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EMC Tears Past IBM in Corporate Data Storage Race: Spotlight
Hopkinton, Massachusetts, Jan. 11 (Bloomberg) -- EMC Corp. Chief Executive Michael Ruettgers honed his management skills in Raytheon Co.'s Patriot missile program, hailed during the Persian Gulf War for downing Iraq's Scud missiles.
After Raytheon, he went on to shoot down EMC's top rival, International Business Machines Corp.
Eight years ago, IBM held 76 percent of the world market for corporate data-storage systems, devices the size of soft-drink vending machines that warehouse everything from payrolls to customer buying habits to destinations for millions of overnight packages. Today, IBM, the world's largest computer maker, is in second place with 22 percent to EMC's 35 percent, according to International Data Corp., a Framingham, Massachusetts, market researcher.
''They took on IBM with superior products,'' said Mark Kelleher, a Tucker Anthony analyst who rates EMC a ''strong buy.''
EMC did it with innovative technology, building machines that can store 6 terabytes -- the equivalent of 120,000, four- drawer filing cabinets.
But novel hardware is easy to copy. So EMC developed software that quickly dredges up information from the computing depths. Today, EMC is one of the world's 25-largest software companies.
''The way to keep our lead was to develop specialized software'' said Ruettgers, 56, chief executive since 1992. ''That made our machines that much better.''
And to make sure customer information is protected, EMC has a service operation that's so plugged into each machine around the world that vibration sensors on devices in Kobe, Japan, alerted the company to the earthquake in January 1995, before the first reports on cable channel CNN. EMC had the machines running again in a few hours.
''They are the only ones you would bet your life on,'' said Britt Mayo, information technology director at Pennzoil-Quaker State Co.
EMC Shares
EMC shares have turned in an enviable performance. It's the third-biggest gainer in the Standard & Poor's 500 Index for the past three years, rising more than ninefold, behind only Dell Computer Corp.'s 35-fold increase and Compuware Corp.'s 17-fold rise. Microsoft Corp. is fourth, rising almost seven times.
EMC's net income rose about 125 percent over the same period, as corporations snapped up its machines. Third-quarter net income rose 52 percent to $201 million.
At a recent price of about 95, EMC has a market value of about $48 billion, just a shade less than American Express Co. The stock isn't cheap, trading at about 65 times 1998 estimated earnings of $1.47 a share. While that's twice as high as the average stock in Standard & Poor's 500 Index, it's less than Microsoft Corp.'s 70 times estimated earnings.
Household Name
While EMC is hardly a household name, its customers include Federal Express parent FDX Corp., UAL Corp.'s United Airlines Inc., Goldman, Sachs & Co., and Bell Atlantic Corp. Some 90 percent of the world's airlines use EMC systems, as do 10 of the world's largest telephone companies.
Online companies, such as Internet search company Excite Inc., also are buying EMC equipment to store Web pages, e-mail and customer orders for goods bought over the Internet.
''Every Web site has to be stored somewhere -- every picture, every video,'' Kelleher said. ''This will be a huge area of growth.''
Analysts are so optimistic about the company's prospects that the 14 who track its results all have ''buy'' or ''strong buy'' ratings on the shares.
Inviting Target
EMC's blend of hardware, software and support lets it charge $200,0000 to $3 million for each machine, about double what the competition charges.
That makes EMC an inviting target for IBM, as well as storage-device makers Hitachi Information Systems Ltd. and Storage Technology Corp. The three companies now offer systems that mimic EMC's hardware.
EMC's specialized software also is under attack. Last month, Sun Microsystems Inc., inventor of the Java programming language, unveiled software that it says lets all kinds of storage devices swap information without regard to hardware or software configurations, blunting the edge of EMC systems.
To be a competitive threat, however, said analyst Kelleher, Sun must convince a big computer maker such as Hewlett-Packard Co. or Compaq Computer Corp. to adopt Sun's software.
That probably won't happen any time soon, at least when it comes to Hewlett-Packard. On Wednesday, Hewlett-Packard said it extended its 1995 agreement to resell EMC equipment with its own high-powered computers through 2001.
''It is not in Hewlett-Packard's or Compaq's best interest to help Sun, a hardware competitor,'' Kelleher said.
Demand for Storage
The worldwide appetite for data storage is soaring. Market research firm IDC estimates that storage-device sales will rise 71 percent to $31.1 billion in 2002 from $18.1 billion last year.
Ruettgers figures demand will be so strong in the next few years that EMC revenue will more than double to $10 billion by 2001 from almost $4 billion last year if the company simply holds its share of the market.
''We are definitely a believer,'' said Duane Eatherly, technology sector manager for Banc One Investment Advisors Corp., which controls about 344,000 shares.
EMC was started in 1979 by Richard Egan, a veteran of Intel Corp., the No. 1 computer chipmaker, and the Apollo space program. The company spent much of the 1980s making memory boards used to store small amounts of information for minicomputers.
Then, Egan, now EMC's chairman, borrowed an idea cooked up at the University of California-Berkeley.
Instead of building storage devices with one disk the size of an old-fashioned vinyl album, as IBM did, EMC built a device housing as many as 128 hard-disk drives much like the small ones inside personal computers.
Reliability
Individually, these fast, small, inexpensive disks weren't as reliable as IBM's big, single-disk system. But information could be stored in several places. Even if one disk was on the blink, another would have it. In the IBM system, when the disk wasn't working, the whole system failed.
Ruettgers, who joined EMC in 1988, realized that anyone could build similar storage systems with off-the-shelf parts. The key was developing software to find the data. The company has invested $1 billion in software development the past few years and plans to spend another billion in the next three years.
EMC figures that software sales were about $400 million last year, a tenth of total sales. Chris Bedowitz, senior analyst at Invesco Funds Group, which controls about 500,000 EMC shares, said he expects software sales to rise 50 percent a year ''and at very high margins.''
Analyst Kelleher estimates that EMC has gross margins -- what's left from sales after expenses -- of about 45 percent on hardware sales. Though hardware margins may fall as rivals copy EMC's hardware, software margins of as high as 90 percent will keep insulate earnings, he said.
Investors and analysts say that the big risk for EMC is that someone comes along with a radical change in storage technology that does to EMC what it did to IBM. That's always a possibility in the high-tech business.
Until that happens, ''it's their market to lose,'' said Tucker Anthony analyst Kelleher.
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