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TMF Interview With EMC Corp. President and CEO Michael Ruettgers
January 26, 1999

With Brian Graney (TMF Panic)

Based in Hopkinton, Massachusetts, EMC Corp. (NYSE: EMC) develops and markets enterprise data storage hardware and software products. The firm's client list includes major banks, retailers, telecommunications companies, and 8 of the 10 largest Internet service providers. We spoke with EMC President and CEO Michael Ruettgers about the company's recent performance and its future on the day EMC announced its fiscal 1998 results.

TMF: Thank you for taking the time to talk to us today. I know this is probably one of your busiest days of the year.

Ruettgers: Yeah, it's one of four days.

TMF: What do you think is a useful way for investors new to EMC, like myself, to think about the company? Or more to the point, when you meet people unfamiliar with your company or information technology in general, how do you describe what your company does?

Ruettgers: That's always a good question because while a number of investors have known of EMC for a long time, there's still a lot of people who don't know us. We're in the computer storage business and the easy way to think about us is that we make the filing cabinets that store all of the information that the world's largest companies use for running their businesses. If you look at popular topics now like the Internet and e-commerce and e-business, one of the things [new investors] might want to understand is that all of that information needs to be stored someplace. So, as these websites get bigger and bigger, we find companies coming to us to store those things. So underneath this whole trend toward the Internet and e-commerce is what you might call a trend towards e-storage.

TMF: What do you think is the best way for prospective shareholders to track the company's progress and performance? What are the important moving parts of your company's financial structure that you think investors can really focus on when they are following EMC?

Ruettgers: There's a couple of things that come to mind pretty quickly. One is the revenue and profit growth rates. Last year revenue grew at 35 percent and profits grew at 47 percent. Compare those growth rates to other investment opportunities [investors] have. We believe two things: one is we'll grow by more than 30 percent again this year and we believe that we will get from just under $4 billion in revenues in 1998 to $10 billion in revenue in 2001. So [investors] ought to be looking for opportunities to compare us against other investments that would have these kinds of growth rates.

TMF: Talking about the rapid growth rates, from a business management standpoint what do you think has been the most important element in fueling that growth?

Ruettgers: Well, I think a couple of things. One is we've had excellent products. We've had a very, very close working relationship with our customers so we knew especially what customers were trying to do, but I think even before customers could articulate it themselves. As a result we've seen a number of trends before anybody else did. This current trend that we're in now to enterprise storage network or consolidation of data into data centers is something that we caught and saw a couple of years ago before even the consultants were seeing that. So the products, an understanding of what customers need, and the ability to match the two of them together [has fueled the growth].

TMF: Your net margins have really risen over the past three years from about 17 percent in '96 to I think you said nearly 22 percent last year. If you could maybe explain a little bit what has led to this increase in margin performance and how you plan to improve it in the future.

Ruettgers: One of the things that we've done is transform the company from just being a hardware company to now being a software company. As a result, in '98 we had software revenues of $445 million. That was 150 percent more than the revenues we had in '97, which were $177 million. So we're actually the world's fastest growing major software company. And, as you know, with software you typically get higher margins. What we've been doing is investing in our SG&A [selling, general, and administrative expenses] line to get these higher margins. So the higher gross margins are driving the higher operating margins that we're seeing.

TMF: Do you project in five years down the road or so that EMC will be a pure play software company?

Ruettgers: No, I don't see that because hardware is still an important piece of what we do. But certainly software will have a larger content in our business.

TMF: There seems to be a real dichotomy within the data storage industry between software and the appliances that actually store the information, like file servers. What's your take on that and what do you think the future holds for those two technologies?

Ruettgers: What we see is customers wanting to consolidate all of their information into a place where they can protect it. So what you have is people wanting to consolidate mainframe information, Unix information, and also NT information. They want to have it in the same infrastructure that they have their mainframe in because all of the stuff is becoming mission critical today. EMC is the only company that can store all three of those classes of data. We are the only ones who can store it, we're the only ones who can share it between the various ones, we're the only ones in the position to manage it so you don't have to spend all of those resources. We believe that if you do that then a customer gets an infrastructure of hardware and software that allows them to protect, manage, and share all of the most important information. And today we do that uniquely.

