EMC Misses the Mark

EMC warned Monday that its second-quarter results will come in below Wall Street estimates, but the company said there was some good news behind the shortfall — stronger than expected demand for its new high-end Symmetrix DMX-3 systems.

In a statement, EMC Chairman, President and CEO Joe Tucci said the company “received more customer orders than we anticipated very late in June for our new EMC Symmetrix DMX-3 systems, and fewer than anticipated customer orders for our prior-generation Symmetrix DMX-2 systems, and we therefore did not have the right inventory mix to fulfill demand as we closed the quarter.”

Tucci said the transition to new platform families “is now substantially complete, and as we finished the quarter, it was clear that our customers have now completely embraced the new Symmetrix DMX-3 and Clariion CX-3 storage platforms.”

He said EMC ended the quarter with healthy margins and a backlog that was about $100 million larger than planned. “If we had been able to fulfill the strong Symmetrix DMX-3 demand and some of the other customer orders had come in a bit earlier, we certainly would have been able to meet our financial targets,” he said.

Still, Wall Street expressed its disappointment with the company’s execution, sending EMC’s shares 5 percent lower in afternoon trading.

The storage giant said sales rose 10 percent from the year-ago quarter to $2.575 billion, and earnings will come in at 12 cents a share. Analysts were looking for earnings of 13 cents a share on revenues of $2.67 billion, according to Thomson Financial. Product bookings were up 14%.

Tucci said VMware license revenue grew 70 percent in the quarter, and content management license sales grew 30 percent, excluding the Captiva acquisition. License revenues from EMC Smarts-related software offerings nearly doubled in the quarter, and backup and recovery software licenses grew 10 percent. “Overall, the second quarter, while not up to our expectations, will show double-digit year-over-year revenue growth on the top line and gross margin improvement over the first quarter,” Tucci said.

CFO Bill Teuber said the company spent about $1 billion on its stock buyback program during the quarter, repurchasing more than 78 million shares. “We are going to continue to aggressively repurchase our shares in the second half of the year,” he said.

EMC shares have fallen more than 20 percent this year.

In a research note, Baird analyst Daniel Renouard wrote, “Despite a challenging quarter, we believe EMC is well positioned for accelerating results the remainder of 2006 due to a likely rebound from transitory execution issues. … Results are not disastrous nor surprising given fairly low expectations we believe have been reflected in the stock.”

EMC will announce complete second quarter results and hold a conference call Friday morning.

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