StorageTek Decries IT Spending

Storage Technology Corp. (StorageTek) (NYSE: STK) execs say enterprise spending is declining. But a flurry of industry reports suggests that it's tape library sales that are falling off -- a view the StorageTek CEO apparently disputes.

While a bunch of storage companies experienced soft quarters lately, including StorageTek, others have done well. EMC Corp. (NYSE: EMC) reported $1.97 billion in revenues last quarter; IBM Corp. (NYSE: IBM) reported strong growth with its zSeries mainframe servers; and even Sun Microsystems Inc. (Nasdaq: SUNW) showed some life in storage sales. (See EMC Bucks June Swoon, IBM Posts 2Q Results, and Sun Reports Profit.)

In contrast, StorageTeks revenue of $516.6 million missed its original forecast by more than $31 million and dropped 2 percent from last year (see Storagetek Announces Q2). Its tape library revenue decreased 9 percent to $215 million, even though disk revenue increased 10 percent to $46 million.

Okay, so StorageTek will concentrate more on disk, right? Wrong. Its plan for recovery is to push its new tape libraries and hope its traditionally strong fourth quarter is better than usual this year.

“In the beginning of the year there were expectations that IT spending would pick up in 2004,” StorageTek CEO Pat Martin told analysts after announcing quarterly earnings Tuesday night. “Clearly, this has not been the case in the first half of the year. However, we are hopeful that we’ll see a rebound in spending in the fourth quarter.”Two weeks ago, StorageTek lowered its guidance for the quarter, saying it expected revenues of $510 million to $520 million and EPS of $0.29 and $0.33 (see StorageTek Sings Sad Song). First Call

consensus before StorageTek lowered guidance had been $549 million and $0.32.

Undaunted by this, StorageTek has set its sights high for the rest of the year. Martin yesterday forecast single-digit revenue growth for the full year, giving guidance of $178 million to $190 million for 2004. That means fourth-quarter sales must rise even more than the 20 to 25 percent that StorageTek historically has seen in that part of the year. Martin said he expects new tape libraries to fuel those sales (see StorageTek Streamlines Tape Library and StorageTek Slings SL500).

That’s a pretty big rally to expect from a market segment that appears in decline. “The real threat to StorageTek’s tape business is the ongoing shift in favor of disk-based backup,” Goldman Sachs & Co. analyst Laura Conigliaro wrote today in a research note. “StorageTek’s BladeStor [disk] product is a highly credible offering, but there is still a risk that the shift towards disk as either an incremental staging area to tape or as an outright tape replacement could accelerate.”

StorageTek's strategy doesn't reflect any agreement with this view. Though the company plans product upgrades in all areas and expects to spread the hoped-for seasonal fourth-quarter increase among tape, disk, and services, it is mostly banking on its SL8500 enterprise tape library for a lift.

Martin calls the product “absolutely gangbusters,” and CFO Bobby Kocol says it "provides basically everything customers want in a tape solution." He and other execs hope a good amount of StorageTek’s 10,000-plus installed base of enterprise customers will upgrade. “That clearly is the sweet spot for us,” Martin says of the high-end tape library segment.But the SL8500 is already shipping, so why hasn't it done better this quarter? Martin mostly blames a “lethargic IT environment.” He claims StorageTek’s sales pipeline looked strong entering June, but sales didn’t close.

Other industry sources say the quarter was soft the whole way for StorageTek and other tape vendors. Things would have been worse for StorageTek if not for a 9 percent reduction in company spending, which included reducing headcount by 250 to around 7,000. That helped it keep net income to $0.32 earnings per share, which was up from last year.

StorageTek can't escape a string of tape-related issues indefinitely. Besides the declining market for tape in general, the vendor faces increased pressure with EMC getting into tape library sales after signing a reseller deal with Advanced Digital Information Corp. (Nasdaq: ADIC). (SeeEMC to Resell ADIC Tape.) That gives StorageTek another heavy hitter to compete with along with IBM.

Martin's response? EMC’s entry into tape validates its usefulness, he says, and ADIC lacks the expertise to make EMC a factor in the high end (see StorageTek Lauds EMC-ADIC Deal ).

“We’ve been competing against our friends at IBM for 35 years, and we’ve been pretty successful against them,” Martin said. “So I don’t doubt we will be successful against EMC.”On the same day that StorageTek announced its earnings, EMC and Sun reported rosier results. EMC’s revenues grew 33 percent from the same period last year. Sun’s moribund storage sales showed signs of waking, with $427 million in network storage revenues -- up 1 percent year over year and 23 percent from the previous quarter.

Sun president Jonathan Schwartz said most of the revenue growth came on the high and low ends. Sun storage still has a long way to go, though, as storage is only 26 percent of its total computer system revenue.

IBM last week said its storage revenues grew 5 percent year over year. The midrange grew fastest with 7 percent, but 44 percent growth in revenue from IBM’s mainframe servers shows enterprise customers are spending.

— Dave Raffo, Senior Editor, Byte and Switch