EMC Corp needs Sales to Turn Bullish Again
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EMC Corp. (NYSE: EMC) is a world leader in high end data storage solutions and develops, delivers and supports the information technology. It has had flattering EPS and growth projections from analysts but the recent revenue surprise brought it down a notch. Projections still look good for the company, but with the challenges it faces, can it continue to grow this year?
The company came out strong reporting a profit of $586.8 million, or $0.27 per share. This was great compared to a year earlier when it was $477.1 million, or $0.21 per share. And again recently they beat earnings estimates of $0.31 to $0.37. EMC boasted consistent double figure increases in revenue for each of the past four quarters. The last three quarters showed an overall 34.2% increase in profits. But the stock dropped after earnings. It appears the street wanted more. Steve Birenberg of Seeking Alpha explains what happened in a recent article he wrote on EMC:
“EMC's latest quarter supported this view. EPS of 37 cents was a penny better than expected while revenues of $4.04 billion fell about $50 million short of consensus.”
So what’s wrong with beating earnings estimates but falling short on revenue estimates?
Investing 101 would tell us that EPS is easier to prop up and make look good. A company can easily just cut costs to increase its earnings, but do little to improve its top line (revenue). But, if the company is not selling its product, there is not growth. Obviously, what we want as investors is EPS and revenue growing together. Sell product and reduce costs to increase earnings! This is what we want but if revenue is not growing but EPS is, that does not sit well with investors or analysts. That shows that the company may be cutting costs, but its sales are lower than the previous year.
EMC Corp. will only be able to rebound if it can grow like the analysts estimate it would. Next quarter estimates are expected to grow by 10.10% and by September, 11.60%. This is the key to the company’s turn around this year. It is a good solid company and it is not alone in its recent struggle. Other companies that it competes with that provide IT infrastructure have also struggled.
Hewlett-Packard (NYSE: HPQ) reports on May 23, but its estimates are not good. Earnings estimate: $0.91 a year ago: $1.24 Revenue estimate: $29.89 billion a year ago: $31.63 billion (-15.50%). IBM (NYSE: IBM) is another one that struggled this year. Its stock dropped when it reported just like EMC. Earnings: $2.61 a year ago: $2.31 Revenue: $24.7 billion analysts expected $24.82 billion. So it wasn’t just the company, the whole IT infrastructure business struggled with revenue last quarter.
EMC Corp.’s future growth will depend a lot upon how it does in sales the next couple quarters. Even its 80% stake in VMware (NYSE: VMW)—a high flying popular company -- is not without concerns of a maturation point by analysts.
VMware's virtualization software can make multiple physical computers behave like a single, ultra-powerful "virtual" machine. With virtualization software, websites can be run more cheaply and reliably by allowing webmasters to deploy resources "virtually" on an as-needed basis, rather than forcing them to keep excess capacity up and running to handle occasional traffic spikes and crises.
Deutsche Banks says in a recent description of the company that Q1'12 numbers met or slightly beat the guidance provided by the company and all the metrics came in above the street estimates. But they said that there is indication of maturation of the core business with license revenues/billings growth declining to ~15% compared to the average growth of mid 30% seen in the past 4 quarters.
So for EMC to turn around and continue its move up, it is going to have to meet or beat revenue numbers the next quarter and into September. Even with VMware, analysts are worried about market maturity and a reduction in revenue for it also. It has done a good job reducing costs like all companies have been forced to do and now its challenge is to increase revenue again. This is what it needs to turn itself around.
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