Has any computer company had a more dramatic reversal of fortune in the past three years than EMC Corp. (EMC)? Sales fell 40% from 2000 to 2002, turning $1.8 billion in profits into $626 million in losses. But on Oct. 19, the data storage giant and icon of the New Economy reported a 34% surge in third-quarter sales, to $2.0 billion, its fifth straight quarter of 20%-or-better growth. Sales and gross margins at the Hopkinton (Mass.) company are approaching their boom-time levels. And with a 21% share, it is once again tops in the $15.4 billion storage market, ahead of Hewlett-Packard Co. (HPQ) and IBM (IBM), according to market researcher IDC.
But don't break out the Veuve Clicquot just yet. Act II of this comeback drama is full of suspense. Chief Executive Joseph M. Tucci has devised an ambitious plan to transform one of the most successful hardware companies of the 1990s into something quite different. In a bid to make EMC a key ally for corporations, on par with IBM and Cisco Systems Inc. (CSCO), he's pushing further into selling software and consulting services, while giving customers more options in hardware. The idea is to remake what has been a one-trick pony into a versatile workhorse that can solve companies' toughest tech challenges. "EMC now needs to become multiple companies," says Gartner Inc. (IT) analyst Carolyn DiCenzo. "They can't fail. They will lose everything if they fail."
Tucci is taking aim at one of the biggest technology issues for Corporate America: the rising tide of data. As the amount of information they generate is exploding, companies are struggling to figure out how to turn all those bits and bytes from a liability into a competitive advantage. Every tech company claims to have the solution, but only EMC is building its sales pitch on storage expertise. If it can help customers move, organize, and manage data more efficiently, it could win a prime position in executive suites around the globe, assisting companies as they launch initiatives and plot strategy. That would be a huge leap from a few years ago, when EMC simply pushed customers to buy more hardware. "I want to solve your information needs, not your storage needs," Tucci says. "[We want to be a company] you can't live without."
Tucci, a 57-year-old Brooklynite who took over as CEO just months before EMC's sales crashed in 2001, has little choice but to diversify. Prices for the sophisticated storage systems it makes are tumbling, down nearly 90% since 1999, to $26 a gigabyte last year. The result is that even though demand for storage capacity will grow 55% this year, industry revenues are on track to rise only 7%, says IDC. Meanwhile, rivals are storming the field, assuring that competition remains cutthroat. On Oct. 12, IBM made what it called its most important move in storage in a decade, launching two powerful new systems. "We're going to be No. 1 [in storage] in a few years," says IBM Senior Vice President William M. Zeitler.
Neutralizing that threat is requiring fundamental change. In the past year, EMC spent $3.6 billion on three big software companies. While that has boosted the company's margins and growth, it also has resulted in a host of unfamiliar challenges. EMC needs to manage more businesses than ever before, stitch products together into bundles it can charge a premium for, and sell software independent of its hardware for the first time. Some wonder if Tucci can deliver on his grand vision. "I have a great deal of respect for EMC," says Daniel J. Warmenhoven, CEO of rival Network Appliance. "But they're overreaching by a lot."
Fortunately, EMC is standing on a solid base. Revenues for the year are expected to surge 30%, to $8.1 billion, not far from 2000's $8.9 billion. Net income is projected to jump 71%, to $850 million. And non-hardware revenues -- software and services -- have more than doubled since 2000, raising gross margins to 51%, not far from the 58% peak four years ago.
EMC is counting on a new sales pitch to keep the momentum going. With customers facing limited budgets, it's offering to help them devise strategies for making do with less. With tools that can automatically move stored information between systems, less critical content such as old employee e-mails is shunted onto inexpensive hard drives, while vital data like online-sales transactions are kept on high-end systems that back up constantly and allow instant retrieval.
For big corporations suffocating under mountains of data and in no mood to shell out for more hardware, smart systems such as these are a big draw. Take Bear Stearns Cos. Inc. (BSC). The investment bank is investing millions in EMC hardware and software that allows it to move and manage data based on their relative value, the risk if they are lost, and new federal rules on retaining communications like e-mails. To ensure operations are never interrupted, the system constantly produces duplicate copies of vital information, such as records of equity trades, in two separate data centers from which it can be retrieved in a flash. The next step is to automate data management at every step, removing the need for human intervention and saving time and money. "They've just hit the tip of the iceberg," says Bear Stearns Chief Technology Officer Peter D. Cherasia.
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That's one reason EMC will probably continue to prowl for acquisitions. Analysts say logical targets include companies that make software that runs well on EMC hardware, such as privately held CreekPath Systems and OuterBay Technologies, as well as businesses with software for managing servers and software applications, such as BMC Software (BMC) and Mercury Interactive (MERQ). And to compete with HP and IBM's armies of consultants, EMC will probably need to add to its expertise through acquisitions of small and midsize services and systems-integration firms. "At some point they're going to have to do some pretty big things," says IDC Vice-President John McArthur.
Tucci declined to comment on potential targets, except to say he'll keep "expanding the pie." On Oct. 12, he picked up Dantz Development Corp., a small, privately held developer of backup and recovery software for small and midsize businesses. EMC said the purchase price was less than $50 million.
Meantime, EMC's rivals are pushing hard to keep pace. HP, which stumbled badly in the corporate market in the second quarter, is expanding its storage sales force by 25%. Hitachi (HIT) Data Systems, whose gear is resold by HP and Sun Microsystems (SUNW), is promoting a high-end machine that it says is four times faster than EMC's top-of-the-line model with twice the capacity. "There is no EMC comparison to this product," says Boris Sherman, director of enterprise architecture at United Airlines Inc. (UALAQ), which is testing the product.
But EMC's chief is betting the storage game has changed. Even as storing data has become a top priority, most customers are more interested in hardware being smart than speedy. "The last thing that impresses me is how fast my car goes," says Tucci, whose collection includes a silver Porsche capable of topping 185 mph. "It's functionality." He had better hope so. EMC looks more like an all-terrain, do-everything SUV than the nimble sports car of old. Keeping it hugging the curves is only going to get tougher.
By Andrew Park in Hopkinton, Mass., with Steve Hamm in New York