EMC Posts Earnings Jump, But VMware Disappoints

EMC beats Wall Street expectations with a 33 percent rise in earnings, but the storage technology company's euphora was short-lived as its VMware unit failed to meet the street's expectation despite an 80 percent rise in sales. EMC expects VMware to contribute to its earnings this year.

EMC posted robust earnings of $525.7 million for the fourth quarter -- a 33 percent rise over year-earlier results that beat Wall Street's expectations. Moreover, revenue increased by 19 percent to a record $3.83 billion.

Despite troubling signs of deteriorating U.S. economic conditions, EMC saw its revenue rise by a healthy 16 percent in North America, which represented 55 percent of the company's total revenue in the quarter. Even better, EMC's revenue growth from operations overseas increased by 23 percent, on average, in comparison with the year-ago quarter.

EMC Chief Executive Joe Tucci characterized all of 2007 as a breakout year for the company. "We exceeded all of the aggressive financial targets we set out to achieve at the beginning of the year," he said.

Caution Rules the Day

EMC's information-storage unit increased its fourth-quarter revenue by 14 percent to $3.03 billion due to strong customer demand for IP storage solutions and next-generation backup and recovery capabilities. Moreover, the company's content management and archiving unit grew revenue by 17 percent to $238 million, in comparison with year-earlier results. Additionally, EMC's revenue at its RSA information-security Relevant Products/Services unit grew by 30 percent year-over-year to $148 million.

Looking forward, CFO David Goulden said EMC has never been better positioned to continue to grow and gain market share. At the same time, however, Tucci admitted that the current economic climate is both "more challenging and more uncertain" than in 2007.

"We have not seen much on the downside, but moving forward, being cautious is the rule of the day," Tucci told analysts during a conference call.

Tucci expects IT spending growth to continue but "at a couple of points less than in 2007." On the bright side, Tucci noted that the key IT segments of information storage, content management and archiving, and information security are forecast to grow by 5, 8 and 16 percent, respectively, during 2008.

"EMC is well positioned in the areas where IT spending will grow the fastest this year," Tucci said. "And we are expanding our global presence with commercial customers in key emerging markets."

Tucci expects his company's 'One EMC' initiative "to interlock and drive more technology and product integrations across our information storage, content management and archiving, and RSA information security business units, making it much easier for our customers and partners to do business with EMC." He also predicted that flash drive technology will "revolutionize the storage industry over the next several years."

VMware Disappoints

Tucci credited EMC's highly successful partial IPO of VMware as one way that the company had met its key 2007 goals. Going forward, VMware's contribution to EMC's bottom line will continue, given that the parent holds 85 percent of the spin-off's shares.

Though VMware reported an 80 percent rise in sales to $412 million in the fourth quarter, the result failed to fulfill Wall Street's expectation of $417 million. Moreover, the entry of Microsoft Relevant Products/Services into the virtualization software arena later this year raises doubts about VMware's prospects in 2008. Industry analysts estimate that VMware accounted for about 13 percent of EMC's revenues last year.

"As others begin to enter the market, VMware and our partners are continuing to broaden and deepen our highly reliable end-to-end virtualization solutions," VMware CEO Diane Greene told investors during a conference call.

Meanwhile EMC intends to continue to focus on innovation and research and development. The effort is expected to enable the company "to tackle emerging customer priorities such as Web 2.0, virtualization, compliance and new online methods for purchasing and consuming software," Tucci said.