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EMC's first quarter hints at pricing shift

A stellar quarter raises some interesting questions about EMC's pricing strategy

EMC Corp blew past Wall Street analysts' expectations for its first quarter of 2004, citing record software sales and a significant boost in its channel business. Does this momentum mean a return to aggressive pricing by EMC?

According to analysts who track the company, this is unlikely in the near term. EMC's pricing structure is very different today than a year ago, they say, as it is tied much more closely to the channel.

"Their strongest sales are coming from new products like the Clariion, which is sold through the channel at a controlled price," says Tom Lahive, senior analyst with Enterprise Storage Group. "It's more about controlling distributors and resellers than single account sales…At the beginning of the quarter, EMC sets a price with the channel and then has to live with it for that quarter."

On the software side, EMC's acquisitions of Legato, Documentum and VMware are gradually becoming part of a "solution sale," which generally keeps the price flat, or up a bit, Lahive says. "There's a great referral business going on between the legacy EMC hardware sales guys and the new software sales groups."

While EMC might be bound by channel pricing arrangements in the near-term, analysts suggest its repositioning as a "solutions provider" could over time enable the company to raise its prices again. "The contribution from software gives EMC less reliance on hardware," says one Wall Street analyst who requested anonymity. Furthermore, he says HDS is less of a threat to EMC on pricing today than it was two years ago since "Hitachi Ltd is curbing the freedom of HDS pricing -- meaning there is an increased emphasis on profitability," he says.

Steven Milunovich, First Vice President at Merrill Lynch, reports in a note to investors today: "We are impressed with how EMC has taken a page from IBM's playbook to provide storage solutions. As a result, we don't expect competitive products in the second half to hurt EMC's momentum much." IBM and HDS are expected to roll out new high-end systems later this year.

ESG's Lahive tracks unit prices of EMC's products and notes that its prices aren't coming down in line with the industry average. As a rule storage declines 35% per megabyte per year.

EMC Estimated ASP per MB / fully-configured system
CLARiiON $/system Q1'03 Q1'04 growth
CX 600, 700, 800 $0.04 $0.03 -14%
CX 400, 500 $0.03 $0.03 -3%
CX 200, 300 $0.02 $0.02 -12%
Symmetrix $/system Q1'03 Q1'04
DMX 3000-P $0.060 $0.045
DMX 1/12000 $0.040 $0.032 -20%
DMX 800 $0.35 $0.28 -20%
Source: Enterprise Storage Group. April 2004

The results

For its first quarter of 2004, EMC reported a net income of $139.8 million, or six cents a share, compared with net income of $35.2 million, or two cents a share, a year earlier. Revenue climbed 35% to $1.87 billion from $1.38 billion, surpassing the First Call estimate of $1.83 billion.

The company said acquisitions contributed 14.7% of the revenue growth during the quarter with software revenue up 62% to $484 million from last year. More specifically, it says its DatabaseXtender software, which monitors database growth and usage and relocates inactive data to various EMC or non-EMC storage systems was a significant revenue generator in the quarter.

EMC's hardware division saw revenue climb 19% year-over year to $895 million, driven by the Clariion products, but sales of its Symmetrix system dropped 8% sequentially. "This is probably just seasonality," according to Milunovich. He says customers tend to make big purchases in the fourth quarter which often leaves sales of high-end systems like the Symmetrix lower in the first half of the year.


EMC reports revenue surge

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