EMC: A Revival in Progress


A year ago, EMC Corp. (EMC) looked like road kill. Shares of the data-storage outfit had plunged 95% from their late 2000 peak, to $4 and change. A new high-end storage device was a few months late in getting to market. Rival Hitachi (HIT) was purloining market share that EMC once had a lock on. And CEO Joe Tucci had yet to deliver on his promises of higher software revenue and gross margins.

It's too early to crown EMC the Comeback Kid, but the former highflier is at least on the road to recovery. It has chopped $2 billion, or 28%, from expenses since late 2001 and is making money again. Its share price has more than doubled since January to close at $13.18 on Oct. 23. EMC has broadened its product line to include offerings in the fast-growing middle and lower tiers of the market, and Tucci has started to make good on his promise to have software contribute 30% of EMC revenue (up from 23% today) with two recent acquisitions.

"They've done a good job of responding to a changing environment, and their results are beginning to show the benefit," says Robert Montague, a senior analyst with RBC Capital Markets.

SYNCING THE PIECES. The hard work is just beginning, too. The trick now will be to get the new and old pieces working in sync, no easy feat for a company that sold basically one item -- a big, expensive storage device -- for much of the past decade. Faster product-cycle times and annual declines in hardware prices of about 40% mean EMC will have to run fast just to stay in place. Tucci says it's in shape to do so. "The spring in EMC's step is back," he told analysts at an August strategy meeting. But he doesn't underestimate the job ahead: "I got a lot to do."

EMC says the integration of the new players on its team is going smoothly. First up is Legato, a storage-software management outfit for which EMC paid $1.3 billion in stock. EMC announced the deal in early July and said on Oct. 16 it had finished the integration plan -- a week before the deal closed.

Next up is Documentum, which makes content-management software, including collaboration systems. EMC announced on Oct. 14 that it would pay $1.7 billion in stock for the Pleasanton (Calif.) concern. The move surprised many analysts, who had expected EMC to shop for tools to manage companywide enterprise systems, not just storage boxes. They also wondered why Tucci, who has described himself as "cheap," paid a relatively high price for a business that posted a loss of $1.2 million on $227 million in revenue in 2002.

"TOO MANY NAMES." EMC's response: Documentum is growing at a double-digit clip, and it helps EMC go beyond simply moving data in and out of secure high-tech file cabinets. Documentum allows customers to better manage their bits and bytes, from creation to archiving to disposal. EMC calls this set of tasks information lifecycle management (ILM).

That new label has left some wondering what happened to the old one. Since taking the reins in early 2001, Tucci had touted EMC's AutoIS initiative, for automated information storage. That meant being able to manage information on competitor's boxes as well as taking the grunt work out of managing storage by automating the task of deciding where data goes when.

"We killed the name because there were too many names," says Tucci. "Open software is now a subset of ILM," a name that also seems to have marketing advantages. As EMC Executive Vice-President Mark Lewis explains it, ILM better represents what the customer needs, rather than what EMC wants to give them.

INTENSE COMPETITION. Software revenue will rise to 27% of EMC's total revenue in 2004's fourth quarter as a result of the acquisitions -- still short of the 30% goal. "Software will look like an unfinished puzzle for another two years," says Tony Prigmore, senior analyst at Enterprise Storage Group in Milford, Mass. Tucci promises that EMC will continue to grow organically, as well as through partnering and acquisitions.

The overall storage market will remain a fierce battleground. Network Appliance (NTAP) in Sunnyvale, Calif., recorded a 25% increase in sales of its storage products in the quarter ended Aug. 1, compared with a 20% boost EMC booked in the quarter ended Sept. 30. (NetApp has about $1 billion in annual revenue, compared with a projected $6.1 billion for EMC this year.) And though EMC remains the market leader in storage software, archrival Veritas (VRTS) is coming on strong. Its sales in the third quarter were up 23% over the year-ago period.

Still, EMC's margins are on the way to recovery. Its reported gross margin rose to 44.7% in the third quarter, up from the 30s a year ago. Better yet, it expects revenue to grow 23% next year and for gross margins to eventually top 50%. That's still shy of the salad days when its gross margin reached 60%. But at least EMC isn't eating crow anymore. By Faith Arner in Boston


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