THE WALL STREET JOURNAL/NEW
ENGLAND
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Heard in New England:
EMC Sales May Feel Bit of a Bite
On Y2K Fears, Analysts Predict
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By Andrew Caffrey
Staff Reporter of The Wall Street Journal
Is highflying EMC about to hit an air pocket?
Though it remains a darling of Wall Street, skeptics says the Hopkington, Mass., data-storage
company may experience a slight slowdown in orders as customers halt additions to their computer
systems in the final weeks and months leading to 2000. These skeptics caution that if such a
slowdown does occur, it could affect EMC's sales for several quarters.
Given that at around $108 a share, EMC is trading at 55 times 1999 projected earnings, and that
investors lately have been skittish about expensive growth stocks, any suggestion of turbulence ahead
could hurt EMC's stock.
"Expectations for EMC are so high, it doesn't take much to clock a high-growth company like that,"
says James Gribbell, vice president of Cambridge, Mass., investment firm David L. Babson.
Mr. Gribbell's firm detected the potential for slower data-storage sales when it surveyed companies
last year about their computer spending plans. "Anecdotally, we see the same storage trends across
the board," he says. "The storage companies, like EMC, are potentially vulnerable or may see an air
pocket."
Lately, though, EMC has been invincible. The company had a record year in 1998: Revenue grew
35%, and per-share net income jumped 43%. The stock price has doubled in the past four months.
Long term, the future looks just as good. Computer-industry executives and consultants forecast the
data-storage market, already at $10 billion a year, will grow at least 30% annually for the next
several years. EMC Chief Executive Michael Ruettgers says his company will grow even faster by
continuing to take market share away from competitors. He predicts EMC will have $10 billion in
revenue by 2001, up from $3.79 billion in 1998.
Wall Street so far is buying it. For 1999, the consensus estimate of analysts who follow the company
calls for a 32% increase in earnings, to $1.97 a share.
Even skeptics say EMC's growth looks assured over time. But, near term, they see uncertainty.
Much of the contrary information on plans for data-storage spending is anecdotal. That makes it
difficult to quantify an industrywide drop-off, much less the potential hit for EMC.
The situation also varies greatly from customer to customer. For example, at Staples, the
office-supplier based in Westborough, Mass., "there will be a bit of a lull for a short period of time" in
buying storage, says Brian Light, chief information officer.
Staples purchases data-storage devices from several vendors, but "largely relies on EMC," Mr. Light
says. For its Year 2000 project, he says, Staples last year bought twice as much data-storage
capacity as it normally does, so it expects to buy less this year.
"Across the board, the market is expecting a slowdown," Mr. Light adds, "but it's only temporary."
At Home Depot, meanwhile, data-storage spending is expected to increase right through the end of
the year because the Atlanta retailer is growing so fast. With plans to open more than 160 stores this
year, the company is likely to buy 30% to 40% more data storage than usual, says Ron Griffin, senior
vice president. Mr. Griffin does say, however, that the retailer will add only EMC devices it already
knows, and no new models. Many Home Depot suppliers will do the same, he says.
Like Staples, Home Depot purchases most of its data storage from EMC. And like his Staples
counterpart, Mr. Griffin declines to disclose a dollar amount on those purchases, except to confirm it
is in the millions of dollars.
A survey by Gartner Group, a Stamford, Conn., computer consultant, found that as many as 30% of
businesses were planning not to add data storage to their computer systems during a "lock down"
period later this year.
The lock down is essentially a freeze on any new additions -- hardware or software -- that many
companies are planning after they clean their computer systems of any Year 2000-related bugs. By
not adding new and unfamiliar components to the computers they spent months or years fixing, the
lock down offers companies a cooling-off period during which they can constantly monitor their
systems leading up to Jan. 1, 2000. The freeze also is designed to minimize potential legal liability by
allowing corporate executives to prove they took all possible precautions to prevent their computer
systems from failing.
Sears, which claims to have one of the largest computing systems in the business world, plans to
impose a freeze on new devices, including data storage, when a lock down goes into effect March
31, says a spokeswoman for the Hoffman Estates, Ill., retailer. But the company says it will add new
EMC devices if they are "identical" to boxes it already has that have been tested for Y2K
compliance.
The Gartner Group's survey was conducted in the 1998 fourth quarter and included data-center
executives at 400 organizations around the world. But exactly how widespread and how
comprehensive lock downs will be remains unknown, says Michael Chuba, a Gartner Group analyst
involved in the survey.
Mr. Chuba expects many companies to loosen restrictions as they get a better grasp of their Y2K
preparedness. His firm will conduct another survey in March, and he predicts the percentage of
customers planning to delay data-storage purchases will be less.
However, he says, "There still will be some percentage that will go through on a lock down. I suspect
it will be double digits, and that will have some effect on some vendors' fourth-quarter business."
The Gartner Group survey wasn't vendor-specific, so it's not known how many of those companies
are EMC clients or potential clients.
But Michael Casey, Gartner Group's research director for systems storage, says, "We've got enough
data right now from enough customers to believe it's a real effect" on data-storage spending.
Mr. Casey says data-storage vendors could see flat sales growth in the fourth quarter compared with
the 1998 period and says the slowdown could extend into the first quarter. It will be modest, "not like
falling off a cliff," he says. What's more, the downturn could be partly offset by higher-than-expected
sales in the first half as companies rush to install more data storage before locking down their
systems.
John McArthur, program director for storage-systems research at International Data Corp. of
Framingham, Mass., says his data suggest "a slight depression of the growth rate" of data-storage
sales this year. But, he says, EMC will not suffer because it has such a stranglehold on the market.
"It'll be hard to find the blip in EMC because of the growth rate and the rate at which they're taking
{market} share" from other companies, he says.
EMC doesn't appear too concerned about a fall off in business later this year. "We watch that really
closely," Mr. Ruettgers, the chief executive, says in an interview. Growth in the overall market is so
robust, the company adds, that it should more than compensate for any momentary drop-off in
purchases by customers.
Still, EMC says it will combat any freezes by its clients. A company spokesman says EMC, like other
vendors, has tools that would allow customers to add new storage devices without disrupting their
Year 2000 fixes. EMC also says it should be able to weather lock downs if its customers continue to
add EMC boxes identical to ones already on their computer systems.
EMC is known for being good at managing its business -- and Wall Street's expectations. Mr. Casey
of Gartner Group says that if EMC detects problems with sales in the fourth quarter, it may try to
persuade customers to book orders on new devices this year and to take delivery next year after the
freezes are lifted. However, Mr. Casey says that would mean EMC would "probably have a good
fourth quarter at the cost of sucking in demand from the first quarter of 2000."
But many buyers of EMC stock "are long-term investors who will look through any minor correction
in growth and conclude this is a great company," says Ned Riley, chief investment officer for
BankBoston. The bank owns EMC shares, but Mr. Riley declines to disclose how many.
"If there is a minor alteration," he says, "that could be used as an opportunity" to buy EMC's stock.
Watching Ned Riley on cnbc and cnn he appears to be conservative and not a big taker on internet stocks. To say any slow down (imo) would be a buying opportunity in emc stock makes me quiet complacent. John |
