By Ann Silverthorn
—Although EMC posted gains in every area of its business in Q2, Joe Tucci, EMC's president and CEO, is very disappointed that his company "didn't live up to EMC standards." EMC's $2.57 billion consolidated revenue in the second quarter fell $90 million short of predictions. Tucci said in a conference call that the major factor affecting earnings in the second quarter was a wrong mix of in-factory inventories—specifically with Symmetric DMX systems.
"It was a self-induced execution failure on our part," Tucci said. "There is no excuse."
Tucci said that as EMC progressed through the second quarter, DMX-2 and DMX-3 were tracking well according to their plans. But during the final week of the quarter, DMX-3 orders exploded while DMX-2 orders stalled. Although EMC had contingent capacity to ship more than 100% of its DMX-3 plan, it didn't have sufficient systems built to meet all of the demand.
In most cases, the DMX-3 orders included other EMC hardware and software products, such as Centera, Clariion, and Connectrix switches, according to Tucci. Most customers only accept shipment of completed orders, however.
Tucci said EMC has learned three things as a result of its Q2 execution failure:
- They need to make new product transitions faster.
- They played too close to the supply chain.
- They kept DMX-2 in production too long.
Addressing the role the Clariion line of midrange arrays played in Q2 earnings, Tucci said it took until the end of the quarter for the Clariion CX transition to the Clariion CX3 (which was announced in May) to gain customer acceptance. Although mid-tier transitions tend to happen faster than high-end, CX to CX3 was a major product redesign and Tucci said many customers want to test those types of new products in their own environments before ordering. Tucci also said that the purchasing process for many customers now involves company security officers and more diligent purchasing departments.
Tucci differentiated between major product redesigns and "mid-life kickers." Mid-life kickers involve faster chips and connectivity, more memory, cache, and drives, and more features in the operating system. Major product redesigns involve substantial changes to the underlying technology, and this was the case with both the Symmetrix DMX-3 and the Clariion CX3.
In spite of not achieving its earnings goal, EMC's second quarter earnings were still 10% higher than the $2.34 billion reported for the second quarter of 2005. Total bookings were up 14%, storage was up 11%, and services were up 12%—all on a year-over-year basis.
EMC's subsidiary, VMware, was up 73% and EMC's content-management license revenue grew by 79% (30% excluding Captiva). SMARTS nearly doubled and Centera and Celerra were up 20%. Backup and recovery software rebounded with 13% growth, and even with its problems, Symmetrix was still up 9% (all year-over-year).
Still, because of late order and larger backlogs, EMC has revised its projections for 2006. Consolidated revenue projections were previously between $11.1 billion and $11.3 billion, but EMC has revised that figure to $10.8 billion.
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