EMC by linxiaoqin


									Brianna Brown EMC is the world leader in the                 Ticker:      EMC
Paul Underwood development and delivery of                   Exchange:    NYSE
Stephanie Gates information infrastructures—products,        Index
                services and solutions for information       Membership: S&P 100
                management and storage—worldwide.                         S&P 500
                                                                          S&P 500 Super Comp
                                                             Sector:      Technology
                                                             Industry:    Data Storage Devices
                                                             Employees:    26,500
                                                             Recent Trade: $12.18
                                                             52 Wk Range: $9.44-$14.75
                                                             Market Cap: $28 Billion
                                                             Shares Out: 2,240,291
                                                             Beta:          1.38
                                                             EPS (9mos.): $0.37
                                                             P/E:         25.9
                                                             P/CF:        13.2
                                                             P/B:           2.4
EMC operates in four segments:                               P/S:           2.9
   Information storage products                             PEG:           1.68
         o Networked information storage systems
         o Offers the industry’s broadest line of tiered     Recommendation:
             storage platforms and technologies              We regrettably recommend a hold on
   Multiplatform Software                                   the purchase of EMC stock.
         o Resource management software (automates           Although EMC has explosive growth
             management information infrastructure)          potentials, we believe the full value
         o Provides system to archive, protect and recover
                                                             of EMC stock will not be recognized
                                                             quickly enough to justify a current
   Services
         o Technology solutions and customer service,        investment. The true profitability of
             consulting and education                        EMC’s business model and strategic
   VMware                                                   positioning will be realized in years
         o Virtual infrastructure solutions                  to come when EMC will capitalize on
         o Server consolidation and containment, disaster    the synergies resulting from its many
             recovery, business continuity1                  acquisitions. 

    Yahoo Finance
                           Table of Contents
Company Profile……………………………………………………………………….……….…3

Company History……………………………………………………………...…………………..4

Recent Company News……………………………………………………...………….…………5

Company Executives…………………………………………………...…………………………5

A Working Example of EMC………… ………………………..…………...……………………6

Industry Overview………………………………………………………………………..……7 - 8

Information Lifecycle Management—What is it?………………………………………....... 8 - 10

Product Breakdown
       Back-End Hardware, Description and SWOT……………………………………... 10 - 12
       Back-End Software, Description and SWOT…………………...…………………..12 - 15
       Virtualization and VMware, Description and SWOT………………………………15 - 17

Financial Ratio Analysis………………………………………………………….….……... 18- 21

Pro Forma……………………………………………………………...…………………... 22 - 23

Valuations…………………………………………………….…………………………..…23 - 24

Third Quarter Earnings Announcement ……………………………………………………..…. 25

Future Implications ………………………………………………………………………..…… 25

Analysts’ Opinions………………………………………….……………………………………26

Our Recommendation……………………………………………………………………….26 - 27

Balance Sheet…………………………………………………………………..……………..… 28

Income Statement……………………………………………………………………………..… 29

Value Line ……………………………………………………………………………………….30

                                    Company Profile2
         As the world leader of developing and providing information infrastructures, EMC’s
mission is to “help organizations of all sizes get the most value from their information and their
relationships with [EMC].” EMC helps businesses manage their information from creation to
disposal. It capitalizes on the utilization of information lifecycle management (ILM) strategies.
ILM strategies enable companies to efficiently manage their information at every point in their
information lifecycle. EMC combines its “best-of-breed platforms, software, and services into
high-value, low-risk information infrastructure solutions that help organizations maximize the
value of their information assets, improve service levels, lower costs, react quickly to change,
achieve compliance with regulations, protect information from loss and unauthorized access, and
manage and automate more of their overall infrastructure.” EMC draws on a diverse customer
base consisting of organizations around the world, in every industry and of every size. Banks,
financial services, manufacturers, retail, healthcare and life sciences organizations, internet
services, telecommunications providers, airlines and transportation companies, educational
institutions and public-sector agencies are all part of EMC’s diversified customer base.

        EMC’s success is built on its continual innovation. In 2005, EMC invested more than $1
billion dollars in research and development. EMC continues to invest heavily in research and
development to maintain its position as the leader in its industry.

        Established in 1979 and based in Hopkington, Massachusetts, EMC now possesses 100
sales offices and distribution partners in over 50 countries. Many of the world’s major computer
companies resell EMC products. To increase its service, EMC has also formed alliances with
leading technology companies such as Cisco, Microsoft, SAP, and Oracle.

       EMC holds the most stringent quality management certification from the International
Organization for Standardization (ISO 9001), and its manufacturing operations hold an MRP II
Class A certification.

    EMC Home Page
                                  Company History3

1979—EMC was founded by Richard J. Egan and Roger Marino in Newton, Ma
1986—EMC went public
1988—EMC is first listed on the NYSE
1994—EMC enters Fortune 500 list of America’s largest industrial corporations; sales surpass $1
1995—EMC overtakes IBM as mainframe storage market leader
1997—#16 on Business Week’s 50 list of America’s best performing companies
    Named worldwide open storage market leader
1999—Named stock of the decade by NYSE for best 10 year performance
    Ranked #5 on Business Week’s ranking of America’s Top Performing IT Companies
    Joseph Tucci named President and CEO
2000-2003—EMC introduces several new lines of systems and software to its product list
2004—EMC celebrates its 25th anniversary and remains one of the fastest-growing and most
      successful major information technology providers in the world
    EMC expands its business to the fast-growing small and midsize business market with its
      acquisition of Dantz Development Corp.
    EMC introduces EMC CLARiiON AX100 based on a unique EMC patent design that
      enables customers to install network storage systems
    EMC introduces other new technology and improved network storage products
    EMC is named the “2003 IT Supplier of the Year”
    EMC completes the acquisition of VMware, Inc.
2005—EMC continues to introduce, expand and acquire new services and products
    EMC’s revenues increased 17% to $9.66 billion
    EMC is the revenue growth leader among the nine largest content management software
2006—EMC’s Joe Tucci is named the top CEO in the IT hardware industry for the second
      straight year by readers of Institutional Investor
    EMC announces its acquisition of RSA Security
    EMC acquires privately held providers of software managing solutions
    EMC opens a new software development center in Shanghai
    EMC continues its introduction and expansion of new and improved software

