VERITAS Software and EMC Report Lowered Earnings, Diminished Expectations

Two prominent companies in the storage industry recently reported their second-quarter 2001 earnings. VERITAS Software reported that sales had risen 42 percent ($275 million) for the quarter, a result that met Wall Street's expectations. (The company's cash position grew from $125 million to $1.5 billion.) However, Gary Bloom, CEO of VERITAS, projected that sales for the second half of 2001 would rise only 25 percent to 35 percent—down from previous projections of 35 percent to 50 percent.

"Our results for the quarter were exceptional," Bloom said. "By all financial measures, our financial position has never been better. You start looking at what other people are doing, and you start evaluating an incredible miss by EMC and listening to their comments and looking at their peer group. With everyone else as bearish as they are on their future, we felt our \[previous projections for the rest of the year were\] a little optimistic, given our peer companies."

EMC reported a second-quarter 2001 profit of $109 million on sales of $2.02 billion—a drop of 75 percent in its profits the second quarter of 2001. (EMC had expected sales of $2.40 billion for the quarter.) Information storage (hardware) accounted for 97 percent of EMC's revenue in the second quarter—at $1.96 billion, that portion of the company's revenue was 2 percent lower than during the second quarter of 2000. EMC's software revenues for the quarter rose 42 percent over the previous year to $498 million. Networked information storage revenues rose 56 percent to $714 million. Information storage services revenues grew 73 percent to $232 million. EMC reported that cash on hand and investments reached $4.9 billion by the end of the second quarter 2001.

EMC's top management wouldn't make any forecasts about revenue or gross margins for the third quarter because of the current uncertain economic outlook. However, EMC management implied that the economic situation would worsen—Japan's economy appears to have stalled, and recent problems in Argentina will affect the worldwide money supply.

EMC Chairman Mike Ruettgers announced that many EMC customers are delaying purchases until the economy improves—a trend that you'd expect to be magnified with the high-end storage servers that EMC sells. "These have been the most turbulent economic times of the last 10 years," Ruettgers said. He blamed EMC's diminished profits on the lower margins the company needed to adopt to increase sales. EMC's gross margins dropped from 57.9 percent to 47 percent. Joe Tucci, EMC's CEO, claimed that although the company now faces increased competition in the industry, it's still successfully closing deals against its competition.

Tucci said that EMC is concentrating on five strategic areas: network information storage, information storage software, international business, information power plants (EMC's term for very large storage networking systems), and software for centralized management. At the same time, the company is improving support services for all those areas. One of the company's initiatives is to develop a force of certified technical service people to support its products.

Although several economists had expected the downturn in the US economy to begin to level off and start turning upward in the fall, the recession that has hit the high-tech industry hard will apparently last several months longer. The good news is that unlike Sun Microsystems, which posted the first quarterly loss in its 12-year history, both VERITAS and EMC are still quite profitable.

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