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On the same day that Intel (NASDAQ: INTC) announced that its fourth-quarter revenues would come in $500 million shy of expectations, perhaps the biggest surprise was that EMC (NYSE: EMC) said its quarterly results will meet Wall Street estimates despite the toughest economy in three decades.
It's one more sign that the storage market continues to hold up much better than other IT spending areas, as companies find it harder to put off storage purchases as they cope with ever-expanding volumes of data and regulatory demands that require data to be protected and accessible (see Storage Sales Defy Economic Downturn).
Analyst Kaushik Roy of Pacific Growth Equities, who said a month ago that EMC's quarter appeared to be on track, wrote this morning that "It is now clear to us that the end-demand for storage remains relatively healthy. ... EMC has delivered on its promise even in such a brutal environment.
"Compliance and disaster recovery/business continuity remains a big driver for storage spending," he added.
EMC said its fourth-quarter sales will come in at $4 billion, up 4 percent from the same period a year ago and just above the Thomson Financial consensus estimate of $3.96 billion. EMC also said its non-GAAP earnings will come in at 23 to 24 cents a share, also just above forecasts.
EMC CEO Joe Tucci said in a statement that "Customers are telling us that information infrastructure and virtualization products and solutions are at or very near the top of their IT spending priorities. This, coupled with the technological advantage and quality of EMC's solutions and the strength of our sales and service organizations, helped us achieve our Q4 financial goals."
Still, EMC also announced a restructuring plan "to improve the competitiveness and efficiency of its global business." The restructuring, which will hit its Information Infrastructure business but not its VMware (NYSE: VMW) subsidiary, will eliminate 2,400 jobs, or 7 percent of the company's workforce, and reduce costs by $350 million this year and $500 million in 2010. EMC said it plans to consolidate back office functions, field and campus offices; rebalance investments toward higher-growth products and markets; reduce management layers; and reduce indirect spending on contractors, third-party services and travel.
"[W]e believe this additional program will help us strike the right balance between achieving higher levels of efficiency and sustaining strong business agility and performance, without in any way compromising our ability to serve the needs of our customers over the long-term," said Tucci. "...Our goal is to position EMC for continued success throughout the downturn and for even greater success during the next economic growth cycle."
Who's Hot and Who's Not?
Analyst Jayson Noland of R.W. Baird said EMC might not be able to avoid the economic turmoil indefinitely. "EMC had relatively weak scores in our recent reseller survey, with four VARs above plan, eight on plan and 16 below," Noland wrote in a research note this morning. "Though enterprise storage as a category remained the strongest area of IT spending, EMC's subpar channel feedback may reflect negatively on the company's early 2009 pipeline."
Baird's VAR survey released earlier this week found that the fourth quarter for resellers was in line with lowered expectations, but Noland and analyst Joel Inman described the first quarter outlook as "lackluster." Resellers expect storage to remain relatively strong in 2009, and PC and server sales weak, they said.
Resellers were most positive on NetApp (NASDAQ: NTAP), HP (NYSE: HPQ), Data Domain (NASDAQ: DDUP), Commvault (NASDAQ: CVLT) and VMware, the analysts said.
Roy said he also expects strong quarters from Brocade (NASDAQ: BRCD) and QLogic (NASDAQ: QLGC), even though QLogic competitor Emulex (NYSE: ELX) already pre-announced disappointing results. Roy said he is cautious on NetApp and Sun (NASDAQ: JAVA).
EMC said its restructuring program will result in a pre-tax charge of $248 million in the fourth quarter and additional restructuring charges of $100 million to $125 million in 2009 and 2010. The company also expects to incur additional transition costs of $75 million to $100 million.
EMC will report full results on Jan. 27. Its shares were up 4 percent in morning trading today.