                                  Recent Company News4
October 17—EMC announces third quarter earnings report
October 10—EMC announces contract with Cable and Wireless resulting in EMC software
             being deployed in multiple countries and managing key new domains
October 6—EMC Corp. launches Business Development Company that will operate under the
             name of MorrisBDC
October 5—EMC Corp. awarded HSPD-12 contract by Environ. Protection Agency
October 4—EMC launches EMC Smarts Application Discovery Manager 5.0
October 3—EMC and Microsoft form new Enterprise Content Management Alliance, tightly
           integrating its technology and products with the market leader
September 18—EMC completes RSA Security Acquisition
September 12—EMC and Dell extend multi-billion dollar strategic alliance through 2011

                                    Company Executives5
                    Joseph Tucci, Chairman of the Board, President and CEO
                         EMC’s CEO since January 2001 and President since January 2000
                         Named the top CEO in the IT hardware industry for the second straight year by
                            readers of Institutional Investor
                         In 2006 President George W. Bush announces his intention to appoint Joe Tucci as
                            a member of the President's Council of Advisors on Science and Technology

                    William Teubler, Jr., Vice Chairman
                         EMC’s CFO between 1997 and August 2006
                         Joined EMC in 1995
                         Previously V.P. and Corporate Controller

                    Arthur Coviello, Jr., Executive V.P., President RSA
                         CEO of RSA since 1995
                         Currently serves as Co-Chair of TechNet New England and is a Member of the
                           2006 TechNet National Executive Council
                         Has more than 30 years of strategic, operating and financial management
                           experience in high technology companies

                    David Goulden, Executive V.P. and CFO
                        Previously, led EMC’s customer operations worldwide
                        Oversaw Marketing and New Business Development
                        Joined EMC in July 2002 from Getronics, a global IT services provider. There, he
                           was a member of the Board of Management, President and Chief Operating Officer

    EMC Home Page
                                       A Working Example of EMC6
                     EMC works with a variety of industries helping customers to use their information more
             efficiently. The following is an example of the benefits derived from using EMC technology in
             the healthcare industry:
                                                                 EMC offers solutions to collect, store and deliver
The delivery of medical care is a complex process as             patient information rapidly and accurately. EMC’s
patients are diagnosed, treated, and monitored over the          solutions enable healthcare providers to speed up
course of their illnesses. Individual patients, medical          clinical workflow and turnaround times, reduce
institutions, physicians, insurers, employers and                costs, and improve the overall patient experience.
government agencies are all important participants in the
effort to improve healthcare safety, quality and efficiency.
                                                                 An Electronic Health Record (EHR) provides a
                                                                 consolidated, centralized, and secure view of a
                                                                 patient’s information. The EHR provides patient
                                                                 information from birth to present, serving as a
                                                                 repository that can be quickly accessed.

                                                                 EMC enables patients to gain secure access to their
                                                                 updated medical information and allows the
                                                                 information to be easily transferred.

                                                             Physicians gain immediate access to current and archived
                                                             patient information, accelerating patient diagnosis and
                                                             time to treatment. EMC technology allows geographically
                                                             dispersed physicians to easily communicate.

                                                        Quick access to patient data helps hospitals to streamline
                                                        physician consultations, efficiently schedule clinical resources,
                                                        and avoid adverse drug interactions—resulting in better patient
                                                        outcomes and shorter hospital stays.

                                                    Electronic patient data repositories enable insurers to securely and
                                                    rapidly process claim submissions, determine eligibility for
                                                    treatment reimbursement, and respond to patient inquiries.

                                        The Industry7 8
        The forecast for the computer storage devices industry is strong due to the significant cost
reductions and performance enhancements in computer storage technology. Increased demand
by the consumer electronics sector is expected to drive the continued strong growth into the next
five years. The introduction of legislation requiring more transparent business procedures in the
US (such as the Sarbanes-Oxley 2002 legislation) will increase the demand for high-capacity
storage in the commercial sector, with companies needing to efficiently store business
information from previous years to comply with such regulations.

Key Issues affecting the Industry:
    Compliance driven growth—a large part of the growth in the industry is expected to
       result from investments in storage systems to meet compliance requirements for new laws
       which are requiring companies to adopt better data-handling practices
    Increasing hard disk demand—as hard drives are used in more consumer electronics, the
       demand for such hard drives will increase
    Consolidation of PC manufacturers—mergers and acquisitions in the PC business have
       resulted in large clients with higher bargaining power. As a result, margins for storage
       device manufacturers are expected to decrease
    Storage commodization—expected to continue to impact storage systems with low-cost,
       high capacity drives

Significant Trends
    Information Lifecycle Management—EMC is one of the few in its industry to implement
       this priority based, tiered data storage solution
    New Technologies—nano-technology and holographic technologies are in demand to
       meet a growing need to reduce the cost and size of storage devices

                   The information storage industry is constantly evolving. To maintain its position
          as the market capitalization leader in its industry, EMC focuses on expanding its
          capabilities and operations. EMC acquires new technologies by actively pursuing an
          acquisition-based growth strategy. As a result, EMC continues to grow significantly
          faster than the markets it serves while achieving a larger share of its increasing
          worldwide market opportunity. The following list highlights many of EMC’s
          acquisitions that have helped to make it the largest provider of data storage platforms in
          the world:

         8/9/1999 Data General and CLARiiON (foundation of storage networks)
         12/21/1999 Softworks
         11/1/2000 CrosStor
         4/12/2001 FilePoolCentera
         9/25/2002 Prisa Networks (Storage Area Network Management)
         4/15/2003 Astrum
         7/14/2003 Legato Corporation (backup software)
         7/14/2003 Documentum
         12/15/2003 Vmware
         10/12/2004 Dantz Development Corporation
         11/2/2004 Allocity
         12/21/2004 System Management Arts (network management software)
         8/16/2005 Maranti Networks (Intellectual Property)
         8/17/2005 Rainfinity (storage virtualization system targeting global file virtualization;
          builds on Vmware)
         10/20/2005 Captiva Software
         10/25/2005 Acartus
         1/9/2006 Internosis
         3/9/2006 Authentica
         5/9/2006 Kashya
         5/11/2006 Interlink Group
         6/7/2006 nLayers
         6/19/2006 ProActivity Software Solutions Ltd.
         6/29/2006 RSA Security (Company’s information security division)
         9/18/2006 Network Intelligence

