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StorageTek Rides High

In times of crisis and uncertainty, dependable legacy technology is king. While the stocks of many cutting-edge storage networking infrastructure companies are struggling near 52-week lows, 32-year-old StorageTek (NYSE: STK), whose focus is still tape drives, is riding high.

StorageTek reported third-quarter earnings after Wednesdays market close of $18 million, or 17 cents a share, clobbering analysts’ expectations of 10 cents a share. Revenue of $498 million was slightly lower than the consensus $506 million. The company disclosed Oct. 11 that earnings would be better than the 9 cents analysts predicted at the time and that revenues would be roughly $500 million.

The results show a sharp improvement over last year’s drab results -- a period just after the company had completed a reorganization. Earnings were up 183 percent from the year-ago quarter of $6.3 million, or 6 cents per share. Revenues climbed 2 percent over last year’s $487 million and gross profit margins improved to 45 percent from 43 percent. The company’s cash reserves grew by $45 million in the quarter to $352 million.

But to achieve these strong results, StorageTek paid a price -- suffering the last two years with some of the same afflictions that now plague other industry players. The company took a hit in early 1999, when due to a components shortage it could not fulfill its demand for its flagship product. That same year, IBM Corp. (NYSE: IBM), which had previously resold StorageTek products, became a competitor. And if that weren’t enough, a federal appeals court that summer ruled that the company had to pay $71 million in a patent duplication lawsuit.

StorageTek lost $75 million that year, amidst growing speculation that the market for tape storage was dying. But the company retrenched in 2000 by spinning off unprofitable business units, implementing numerous cost-cutting measures, eliminating 1,200 jobs, and hiring new CEO Patrick Martin.

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