For three straight quarters, EMC (NYSE: EMC ) has made Wall Street's analysts and their earnings predictions look small-f foolish. Will its record of outperformance grow as fast as the worldwide supply of data that it seeks to store on its servers?
What analysts say:
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Buy, sell, or waffle? Twenty-five analysts follow this electronic archivist, the same as last quarter. However, sentiment has soured somewhat. Only 15 analysts now rate EMC a buy, and holds have grown to 10.
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Revenues. On average, analysts predict 19% sales growth to $3.07 billion.
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Earnings. Profits are predicted to rise 25% to $0.15 per share.
What management says:
Back in April, CEO Joe Tucci described EMC's first-quarter results as a "solid start" to 2007. Indeed, sales rose 17% year over year, and profits per diluted share grew at more than twice that rate. But the best number of all was free cash flow. At $586 million for the quarter, it eclipsed last year's Q1 number by 37%.
What management does:
As sales grow, EMC continues to maintain an admirably consistent gross margin of 53.6% on a rolling basis -- for three straight quarters now. However, operating margins are sliding on the back of faster-rising selling, general, and administrative costs, and (finally) increased R&D expenditure. And the debt that EMC took on as part of its RSA acquisition is requiring interest payments that are putting additional hurt on the net.
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Margins
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12/05
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3/06
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6/06
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9/06
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12/06
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3/07
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Gross
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53.7%
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53.9%
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53.8%
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53.6%
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53.6%
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53.6%
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Operating
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16.4%
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16.7%
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16.4%
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16.5%
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16.2%
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15.7%
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Net
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11.7%
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11.4%
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11.0%
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9.2%
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11.0%
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10.9%
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All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.
One Fool says:
Credit for much of EMC's growth goes to its VMware "virtual storage" division, which nearly doubled its revenues year over year in Q1. This division continues to move down the path to IPO-hood, as management tries to "unlock" the value of its parts from the discount imposed on their sum. But might it have the opposite effect?
Consider: Lucky Intel (Nasdaq: INTC ) managed to pick up 9.5 million of VMware's Class A shares for its Intel Capital unit at the bottom of this range -- $23 apiece. Meanwhile, underwriters Citigroup (NYSE: C ) , JPMorgan (NYSE: JPM ) , Merrill Lynch (NYSE: MER ) , Lehman Bros, and Credit Suisse plan to IPO the rest of the shares at somewhere between $23 and $25 per share. At the midpoint of that range, VMware could end up valued at about $7.2 billion, and EMC's retained 89% stake at $6.4 billion.
On the one hand, that bodes well for EMC's desire to unlock VMware's hidden value. The shares will be trading at roughly 10 times trailing revenue, a significant premium to EMC's 3.6-times-sales valuation.
However, viewed from the perspective of a VMware-less EMC, things might not work out so well. Net out VMware's revenues from EMC's firmwide revenues, and subtract the putative value of its post-IPO stake in VMware from EMC's market cap, and look at what's left.
Once VMware departs the mothership, the rest of EMC -- much slower-growing than VMware, by the way -- will still fetch 3.2 times sales. That's a significant premium to the valuation its rivals command: More than twice the P/S ratio accorded Hewlett-Packard (NYSE: HPQ ) , and nearly twice that of IBM (NYSE: IBM ) . EMC may intend to "unlock value" with this IPO, but it may end up just illuminating how very overvalued the parent company is.
What did we expect out of EMC last quarter, and what did it produce? Find out in:
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