        "At EMC our focus is on information. Over the past three years we have invested nearly
$10 billion to bring innovative technologies to our customers through our own R&D and
acquisitions. Today we have the world's best solutions for storing information, protecting and
securing information, managing and moving information, and optimizing information
infrastructures. Our greatest opportunity and competitive advantages lie in the value realized by
our customers when these capabilities come together in a unified information infrastructure."—
Joe Tucci, EMC’s chairman, president, and CEO9

                             EMC – Where Information Lives
       As an acquisition oriented company, over the last 10 years EMC has diversified its
technologies from strictly data storage hardware to content management and virtualization
software. Its foremost product line of high capacity storage area networks continues to be the
major focus of EMC sales and reputation. However, EMC has positioned itself to fulfill every
CIO’s strategic dream of total “Information Lifecycle Management”. The following is a breakup
analysis of EMC’s diverse products and services and how they relate to the information lifecycle
management strategy.

Information Lifecycle Management (ILM) – What Is It?
        The modern corporation’s underlying day to day activities revolve around the sharing and
collective creation of information in the form of ‘content’. Word documents, training videos,
websites, Excel files, database records, CAD drawings, as well as hard copy and faxed
documents, are all examples of ‘content’ that corporations rely on to convey meaningful
information. There are several organizations that have attempted to define information lifecycle

    EMC 3rd Quarter Earnings Announcement
management. The Storage Networking Industry Association defined ILM as a five phase

   -   Creation and Receipt
   -   Distribution
   -   Use
   -   Maintenance
   -   Disposition

       Other organizations like the Association for Information and Management (AIIM) have
suggested more specific terms and a new nomenclature “Enterprise Content Management” or
ECM. They break down enterprise content management as

   -   Managing the capture
   -   Storage
   -   Security
   -   Revision Control
   -   Retrieval
   -   Distribution
   -   Preservation and Destruction

        Every company has some method of a content management system. To produce content,
companies rely on software like Microsoft Office, or Adobe Photoshop. When it comes to
sharing and distributing this content, smaller companies typically use ‘shared files’ over local
area networks. Larger companies might use things like ‘network drives’ over wide area
networks. Although these methods provide parts of the overall solution, they are by no means
comprehensive. For years, many companies have produced very specific solutions to key
problem areas of the ILM strategy. EMC has purchased the best of these niche solution
companies, (21 in the last three years) and are in the process of amalgamating the solutions into a
comprehensive solution set, a first for the technology industry.

An Abstract Example of ILM

        Imagine a library full of authors. These authors are continually reading, editing, and
adding to the collection of books within the library. An efficient library would correctly manage
the collection so that the authors could maximize their productivity while at the same time
effectively utilizing library resources. While the author’s primary concern is creating content
using ‘front-end’ methodologies like pen and paper, the library’s primary goal is to provide a
platform for the authors to retrieve the books they need so they can produce more books. In order
to achieve this there are several ‘back-end’ functions that take place. For example, the physical
storage, and re-shelving are all handled transparently by the ‘back-end’ without the authors’

        It is important to make the distinction between the ‘front-end’ and ‘back-end’ of content
management. Font-End refers to the portions of content management which the standard user
directly interacts with on a day to day basis. Microsoft Word, Adobe Acrobat Reader, and File

Explorers are examples front-end applications which provide users with the ability to create, edit,
and manage content. The back-end portion of information lifecycle management should be
totally transparent, or at least opaque, to the average user. Actual storage, retrieval, distribution,
security, and compatibility issues should be managed by the back-end in order to serve content
for front-end applications to manipulate.

Where does EMC fit, Back-End or Front-End?

        From its nascent stages, EMC was squarely positioned to provide solutions bounded by
the technical demands of primitive back-end content management strategies. By providing high
capacity storage arrays, they basically sold server racks filled with hard drives where members of
a network could store and organize their content manually. Today, EMC has acquired a series of
technology companies which provide unique solutions to various aspects of the enterprise
content management strategy. As evident within their Data Storage hardware products and
services, content management software, and virtualization software, EMC is now positioned to
approach the market as the premier provider of the back-end infrastructure of every CIO’s
information lifecycle management strategy.

    EMC’s Bread and Butter – Back-End Data Storage Hardware
                    Lynchian Slow Grower

                                                     EMC Clariion CX500
                         EMC Symmetrix

        As the preeminent example of EMC’s ILM back-end infrastructure, EMC offers a variety
of high capacity storage arrays. These are basically huge collections of hard drives connected by
fiber optic cables. These storage arrays can hold vast amounts of information; the largest single
unit cabinet array can house around 960 Terabytes (the entire Library of Congress is about 20
Terabytes of text) of information while the smallest units offer a rack mounted 4 disk drive

        The EMC data storage line is supplemented by its software services and support products.
While a whole suite of applications are provided with the product for its management and day to
day operation, EMC offers many additional software programs to aid the overall maintenance of
large data centers.
        The physical storage of content is the backbone of the information lifecycle management
strategy. A centralized and highly redundant location for data to be warehoused is necessary to
provide front-end applications (word processors, web applications, etc) the content they need.

SWOT Analysis – Data Storage
Strengths –
       Superior Technology
       The main technical challenge with large storage arrays is the speed at which data can be
accessed and served. EMC just released its patented Direct Matrix Architecture which delivers
up to 64 GB of data per second, the highest throughput rate amongst its competitors.10

       Broad and Increasingly Demanding Customer Base
       EMC has developed three brands of high capacity arrays. Symmetrix arrays for large
corporations, the Clariion model for medium sized businesses, and the Insignia line for small
companies. This has allowed EMC to build a broad customer base and reputation as smaller
companies are able to easily upgrade their existing systems as their informational demands grow.

