EMC Weighed Down By VMware

The storage giant is weathering the economic downturn well, but its VMware virtualization unit slows from its blistering growth rate.

EMC posted stronger than expected quarterly results Tuesday morning, but the company's shares fell more than 7 percent in early trading on a tepid outlook for IT spending and disappointing results from its VMware spinoff.

EMC's fourth-quarter sales rose 19 percent to $3.83 billion, handily beating Wall Street analysts' $3.66 billion consensus estimate, according to Thomson Financial. Earnings per share of 24 cents were a third higher than the year-ago quarter, also beating forecasts, and earnings rose to 30 cents after several items were factored out. Net income for the quarter was $525.7 million.

The data storage giant said its results were driven by global double-digit sales growth in its Information Storage, Content Management and Archiving, RSA Information Security, and VMware Virtual Infrastructure units.

For the full year, EMC's sales were up 19 percent to $13.23 billion, with net income of $1.67 billion.

The company's outlook seemed pretty solid too, projecting 13 percent sales growth to $15 billion for 2008, compared to a $14.7 billion Wall Street forecast. Information Infrastructure will account for the bulk of those revenues, rising 9 percent to $13 billion.

But the company's projected earnings for the year of 78 cents a share were four cents less than analysts expected, raising concerns about margins on the company's conference call. The company attributed the lower gross margins to higher non-cash expenses, including stock-based compensation from the VMware IPO, along with new services for small businesses that will result in higher channel sales.

Analysts on the company's conference call were also concerned about a sequential decline in contributions from EMC's partnership with Dell, coming a day after Dell closed its acquisition of EqualLogic. CEO Joe Tucci responded that the Dell partnership is "still very strategic" to EMC. Dell and EMC recently partnered on a new iSCSI offering that Tucci said is off to a "very strong start."

Tucci said 2008 will be "more challenging and more uncertain" because of a broad economic slowdown, and he said he expected "a couple points less" of IT spending growth in 2008. He added that the company's product mix is more balanced than it was in the last economic downturn in 2001, when it was primarily a high-end storage company.

Tucci reiterated the company's plans for new products addressing "Web 2.0, virtualization, compliance and new online methods for purchasing and consuming software," along with new MAID storage, de-duplication, NAS and security offerings. Tucci also pledged a new hardware and operating system offering for Web 2.0 storage.

Also weighing on EMC shares was a 30 percent plunge in shares of VMware, which reported 80 percent sales growth to $412.5 million in the fourth quarter, $5 million less than expected. VMware's projected 50 percent sales growth for 2008 was also less than analysts were hoping for. EMC owns about 86 percent of VMware. After Tuesday morning's sell-off, Wall Street valued EMC at about $33 billion, while fast-growing VMware's market cap shrank to $22 billion.

EMC's fourth-quarter systems revenue was up 15 percent and represented 44 percent of the company's business in the quarter. Software license and maintenance revenue grew 20 percent, accounting for 40 percent of total sales. Services and systems maintenance revenues were up 27 percent. North American sales were up 16 percent, while growth elsewhere was 23 percent.

Storage hardware and software sales grew 14 percent to $3.03 billion, driven by strong Symmetrix, Clariion and Celerra sales, with particular strength in multi-protocol systems. Content Management and Archiving was up 17 percent to $238 million, and RSA Information Security sales grew 30 percent to $148 million.

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