Profits

Despite the fact that EMC has grown to become an US$11 billion technology giant with 31,000 employees, 100 sales offices and 50 distribution partners worldwide, the company has been getting no love from Wall Street.

EMC stock has bounced around in a narrow band between US$10 and US$17 a share for the past few years, and shareholders have become restless. After all, EMC stock had been a high-flyer in the 1990s, skyrocketing from around US$10 a share in January 1998 to more than US$100 a share in 2000. Then came the dot-com crash, and EMC stock has never recovered.

In March, the country's largest pension fund put EMC on its annual list of underperforming stocks. And shareholders have complained that EMC spent too much on RSA.

EMC CEO Joe Tucci in March acknowledged that the company overspent for RSA, which he says was valued at US$1.6 billion when it was acquired -- US$500 million less than EMC paid. Tucci added that he is confident that the RSA acquisition will prove itself over time.

"Over the last three years, their stock has gone nowhere. In 2007, one of the questions will be how will they grow at two times IT budget growth in light of analyst reports that in terms of the macro economy, there are cuts in IT budgets. Those are the questions people will look to,'' Morgan Keegan analyst Freed says.

Paul Mansky, an analyst at Citigroup, adds that investors generally agree with EMC's acquisition strategy. But he adds that its performance has lagged behind expectations.

In an effort to boost the company stock price, EMC has undertaken several initiatives, including a recent recapitalization and staff cuts (a modest reduction of around 1,100 people).

Another challenge for EMC is to increase employee productivity. "Revenue per employee actually declined about 2 percent last year, while operating expenses per employee increased by about 6.5 percent, which equates an 8.5 percent decline in employee productivity. Compare this to the prior two years in which the delta was a net positive 2.4 percent and 1.9 percent, respectively," Mansky says.

According to Lewis, it will take a combination of marketing its new technology and image, a well-run product strategy and creative financial management to spur upward movement in EMC's stock.

"In addition to continued articulation of -- and execution against -- our information-infrastructure strategy, which the industry is embracing nicely, we are continually evaluating ways to unlock value for investors. For instance, in 2006, EMC invested approximately US$3.8 billion in share buybacks. We also recently announced our intent to IPO a portion of VMware," Lewis says.

In addition, there are signs that EMC's bid to step up in class and compete against such heavyweights as IBM and HP is starting to show results.

EMC's stock has been on a steady, upward course since August, doubling from a low of US$9.44 a share to the current price of about US$18 a share. (However, as bloggers on financial messages boards are quick to point out, EMC was selling at US$17 a share in January 2002, so a US$1-a-share increase in more than five years is nothing to write home about.)

The latest earnings report was mostly positive. Information storage kept up its steady growth at 7.7 percent, and VMware continues to lead the way at 95 percent growth over 2006, but content management and archiving slumped to a paltry 2.9 percent increase. Overall revenues were up 16.6 percent for the first quarter of 2007.

Analysts are predicting that the upcoming mini-IPO of 10 percent of VMware might help to jump-start EMC's stock price.

Analysts also are impressed with the way the company is taking a leadership position in the marketplace. "EMC and IBM are at the forefront of bringing infrastructure management together, but EMC is forging the way,'' says Joseph Martins, an analyst at Data Mobility Group in Nashua, N.H.

He adds, "EMC started the information-management talk, and they continue to bang the drum louder. They're successfully uniting two fields in a way that's meaningful. EMC has acquired all the pieces, and they have the money and the professional services to make it work.''

One final factor in EMC's favor is that customers remain onboard. "Over the past two and half years, they have already proven to me that their quality is great -- they're the best in the industry when it comes to large-scale arrays, and we love their support. As we become more aware of the new software products they're beginning to offer, we'll take a serious look at them," says Kenneth Deans, vice president and CIO at Bassett Healthcare, in Cooperstown, N.Y.

He adds, "I think with the growth of any company there are always challenges. My take is it's positive. If I went down our list of 80 vendors, they are in the top three in terms of quality, performance and service now, and they will remain so looking down the road. They've been stellar in every way. As long as they can continue with that, I'm happy.''