Weaknesses –
        High Prices
        The highest end Symmetrix system can cost anywhere from $500,000 to $2,500,000
averaging 4 to 8 cents per megabyte. This is relatively expensive when compared to Hitachi and
IBM’s 3 to 6.5 cents per megabyte. The extreme price and expected longevity of these systems
can also lead to volatile cyclical sales.11

Threats –
        Hitachi Data System’s ‘Lightning’ and IBM’s ‘SHARK’ high capacity data storage units
are the only major competitors on the market today. Both Hitachi and IBM have gained market
share on EMC over the last few years. This was due primarily to performance vs. price concerns
during a time when IT budgets were dwindling. However, with the recent release of the Direct
Matrix Architecture and a hefty price reduction, EMC has assuaged these concerns and is
beginning to regain some of its lost ground. Hitachi and IBM have both seen major sales
slowdowns recently, especially in the high-end storage sector.

       New Technologies
       The second major threat of any high-tech storage media faces is emerging technologies.
Specifically, ‘Solid State Storage’ is a form of high capacity RAM that has no moving parts and
extremely fast access time. The major current downfall to this technology is its high cost (around
$1.85 per megabyte) and maximum total capacity (1 Terabyte). The access time for solid state
technologies is .01-.1 milliseconds, while EMC storage arrays offer 4 to 10 millisecond response

time. There are very few specialized applications that can actually benefit from this access speed
differential. For the vast majority of applications, access time of 4 to 10 milliseconds is more
than acceptable.12

Opportunities –
        Open interface with competitors
        In 2003, EMC and IBM signed an agreement to exchange application programming
interfaces. This allows for greater interoperability within environments where both IBM and
EMC storage arrays exist. At the time, this was touted as a victory for IBM. The SHARK array
was outperforming the aging Symmetrix systems and was proving more cost effective, this
agreement should have opened the door for IBM to swallow up existing EMC customers.
Unfortunately for IBM, the release of Direct Matrix Architecture has propelled EMC back on
top. Now EMC storage arrays are providing the better value, and with the new interoperability
pact, are capable of easily replicating and eventually replacing existing legacy IBM systems with
new EMC arrays. 13

     Documentum and RSA – Back-End Software for Content Management
                          Lynchian Stalwart

        The next layer in EMC information lifecycle management strategy is the software back-
end that interfaces with the storage array hardware. The “Documentum” product line is a suite of
applications bundled together to provide a means of “creation, management, processing,
delivery, and archival of any content according to user-defined business rules”. Basically,
Documentum is meant to first provide organizations with the ability to specify custom rules and
policies regarding the way information is categorized and accessed. Documentum then archives
the specified content into the preferred backend data storage array (preferably a Symmetrix or
Clariion system, but not necessarily). Documentum ‘adds intelligence’ to the data by relating and
indexing the data together which aids in searching for related content. Ultimately Documentum
also provides the seamless publication and access of the content as printed text, as a fax, in an
email, or through a dynamic web portal.

RSA Security
        The most recent acquisition of EMC has been the highly respected RSA security. RSA
security will take on the responsibilities of authentication and access control across remote sites
to centralized Documentum managed content. This acquisition rounds out the access control
responsibilities of Documentum by providing a formal security division. RSA will also continue
to offer its standard products and services. The original product of RSA security was a software
based BSAFE library for developers to utilize for web based e-commerce sites. In 2003 RSA
announced its new SecurID product line as a method of ‘Two Factor’ authentication, something
RSA pioneered. By pairing something you know (a password) and something you have (SecurID
keychain/credit card), authentication is much more reliable and secure. The authentication
process is identical to standard ‘login’ scenarios, the only difference is that after you enter you
name and personal password, you are prompted for the SecurID pass code. This is a number that
dynamically changes throughout the day that is located on a physical device like the SecurID
keychain. 14

SWOT Analysis – Back End Software

Strengths –
        Market Presence of Documentum
        Documentum is a tried and tested solution with a huge corporate footprint. It is currently
in use by every branch of the US government. Just to name a few, this includes the White House,
all branches of the US military, the Smithsonian, and the Library of Congress. The Documentum
solution has spilled out into every major energy company, auto maker, and insurance company.
As a testament to its back-end nature, few people are actually aware of its prevalence. Another
major strength of EMC’s Documentum is its offering as the only complete solution to all back-
end ILM software requirements.

        The RSA Added Value and Synergy
        Originally, the founding members of RSA developed a patented 23 line algorithm which
was primarily responsible for the proliferation of e-commerce website security. Although the
patent expired in 2000, it was the first publicly available ‘Public-Key’ encryption method which
enabled secure transmission over the internet. RSA BSAFE encryption libraries (which are

patented revisions of the original algorithm) are the gold standard when it comes to encryption.
The new RSA security division at EMC is the last piece of the Documentum puzzle. EMC can
now tout its Documentum product as a complete software back-end ILM solution, complete with
industry leading security features.

        What Is ILM?
        The largest concern for EMC’s software back-end is its dependence on companies’
realization that information lifecycle management is a key business process. The level of
abstraction is somewhat confusing and not all CIO’s are convinced that their existing primitive
solutions are recipes for disaster. However, as compliance standards like Sarbanes-Oxley begin
to formally require businesses to meet informational requirements, policy makers will be forced
to reconsider their position.

        Bordering on Front-End
        Some limited features of the Documentum product border on front-end software,
specifically ‘Captiva’. It is responsible for capturing hard copy documents and passing them into
Documentum. Limited aspects of EMC’s software, like Captiva, are poised to compete with
EMC’s greatest ally (Microsoft, see below).

