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Thursday, August 10, 2006

IBM's Shot Across EMC's Bow

Stocks: (RSAS)(EMC)(IBM)(FILE)

EMC's multi-platform software products accounted for over about $500 million of the company's nearly $2.8 billion in revenue last quarter. About half of FileNet's $117 million in revenue comes from their software that manages content and and automates business processes.

EMC describes its software offerings as, in part, as content management software. This means that IBM's purchase of FileNet is going to put some pressure on that portion of EMC's customer base. Both the Associated Press and The Wall Street Journal went to some pains to point out that FileNet's primary competitors are Cisco and EMC.

EMC does not need any more problems. The company recently promoted three executives to operate the company, including a new EVP/CFO. The company's purchase of RSA was viewed as too expensive and the strategic fit to EMC is still not clear to some on Wall St. And RSA's profits dropped when it announed its earning on July 19.

The market has had enough of EMC's poor financial performance as well. When it announced earnings on July 14, earnings dropped from $293 million in the quarter last year to $279 million in the most recent quarter. The company also guided down for its fiscal year. Revenue is now forecast at $10.8 billion instead of the $11.1 to $11.3 billion previously forecast.

Filenet was clearly small enough to only be a thorn in EMC's skin, but as part of IBM, that role may change quickly.

It's another event that casts doubt on EMC's ability to return to its "hot stock" status. From late 2004 to early 2005, the stock ran from about $10 to around $14. And, the stock mostly remained around $14 until March of this year. It now trades at $9.50, very near its 52-week low.

If the RSA integration does not go perfectly, or companies like Filenet begin to take share in the content management software arena, EMC may fine its shares even lower.

Douglas A. McIntyre can be reached at He does not own securities in companeis that he writes about.

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