Storage Computer Turnaround Stalled

Storage Computer Inc. (Nasdaq: SOS) received a $5 million shot in the arm from an old investor this week, providing some temporary relief from nagging financial woes. But it will take more than this modest sum for the decade-old company to complete its much talked about turnaround (see SOS Distress Call Answered).

The Nashua, New Hampshire-based firm has reported an 87 percent drop in second-quarter profits compared to last year's quarter. Its revenues for the quarter ended June 30, 2001, were down 53.8 percent sequentially and 53.7 percent year over year to $950,913 (see SOS in Distress).

The losses are in part due to a backlog of unfilled orders -- worth in excess of $1.6 million. The majority of those orders ($1.35 million-worth) come from a contract with Crimson Media, the company said (see Storage Computer Turns Crimson). Peter Hood, Storage Computers CFO told Byte and Switch this backlog is due to a delay in Storage Computer shipping new products that were expected in August, but are now unlikely to hit the streets before the end of year.

The new CyberBorg and CyberNAS boxes have been held up because of “complex technical challenges and supplier delays,” says Hood. The company was unable to give specific details but says optical network interface integration into NAS and SAN systems is not a straightforward challenge.

“We can’t talk about a number of these issues, as the features have not been announced yet,” says Todd Viegut, VP of marketing at Storage Computer. The integration of RAID and NAS management into one common interface is one feature the company says is a “market differentiator” as it reduces integration and systems management burdens, but it is also difficult to do.Storage Computer picked up the CyberBorg and CyberNAS products via its acquisition of CyberStorage, a year ago. They remove the routing layer currently required to connect a SAN to the wide area network, enabling the device to reside directly on an optical loop. Storage Computer claims that to do this using EMC Corp. (NYSE: EMC) and Nortel Networks Corp. (NYSE/Toronto: NT) equipment would cost millions and that its solution achieves the same thing at a fraction of the cost (see Storage Computer: Fighting Talk).

Gross margins were 22 percent for the quarter, compared to 52.7 percent for the same quarter a year ago. The company attributes the decrease to increased factory costs, including a new quality assurance program and higher technical service expenditures, both of which have been implemented in anticipation of increased sales growth.

”It’s probably overkill as internal QoS programs go,” says Viegut. The products come out of engineering and go into another group that does nothing but hammer and test and supply information back to engineering, he said. “When we go into beta, others would be going for market entry." The company has also put in place a nationwide technical service support team.

Since the acquisition of CyberStorage, Storage Computer has upped its headcount by 40 to 50 people. And in advance of the sales growth it keeps talking about, it has decided to keep all of them. “This increase continues to impact our short-term costs,” says Hood. The decision not to reduce headcount in tough times seems strange to some and contrary to the current trend for laying off staff to curb costs.

”We are gearing up for the revival of our company,” says Hood. “There’s no guarantee this is going to happen, but the current backlog of orders shows potential.”The $5 million financing boost from Rose Glen Capital Group, an existing investor in the company, will be used to offset operating losses until sales reach breakeven. Hood was unable to say when this will be.

— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com