        Microsoft Sharepoint 2007
        It most software arenas, Microsoft can usually be considered the largest threat. With its
pending release of Sharepoint 2007, Microsoft is formally delving into the depths of
comprehensive information lifecycle management. Fortunately for EMC, they have focused their
attention exclusively on front-end applications. Below is a graphic describing how Sharepoint
will be the central hub to all Microsoft Office products:

How does this relate to EMC and Documentum? On October 3rd 2006, Microsoft made the
partnership announcement to directly support EMC’s Documentum infrastructure within its new
Sharepoint systems. Meaning, companies with existing EMC Documentum infrastructures will
be able to immediately import their back-end ILM strategy into Sharepoint. 15

         IBM FileNet, Hummingbird, and Alfresco vs. Documentum
         There are several packages that offer similar products as Documentum. FileNet and
Hummingbird are the two major proprietary packages that offer partial solutions to back-end
software ILM solutions. These two packages lack many features, especially robust security that
Documentum provides. In addition the competitor’s products have focused a large portion of
their energy on front-end interfaces, while in principle, they should be totally transparent.
         Alfresco is an Open Source alternative to Documentum. That is to say a ‘free’ version
that is currently in development that should offer the same features Documentum does. However,
as with almost all Open Source projects, the high level of formal software support, a key
requirement for decision makers, is fundamentally flawed. Because the software is not totally
produced ‘in-house’, the support teams will not have the complete working knowledge of the
underlying software to offer the same level of support.

           EMC’s Ace in the Hole – Virtualization through VMware
                           Lynchian Fast Grower
       Imagine a data center with rows of cabinets full of individual computers. Each of these
computers is performing a specialized task which requires the complete dedication of one
computer to achieve its goal. These computers fit the classical definition of a ‘Server’. Each
individual server requires a processor, a video card, a network card, and a slew of other
expensive hardware accessories. For every application that requires its own dedicated server, a
new computer must be purchased, installed, configured, and maintained over its useful lifespan.
This process is very time and capital intensive. The sheer wiring up of a new server is enough to
make one sick:

        VMware solves this problem with an elegant solution. It ‘virtualizes’ these individual
servers onto one high performance machine. The main VMware server is a very robust machine
touting over 10 individual processors, multiple hard drives, and a few network cards. The
VMware software partitions off portions of the host machine’s plentiful resources, and creates a
‘virtual’ server within the powerful host machine. Meaning, within one actual computer, several
virtual computers are actually functioning independently. Below is a picture of a Dell branded
server built for VMware.

        No longer is it necessary to actually obtain an additional dedicated machine when you
simulate multiple machines on one physical box. The old methods of utilizing whole teams of
people to acquire, install, and wire up new servers is replaced by a single VMware administrator
who can create new virtual machines in a matter of clicks. VMware has the ability revolutionize
server infrastructures across all industries.

SWOT Analysis – VMware and Virtualization
       Cross Platform Solution
       Compatibility across platforms is essential for products to become widely accepted. The
sweetest aspect of the VMware program is its ability to virtualize all flavors of operating
systems. Below is a photo of a Linux VMware server running a virtualized Windows machine:

        Most Established Virtualization Software on the Market
        As the pioneer of virtualization software, VMware has established its reputation as the
premier virtualization vendor. The hardware virtualization industry is VERY young. VMware
has already established a solid reputation with documented results, the only such company to do
so. Recently it has taken charge in leading the effort to standardize hardware virtualization, thus
dictating the terms its competitors will follow. 16

       Not Part of an Operating System
       VMware does not come as a native product within an operating system (OS). Instead, it is
proprietary software that leverages the resources of existing OS. This can lead to slower
performance compared to native OS virtualization that has a closer relationship with the
hardware that is being virtualized.

        Revamping Server Infrastructure
        Dell, Redhat, HP, AMD, and Intel are just a few of the companies that VMware has
already managed to ally itself with. These strategic partnerships represent the solid foundations
that corporate decision makers look for when reevaluating their own technical infrastructures.
VMware is a new technology that is fundamentally changing the way conventional data centers
are structured. As more and more companies begin to realize the potentials of virtualization,
VMware will spread like wild fire.

         Microsoft and Open Source
         Currently, there are two virtualization packages that are being developed. Microsoft
offers its “Virtual Server” which it plans on replacing with “Windows Hypervisor”. Hypervisor
is meant to be released sometime after the 2007 release of the long awaited ‘Longhorn’ server.
Unfortunately for Microsoft, the Longhorn release date has been delayed, and all subsequent
patches (in which Hypervisor will be released) have been delayed even further.
         Xen, is the open source alternative to VMware that was released earlier this year.
Currently the release is not stable enough to be used in production servers as the open source
community is still developing it. Xen, like most open source products, also faces the trouble of
quality support that large corporations demand.

                               FINANCIAL RATIO ANALYSIS
         For the ratios, we took data from the last five annual reports, fiscal years ending
  December 31. As competitors, we chose to compare EMC to International Business Machines
  (IBM), Hitachi (HIT), Network Appliance (NTAP), and SanDisk (SNDK). The product mix of
  EMC and the competitors are listed below to show the comparability.

           PRODUCT MIX IN 2005
                                               EMC          IBM        HIT          NTAP       SNDK
                       Products               72.53%      43.96%     62.82%         87.91%     89.62%
                        Services              27.47%      51.96%     32.48%         12.09%
                       Financing                           2.64%      4.70%
                         Other                             1.43%                      10.38%
                         Total              100.00%      100.00%     100.00% 100.00% 100.00%

                  Market Cap17              $28.00B $136.69B $19.65B            $14.09B        $11.78B


                            2005     2004     2003     2002   2001    IBM      HIT      NTAP SNDK
        Current Ratio       1.79     1.64     1.84     2.07   2.26    1.30     1.23      2.22 4.51
        Quick Ratio         1.59     1.46     1.64     1.85   1.99    1.22     0.92      2.15 3.93

         EMC is positioned between its competitors in the liquidity arena. The Current and Quick
  Ratios have been falling the past five years, but they are arguably still a liquid company.
  Overall, the company has room to improve their liquidity, but we see no reason for alarm.
  Liquidity will improve once the acquisitions become fully integrated within the company.

