A data storage provider says it deserves more from Wall Street
At a Jan. 18 event to unveil 41 new computer-storage and software products, EMC (EMC) made history. Twenty-six people—mostly women in revealing white unitards—walked onto a stage in New York City and crammed themselves into a Mini Cooper, setting a Guinness world record. Later, via a video feed from Miami, the stuntman Bubba Blackwell jumped his motorcycle over 40 of EMC's refrigerator-sized storage systems. The takeaway from the contorted bodies and the flying Harley was meant to be the "record-breaking performance" of EMC's products. Underlying that message, though, was EMC's desire for more attention, maybe even some love and respect, from its customers and investors.
EMC executives say that outsiders fail to grasp the magnitude of the company's turnaround. EMC flew high during the 1990s, when it became synonymous with the Internet build-out and ended the decade as the New York Stock Exchange's best performer. Then it crashed hard following the dot-com bust, as corporate tech buyers turned away from the company's pricey, specialized storage system. EMC looked like it was heading toward an ugly, drawn-out demise.
Thanks to dozens of acquisitions over the past few years, EMC has undergone a radical, if quiet, transformation. Where it once relied on a single hardware product—the Symmetrix storage array, essentially a black cabinet full of hard drives—for more than 80 percent of its sales, EMC now gets about 60 percent of its revenue from software and services, estimates Toni Sacconaghi, an analyst with Sanford C. Bernstein. This shift has occurred under the stewardship of Joseph M. Tucci, EMC's chief executive officer, who has set the company's sights on the booming market for cloud computing. Despite the shift, EMC's share price has languished for much of Tucci's tenure. "There are times you get frustrated," Tucci says. "But who am I to second-guess the market?"
Tucci, a New York native who says he's wanted to be a Fortune 500 CEO since he was a teenager, never embraced the showmanship that many of his peers—particularly in Silicon Valley—bring to the job. While he gave a brief speech at the Jan. 18 event, Tucci spent most of his time offstage with customers. "Joe is an unassuming guy," says Kevin B. Rollins, the former CEO of Dell (DELL). One consequence of his reserve is that many have overlooked EMC's shift in focus. "I think they get underestimated," says Rollins.
Tucci became CEO in 2001. Bad timing: Sales plummeted in 2002, and EMC cut its staff from 24,500 to 17,000. When business stabilized, Tucci began expanding beyond storage. He pushed engineers to develop a broader portfolio of products, bought a pair of data-management software companies, and, in late 2003, acquired VMware for $625 million in cash. That startup made so-called virtualization software, technology that saves companies on capital and energy costs by letting them run multiple operating systems and software applications on one server.
In 2003, the VMware price tag appeared staggering. The virtualization market was small and, worse, Microsoft (MSFT) was coming out with its own, cheaper virtualization products. The VMware purchase has since turned out to be one of the all-time savvy buys in tech. The company, now 80 percent owned by EMC, dominates the virtualization market, had $2 billion in revenue last year, and is valued at $39 billion.
Since nabbing VMware, EMC has snapped up a host of companies that put it in position to not just store customers' data but also to secure it, back it up, and analyze it. Bernstein's Sacconaghi says hardware companies like EMC rarely get a second act. "There's a litany of hardware-centric companies that have fallen by the wayside because they didn't evolve," he says. "But EMC very methodically, purposefully, and skillfully migrated the portfolio."
Investors have been cool toward EMC's turnaround story in recent years, although the company's shares have gained in the last two years alongside a broader stock market recovery. Sacconaghi notes that EMC has "become somewhat dependent" on cash-devouring acquisitions for growth. Some investors struggle with how to properly value what is essentially two companies in one. EMC is a slower-growing technology veteran but one that derives much of its worth from VMware, a growth stock. Roughly 60 percent of EMC's $50 billion market capitalization comes from its stake in VMware, which some major EMC investors think is overheated. "I think on a standalone basis VMware is probably overvalued," says Jeff Donlon, the managing director of the technology group at Manning & Napier Advisors. Donlon's firm was one of EMC's top 10 shareholders two years ago but has been selling the stock as both EMC and VMware have risen. Still, Donlon credits Tucci with securing "a bunch of crown jewels" and giving the company a shot at a bright future.
As a reward for his hard work, Tucci has earned the chance to pit EMC and its close to $17 billion in annual revenue against a formidable club of larger rivals, including Hewlett-Packard (HPQ), IBM (IBM), Oracle (ORCL), and Dell. These companies are colliding as they transition from specialists to one-stop-shops that can provide the core technology as businesses shift to the cloud. The re-focusing by Tucci, 63, was intended to prepare his company for exactly this type of battle. "Do I think there will be very big companies that fail or disappoint greatly here?" he asks. "Yes. You just have to have the conviction and be strong enough in your own belief and keep pushing."
The Mini Cooper and Harley stunts underscore EMC's new, more aggressive marketing approach as it tries to remain among the living. Last year, EMC hired Jeremy Burton, a former Oracle executive known as a savvy seller of complex technology, as its chief marketing officer. Burton's challenge is to communicate that EMC has moved beyond its long-standing reputation as an expensive storage shop. "When people are sick of seeing our ads and start stabbing themselves with blunt instruments, you have to run them for another two years and then perceptions will change," Burton says.
The silver-haired Tucci plans to remain in the background, away from the marketing extravaganza. He's found an unusual niche: a tech CEO whose ego doesn't need feeding from an adoring public. As Scott McNealy, the former CEO of Sun Microsystems, puts it: "Joe is weird because he's not weird."
The bottom line: Acquisitions have made EMC a one-stop-shop for cloud computing needs. Wall Street, so far, remains unimpressed.