EMC: The long view

Despite the sting of the dot-com bust, storage giant forecasts strong, steady growth.

By Erik Sherman -- Movers and Shakers, 6/15/2001

	AT A GLANCE
	EMC Hopkinton, MA www.emc.com 2000 revenue: $8.87 billion 2000 net income: $1.78 billion NYSE symbol: EMC Share price: $39.96 (4/26/01) 52-week high: $104.94 52-week low: $25.05

It was only spring, and already the year was proving tough for Joseph Tucci. Having become CEO of powerhouse storage vendor EMC a mere 15 months before, he and his company were now being hammered by the market.

At the beginning of the year, right after the company beat earnings expectations by 2 cents per share, founder and chairman Michael Ruttgers said EMC was still confident about reaching $12 billion in revenue in 2001. Unlike a good number of companies that had felt business slip, EMC seemed to be charging along as it had historically.

A little more than four weeks later, however, reality came knocking. Media reports had EMC warning that its sales could fall as much as $1 billion below its own expectations.

In March, Tucci called these stories misreporting, saying that the $12 billion mark was still within reach and claiming that the company had lowered the floor, but kept the same target. By April, it was a distinction without a difference. EMC announced that first-quarter results would again differ from analyst expectations by 2 cents per share, only this time in the other direction—down. Revenue growth would be more modest than in the past, all due to tighter IT budgets and a global economic slowdown.

Yet Tucci may be exactly what the company needs to not only maintain itself in difficult times, but to expand its performance when a number of large competitors are hungrily eyeing the long-ignored storage market.

Not surprisingly, EMC, which had been portraying itself as the Internet storage company, took a hit from the dot-com demise. But the damage could have been worse. Tucci has enforced an approach in which no more than 15 percent of the company’s business is dependent on any one sector and no single customer represents even 2 percent. At their height, dot-coms accounted for 12 percent of EMC’s revenues—enough to hurt, but not to cripple.

Even in a down time, though, EMC maintains a strong basic financial position. According to Tucci, the company ended last year with $8.8 billion in revenue, $5 billion in the bank, and no debt.

	“We still believe that we can grow this company at a 35 percent growth rate if you look at the next five years.” —Joseph Tucci, CEO, EMC

There could be some additional surprises still to come. According to financial records from Hoovers.com, EMC’s days of sales outstanding—the measure of time between shipping an order and receiving payment—was almost 75 in March, almost two weeks longer than EMC’s competitors. Just under a month later, the figure was up to almost 86 days. A possible explanation might be that, like a number of other corporations, EMC had extended credit to some customers, like dot-coms, that looked like they might have difficulty paying their bills. “I think it was lack of attention as the company was growing,” says Tucci, who notes that the figure has been coming down since.

Inventory management also seems a weakness; the company turns its inventory only four times a year, less than other storage vendors. However, Tucci argues that the PC sales of competitors such as IBM, Compaq, and Hewlett-Packard mask their true movement of storage products.

Tucci, though has a focus farther out than the next quarter or two. “We still believe that we can grow this company at a 35 percent growth rate if you look at the next five years,” he says. “We have one thing none of [our competitors] has, and that’s focus, from the top of the company to the rank-and-file people who maintain the place. ...Our R&D budget is well over a billion this year. There’s nobody putting in that type of investment and focus.”

However, EMC may not be able to continue charting such growth using its historic strategies, according to Eric Rocco, vice president of IT services research at Gartner Group. “Those rates of growth cannot sustain themselves,” Rocco says.

A major question remains: What will EMC’s focus be? A knee-jerk answer would be “storage,” but that would ignore the company’s reputation of providing customer service that’s “unequaled in the business,” according to Joe Butt, an analyst with Forrester Research. “They have these huge call centers where they have the appropriate people standing by to fix most things remotely.”

Also in EMC’s favor is Tucci’s track record. While CEO of Wang Global, a position he held until joining EMC in 1999, Tucci led the beleaguered company out of Chapter 11 bankruptcy, largely by developing a global services division. Rocco believes EMS is about to ramp up a formidable new profit center. “With the software business, customers are coming to EMC saying, ‘We need help installing, integrating, and ultimately installing the software,’” Rocco says. “That’s where EMC is charging fair-market value and making margin.”

According to Tucci, 75 percent of the company’s considerable R&D budget goes into software. “This is not just storage,” he says, “this is information-management storage. This is managing one of the more precious resources in any company—your information.”

Rocco pegs EMC’s service revenues last year at $612 million, or about 8 percent of the company’s overall income. That’s small change in comparison with the 15 to 20 percent of revenue Compaq and HP garner from service, let alone IBM’s 35 percent, but EMC is a company that used to give its services away. What’s more, that 8 percent has literally come in the space of Tucci’s first year as CEO.

Services will become increasingly important as startups with “all types of new, potentially disruptive storage technologies” begin attacking EMC’s core business, Butt says. Companies such as BlueArc and Scale Eight are developing storage products for specific types of data—rich media or large files, for example.

For EMC, the name of the game is adaptation. “They have to worry about the fact that part of their market is gone, so they’ll have to deal with slower [hardware sales] growth,” Butt says. “It’s not one-size-fits-all anymore.”

But resignation to fate is not in the cards for Tucci. “[Wang] was in Chapter 11 bankruptcy; you can’t get much worse than that,” he says. “The real fun in life comes from growing companies.” The growth just may not be quite what EMC’s competitors are expecting.