  Asset Management

                             2005      2004     2003      2002     2001      IBM       HIT      NTAP SNDK
Average Collection
Period (days)                53.09    51.56     55.74    59.15     69.42   38.21       93.74     73.35   52.08
Inventory Turnover            6.17     7.81      6.60     7.58      7.27   19.22        5.85     12.57    4.02
Fixed Asset Turnover          5.51     5.24      3.87     3.35      3.88    6.63        3.85      4.03   10.92
Total Asset Turnover          0.58     0.53      0.44     0.57      0.72    0.86        0.94      0.63    0.74
TATO (Goodwill
removed)                     0.75      0.68     0.55      0.58     0.72      0.95      0.95      0.75    0.74
Capital Intensity            1.74      1.87     2.26      1.76     1.39      1.16      1.06      1.58    1.35
CI (Goodwill
removed)                     1.34      1.47     1.82      1.73     1.39      1.06      1.05      1.34    1.35
       Yahoo Finance
               Similar to Liquidity, EMC falls between its competitors in many of these ratios. The
       company has done an excellent job reducing its days in receivables, especially compared to its
       competitors. However, it now takes longer to turn its inventory and thus increases the days that
       goods are in inventory. While Inventory Turnover has slowed, Fixed Asset and Total Asset
       Turnover have increased. The Fixed Asset Turnover falls within the range of the competitors,
       however the Total Asset Turnover seems a bit low. Because EMC has been involved in several
       acquisitions in the past few years, Goodwill has had an impact on total assets. Large amounts of
       Goodwill have been added to the Balance Sheet with each acquisition. With Goodwill removed,
       Total Asset Turnover looks normal compared to competitors. Also, Capital Intensity with
       Goodwill removed falls in line with competitors.

       Debt Management

                     2005       2004       2003       2002      2001       IBM        HIT       NTAP          SNDK
Ratio                 0.28       0.25      0.23       0.25       0.23      0.69       0.75       0.41         0.19
Ratio                 0.39      0.34       0.29       0.33       0.30       2.19      3.00       0.70          0.24
Equity Multiplier     1.39      1.34       1.29       1.33       1.30       3.19      4.00       1.70          1.24
TIE Ratio            185.33    138.90     132.40    (43.26)    (61.55)     42.62      6.74      240.29       1,006.25
Average Payment
Period               47.65      47.53      44.54     47.25      36.45      49.13     133.03     45.64         83.58

STRUCTURE            2005       2004       2003      2002       2001       IBM       HIT       NTAP          SNDK
Debt                28.14%     25.28%     22.76%    24.65%     23.14%     68.70%    74.98%     41.02%        19.11%
Equity              71.86%     74.72%     77.24%    75.35%     76.86%     31.30%    25.02%     58.98%        80.89%

               Debt is very effectively managed at EMC. We thought that in comparing the various
       companies, it would be helpful to see their capital structures. While EMC has a fairly low
       amount of debt, IBM and Hitachi have much higher amounts, which contribute to their lower
       TIE Ratio, and higher Equity Multipliers, Debt-to-Asset Ratios, and Debt-to-Equity Ratios.
       Thus, for Debt Management, it is more helpful to compare the company to Network Appliance
       and SanDisk, who have similar capital structures. Based on this evidence, we are not in the least
       bit concerned about any risk from debt. The company has the capability to even increase debt
       should they choose to do so. EMC could stand to take on more debt for acquisitions down the
       road, however, the acquisition rampage should be coming to a halt. The numbers here are low
       and EMC can cover interest over 185 times. The Average Payment Period has increased since
       2001, but is still better than three out of the four competitors listed here. EMC needs to decrease
       its Average Collection Period further so that there are fewer days in receivables than there are
       days in payables. That way, they receive cash before they have to pay it out.


                     2005  2004   2003   2002                        2001         IBM            HIT     NTAP    SNDK
Gross Profit
Margin             53.73% 51.21% 45.57% 38.96%                     40.10% 40.09% 21.95% 60.80% 42.18%
EBIT Profit Margin 15.32% 12.69% 6.43% -9.08%                      -9.84% 10.29% 2.37% 14.92% 25.00%
Net Profit Margin  11.73% 10.59% 7.95% -2.18%                      -7.16% 8.71% 0.39% 12.89% 16.76%
Return on Assets    6.75% 5.65% 3.52% -1.24%                       -5.13% 7.50% 0.37% 8.17% 12.38%
ROA (Goodwill
removed)            8.78% 7.18% 4.36% -1.26%                       -5.13% 8.24%                  0.37%    9.61% 12.38%
Return on Equity    9.39% 7.56% 4.56% -1.64%                       -6.68% 23.97%                 1.49%   13.85% 15.31%

                                          Profitability Comparison








                2005     2004      2003        2002         2001         IBM           HIT        NTAP    SNDK


                                  Gross Profit Margin   EBIT Profit Margin   Net Profit Margin

            These ratios, can give the sense that the company is not performing as well as its
    competitors. While the Profitability ratios tend to be lower than the competitors about 25-50
    percent of the time, one must observe the overall trend. EMC has been increasing margins over
    the past five years, as is evidenced by the graph above. We believe the company has great
    potential to grow in this area and could surpass its competitors in the future. Generally, the
    margins are strong and improving. Returns are also improving, very dramatically. EMC has
    shifted from negative to positive returns that fall within the range of competitors. We expect
    these returns to continue to increase.

Extended DuPont Model

                                 Net Profit            Total Asset            Equity
                 ROE       =      Margin        x       Turnover        x    Multiplier
    2005        9.39%      =      11.73%        x         0.58          x      1.39
    2004        7.56%      =      10.59%        x         0.53          x      1.34
    2003        4.56%      =       7.95%        x         0.44          x      1.29
    2002       -1.64%      =      -2.18%        x         0.57          x      1.33
    2001       -6.68%      =      -7.16%        x         0.72          x      1.30

    IBM        23.97%      =       8.71%        x          0.86         x       3.19
    HIT         1.49%      =       0.39%        x          0.94         x       4.00
   NTAP        13.85%      =      12.89%        x          0.63         x       1.70
   SNDK        15.31%      =      16.76%        x          0.74         x       1.24

        The Extended DuPont Model gives some insight as to how the Return on Equity is
derived and what factors have influence over it. As mentioned above, ROE has consistently
improved during the five year timeline. This improvement has occurred because of increasing
Net Profit Margins and an increasing Equity Multiplier (these values include Goodwill). The
ROE has even increased in the midst of a changing TATO, and even when TATO has decreased
overall from 2001-2005. If EMC could improve TATO, ROE could rise even more. Once
EMC’s acquisitions cease, TATO will increase because there will be less Goodwill added each
year. This could be balanced out by a fall in the Equity Multiplier.

