EMC fails to execute with acquisition imminent

Twelve quarters of double-digit revenue growth reported late last week by EMC was not enough for CEO Joe Tucci, who said execution was not up to the company's own high standards.

Two weeks after EMC announced it would add $2.1 billion worth of information security to its portfolio with the acquisition of RSA Security, the company released its second-quarter earnings, which at $2.57 billion were 10% higher than last year's second quarter. However, profits took a dive by 5% and caused the company's stock price to fall below $10 per share for the first time since August 2004. As a result, EMC lowered its expectation for the year from $11.1 billion to $10.8 billion.

Year-over-year, EMC has seen 14% growth in new bookings, but Tucci said the company must focus its efforts on both EMC's short-term performance and long-term growth and opportunity. He said a sudden stall in the sale of traditional storage systems and inventory issues for new products was because of “an execution failure.” For example, computer storage brought in $279 million in the second quarter compared to $293 million a year ago.

However, many of EMC's newer lines performed well. “Our strategy continues to be validated by the performance of our newer software businesses, which are driven by the technology and people that have joined EMC through acquisition,” Tucci said.

EMC subsidiary VMware grew total revenues 73% year-over-year to $157 million, its highest growth rate in five quarters. EMC Smarts, acquired in early 2005 for $260 million, nearly doubled in license revenue, helping software license revenue grow overall by 14% to $997 million. And the company's backup and archive software license revenue returned to double-digit growth by increasing 13% over last year's second quarter.

When the RSA acquisition was announced June 30, EMC was still expecting more for its quarter, but issued a warning last week prior to its earnings report that resulted in lowered expectations.