StorageTek Aims Higher

Storage Technology Corp. (StorageTek) (NYSE: STK) has raised its fourth-quarter guidance significantly, but investors want the company to show a change of direction as well (see StorageTek Raises Q4 Guidance).

StorageTek anticipates revenues will be greater than $650 million and earnings per diluted share "in excess of" 55 cents when it reports its end-of-year quarter on January 22, 2004. This compares to First Call analyst consensus of 52 cents. Previously, the company predicted revenues would be in the range of $610 million, with EPS of 50 cents.

The new guidance represents a 25 percent sequential increase in revenues and nearly a 96 percent increase in EPS compared with the company's third-quarter results (see StorageTek Boosts Q3 Profit).

StorageTek gives no reasons for its improved outlook, but analysts attribute it largely to growth in the company's tape drive sales, which accounted for about 78 percent of revenues for the first nine months of 2003. StorageTek continues to invest in tape, where it's still on track to release a high-end product in the second quarter (see StorageTek's Incredible Bulk).

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But StorageTek's focus on tape is a mixed blessing, analysts say, because tape is largely viewed as a technology on its way out. What's more, StorageTek remains weak in key growth areas of the storage market. It was a relative latecomer to the Information Lifecycle Management (ILM) party, though it's offering a range of hardware and software, including disk arrays, as part of its ILM strategy (see StorageTek Adds More ILM).

Kaushik Roy of Susquehanna Financial Group thinks StorageTek's showing in the disk market's been weak as well: Despite reselling disk storage arrays from from LSI Logic Corp. (NYSE: LSI), as does IBM Corp. (NYSE: IBM), StorageTek's failed to do as well as Big Blue. Roy attributes this to a lack of initiative in adding value to the subsystems.

The solution for StorageTek, says Roy and others, lies no further than its cash and investments -- which were $928 million last quarter. Roy says investors want StorageTek to use that cash, either to issue a dividend or to expand its horizons through acquisitions.

StorageTek may be better advised to buy its way further into the software market, instead of struggling in the highly competitive midrange disk-based storage segment, Roy opines. "If I were them, I'd focus more on software... The margins are higher, and that's where the customer pain point is."

Others agree StorageTek needs to open its wallet. In a note to clients today, analyst Stephen Chin of UBS writes that "additional differentiation of products" is still needed by StorageTek. "We... expect the company will likely look to leverage its solid cash position of over $1B to further enhance its storage softare capabilities as a means to better differentiate its product sets," he writes.None of this is to say analysts have a negative view of StorageTek's ability to make money from tape -- at least for awhile. In a note this week, Robert Montague and colleagues at RBC Capital Markets say they expect StorageTek to finalize an "OEM agreement with a Tier 1 system vendor" for midrange tape products: "We believe this agreement, if awarded, will likely generate initial revenue toward mid-2004 and should position the company for revenue acceleration in the second half of 2004."

Mary Jander, Site Editor, Byte and Switch