                                  PRO FORMA INCOME STATEMENT

                                             EMC Corporation
                                       ProForma Income Statement
                                     Fiscal Years Ending December 31
                                 (in thousands, except per share amounts)

                                  2006E          2007E          2008E          2009E          2010E         3 yr Comp.     % of revenues
Product Sales growth                   15.0%          15.0%          15.0%          12.0%          12.0%          18.6%
Services growth                        25.0%          25.0%          25.0%          18.0%          18.0%          30.0%
TOTAL                                                                                                             21.4%

   Product sales                  $8,060,380     $9,269,437    $10,659,852    $11,939,035    $13,371,719    $17,787,701       73.72%
   Services                       $3,318,661     $4,148,327     $5,185,408     $6,118,782     $7,220,162     $6,342,550       26.28%
                                 $11,379,041    $13,417,763    $15,845,261    $18,057,816    $20,591,881    $24,130,251      100.00%
Costs & Expenses:
   Cost of product sales          $4,108,986     $4,725,334     $5,434,134     $6,086,231     $6,816,578     $9,067,739       50.98%
   Cost of services               $1,471,882     $1,839,853     $2,299,816     $2,713,783     $3,202,264     $2,813,028       44.35%
   R&D                            $1,212,493     $1,429,729     $1,688,391     $1,924,150     $2,194,167     $2,571,198       10.66%
   SG&A                           $3,078,772     $3,630,380     $4,287,176     $4,885,817     $5,571,446     $6,528,806       27.06%
   Restructuring & other           $105,588       $124,505       $147,030       $167,561       $191,075        $223,908       0.93%
                                  $9,977,722    $11,749,802    $13,856,548    $15,777,541    $17,975,531    $21,204,679       87.88%
Operating income (loss)           $1,401,319     $1,667,962     $1,988,713     $2,280,275     $2,616,351     $2,925,572       12.12%
Investment income                  $252,271       $297,469       $351,286       $400,338       $456,518        $534,963       2.22%
Interest expense                     ($8,740)      ($10,306)      ($12,170)      ($13,870)      ($15,816)      ($18,534)      -0.08%
Other expense, net                  ($15,894)      ($18,742)      ($22,133)      ($25,223)      ($28,763)      ($33,705)      -0.14%
Income before taxes               $1,628,956     $1,936,383     $2,305,696     $2,641,521     $3,028,290     $3,408,296       14.12%
Income tax provision (benefit)     $428,105       $504,806       $596,134       $679,375       $774,713        $907,834       3.76%
Net income                        $1,200,851     $1,431,577     $1,709,562     $1,962,145     $2,253,577     $2,500,462       10.36%

Weighted avg. shares, diluted      2,240,291      2,195,485      2,151,575      2,108,544      2,066,373
EPS                                    $0.54          $0.65          $0.79          $0.93          $1.09


         We divided sales revenue into two categories – product sales and services. For product
sales, the estimated growth rate for the first three years out is based on the three year historical
average of 18.6%. With acquisitions coming to an end, we expect sales to lose some momentum
so we forecasted growth in products at 15% the first three years. For the last two years, we
reduced the amount to 12% as a more likely target. In the services area, the three year historical
growth average is 30%. To be more conservative and take growth from acquisitions into
account, we took that down to 25% for the first three years and then down to 18% after that.

Forecasted Data

       To compute forecasted costs, expenses, and other variable numbers, we first added the
values over the last three years to get a cumulative amount of each. Then we divided that
number by the cumulative amount of sales from the past three years to arrive at a percent of

revenue. We matched cost of product sales with product sales and cost of services with services,
instead of using total revenues. The rest of the expenses were over total revenues.

Common Shares Outstanding

        The past three years of weighted average diluted shares have been decreasing because of
a stock repurchase plan of up to 300 million shares. As of FYE 2005, 182.5 million shares were
reacquired.18 Because of this, we have decreased the amount of outstanding shares by 2% each


                         TTM          2006         2005         2004         2003
              EMC        25.9           -          29.0         41.3         58.7
              IBM        17.0           -          16.7         20.0         21.4
              HIT        41.8           -          44.0           -          52.7
             NTAP        59.2         53.7         45.2         44.3         60.3
             SNDK        32.1           -          31.4         17.3         30.0
            Average      37.5           -          34.3         27.2         41.1
            Industry     26.4

       EMC is trading at a higher P/E to the industry, but a lower P/E compared with the
competitors' average. The P/E has fallen consistently, unlike some of the other companies.
Trading at a P/E below the average and below most of the competitors, we feel that EMC is


                         TTM          2006         2005         2004         2003
              EMC         2.4           -           2.7          3.1          2.9
              IBM         4.1           -           3.9          5.4          5.7
              HIT         0.9           -           1.0          1.3          0.8
             NTAP         7.9          7.2          5.9          4.7          4.6
             SNDK         3.8           -           4.8          2.3          3.3
            Average       4.2                       3.9          3.4          3.6
            Industry      5.2

   2005 Annual Report
       For P/B, EMC is trading at a discount to competitors once again. The company is far
below the industry and the competitor average. It is undervalued in this regard.


                         TTM           2006          2005         2004         2003
              EMC         2.9            -            3.4          4.4          4.6
              IBM         1.6            -            1.5          1.8          1.8
              HIT         0.2            -            0.3          0.3          0.2
             NTAP         6.9           7.0           6.4          5.8          5.2
             SNDK         4.5            -            5.3          2.7          4.9
            Average       3.3                         3.4          2.7          3.0
            Industry      2.1

        Here, EMC is trading closely between the average of competitors and the industry.
Similar to P/E valuation, it is above the industry, but below the other competitors. This value has
also fallen over the years. With this measure, we find EMC to be fairly priced.

