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StorageNetworks: Big Layoff

Service provider lays off one third of staff and announces second-quarter loss of $32 million

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.

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