By Don Clark and Lisa Beilfuss
EMC Corp. reported a 17% drop in second-quarter profit and
further reduced its full-year outlook as customers reduced spending
on the company's mature lines of storage hardware.
The company, which has been facing pressure from activist
investors, on Wednesday also announced plans to trim $850 million
from its annual expenses in an effort to improve profit
margins.
Despite gloomy comments from EMC management about business
conditions, analysts said investors had expected even worse news.
EMC's stock, off 16% this year through the close of trading
Tuesday, rose 2.5%.
EMC, based in Hopkinton, Mass., built an entrenched position as
companies stocked up on storage gear to support business software
in 1990s. But Joe Tucci, EMC's chief executive, said customers are
reducing spending on those applications while readying new ones to
exploit mobile devices and other new technologies.
The company has upgraded its product lines, offering systems
that store data on flash memory chips, rather than hard disks. EMC
said revenue from its emerging storage category grew 49%, but
revenue from high-end equipment fell 13% in the second quarter,
while midrange products slipped 9%.
"We now believe that the traditional storage market will not
improve this year," said David Goulden, who heads EMC's information
infrastructure unit.
The company's leadership poses further challenges. Mr. Tucci,
whose employment contract expired earlier this year, gave no
further clues about when a successor might be named but said EMC
directors are working on it. The board is "deeply engaged in a
smart navigation of the CEO succession process," he said.
EMC reported a second-quarter profit of $487 million, or 25
cents a share, down from profit in the year-earlier quarter of $589
million, or 28 cents a share. Excluding stock-based compensation
and other items, EMC said earnings per share came to 43 cents, flat
from a year earlier.
Revenue grew 2% to nearly $6 billion, or slightly higher
excluding the impact of a legal settlement by its VMware Inc.
software subsidiary.
Analysts excluding those items had predicted 41 cents in
per-share profit on $6.1 billion in revenue.
VMware on Tuesday reported that profit grew 3% as sales rose 4%.
Another member of what EMC calls its federation of companies,
Pivotal Software Inc., posted an 18% revenue increase.
EMC reduced its annual forecast in April because of currency
exchange issues. The company on Wednesday said it now expects to
report $1.87 in per-share profit this year, down from its last
estimate of $1.91 a share. It put annual revenue at $25.2 billion,
down from its earlier estimate of $25.7 billion.
EMC has faced pressure to change its federated structure from
investors that include Elliott Management Corp. The firm purchased
a large stake in EMC last year and has urged the company to spin
off its roughly 80% stake in VMware to help boost EMC's share
price. That pressure eased somewhat in January, after Elliott
agreed to a standstill agreement until September.
Daniel Ives, an analyst with FBR Capital Markets, said the
second quarter wasn't the "disaster" feared by investors, who may
bet on structural changes ahead that could boost the company's
share price. But EMC still faces big problems, in his view.
"They have an Everest-like uphill climb in terms of
reaccelerating growth," Mr. Ives said.
Write to Don Clark at don.clark@wsj.com and Lisa Beilfuss at
lisa.beilfuss@wsj.com
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