StorageNetworks: Big Layoff

StorageNetworks Inc. (Nasdaq: STOR) greeted the financial community and stunned its staff on its second-quarter earnings conference call today with news that it is immediately laying off 220 employees, more than one third of its workforce. The job cuts are mainly in sales, marketing, and business development (see StorageNetworks Grows, Reduces).

For the quarter, StorageNetworks lost $32 million, or 33 cents a share, on $33 million revenues. For the quarter a year ago, the company lost $31 million, or $1.20 a share, on $8 million revenues. The per-share loss a year ago was much higher because there were fewer outstanding shares. The company staged its initial public offering at the end of that quarter.

Due partly to the high cost of underused facilities, StorageNetworks has had negative gross profit margins since going public. Company officials said today they are turning that around and expect gross margin profitability” in the third quarter. They expect revenues for the year to be in the $120 million to $127 million range.

Legg Mason Inc. analyst Todd Weller says he expects StorageNetworks to be “EBITDA positive” (earnings before interest, taxes, depreciation, and amortization) in the third quarter of 2002 and profitable by the end of 2003. He rates the company a Buy.

Following the demise of many of its dotcom customers, StorageNetworks is reshaping its business model by shutting down some of its costly remote storage facilities, which it calls “storage points of presence.” These facilities were to be the cornerstone of a business model that would effectively sell storage as a utility.In a related development, StorageNetworks announced yesterday that it is suing Metromedia Fiber Network Inc. (MFN) (Nasdaq: MFNX)for breach of contract, misrepresentation, and deceptive trade practices. StorageNetworks alleges Metromedia failed to provide the fiber optic capacity required by a lease agreement between the two companies. Analysts speculate StorageNetworks would like to shave expenses by terminating expensive long-term leases with MFN.

StorageNetworks now is attempting to refocus on two small but growing business segments that are less capital intensive and presumably more resistant to the economic downturn. Both are service oriented and rely on StorageNetworks’ proprietary software. The first, called STORmanage, helps businesses manage their own storage systems more effectively. The second, STORfusion, provides a similar service for carriers and service providers.

These services provide customers “virtualization” software that sees multiple storage devices as a single device. “Typically, companies use only about 40 percent of their storage capacity, because when storage is attached to certain servers it can’t be used by others,” explains Gartner/Dataquest analyst, Adam Couture. StorageNetworks also provides software that lets businesses and carriers monitor and manage storage equipment and networking gear from a remote location.

STORmanage has signed on several high-profile customers, including Cisco Systems Inc. (Nasdaq: CSCO), Enron Broadband Services Inc., and Martha Stewart. The STORfusion unit has signed on Fujitsu Ltd. (KLS: FUJI.KL). Analysts say both will disclose other major customer wins in the near future.

StorageNetworks already has competitors providing similar services. They include Storability Inc.

and StorageWay Inc.Dataquest's Couture notes that when StorageNetworks emerged in 1998, EMC Corp. (NYSE: EMC) worked to be its key supplier. But now that StorageNetworks is technology-agnostic, EMC is courting these other vendors with funding and equipment and is generating customer leads for them.

StorageNetworks was trading at $6.38, this morning, barely above its 52-week low of $6.25.

— Tom Davey, special to Byte and Switch http://www.byteandswitch.com