Price-to-Cash Flow

                         TTM           2006          2005         2004         2003
              EMC        13.2            -           15.0         17.3         19.0
              IBM         9.0            -            9.0         10.9         11.2
              HIT         3.8            -            4.0          4.9          2.2
             NTAP        26.6          26.0          22.0         21.9         23.8
             SNDK        30.0            -           25.2         20.7         19.4
            Average      17.4                        15.1         14.6         14.2
            Industry     20.1

       EMC is undervalued compared to both industry and competitor average when
considering P/CF. P/CF has dropped every year since 2003.

             EMC’s 3rd Quarter Earnings Announcement23 24 25
        3rd quarter profit fell by a third, as a result EMC announced it would cut its workforce by
         1,250 jobs (a 4% reduction)
        The job cuts will not affect its virtualization subsidiary VMware
        Revenue rose 19% to $2.82B from $2.37B one year ago producing 13 straight quarters of
         double digit revenue growth and delivering the highest quarterly revenues in its 27 year
        Software license and maintenance revenue grew 25% to $1.1B
        Professional services, systems maintenance and other services revenue grew 7% to
        RSA Security and Network Intelligence boosted EMC’s 3rd quarter revenue by nearly
         $38M; security revenues for the entire quarter grew 30% compared to last year
        Sales of its high-end Symmetrix Storage machines increased 21% to $763M
        VMware had another record quarter and increased total revenues 86% from last year to
        Diluted earnings per share were up 30% compared with last year’s 3rd quarter
        EMC accelerated its stock buyback, buying nearly a third more shares than it purchased
         during the second quarter; EMC plans to invest at least $3B repurchasing shares in 2006
        During the quarter, EMC announced its 15,000th content management customer,
         reflecting EMC's strong leadership in its market

                           Implications for the Future26 27 28
        EMC has undertaken 21 acquisitions in the past three years; this has cost the company
         about $10B, but has enabled EMC to move beyond its core storage hardware business
         into the faster-growing data storage software and services
        In a conference call Joe Tucci, EMC’s chairman, president and CEO, told analysts that
         EMC planned to slow its acquisitions, “We think we have pretty much what we need, and
         will concentrate on organic growth and efficiency.”
        The Employee cut will enable EMC to better organize its workforce and integrate its
         numerous acquisitions. Joe Tucci explains, “The time is right for us to accelerate the
         integration of EMC and most of the companies we have acquired over the past three
         years, create more efficient, centralized corporate functions, reduce management layers
         and take greater advantage of opportunities to improve our overall cost structure.”
        Newly acquired companies have boosted EMC’s total employment by nearly 6,000 in the
         last year and the company expects to finish 2007 with more employees than it will have
         at the end of this year

   Yahoo Finance
   EMC Home Page
   Yahoo Finance
   EMC Home Page
        There is no projected slowdown in demand for information storage systems. David
         Goulden, Executive V.P. and CFO explains, “People are creating information at the same
         rate they used to but they have to keep it longer and have it more available.”

                                   Analyst’s Opinions29

                                                                                  Three Months
                      Current Month         Last Month      Two Months Ago
Strong Buy                   7                   8                   8                  10
Buy                          10                  9                   9                  10
Hold                         12                  12                 11                   9
Sell                         0                   0                   0                   0
Strong Sell                  0                   0                   0                   0

       "Today, EMC is stronger financially and technologically, and it is more balanced and
customer focused than ever before. [They] are the clear worldwide market share leader in every
major storage hardware segment and either the clear leader or fastest grower in every major
storage software segment. [Their] current market capitalization makes [them] one of the 10 most
valuable enterprise information technology (IT) product and solutions companies in the world.
And among these elite IT groups, EMC was the fastest-growing company in revenues and
earnings per share during 2005. "30

                                     Why Buy EMC?31
        The storage industry represents one of the highest forecasted growth rates for IT spending
        We are impressed by EMC’s position in the storage industry and believe in the
         investments the company has made. We feel the company is setting the pace for the
         storage industry
        The company has been transitioning from a hardware driven company to a healthy mix of
         hardware/software/professional services. The big push for the future comes from its
         virtualization products which includes VMware.
        Products and services growth should allow the company to continue expanding operating
        We believe EMC has great growth potential in the small and medium enterprise segment;
         this is a largely untapped segment driven by a need for affordable storage hardware
        EMC has one of the largest direct salesforces
        We believe EMC’s recent acquisitions will start contributing to profitability
        The Company’s revenue growth has revived over the past three years as the market for
         storage systems resumed double digit growth

   Yahoo finance
   EMC home page
      After a significant slowdown in 2001 and 2002, EMC has posted profits since 2003 and
       operating margins have increased due to increases in product and service revenue
      The Company appears to be in strong financial health with over $2.3B in cash and less
       than $127M in [long-term] debt. The company has sufficient ratios to support
       acquisitions and additional product development
      The price levels of EMC make it attractive. EMC is trading at a discount based on P/E,
       P/B, and P/CF values.
      EMC is the only comprehensive back-end information lifecycle management
       infrastructure provider in the world. Its business model will undoubtedly mature into a
       full-fledged money making machine in the years to come.

                            Our Recommendation - Hold
        Given our analysis of EMC, we believe this company to have a very high earnings
potential. However, we feel that investing now is not in the best strategic interest of the Student
Managed Fund portfolio. It will be a matter of years before EMC’s recent acquisitions will be
fully integrated as a comprehensive solution set. Until that time, we recommend a hold on the
purchase of EMC. The market has yet to realize the true value of the company with its recent
acquisitions. Although the current stock price is undervalued given the company’s potential
growth in earnings, we believe that the Student Managed Fund’s resources can be allocated more
appropriately (that is to say, more profitably) in the present.
        We regret that we will miss out on the explosive growth of VMware, but recognize the
folly in basing an investment on the success of a single product. In the long-run, we expect
EMC’s price to reflect the true value of its business model. 2011 SMF managers can expect our
return with a buy report for EMC.


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