EMC Revamps, Cuts Earnings Outlook - Analyst Blog

Data storage company, EMC Corporation (EMC) has cut its GAAP earnings outlook for fiscal 2010 due to a restructuring charge of approximately $90 million to be incurred in the fourth quarter of 2010. The charge will be incurred as part of reorganization in EMC's international business.

EMC lowered its outlook for 2010 GAAP earnings per share (EPS) from 91 cents to 87 cents. The company also revised its outlook for its GAAP income tax rate from 20% to 24% for 2010.

However, revenues are expected to be $16.9 billion for 2010, unchanged from the previous forecast. Management does not expect any negative currency impact on 2010 revenues. EMC also reaffirmed its previously issued non-GAAP EPS outlook of $1.25 for fiscal 2010.

For 2010, consolidated restructuring and acquisition-related charges, stock-based compensation expense, and intangible asset amortization are expected to be 2 cents, 23 cents and 9 cents per share, respectively.

According to the Zacks Consensus, EPS is expected to grow to $1.02 for fiscal 2010. This EPS includes stock-based compensation but excludes one-time charges.

The company plans to restructure its international operations by transferring the newly acquired Isilon Systems and Bus-Tech businesses to its international holding company.

Bus-Tech is a privately held provider of VTL (Virtual Tape Library) solutions that utilize open systems disk storage to store and retrieve mainframe tape data.

EMC acquired storage systems vendor Isilon Systems to tap the surging demand for data storage technology. It is one of the largest deals in the storage space. The acquisition will enable EMC to gain a stronger foothold in the computer storage devices. EMC expects the acquisition to be accretive to its bottom line in 2011. Management also expects combined revenues to reach $1 billion by the second half of 2012.

This initiative will facilitate EMC's international expansion, reduce administrative costs, improve the company's organizational structure and strengthen operations, management added. EMC expects the restructuring to be completed in 2010.

Ongoing initiatives to reduce the cost structure are making strong headway for EMC, driving margins and bottom-line growth. EMC has cut about 2,400 jobs till date under its restructuring initiatives. Operating expenses have been reduced 4.9% year over year in 2009.

Operating expense reduction of more than $450 million in 2009 and $500 million expected in 2010 will provide strong earnings growth in 2011 and beyond. Also, in 2009, the company announced restructuring and consolidation of facilities and subsidiaries along with the termination of contracts to streamline operations. These actions are expected to be completed by 2015.

Through a combined focus on revenue growth, accelerated investment in research and development, and continued cost containment efforts, EMC expects to increase 2011 earnings. The expense reductions are encouraging, and are likely to lower the spending base, with a corresponding positive impact on profitability. However, execution will be something to watch.

Further, competition from International Business Machines Corp. (IBM), NetApp Inc. (NTAP), and Hewlett-Packard Company (HPQ) are intensifying.

The limited number of estimate revisions points to the fact that there are no major catalysts that could drive shares. EMC is currently rated as a Zacks #3 Rank (short-term Hold) stock. Over the long term, we maintain our Neutral rating on the stock.

 
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