TMF: As a business manager, what do you think are the one or two ways that the company can best build shareholder value over long stretches of time? What is EMC planning for the upcoming year in building shareholder value?

Ruettgers: I think you start with shareholder value by building customer value. We have a current set of ads that are running that talk about "The EMC Effect." What that relates to is how we help businesses grow their business, become more profitable, maintain their customer base, grow their customer base, mine their customer base, meet customers in different places like using e-commerce and that. So we think the first thing you have to do is be very close to your customers. If you look at the presentation we have, 90 of the Fortune 100 companies are our customers in the U.S., 25 of the top 25 banks are our customers, 90-some percent of the airlines are our customers.

If you have a strong customer base and strong customer loyalty, then you're in a position where you can start delivering shareholder value. For us, then, once you get the customers, you have to bring new products into the market that customers are looking for. For us, that's particularly on the software side because most of the value that our systems have now comes from the software we make. So, for us, it will be the expansion of the software content and general growth of business.

TMF: Your recent earnings press release mentioned that EMC's next wave of growth will really be fueled by Fibre Channel and also your Enterprise Storage Network. Can you talk a little bit about those technologies and why you believe they will become so important in the future?

Ruettgers: What we see happening is that the three major operating systems that you have today -- mainframe operating systems, Unix operating systems, NT operating systems -- will continue to coexist for a couple of years, but most of the data that's being stored is going onto the NT operating system. In NT systems, you're getting this large proliferation of data that's out in departments all over the place and businesses really want that consolidated so they don't lose it. And the best way to consolidate storage from all of these various servers is to use Fibre Channel, because with Fibre Channel a server can be up to 10 kilometers away from the storage system. So, even on a campus you can have the server wherever you want but we'd store all of the information for you in one facility. And in that model, you need Fibre Channel. You need Fibre Channel switches to do that and that's why it's so important.

TMF: There's been some reports lately of some insider selling at EMC. We're going to avoid the whole topic of current share price and market valuation, but why do you think EMC is a good investment today and are you personally buying shares?

Ruettgers: Well, I continue to think it's a good investment, but I have to tell you I've yet to run into a CEO that didn't think his stock was underpriced. But as I said on the conference call earlier, if you look at the S&P 500, which sell at four times growth rate, and you look at people like Cisco (Nasdaq: CSCO) and Lucent (NYSE: LU) and some of these others that are selling at more than three times growth rate, it appears to me that EMC -- selling at less than two times growth rate -- is certainly inexpensive compared to those other guys.

TMF: Do you think looking at earnings per share compared to growth rates is a really good way of valuing a software company?

Ruettgers: Yeah, I think you have to look at that because most people don't invest in a single stock; they have some level of diversification. And when you look at diversifying ,even among the S&P 500, it seems to me that you want to have ones that are selling at different multiples to those growth rates. Look at the S&P as an index -- they're selling at four times growth rate and we're selling at less than two times growth rate and they have a growth rate of six percent while we have a growth rate of 35 percent. It seems to me that you ought to put some of your portfolio into companies that have our kind of profile.

TMF: What do you think is the most commonly misunderstood element of your business? Is there some aspect of your company that folks on the street just don't quite get?

Ruettgers: I think they're starting to understand how important the software side is from a margins standpoint, but I don't think they appreciate how much customer loyalty comes from a software product. Once a customer starts getting real benefit out of a software product, they change their business typically to do that. And it's very difficult to switch from one kind of software product to somebody else's software product.

TMF: Finally, what do you think is the biggest near-term challenge facing your company today, and what do you think is the biggest long-term challenge for EMC down the road?

Ruettgers: Our biggest challenge is executing. The market growth is substantial, we have the largest share of the market, we have products that are ahead of the competition. In order to execute, you have to have the right people so I spend a lot of my time recruiting people. We've got a major program to do a much stronger job of management development. So a lot of it revolves around people, you know, recruiting them, training them, and making them effective.

TMF: Thank you very much Mr. Ruettgers. I really appreciate you taking the time.

Ruettgers: OK, Brian. Good luck to you.

TMF: Thank you.

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