EMC Warns Again

Friday Jul 14th 2006 by Clint Boulton
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But one analyst sees good times ahead.

Just days after warning that its second-quarter results would miss Wall Street estimates, EMC lowered guidance again.

EMC on Friday reported profit for the second quarter of $279 million, 5 percent lower than the $293.4 million reported in the year-ago quarter.

Revenues were $2.57 billion, lower than the $2.67 billion predicted by financial analysts, and EMC also lowered 2006 sales guidance.

EMC CEO, President and Chairman Joseph Tucci acknowledged, as he did on Monday when the company warned that it would miss estimates, that the inventory shortage was due to greater than expected demand for high-end Symmetrix DMX-3 systems in the final week of the quarter.

At the same time, EMC received fewer customer orders for its Symmetrix DMX-2 systems, which the executive said was kept in production too long.

"During our final week of the quarter, DMX-3 orders literally exploded while DMX-2 stalled," Tucci said on a conference call, noting that it caused "a severe shortage."

Tucci said that while EMC had contingency capacity to ship more than 100 percent of its DMX-3 plans, the company did not have sufficient systems to meet all of the demand.

The Symmetrix-3 delays had a domino affect, halting shipments of Centera and Clariion systems because of contractual requirements to only ship complete orders.

"Our overall execution was clearly not up to EMC standards," said Tucci. "This was a self-induced execution failure on our part. There is no excuse."

The chief added that EMC needs to improve its transitions to new products and not to "play it too tight with our supply chain."

Despite these failings, Tucci found some silver linings. He said a 14 percent year-over-year growth in new bookings speaks to the enthusiastic customer endorsement of EMC's mix of hardware and software.

EMC uses its products to propel its information lifecycle management (ILM) strategy, a method for how corporations can store, retrieve and secure specific files from a repository of millions.

Thanks to demand for its VMware virtualization software and Documentum content management software, the information systems vendor's Q2 earnings were 10 percent greater than the $2.34 billion the company earned for Q2 2005.

VMware, an independent EMC subsidiary, saw a 73 percent year-over-year sales leap to $157 million. Content management software license revenues grew 30 percent, excluding EMC's Captiva purchase.

EMC's Smarts resource management software sales growth also continued to climb since EMC acquired the company a year ago. While EMC does not break out numbers for these assets, Tucci said customers are buying Smarts to detect and solve problems before they bring a computer system down.

Overall, systems revenue in the second quarter was $1.15 billion, an 8 percent increase over the year-ago quarter, while software license and maintenance revenue grew 14 percent to $997 million. Services revenue rose 9 percent to $424 million.

EMC completed the second quarter with $6.3 billion in cash and investments.

Looking forward, EMC said it expects revenues for the third quarter of 2006 to be at or above $2.66 billion, with an EPS of 12 cents.

Revenues for 2006 are expected to surpass $10.8 billion, lower than the $11.1 billion the company previously expected.

Shares of EMC were down 4.5 percent to $9.53, a nearly two-year low, in midday trading.

In a research note titled "Calling All Value Investors," Baird analyst Daniel Renouard said EMC shares "remains a good value for patient investors."

Renouard wrote that Symmetrix and Clariion product transition issues "are now largely resolved. New Clariion field feedback and uptake have been positive."

Renouard was upbeat on VMware sales prospects too.

Article courtesy of Internet News

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