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EMC: Economy "much tougher"

The storage system maker reports earnings that meet lowered estimates, and warns of tough times ahead.

Storage giant EMC reported second-quarter earnings in line with lowered estimates and said the global economy has "become much tougher."

The company, which issued a profit warning earlier this month, reported earnings of $109 million, or 5 cents a share, for the quarter ending June 30. The earnings included a charge of a penny a share to account for staff reductions. The results were sharply lower from the profit of $429 million, or 19 cents a share, in the same quarter a year ago. Revenue was $2.02 billion, down 6 percent from the $2.15 billion reported a year ago.

Mike Ruettgers, EMC's Executive Chairman, said he couldn't recall "a more difficult environment in terms of technology spending than the one that has unfolded over the past few months."

"In a typical sales quarter I can count on my hand the number of deals postponed. (In this quarter) literally hundreds of sales deals were deferred," Ruettgers said in a conference call. "Whether these deals will resurface in (the third and fourth quarters) is unclear."

EMC, once a Wall Street darling, is struggling to regain its footing amid a slowdown. When the company issued its profit warning for the quarter, analysts were surprised by the size of the earnings miss.

Other companies in the storage sector have also struggled. On Tuesday, Veritas Software, which provides data-management software, met Wall Street estimates but cut its 2001 revenue forecasts. Veritas is now predicting revenue growth of 25 percent to 35 percent, down from 35 percent to 50 percent. The warning came just days after management reiterated its financial targets.

The company said it will continue to invest in research and development and focus on growing market share and customer service. "Our strategy is aimed squarely at long-term profitable growth and market leadership," said Joe Tucci, EMC president and CEO. "When the fog lifts, EMC's technological stature and market leadership will be stronger than ever."

EMC added that information-technology spending may slip in 2001 for "the first time in decades" and delayed projects and cancelled orders are the biggest reasons the company can't hit its revenue or profit-margin targets.

Tucci said EMC's keys to growth are networked information storage and storage software, two areas that showed strong growth, but not enough to offset slow sales for EMC?s systems. Revenue from networked information storage, a category that includes storage-area network (SAN) and network-attached storage (NAS), was $714 million, up 56 percent from a year ago. Software revenue grew 42 percent over the year-ago quarter to $498 million, and services were up 73 percent to $232 million. Revenue for EMC?s storage systems, however, was $1.22 billion, down from $1.51 billion a year ago.

The company was reluctant to look too far forward, however. Chief Financial Officer Bill Teuber said that, because of uncertain economic times at home and abroad, "we cannot say anything definitive regarding potential revenue or gross margins. (The fourth quarter) is also too far out."

In the longer term, he did say the company expects gross margins to "start with a five," indicating the 50 percent range, and to see operating income be in the 20 percent range.

Margins were hurt in the current quarter due to lower sales volumes, as well as pricing pressure and discounts offered to customers. The customer-incentive programs in particular had an "unexpected effect" on margins Teuber said.

"Last year was all about providing customers with robust (technology)," said Tucci. "Now the customer plea is "help lower my costs while at the same time positioning me for the future."

Margaret Kane contributed to this report.