For the second quarter the company posted revenue of $2.58bn, up by a respectable 10% year-on-year, but below guidance by $80m, or 3%. Second quarter GAAP EPS was $0.12, compared to guidance of $0.13. Full year guidance was cut from a range of $11.1bn to $11.3bn, to a minimum of $10.8bn.
The company also extended its tale of mismanagement by admitting that it fluffed the transition to a new midrange Clariion box, leading to flat sales of that device. This added to the mishandling of a high-end Symmetrix transition, which EMC had already blamed for missing its second quarter targets.
CEO Joe Tucci declared: The senior executive team, especially me, takes full responsibility, and I give you my personal commitment that we can and will do better.
This is the third quarter in a row that EMC has seen slow sales until a strong closing rally, and the second quarter running that the rally did not save the company from missing its targets.
Three quarters in a row we’ve done amazing diving catches in the out-field. But twice now we haven’t got up fast enough to throw it and get the runner out, said Tucci.
For the first quarter, the company also undershot its revenue target but by only $20m. So across the first two quarters EMC missed its revenue guidance by a total of only $100m. But it has cut its full-year guidance by $300m. At least the new guidance still delivers a respectable growth, at 12% year-on-year. For the third quarter, EMC forecast revenue of $2.66bn or more, with GAAP EPS of $0.12.
On a positive note, sales of EMC’s Legato-originated backup and recovery software were up 13% year-on-year, suggesting strongly that EMC has put right the damage that a recent sales reorganization did to Legato. VMware sales continued their dramatic growth, and sales of EMC’s content management software were up 30% excluding the impact of the Captiva acquisition.
In total EMC’s hardware sales grew by 8%, while its software revenue was up 14%, and its services revenue was up 9%.
The Symmetrix transition was to the latest DMX-3 versions of that box. During the final week of the quarter DMX-3 orders literally exploded, while DMX-2 sales stalled, said Tucci. That resulted in a glut of DMX-2 boxes in the warehouse, and a severe shortage of DMX-3s, and overall Symmetrix revenue was flat year-on-year.
But the inventory problem may have resulted from tougher than expected competition that made it difficult to shift the older boxes. Although EMC blames its problems on execution and weak IT spending, we believe that the company is facing increasing competition from IBM in mainframe storage, from Sun due to better focus and more aggressive pricing, and from Hitachi Data Systems and Network Appliance, said Shebly Seyrafi, analyst at merchant bank Kaufman Bros LP.
For sure, several competitors have refreshed their product lines. Also for sure, customers are forming more formal bidding processes, which is affecting the timing of orders, Tucci said. Customers are taking longer over purchases because of a combination of factors such as Sarbanes-Oxley in the US, the emergence of chief risk officers, and the increased involvement of purchasing departments, Tucci said.
EMC is also in the middle of a mid-range transition to the new CX-3 versions of its mid-range Clariion arrays. Although midrange market transitions are quicker because of lower needs for customer testing, Tucci said that EMC also mishandled this transition, by slipping on the launch date for the CX-3, which ideally should have been April 1st.
We launched it on May 8th. So you’re in the seventh week of the quarter before orders begin hitting the factory. We knew internally that seven weeks was not going to be enough, he said.
But EMC said that bookings for the Clariion were up by more than 20%, and Tucci predicted that Clariion revenue will return to growth rates of over 20% when EMC fills out the low end of the range with new hardware that will be both cheaper and more expensive than the current entry-level Clariion AX-150. He did not say when this will happen.
Tucci took time during the earnings call to review the performance of some past EMC acquisitions, a move that was obviously prompted by the strong criticism of his plan to pay $2bn to buy RSA Security Inc. The stars of the review were VMware and Documentum, which have showed 103% and 24% revenue CAGR respectively since their acquisition, based on second quarter revenue run-rates. Even Legato has pulled off a respectable 11% CAGR, Tucci said.