all [the fault of] IT spending. If it was then IBM would be guiding down," he said. "I would guess EMC is probably losing share in all areas."
EMC recorded a loss of $51 million, or two cents a share, compared with a year-earlier loss of $11 million, or a penny a share. Factoring in two one-time benefits, net income was $21 million, or a penny per share.
Revenue for the quarter came in at $1.26 billion, up 4% from the year-earlier period and down 9% from the second quarter. Revenue was expected to be $1.25 billion.
Factoring in stock-option expenses, which cost $75 million after taxes, the company said its earnings would have been three cents lower.
Management's take on the fourth quarter was bleak. "Given the state of the market and the lack of customers' confidence in the economy, we expect flattish revenues quarter over quarter," said CFO William Teuber on the conference call. "We believe demand eroded further at the tail end of Q3. Any optimism we had about things getting better dissipated by the end of the quarter."
Describing a scenario similar to that depicted by IBM (IBM:NYSE) yesterday, which saw push-outs in its services unit, CEO Joe Tucci said customers are delaying expensive investments. "In the past quarter, a significant number of large deals didn't close," he said, adding that only one was lost to competition. "The other deals were simply pushed out to future quarters. In the end of Q3 there was not just a continuation of bumping along the bottom, but a deterioration in data center big spending projects."
He said a slew of customers had explained to him that their profit-recovery plans were behind schedule and further budget cuts were in the works.
On the conference call, EMC said its gross margins had slid to 37% from 38.3% last quarter, hurt mostly by volume declines. For the near term, margins seem likely to stay under pressure, although the company has previously said they would climb to 45% within six to eight quarters after an economy recovery.
An analyst from Sanford Bernstein suggested on the call Thursday that that now seems unlikely to happen until 2005, since a rebound in spending likely won't kick until at least late 2003. Tucci responded that depending on the economy, he could see margins pick up "in 2004 or coming out of 2004."
In the meantime, the company will focus on cutting costs, which Teuber described as "controlling the controllable." EMC says cost-control efforts over the past year have yielded savings of $280 million and that it's reduced its quarterly breakeven level to about $1.4 billion from about $1.8 billion in the second quarter of 2001.
Earlier this month, the company announced it would cut its staff by 7%, to 17,000, a move that will be completed this quarter. At that level, the company's size would have dropped about 30% from its peak in early 2001.
But some analysts have said payroll needs to shrink still further, arguing the company's cost structure remains too high. In a recent note, A.G. Edwards analyst Shebly Seyrafi pointed out EMC used to draw in over $100,000 per employee in better years. Applying that metric to the current payroll would imply a headcount of only 14,000 -- suggesting another 18% of staff, or 3,000 jobs, still need to be cut.
Meanwhile, others speculate that Street growth estimates remain too high. According to the most recent consensus numbers, analysts are modeling for revenue growth of 9.6% in 2003, with growth of 8.2% expected to follow in 2004.
In early morning trading Thursday, with tech stocks rising across the board, EMC added 3 cents, or 0.6%, to $4.79. Shares have now bounced up 25% from the five-year low of $3.83 they hit Oct. 4, after the company warned that it would miss its goal of making a profit in 2002 and said third-quarter numbers would come in lower than expected. |
