EMC Confirms Q2 Earnings Shortfall

EMC reported a $279 million profit for the second quarter, or 5 percent lower than the $293.4 million reported in the year-ago quarter.

Revenues were $2.57 billion, lower than the $2.67 billion predicted by financial analysts.

The report comes days after EMC warned of a shortfall, which it attributed to not having the proper inventory to meet demand.

EMC CEO, President and chairman Joseph Tucci acknowledged, as he did on an impromptu warning conference call this past Monday, that the inventory shortage was due to an increased call for high-end Symmetrix DMX-3 systems in the final week of the quarter.

Meanwhile, EMC received fewer customer orders for its Symmetrix DMX-2 systems, which the executive said was kept in production too long.

"During our final week of the quarter, DMX-3 orders literally exploded while DMX-2 stalled," Tucci said on the conference call, noting that it caused "a severe shortage."

Tucci said that while EMC had contingency capacity to ship more than 100 percent of its DMX-3 plans, the company did not have sufficient systems to meet all of the demand.

The Symmetrix-3 delays had a domino effect, halting shipments of Centera and Clarion systems because of contractual requirements to only ship complete orders.

"Our overall execution was clearly not up to EMC standards," said Tucci. "This was a self-induced execution failure on our part. There is no excuse."

The chief added that EMC needs to improve its transitions to new products and not to "play it too tight with our supply chain."

Despite these failings, Tucci found silver linings. He said a 14 percent year-over-year growth in new bookings speaks to the enthusiastic customer endorsement of EMC's mix of hardware and software.

Thanks to demand for its VMware virtualization software and Documentum content management software, the information systems vendor's Q2 earnings were 10 percent greater than the $2.34 billion the company earned for Q2 2005.

VMware, an independent EMC subsidiary, saw a 73 percent year-over-year sales leap to $157 million. Content management software license revenues grew 30 percent, excluding EMC's Captiva purchase.

EMC's Smarts resource management software sales growth also continued to climb since EMC acquired the company a year ago. While EMC does not break out numbers for these assets, Tucci said customers are buying Smarts to detect and solve problems before they bring a computer system down.

Overall, systems revenue in the second quarter was $1.15 billion, an 8 percent increase over the year-ago quarter, while software license and maintenance revenue grew 14 percent to $997 million.

Services revenue grew 9 percent to $424 million.

EMC completed the second quarter with $6.3 billion in cash and investments.

The company said it expects revenues for the third quarter of 2006 to be at or above $2.66 billion, with an earnings per share of 12 cents.

Revenues for 2006 are expected to surpass $10.8 billion, lower than the $11.1 billion the company previously expected.

Shares of EMC were down 17 cents to $9.81 in morning trading.