Storage Spending Slips

Disappointing earnings reports from IBM Corp. (NYSE: IBM), Storage Technology Corp. (StorageTek) (NYSE: STK), and Sun Microsystems Inc. (Nasdaq: SUNW) have financial analysts down on the overall storage market.

Analysts are particularly troubled by revelations from these and non-storage enterprise software vendors that IT spending slowed considerably in March as the first quarter of 2005 came to a close. This trend tempers any optimism about storage spending that might be gleaned from the positive revenue forecast of HBA vendor Emulex Corp. (NYSE: ELX) and an uptick in IBMs disk and overall storage revenue (see Emulex Breaks Through).

“The fundamental technology landscape has shown meaningful deterioration in March, fueled by corporate and consumer indecision amidst an uncertain economic backdrop,” Paul Mansky of Smith Barney

wrote in a research note today.

Mansky thinks storage might suffer less than technology in general because of positive drivers such as compliance. Yet there have been trouble signals over the past week:

Mansky also lowered his expectations for Fibre Channel switch vendors Brocade Communications Systems Inc. (Nasdaq: BRCD) and McData Corp. (Nasdaq: MCDTA) due to recent announcements and an improving relationship between switch rival Cisco Systems Inc. (Nasdaq: CSCO) and EMC Corp. (NYSE: EMC). (See Cisco Storage Spikes and Cisco & EMC Close NAS Deal.)Analysts see Sun’s struggles as potential trouble for HBA vendor QLogic Corp. (Nasdaq: QLGC), as well as SAN systems vendors Dot Hill Systems Corp. (Nasdaq: HILL) and Hitachi Data Systems (HDS).

Sun is one of QLogic’s largest customers, and QLogic took a hit in the first quarter of 2004 due to poor Sun sales (see QLogic Dives on Shortfall). Because Sun resells Dot Hill’s SAN systems on the low end, Dot Hill is also seen as vulnerable for the quarter (see Sun Dogs Dot Hill). Dot Hill receives close to 90 percent of its revenue from Sun.

Sun’s storage struggles were largely in the enterprise, where it resells Hitachi’s new TagmaStore SAN systems. “We think at least a portion of Sun’s high-end weakness owes to its resale of the new Hitachi Data Systems TagmaStore high-end array,” wrote Goldman Sachs & Co. analyst Laura Conigliaro, who said the HDS product launch was “disappointing almost from Day One.”

At least one analyst, Shebly Seyrafi of Merrill Lynch & Co. Inc., expects even EMC to feel the pinch in the long term. While Seyrafi and other analysts forecast EMC will meet expectations for last quarter when it announces earnings Tuesday, he worries its guidance for next quarter will fall short.

“We are increasingly concerned about [EMC’s] Q2 guidance,” Seyrafi wrote in a note to clients. “Several of our recent checks have been negative regarding spending in late March and early April, and IBM referred to weaker tech spending.”Seyrafi expects EMC to give guidance of around $2.3 billion and $0.11 EPS for the current quarter. That would be up from revenues of $1.97 billion and $0.08 EPS for the second quarter of last year, but around the same as EMC is expected to announce for the first quarter of 2005 (see EMC Bucks June Swoon).

Seyrafi points to a continued shortage in Fibre Channel drives that results in EMC paying more for the drives. Also implicated are a product transition to a new high-end Symmetrix SAN system expected in the second half of the year, concerns about tech spending, and increased competition from new IBM and Hitachi systems (see Storage Drives Are Low on Fibre).

— Dave Raffo, Senior Editor, Byte and Switch