EMC profit sinks 23 pct on weak data-storage demand; CEO says tech spending reaching bottom

EMC profit sinks, CEO sees tech spend turnaround

SAN FRANCISCO — EMC Corp.’s first-quarter profit dropped 23 percent on weakness in data-storage spending, which until recently had been fairly resilient to the recession and is forcing the company into more cost cuts. But CEO Joe Tucci predicted that slumping information technology spending “has reached or is very near the bottom” and should rebound in the second half of this year.

The Hopkinton, Mass.-based company’s profit in the opening three months of 2009 still matched Wall Street’s modest forecasts, while sales fell short. It warned that profit margins would be lower this year than they were last year, but didn’t give detailed guidance, blaming the economic uncertainty.

Its shares fell 43 cents, or 3.4 percent, to $12.27 in morning trading Thursday.

EMC said it earned $194.1 million, or 10 cents per share, in the quarter ended March 31, down from $251.6 million, or 12 cents a share, a year ago.

Subtracting employee stock-based compensation expenses and other charges, profit in the latest quarter was 16 cents per share. That matched the average estimate of analysts polled by Thomson Reuters on that same basis.

Sales eroded 9.2 percent to $3.15 billion from $3.4 billion a year ago and short of the $3.25 billion analysts expected.

Tucci said on a conference call with analysts that customers continue to delay big orders and only buy what they need, but added that he sees some easing in the third and fourth quarters.

“While there is some light at the end of the tunnel, they will likely wait a bit and continue to be cautious,” he said.

EMC’s results come amid rapid consolidation among back-end technology providers, a trend that is rounding out the offerings from rivals like IBM Corp. and Hewlett-Packard Co. and strengthening their posture as one-stop technology shops. Oracle Corp.’s surprise announcement this week of its $7.4 billion deal to buy Sun Microsystems Inc., another EMC competitor, and Cisco Systems Inc.’s recent entry into the server market also illustrate the encroachment on each others’ turf.

Those moves are upending relationships between longtime allies and raise the possibility that one day EMC, which itself has spent about $8 billion on more than 40 companies over the past six years, might find itself as a target of another cash-rich rival. Of course, EMC could go shopping, too: the company is now sitting on $7.25 billion in cash and short-term investments.

EMC is in a unique position, as the leader in external disk storage systems, with about 23 percent of the market, according to research firm IDC. Though that part of the data storage market is under pressure: IDC says sales of those machines slowed down for the first time in five years at the end of 2008.

When disk storage built into servers and other machines is included, EMC is third worldwide in market share behind HP and IBM.

In a sign that data storage companies have started feeling the pinch of slowing spending, EMC announced plans in January to lay off 2,400 workers, about 7 percent of its global work force. That and other restructuring moves are expected to save the company about $500 million a year starting in 2010.

EMC said Thursday that it is taking more steps to save another $100 million in 2009, which Tucci said will involve pay cuts but not layoffs.

A big boon to EMC has been its more than 80 percent stake in virtualization software maker VMware Inc., which added $470.4 million in revenue, a 7.4 percent increase over last year, in the latest quarter. But the relationship is straining, and EMC is constantly fending off questions about whether it intends to sell its remaining VMware stake.

While VMware is in a hot area — its software helps companies lower costs by allowing them to run multiple applications on a single server, and easily move those applications between servers — the stock has plunged since VMware’s initial public offering in 2007. Microsoft Corp.’s invasion of VMware’s turf with a competing product has stirred fears about VMware’s prospects.

VMware disappointed Wall Street on Wednesday with falling license revenue and second-quarter revenue guidance significantly below Wall Street’s forecast. EMC said VMware is expected to contribute 2 cents per share less to earnings in the second quarter than it did in the first.