The company saw its revenue slump in backup and resource management software, and grow only very poorly in services, and across its APJ region.
EMC said that all of these problems were caused by short-term or local issues only, and that fixes where needed are in hand. But it also announced that it will triple its spending on stock buy-back this year, a financial move that will bolster its earnings per share, and it very slightly reduced its full-year guidance, by saying that it now expects to come in at the low end of the guidance it issued earlier this year.
For the first quarter ended 31 March 2006, EMC reported net income of $272m, or 11 cents per share, including the cost of employee stock options, which totaled 3 cents per share. Apples-to-apples, that was up 50% year-on-year. Last year there was no US government requirement to count options against net income, but if there had been, EMC’s net income would have been $182m. The Street had expected this 11-cent EPS, which was also in line with EMC’s guidance.
Revenue was $2.55bn, up 14% year-on-year but slightly below Wall Street’s average expectation of $2.58bn and EMC’s guidance in January of $2.57bn to $2.59bn revenue.
EMC CEO Joe Tucci said: We are obviously disappointed that we didn’t do that extra $20 to $40 million of revenues. We could have said, hey, it’s the first time that we missed even a piece of our guidance in a long time.
New license revenue for the company’s mostly Legato-originated backup and archiving software fell 21% year-on-year, and EMC blamed this on a sales force adjustment.
The adjustment was a merger of the sales-force for backup and archiving software with the sales-force for content management or Documentum-branded products. According to EMC, the merger pushed the balance too far in favor of the Documentum software, causing the backup sales slump. As evidence of this, EMC said revenue for content management software rose 30% year-on-year, excluding the impact of the company’s purchases of Captiva and Acartus last year.
EMC is not yet ready to articulate how it will fix this problem and restore the balance. We will be sure to restore our sales focus on the backup and archiving software, a spokesman said.
Overall, EMC’s software new license revenue rose by 11%, to account for 36% of total company revenue. Systems or hardware revenue meanwhile rose by 20% and accounted for 48% of the company’s revenue.
Resource or hardware management software sales slumped by 7%, and EMC said this was because most resource management sales are at the high-end. In this quarter much of EMC’s Symmetrix DMX-3 sales were for consolidation efforts in which customers simply upgraded existing licenses, the company said. High-end Clariion hardware sales were depressed by customers’ holding back in anticipation of new Clariion boxes expected to be launched very soon, and this also affected RM software sales, EMC said.
Services revenue rose by just 6% to reach 16% of total. EMC CFO Bill Teuber said there were two reasons for the low services growth. The first factor was timing. Q1 was backend loaded which made it harder to sign, fulfill and recognize services deals during the quarter. Secondly, much of our professional service business correlates with our platform software, and results there impacted our services revenues, he said.
Among its global regions, EMC’a Asia-Pacific-Japan territory stood out with revenue up just 1%. We have already made some changes which we believe will get this region back on track. Specifically, effective April 1 we put a new leader in the region for the region in place, Teuber said.
Although the company’s full-year revenue guidance remains unchanged at $11.1bn to $11.3bn, EMC now says that it expects to come in at the lower end of that band, which is a slight change in its forecast from January this year when it first announced that revenue band.
For the last couple of years, EMC’s share price has refused to shift, and has floated between around $10 and $15. The company now intends to step up the use of its operating profits to buy back its shares from the market, returning cash invested in the company back to the market. It said it plans to have spent $3bn on purchases of its own stock by year end almost three times what it spent last year.
We have a very strong cash position, and exited the year with $7.4bn in cash and investments. We believe our share price represents one of the best value purchases in the market, so we’re putting our money where our mouth is, an EMC spokesman said.
Injecting $3bn into the market for EMC stock can only help raise the company’s share price. Also, every share that the company buys is one less share used in EPS calculations, boosting the company’s apparent income according to the EPS measure.
During its conference call, one analyst said that as result of the reduced share count, the $3bn buy-back will boost EMC’s EPS by $0.05. EMC disputed that figure, and said the buy-back effect will be lower. It argued that in contrast with the assumptions made for the analyst’s back-of-envelope calculation, it will not spend the $3bn immediately but will spread out its purchases over time. It will also lose interest on $3bn that would have been in its bank account.
Nevertheless, EMC has not adjusted its EPS guidance for 2006, even though the buy-back will boost it by at least some amount.
The company has said previously that it will spend more on acquisitions this year than it did last year, when it spent $700m. Tucci made it clear that these will not include any distracting mega-mergers, but will consist of smaller purchases. I continue to prefer what I call a string of pearls. You can look forward to that. I don’t think you will see anything big, he said.
For the second quarter, EMC said it expects total revenue of at least $2.66bn, with GAAP diluted earnings per share of 13 cents. Non-GAAP EPS, excluding stock-based compensation and intangible amortization, are expected to be 17 cents.
Total revenue for 2006 is expected to be at the lower end of the range $11.1bn to $11.3bn. GAAP EPS for 2006 is expected to be between 54 cents and 57 cents. Non-GAAP EPS is expected to be between 70 cents and 73 cents.
