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EMC earnings to illuminate storage industry health

When the company reports earnings, investors will get to see which analysts are right in the debate about whether the storage industry is insulated from the slowdown in computer technology spending.

When EMC reports earnings Tuesday morning, investors will get to see which analysts are right in the debate about whether the storage industry is insulated from the slowdown in computer technology spending.

The Hopkinton, Mass., company, which makes high-end storage systems used with many other companies' servers, is expected to report net income of 23 cents per share for its fourth quarter, according to analysts surveyed by First Call.

The fourth quarter was the last quarter under the leadership of Mike Ruettgers, who was named chairman, while President Joe Tucci took on Ruettgers' role as chief executive. UBS Warburg analyst Don Young sees the management change as an indication that the last quarter went well, with revenue growing 40 percent to $2.55 billion.

But 2001 is another question altogether.

Hewlett-Packard warned Jan. 11 that earnings would be lower than expected because of an abrupt slowdown in December of spending for high-end computing equipment. The same slowdown forced Sun Microsystems to rein in expenses to meet analyst earnings expectations Jan. 18, and the company warned that revenues will be lower than expected for the first half of the year.

HP and Sun make more money from servers than they do from storage devices, and it's not clear whether storage companies will suffer that fate. Some analysts argue that storage is essential, and purchasing more storage space is mandatory, regardless of economic conditions. Others have a more pessimistic view.

"We believe the slowdown in (information technology) spending in 2001 will impact even critical components such as storage," Robertson Stephens analyst Dane Lewis said in a recent report, downgrading EMC from "buy" to "long-term attractive." One reason some storage is expendable: The demise of many Internet companies has given traditional brick-and-mortar competitors more breathing room, he said.

Lewis also predicted profit margins--famously plump for EMC, as it has managed to stave off attacks by IBM, HP and Hitachi Data Systems--will become thinner.

UBS Warburg's Young, though, believes EMC will stand by its previous guidance of $12 billion in revenue for 2001.

Another sunny indicator could be Inrange Technologies, which makes storage networking hardware used to connect servers to high-end storage systems, such as those from EMC. Bucking the trend, Inrange notified analysts it would have greater-than-expected revenue, and its stock has been climbing ever since.

Another indicator for the health of the storage industry will be the performance of QLogic, which is expected to report a net income of 26 cents per share when it reports results after the market closes Tuesday. QLogic makes storage network chips and other hardware.

Salomon Smith Barney analysts take a middle-of-the-road view of how well the storage sector will fare. "While we believe leading storage companies are insulated from a potential economic pullback, we do not see them as isolated. If there is a sharp pullback in domestic information technology spending, we expect this to have a negative impact on storage demand," the analysts wrote in a recent report.