EMC Shares Plummet After Warning

BOSTON – Rocked by a second profit warning in four months, shares of data-storage giant EMC Corp. dropped more than 26 percent on Friday after the company said price cutting failed to budge slowing demand for machines that store corporate digital information.

``You're not going to see a rebound until at least the beginning of next year,'' FAC Equities analyst Mark Kelleher said. ''The buyer of storage has a lot of power. They wait until the end of the quarter, hold them over a barrel, and beat the pricing out of them.''

EMC shares fell $7.91 to $22.12 in afternoon trade on the New York Stock Exchange. The stock hit a year-low of $22.03 and is off more than 65 percent this year, erasing $100 billion in shareholder value.

Wall Street pummeled the shares of high-tech firms, hit by a raft of profit warnings and a disappointing June jobs report. The EMC sell-off dragged down other storage stocks such as Brocade Communications Systems Inc.,whose shares fell 21 percent to $32.15.

Kelleher said a battle is being waged between EMC's flagship Symmetrix storage device and the hardware being sold by Hitachi Data Systems, a unit of Japanese electronics giant Hitachi Ltd.

``Hitachi will be able to push EMC around on pricing,'' he said.

EMC faces a rocky road in its transition to become a software company as hardware prices fall. Though growing rapidly, EMC software sales accounted for only about 20 percent of first-quarter revenues and are tied to Symmetrix sales.

The Symmetrix is a refrigerator-sized machine that costs corporations several million dollars, but some analysts and competitors say the device is becoming less relevant to the storage industry. Software is increasingly important to companies that must manage massive amounts of information within storage facilities.

Kelleher said Veritas Software Corp., the largest developer of programs to manage storage networks, holds an advantage over EMC's software business because its products are run across the storage platforms of Compaq Computer Corp., IBM, Hitachi and Sun Microsystems.

``The whole world is helping Veritas,'' Kelleher said. ``EMC wants its (software) to sit on Symmetrix.''

If EMC unplugged its software from Symmetrix, EMC would risk losing hardware sales, he added.

EMC entered the year expecting 35 percent revenue growth, but now the Hopkinton, Massachusetts-based firm believes it could fall below last year's $8.87 billion. That would represent a $3.1 billion miss from its long-stated 2001 revenue target of $12 billion.

After the market closed on Thursday, EMC warned its second-quarter earnings per share could fall as much as 76 percent below Wall Street consensus estimates.

While EMC executives blame the economy entirely for falling profits and revenue, the remarkable about-face calls into question whether the No. 1 data-storage firm is being hurt by stepped up competition.

Perhaps more troubling is that EMC's software sales -- the catalyst behind its lofty gross profit margin -- may not be able to offset falling hardware prices.

``In the past, hardware sales spurred software, which in turn generated more hardware demand, helping EMC build a powerful operating model that once earned 59 percent gross margin,'' Merrill Lynch analyst Thomas Kraemer wrote in a note to investors on Friday.

EMC said its second-quarter margin, which is the profit of sales minus cost of sales as a percentage of revenue, would be in the mid-40 percent range, compared with 57 percent in the second quarter a year ago.

EMC said it expected second-quarter revenues of about $2 billion, or about 17 percent less than Wall Street estimates of $2.4 billion.

``The revenue shortfall did not startle us, but the EPS results surprised us,'' Kraemer said. ``The EPS shortfall indicates that hardware pricing, volume shipments, and software sales fell precipitously below expectations.'' EMC would not make company executives available for comment, saying they would give more details on July 18 at a conference call with analysts. The company also declined to back its latest full-year forecast calling for more than 20 percent revenue growth.