January 29, 2008

EMC posts 4Q profit, but shares fall

BOSTON - EMC Corp.'s majority ownership of VMware Inc. gave EMC's long-stagnant shares a boost last year, but the relationship soured Tuesday as VMware's slowing growth obscured a strong EMC earnings report.

The data storage vendor's shares fell more than 6 percent, even though EMC beat Wall Street's expectations with a fourth-quarter profit more than one-third larger than a year earlier. EMC also beat analysts' revenue expectations.

EMC shares closed down $1.02 at $15.89.

It appeared they were focusing on EMC's 86 percent stake in VMware, which reported disappointing revenue after markets closed Monday. The emergence of new competitors in the emerging "virtualization" software market that VMware dominates slowed the Palo Alto, Calif.-based company's growth in the fourth quarter.

Tuesday's decline in EMC shares "is entirely due to VMware," said Matt Bryson, of the technology research firm Avian Securities.

Shares of Hopkinton, Mass.-based EMC broke out of a lengthy slump in 2007, starting the year at about $13 but rising above $25 in late October, a couple months after the debut of VMware's stock in one of the tech sector's most highly anticipated IPOs since Google's. EMC sold a 10 percent stake in VMware, whose software allows a single computer to function like multiple machines.

Shares of VMware, meanwhile, tumbled $28.13, or 34 percent, to $54.87 Tuesday, and are now are valued at less than half of the stock's $125 peak reached three months ago.

EMC said Tuesday its net income for the October-December period was $525.7 million, or 24 cents per share, compared with a profit of $388.8 million, or 18 cents per share, in the same period a year earlier. Revenue rose 19 percent to $3.83 billion from $3.21 billion a year ago.

The profit and revenue performances beat the consensus forecast of analysts surveyed by Thomson Financial, who had been expecting a profit of 22 cents per share, and revenue of $3.66 billion, on average.

EMC's fourth-quarter revenue from software licenses jumped 20 percent, outpacing the 15 percent growth in the storage systems business at EMC, whose rivals include IBM Corp., Hewlett-Packard Co., and Network Appliance Inc. Revenue from professional services and systems maintenance, a smaller business segment than the other two, grew 27 percent.

EMC's North American business posted a 16 percent sales gain, compared with 23 percent growth overseas.

EMC offered its initial financial forecast for 2008, with expectations for revenue growth of 13 percent to $15 billion, and 14 percent profit growth to 78 cents per share, including one-time expenses and gains.

The revenue target beat analysts' forecast of $14.7 billion, although some observers including Bryson had expected EMC to forecast a slightly higher 2008 annual profit.

On a conference call with analysts, Joe Tucci, EMC's chairman, president and chief executive, said EMC was cautious in its profit outlook because of recent economic volatility and fears that it could hurt technology spending.

"Today, we have not seen much of a down side, but as we go forward, I think being cautious is the order of the day," he said.

But Tucci also said EMC "has never been better positioned to continue to grow and gain market share."

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