EMCs actual quarterly loss, based on generally accepted accounting
principles, was $945 million, or 43 cents a share, down 305 percent from a
profit a year ago of $458 million, or 21 cents a share. The quarters $1.21
billion in revenues were down 47 percent.
Pro forma gross margins tanked to 30 percent, down from 47 percent in the
second quarter. Actual gross margins, after factoring in restructuring
charges, were a paltry 3.6 percent. Officials say their objective is to return
to margins of more than 50 percent. And they expect a return to profitability by the middle of next year.
But one must wonder if and when margins will recover to that level. Robertson Stephens
analyst Dane Lewis in a recent report compares the declining margins in
storage hardware to those of the PC and server hardware industry, noting
that Compaq Computer Corp.'s
(NYSE: CPQ)
margins dropped from 46 percent in 1993 to 23 percent in 1999 and have
remained at that level. We expect EMC and other storage hardware vendors to
experience a similar fate, as the nature of aging technologies is lower
margins, he notes.
Over the last few days, EMC has had several bouts of bad news, each followed by
an uptick in share price. Reuters reported Tuesday that Kenneth Gresham,
former vice president of EMCs global systems alliance, accused the company
in a court deposition of improper revenue recognition practices. EMC denies
the allegations, which came out in a trade secrets lawsuit that EMC filed
against Gresham. EMCs stock price took the news in stride, trading higher
in the aftermarket.
IBM Corp. (NYSE: IBM)
bragged before Mondays market open that it had edged out EMC on a
mainframe and storage equipment sale to Wal-Mart. Analysts estimated the
value of the contract at around $40 million, although much of that is for
the mainframes. The gear will be used for the retailers inventory and supply
system. EMCs stock rose 29 cents (2.3%) on the news, to close at 13.10.
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