Will Restructuring Save EMC?

January 29, 2015 by Paul Ausick

EMC Corp. (NYSE: EMC) reported fourth-quarter and full-year 2014 results before markets opened Thursday. The IT infrastructure giant reported quarterly adjusted diluted earnings per share (EPS) of $0.69 on revenues of $7.05 billion. In the same period a year ago, the company reported EPS of $0.48 on revenues of $6.68 billion. Fourth-quarter results also compare to the consensus estimates for EPS of $0.68 on revenues of $7.1 billion.

For the full year, EMC reported EPS of $1.90 on revenues of $24.4 billion, compared with EPS of $1.80 on revenues of $23.22 billion in 2013. Analysts were calling for EPS of $1.90 on revenues of $24.49 billion.

EMC also revealed that on Wednesday the company’s management had approved a restructuring plan:

[The plan] consists of a reduction in force which will be substantially completed by the end of the first quarter of 2015 and fully completed by the end of 2015. The total charge resulting from this plan is expected to be approximately $130 million to $150 million, with total cash payments associated with the plan expected to be in the range of $120 million to $140 million.

EMC forecast consolidated revenues of $26.1 billion for the 2015 fiscal year and adjusted diluted EPS of $1.98. The consensus estimates called for EPS of $2.13 on revenues of $26.21 billion.

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CEO Joe Tucci, who has announced that he will retire next month, said:

Our strategy is working well despite a challenging and rapidly changing IT environment. The company stands at the forefront of our industry with a leading portfolio of solutions and services to help customers optimize their existing infrastructures and build new ones that take advantage of opportunities created by cloud, mobile, social and Big Data.

The company’s chief financial officer added:

EMC is establishing a solid foundation for the future, while also delivering near-term growth as we transform our business. Thanks to the unified team effort, in 2014 EMC grew revenue and EPS, gained share, increased our dividend and accelerated our buyback program — returning $3.9 billion to shareholders. Our strong operational results were impacted by currency fluctuations and EMC’s investments in high-growth businesses. While we expect these factors to continue to impact 2015 results, we remain focused on driving growth for shareholders and delivering best-in-class solutions for customers.

In other words, activist investor Paul Singer and his Elliott Management Group can forget about breaking up the company or slowing down its pace of acquisition in 2015. The latest results are simply not strong enough to quiet the calls for a break-up. Whether or not EMC will be able to withstand even more demands for the company to spin off its 80% stake in VMware Inc. (NYSE: VMW) is the big question going forward.

The revenue miss and the weak forecast are likely to outweigh the restructuring. After all, the restructuring costs seem rather modest and the company has not yet spelled out how much and when savings will be realized.

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Shares were down about 2% at $26.10 in premarket trading Thursday. The stock’s 52-week range is $23.47 to $30.92. Prior to this earnings release, Thomson/Reuters had a consensus price target on the company’s shares of around $32.20.