To: John Carragher who wrote (4293 ) 2/9/1999 9:40:00 AM From: William F. Wager, Jr. Respond to of 17183
John--here's your IBD... EMC: Best-Kept Secret Among Technology Elite Date: 2/9/99 Author: Michael Tarsala The S&P 500's second-best-performing company this decade -behind Dell Computer Corp. -isn't networking king Cisco Systems Inc. or software giant Microsoft Corp. It's relative unknown EMC Corp., a leader in computer storage. EMC has quietly made a name for itself by selling computers that hold data for a variety of mainframes and large servers. Among its accomplishments, EMC has taken control of a key lucrative niche in stand-alone storage server computers that was led by IBM Corp. just three years ago. EMC's financial performance is prompting comparisons to dominant technology companies such as Cisco and Microsoft. EMC's stock is up 35,462% for the decade, while the S&P is up 276%. The company's stock price jumped 210% in 1998 alone. Further, EMC averaged annual revenue increases of 38% and earnings boosts of 44% in the last five years. ''If you look at the kind of market share we have, our earnings momentum . . . all those things stack up with those companies in the winners' circle,'' said Mike Ruettgers, EMC's chief executive. Financial analysts say Hopkinton, Mass.-based EMC soon should be on the short list of technology heavyweights. EMC is poised to make a quantum leap in industry clout in the next few years, analysts say. They say it could become the next ''franchise'' technology company, much like a superstar athlete is considered a team's franchise player. It is expected to reach a lofty level of industry influence reserved for such heavyweights as Microsoft and Cisco. ''This is one of the next bellwether tech companies,'' says Brian Goodstadt, analyst with Standard & Poor's in New York. ''EMC has taken a clear leadership in its industry -and the industry is booming.'' Goodstadt says the disk-storage market is expected to grow 35% annually in the next two to three years. Fast, reliable access to data seems to be needed more than ever. Many large companies have computer storage needs that are doubling each year. Storage is an area where companies can ill afford to cut technology budgets, Goodstadt says. EMC trails Compaq Computer Corp. and IBM in total disk storage revenue. But EMC's lead in stand-alone storage servers gives the company a leg up. This fast- growing niche could prove important enough to thrust EMC into the limelight with the world's technology giants, analysts say. The company's storage servers cost $1 million or more, exceeding prices charged by most of its competitors. But EMC's computers are favored by customers with heavy- duty storage needs. Customers include Internet service providers and companies that sell goods online. EMC's profit margins have increased in each of the past five quarters, Ruettgers says. EMC's margins stand at 53% and are likely to increase despite decreasing storage costs, analysts say. The company also raised average per-unit revenue to $424,000 in 1998's fourth quarter, up from $322,000 in the 1997 period, says Framingham, Mass.-based market researcher International Data Corp. Ruettgers has set lofty goals for EMC. He expects to reach $10 billion in annual revenue by the end of 2001. The company's revenue for 1998 was $4 billion. In EMC's fourth quarter ended Dec. 31, earnings increased 47% to $793 million, up from $539 million in 1997's fourth quarter. Diluted earnings rose 43% to $1.49 a share from $1.04. Revenue rose 36% to $1.19 billion from $873 million. The company is on track to increase revenue 30% in 1999, Ruettgers says. EMC has a two-year technology lead over its competitors, analysts say. As testimony to EMC's lead, more than half of the world's large server companies resell the company's storage computers to complement their own machines. Server leader Hewlett-Packard Co. is a particularly strong customer, accounting for 18% to 20% of EMC's revenue. EMC extended its sales agreement with HP in January an additional three years. HP will sell EMC storage servers that work with HP's servers and desktop computers. EMC is at work to build its portfolio of storage software, as are many of the company's competitors. Software is the fastest- growing part of EMC's business. Ruettgers says software sales will help preserve EMC's high margins. The company's software revenue increased 175% to $164 million in the fourth quarter of 1998, up from $60 million for the same period in 1997. Software now makes up 14% of revenue. EMC's software business should grow 50% in 1999, Ruettgers predicts. To reach Ruettgers' goals, EMC must be able to deal with increased competition. IBM and Sun are two of several U.S.-based companies searching for ways to cut into EMC's business. The company also faces stiff competition from Japanese competitors such as Hitachi Ltd. and Fujitsu Ltd. Ruettgers says the company will spend $1 billion in research and development in the next three years to keep EMC on top. EMC also is moving to sell a select number of its products over the Internet. EMC will only offer repeat customers access to its sales site, since most of its products are complex and require sales assistance. Ruettgers says he's confident EMC can retain its leadership. But EMC could trip in its sales execution, he adds. It's especially important for the company to increase its Japanese business, where Ruettgers says there's a faster- growing storage sales opportunity than in the U.S. The drive toward a $10 billion franchise company will be challenging. But Ruettgers says he takes solace in knowing EMC is focused on a hot market. ''Virtually every trend that exists in high tech drives the need for more storage,'' Ruettgers said. (C) Copyright 1999 Investors Business Daily, Inc.