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Will storage king keep crown?

EMC reports record earnings as the industry focuses on the company as it adjusts to more competition from Hewlett-Packard and IBM.

Storage maker EMC reported another profitable quarter, but the industry is focused on the company as it adjusts to more competition from Hewlett-Packard and IBM.

EMC today reported second quarter revenue of $1.29 billion, 36 percent higher than the second quarter of 1998. Net income for the quarter was a record $289 million, up 52 percent compared with the second quarter of 1998, the company said.

Earnings per share were 27 cents in the quarter, beating Wall Street estimates of 24 cents per share. Overall, software revenue increased 83 perent, and systems revenue increased 29 percent, compared with the second quarter of 1998.

Storage products for corporate networks have been a steady source of revenue for EMC and made it a fairly well-known stock among technology investors, but competition has risen from server manufacturers. With storage systems often accounting for half the profits of sales of high-end computer systems, HP, IBM, and Sun Microsystems have increased their efforts to grab some of EMC's business.

That competition likely will heat up next Monday, when IBM plans to introduce a new storage system code-named Shark that has the same abilities to connect to many types of computers as EMC's Symmetrix product.

EMC's earnings report, the first since the demise of its business relationship with HP, is a fair test of how well it's weathering the onslaught of competition.

So far, EMC appears to have been vindicated. While sales through HP dropped from $147 million to $70 million in the last quarter, EMC says it sold nearly $200 million of products attached to HP servers, "implying that EMC turned a good portion of the anticipated HP revenue direct," said Morgan Stanley Dean Witter analyst Gillian Munson.

"Despite concerns about competition, EMC should show a robust quarter, in part to show the world the HP divorce is not having an impact," wrote Merrill Lynch analyst Steve Milunovich in a recent report.

For more than three years, Hewlett-Packard sold EMC's products, but in the last few months HP replaced EMC with Hitachi Data Systems in its storage product line. That move sent EMC stock down from an all-time high of $64.06 to about $50, but the company has steadfastly maintained that it doesn't expect the move to affect its earnings because it will now be able to sell directly to HP server customers without having to give a fraction of the profits to HP.

The falling-out between the two companies has grown increasingly acrimonious. HP began by saying EMC's products were based on an architecture too old to meet current customer needs. EMC responded by calling HP's Hitachi product "inferior" and filing a lawsuit seeking to get HP to change the name of its storage system.

As a result of a preliminary injunction in the lawsuit, HP changed the product name from MC256 to XP256.

A bigger unknown is the debut of a new competing storage product from IBM. Big Blue plans to debut its "Shark" technology, or Enterprise Storage Server 2105, on July 26, according to Milunovich.

IBM has said Shark will be able to connect to its mainframes, RS/6000 Unix servers, AS/400 servers, and Intel-based Netfinity servers. With it, IBM is aiming to take back market share lost to EMC, the company said. Shark is based on RS/6000 server technology, IBM said.

"We expect IBM to aggressively price Shark," Milunovich wrote in a report.

Although Milunovich takes competition from IBM seriously, he stands bullish on EMC. EMC has growing revenues from Internet companies and is a company that could beat Wall Street analyst expectations, he noted.

Sun Microsystems also is targeting EMC, though its high-end storage product has been delayed. Analysts have noted, however, that Sun does quite well in selling storage products designed to attach only to its own servers.